Nice Ltd (NICE) 2003 Q1 法說會逐字稿

I would like to welcome everyone to the NICE systems 2003 conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded May 14th, 2003.

I would like to turn the call over now to Ms. Kassif (ph), please go ahead

Good morning or good afternoon.

This call will cane forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on the qualifications 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 requirements, declining demand for the company for products, inability to sign and develop and introduce new technologies, products and applications. Difficulties or delays in absorbing and integrating products technology and personnel. Loss of market share, pressure of pricing resulting from competition and inability to maintain certain marketing and distribution arrangements which could cause the actual results of 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 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. Good morning or good afternoon everyone.

Taking into account the difficult seasonal patterns, it was quite a good quarter for us and we are pleased with our performance. Product revenues were about the same as the first quarter, which is down only slightly around eight bases, [inaudible] Revenues were up 38 percent sequentially. As you know this has been an area of focus for quite a while and we're very pleased to see the continued improvement.

Our biggest achievement however in Q1 was the successful integration of the PCS acquisition. Integration risk is one concern that we can now put behind us. The process is complete. The things are in place, the training is finished. Key business partners have all moved over to NICE and we're one fully integrated global company.

Through the quarter, we did some fine tuning to the organizational structure to make sure we have strong management in charge of each key region. We're operating on a truly global basis in every area of our business now. We also took steps to better align the product teams and maintain a flat organizational structure for maximum efficiency and flexibility.

Revenue increased in each sector this quarter with the exception of video, which was down about 1.6 million for the particular strong first quarter last year, but it was up 56 percent from Q1 2002. This is not indicative of anything but timing of revenue integration and seasonal cycle.

We're seeing more activity and more interest all the time in our NICE vision business. Specifically, we're starting to see the first signs of increased nice vision for the preparation into Europe which has been an area of focus for us. In fact, during Q1 we landed a large European Casino deal.

In addition we've developed important new distribution partnerships and while most of these arrangements are not exclusive, these partners have expressed a desire to work with NICE because of the breadth and quality of our product line.

We have several large video projects in our pipeline. We continue to believe that the video business will be up about 50 percent in 2003 over 2002. We're also excited about the prospects of the public safety business we acquired with PCS. Perhaps you recall the announcement of two million dollar order we received in Q1 for the rapid transit system in Singapore. Our public safety system will be used to record radio transmission between emergency services personnel, train crews and the control center. This will aid in the reconstructing the incident in the event of a major accident or other emergency situation.

Activity and interest is good for this type of system, particularly in Europe and Asia. These systems generally range between half a million and two million in site. To see a definite Homeland Security influence at working here because most of the large projects we see are related in some way to country-wide security initiatives.

Now that we have integration of PCS behind us we're turning our full attention to the three main areas of focus that I mentioned during our last quarter.

First, we intend to maintain our lead by offering the best multi media capture platform with the most expensive array of value-added applications. We'll continue to focus on penetrating our large install base of contact center and financial trading customers, as well as gaining new customers interested in improving business performance with our software applications.

Over the past few quarters we've landed important new multi million dollar deals with some of the largest financial services companies in the world. These deals range from around ten side to the low end to over 30 separate sides in the largest of these deals. Some of these deals represent new customer wins, where we have displaced the competitor. Others represent major face upgrade with existing customers. While others are a result of extending our presence from one division into another and from one geography to multi regions for the same customers.

Nearly all of these deals include quality monitoring as well as total as well as [inaudible] capabilities. In each case, our objective is the same, to become the de facto global standard for recording and related business performance applications for each multi natural customer.

I cannot emphasize strongly enough the advantage of having a large install base in which to introduce new business performance applications as they are developed. I would like very much to share with you the details of these deals, including the names of these blue chip customers, but several factors prevents me from doing so.

First, some of these customers, for competitive reasons, do not want it known in advance exactly how they are spending several million dollars in the contact center or financial operations. In addition, we continue to operate in a hyper competitive environment where it's not unusual to see our competitors go to extraordinary lengths to try to take back customer they lost or buy a strategic deal that could lead to more business down the road.

Therefore, it is counterproductive and not in the best interests of our shareholders to talk publicly about competitive wins, signal which accounts we feel are prospects of for new business or make other comments that might initiate or invite ultra aggressive attacks from the competition.

What I can say is we're very pleased with the way the implementation have gone so far. Our team is performing very well in a variety of highly complex integration situations, and we believe that it's a strong chance we'll be able to realize our objective of having these major multi national organization [inaudible] Nice globally over all the various divisions.

Over the past several months we have added significantly to our successful (inaudible) which now represents more than 80 companies with complex centers and financial trading flows. The benefits to the users include the floor for sharing best practice deals and abilities and even job terms. This active user group is important tonight because it provides a window on customers' needs and issues and enable us to engage customers directly on new technologies and applications.

In terms of new products in Q1 we introduced NICE Feedback new business performance applications together customer feedback our IB based survey. This new product is fully integrated with NICE universe quality monitoring system by linking the recorded interaction between agents and customers which the relevant customer feedback product centers and identify service gaps that require immediate corrective action or identify positive customer reaction that can be acted on quickly to gain competitive advantage.

The application can also be used by other departments such as marketing or product development to obtain variable insight more quickly than by using other survey methods.

We continuing to get excellent feedback from leading customers on our content analysis applications. Down the road we expect customers to be able to use tools such as motion detection in conjunction with other systems to create key performance indicators that enable them to act quickly to solve problems and address issues that may not even originate in the [inaudible] sector and we expect this will be an important new source of revenue for us next year.

The second major area of focus we have had for some time is on voice over IP, enterprises are focusing on the benefits of moving to a converged network in terms of cost savings and added flexibility. Moving to voice over IP reduces cost of ownership by minimizing capital investment in equipment and reducing the cost of installation, maintenance and system administration. Voice over IP can reduce a company's long distance bills by eliminating long distance charges by routing calls to multiple sites over its one. There is considerable momentum to voice over IP with conference center which in turn is going to be a catalyst to bringing voice IP to the broader enterprise network to create a complete customer interaction network. This technology gives conference centers the flexibility to redirect calls to (inaudible) sites and outside agents to increase productivity and customer service using multiple channels of interaction. We expect the inaudible IP network to be an evolutionary with voice over IP technology being installed as companies add new conference centers or when they move or upgrade their back up [inaudible] ISPPN network in order to protect existing equipment investment.

We have made a major commitment to integrate our solutions with voice over IP technology and our entire suite of applications supports voice over IP interfaces from the major enterprise network infrastructure providers. Our efforts have already been paying off with a growing number of voice over IP deployments and during the first quarter we were awarded the largest ever voice over IP project by a major financial services company in Europe.

Our competitive advantage in winning this business is the fact that our full suite of applications is available on both the traditional and IP networks and we have strong relationships with infrastructure providers in most areas. This particular project we are working with one partner on a traditional system for the trading floor which will be integrated in a hybrid solution with IP-based applications, working with a different infrastructure provider on the IP-based solution for the back-up.

The third strategic area of focus for us this year is on Homeland Security. Not just in the U.S., but on a global basis. We have established a specific Homeland Security initiative to help us understand opportunities and pursue strategic alliances with important players in this area.

We continue to see strong interest in our digital video solutions through a network of partners that has expanded considerably over the past several quarters In the U.S. we're seeing some large digital video deals in the pipeline that are driven by Homeland Security considerations but we do not believe it's a direct result of the budgetary allocation of the Homeland Security department.

We share the view of many other technology vendors to the security market, very little of the Homeland Security appropriation had found a way to vendors at this point. This is not to say that nothing is happening. We see a definite pickup in activity, our needs are being evaluated and priorities are being set.

Over the past several months some of the initial emphasis on airline and airport security has expanded to other areas such as border control. And other security plus vital infrastructure such as the water supply and power grid. Another significant concern is the full state of first responders communication due to lack of uniform standards and no system for cross agency consideration.

Each of these priorities offer high potential opportunities for NICE, particularly since we have the capability to capture every form of communication, including radio transmissions and we [inaudible] to integrate systems as opposed to separate point solution.

As we have mentioned before, it appears that IT networks are likely to play an important role in security as well as in the enterprise. We're encouraged to see that most of the largest global systems integrators are focusing on the opportunities inherent in the capabilities of next generation networks. They see a major growth opportunity in providing consulting migration support and other service to global enterprise and government customers in managing this important transition . We believe that most strategic alliances with these large system integrator will be important in forecasting each of our major business initiatives and we are devoting considerable effort to developing this relationships.

I'll ask Lori to go over the financial aspects of Q1 then we'll discuss the outlook for the balance of this year before taking your questions.

Thank you, Haim.

I'll begin with the usual breakouts. Revenue from contact centers and financial trading floors was 39.1 million dollars, or 73 percent of total revenues. Security revenue was 14.1 million dollars, or 27 percent of total revenue, primarily reflecting the inclusion of the public safety business for a full quarter.

Geographic breakdown in Q1 was as follows: The Americas accounted for 29.8 million dollars, or 56 percent of revenue. E Maya (ph) accounted for 17.3 million dollars or 32 percent of revenue. And Asia Pacific was 6.2 million dollars or 12 percent of revenue.

Product gross margin improved to 58.3 percent from 57 percent in Q4, leading to an improved mix of video products and a continuation of a trend for the higher proportion of software in the sales mix.

Gross margin on services rose 25.1 percent from 15.2 percent in Q4, mainly due to the higher service revenue. Some of this revenue consisted of maintenance catch up and while service revenue is growing nicely, the overall pace is a bit more modest than it might appear from this quarter's figures.

Operating expenses excluding special charges totaled 26.5 million dollars, up 1.2 million dollars from Q4. The increase is due mainly to the inclusion of TCS expenses for a full quarter. Partially offset by synergies, mainly from staff reductions in Q4 and mid Q1.

Excluding the employee termination benefits that we told you we would have in Q1, we again reported an operating profit this quarter.

On a GAAP basis, including the restructuring charge, we reported a small operating loss of $300,000.

Just to remind you, PCS operations have been completely integrated into NICE so please don't ask us to give any separate financial or performance operation about TCS because there is no such thing. You can consider Q1 the benchmark quarter for NICE's performance since it is a full first quarter of integrated operations.

Net operating cash flow in the first quarter was 8 million dollars reflecting an aggressive collections effort particularly of older receivables. You'll recall DSO in Q4 rose because of the acquisition but we brought things back into line quickly and ended Q1 with DSO of 97 days, which was about the same level as at the end of Q3 of last year.

Also contributing to the total increase in cash was a 6.6 million dollar payment from Talis (ph) reflecting a portion of the purchase price of the assets of PCS as provided by the original agreement.

Thus total cash and equivalents at March 31st rose to 79.2 million dollars compared with 68.6 million on December 31st, 2002.

As required by U.S. GAAP, we have made an adjustment to the price of the TCS acquisition. This change results from a required change in the measurement date used to value the stock portion of the transaction. We are required to use the closing date, November 2nd, rather than the announcement date, July 31st, as a measurement date for valuing the shares.

This reduction in purchase price has been reflected as an adjustment to the December 31st balance sheet in the form of a 7.4 million dollar reduction of goodwill and a 7.4 million reduction of paid-in Capital.

Thus the purchase price has been reduced to 39.8 million dollars from the 47.2 million dollar figure reported at the end of Q4. The balance sheet in our form 20 F when it is filed shortly will reflect this adjustment as does the balance sheet in the Q1 earnings release.

Now I'll turn the call back to Haim to discuss the outlook for the remainder of the year

As I mentioned earlier, with the completion of the PCS integration we've removed the potential risk of serious integration issues. We continue to expect this acquisition to be accretive to the year as a whole.

We have a very strong pipeline of potential new business with more than two dozen potential contact Centers and trading floor opportunities identified. Over one million identified.

However, even though we have record bookings for our first combined quarter, we should remember that our business model is such that we always have limited forward visibility traditionally less than a quarter. In addition, we face a number of other uncertainties that are beyond our control such as the SARS epidemic in the south Pacific region. We're not affected so far and if we are we hope to be able to increase our business to unaffected portion of the region enough to meet our growth.

It's also difficult to predict when and to what extent federal Homeland Security related spending will impact our security business in the U.S.

We see no reason at this time to change or full year guidance of 240 to 255 million in revenue with 80 cents to 90 cents of EPS, excluding any special charges. But we are more comfortable with the lower end of this range.

Currently we expect revenue for the second quarter to be between 55 and 57 million, with EPS between 13 and 17 cents a share.

Before I will ask the questions or pass to the question section, I would like to take maybe an unusual step in terms of referring to a special customer event that was quartered only a few days ago. In the local interception market it's not very common to refer to specific customer names. However, for those of you who might [inaudible] French they might have noted that two days ago the editorial sections and there were a lot of press coverage in Belgium about the integration of the NICE solution to the federal Belgium police and we are very proud of this installation, of this system. This is an innovative [inaudible] Implementation, among the first and the largest in this sector. And we are now looking at how to leverage these new and interesting market for us.

So questions, please.

Ladies and gentlemen, we will begin the question and answer session. If you have a question, please press the star followed by the 1 on your touch-tone telephone. If you wish to decline from the polling process, please press the star followed by 2.

Your questions will be polled in the order they are received, and our first question comes from Toby Fishbein (ph) from Lehman Brothers

Could you break down the revenues from the video segment?

For the first quarter?

Yes

Within the 14.1 million dollars for security, the video is 6.4 million, public safety is 5.2 and the common military is 2.5.

Great. In spite record bookings and continued strong pipeline, [inaudible] Haim just explained the reasons for this, the normal business model of NICE probably is the main one.

But Haim do you see -- you must feel much better than in any previous quarter even that some of the acquisition related risks are, were probably gone and you have this level of bookings and [inaudible] Customer interest. So I'm trying to understand a bit of this contradiction of saying on one hand that you are seeing very positive signs on the marketplace. And on the other hand shifting towards the lower end of the guidance provided for the full year?

As I said things on one hand we definitely see [inaudible] Pipeline activity. However as you all know, there are still volatility in the other markets and economy. So we have decided to take at this point in time a little bit more cautious if you'd like more cautious view of the world. It is still a 10 percent growth compared to last year and that's basically the reason.

Probably for Lori, product and services margins are falling nicely. Where do you see them going longer term? We have product margins at 58 percent and several margins at 25. You said services model is probably seems a bit too good in the first quarter. So where do you see them trending in for the rest of the year?

As we said before, we are looking to see our gross margins in both areas improve steadily over the course of the year. As you noted in terms of services, not quite that type of leap in a given quarter. So it's a slow steady increase at the beginning of the year would be expected.

Or both?

Yes

Last question for me. The sales and marketing expenses as a percentage of sales, continues to run around 25 percent. Do you see a possible immediate decrease, maybe in the second quarter or in the third quarter towards the low 20s?

I don't think that this is something that we're planning on

All right. Thank you very much

Thank you our next question comes from Jonathan Hoff (ph) of UBS

Thank you. Hi Haim and Lori. Could you give us a little bit more color on the jump in the service revenues and also on the gross margins? I believe you're guiding for similar breakdown between products and services. What's behind this leap beyond just patching up and maintenance?

Nothing unusual, Jonathan. Small amount that's related to our catch up which has a positive impact on the margins. Nothing beyond that

Going forward in the level from here we're going to start growing also in service revenues?

As we said, we have the same issue last year. We had a quarter that was unusual. We have these on occasion. We think that earlier I think that the normal pace of growth is somewhat more modest so I wouldn't expect to see the same level of increase in Q2

Haim, from your comments, it sounded -- maybe I misread them -- but it sounded that you're seeing increased activity for larger deals. Did I understand you correctly? If so can you somehow quantify that?

I didn't hear the last sentence, but assuming that I know at least the intention, as I said we are seeing a quite of lot of activity in terms of larger deals in basically all our market segments. This is true both in the [inaudible] Center, integrating floor and also in the security digital video. And that's an area that we're very much focusing on, both in North America and also in some other parts of the world.

So comparing the quarter you're seeing more activity for larger deals in the quarter, though?

Yes, we're seeing continuous strand of working on larger deals than before. So obviously the competitive reasons I unfortunately cannot be more specific than that.

I respect that. Also I'm not sure if I heard you correctly, you said video, you're expecting to grow 50 percent this year over last year? I believe that compares to your previous comments last quarter that you had growth of 30 percent.

We are expecting to see the video business grow this year at least 50 percent over last year, yes.

And last one for me. Lori, can you somehow quantify your Euro exposure in terms of sales? And expenses?

At this point in time, our euro exposure is not that significant. We had a bit more in pounds, if you want to look at it that way. So we don't expect to see that much of a benefit in Q2 from the strengthening of the Euro, if that's what you're asking.

Thank you. Congratulations and good luck.

Our next question comes from [inaudible] of ING financial Markets.

Very nice results, Lori and Haim. I wanted to ask regarding the competitive landscape, are you seeing, maybe more specifically regarding the merger between [inaudible] And witness, are you seeing any more of a competitive pressure or are you seeing, are you expecting this to increase competition or to lower competition and do you see an actual effect in the marketplace?

We have made a customer in this not to discuss out of respect any particular company. All I can say is that the fact that we have made the first move in terms of building European distribution and acquiring company UK-based. I think this by now is clear maybe why we have done it and obviously there is a first mover advantage.

And we hope that we can realize this first mover advantage.

Overall, I would say that of course now we have two competitors that have combined into one. But overall landscape in terms of the competition has not changed significantly this quarter compared to the previous quarters.

I mean looking forward, though, do you expect any sort of change in the competitive landscape because of the consolidation in the market?

Everyone can have their own take in terms of whether it's good or bad to have some consolidation in the market. We have predicted this was going to happen. We have decided to lead this with things that customers want to have strong players to work with them on a global basis and we think we can definitely [inaudible] In the industry segment with 25 percent or so in the recording, voice recording area. So that's how it goes. We basically everyone can have his own take, consolidation is good or bad. But this is an area that we have decided not to wait but to lead

Thank you. Good luck

Thank you. Our next question comes from (inaudible) IPAX.

Good quarter do you expect any efficiency with regard to the merger with TCS?

As I said there's no more merged company there's only one company which is NICE which has operation in three regions, headquarters in Israel and we are constantly now looking at ways to become more efficient, not specifically related to TCS but we constantly, if you would like, try to see where and how we can have efficiencies in the organization in all aspects of the business. This is something we have done in the past and it's now one company we will continue to do that.

Thank you

If there are any additional questions please press the star followed by the 1 on your touchtone telephone.

If you wish to cancel your request, please press star followed by 2. One moment.

We have a follow-up question from Jonathan Hoff. Please go ahead.

Thank you. Could you give us the head count, please, at the end of the quarter, also the braked down between depreciation amortization

Head count at the end of the quarter was one thousand 17 and the depreciation amortization which you can find on the consolidated cash flow statement that accompanied the press release if you didn't receive one I'll be happy to send you one is 4.7 million.

I hoped you had this breakdown between depreciation and amortization

I'll have to get it for you and get back to you

Okay. Fine. Thank you

Thank you. There are no further questions at this time. They've asked me to go ahead with this closing statement. I'd like to remind you a replay of this call is scheduled to begin in two hours until midnight May 18th in the U.S. please call 186- 500-4964. In Israel please call 03-925-5950 Internationally call 972-3-925-5950. Please go ahead

Thank you for your participation. We look forward to talking to you again in our Q2 earnings release. Thank you.

Thank you. This concludes NICE systems third quarter 2003 results earnings conference call. Thank you for your participation. You may go ahead and disconnect.