Nice Ltd (NICE) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Anna and I'll be your conference facilitator for today. I would like to welcome everyone to the NICE Systems second quarter 2003 Earnings Conference Call. All participants are in a listen-only mode. Following management's presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded July 30, 2003.

I would now like to turn the call over to Rachela Kassif. Please go ahead.

Thank you. Good morning or afternoon to everyone. This call may contain forward look statements based on the the Private Litigation Reform Act on 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 market security, markets requirements, declining demand for the product, inability to timely develop and introduce new technology, products and applications, difficulties or delays in absorbing and speak required operations, technologies and personnel, loss of market share, pressure on pricing resulting from competition and inability to maintain certain marketing and distribution arrangements, which could cause the actual results of the performance of the Company to differ materially from those described herein. We have no obligation to update this forward-looking statement. For a more detailed description of the risk factors and uncertainties affecting the Company, referring to the Company's reports 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, everyone to those in the states and those in Europe and the Middle East. Had -- results another solid performance. We saw across the board improvement. The second quarter of 2003 our profit reserve new is up 31% over the same period last year and service revenue has increased almost 150%. In Q2 product revenues increased 9% sequentially and service revenues declined slightly to more normal levels after a sharp increase in Q1. Sequential improvement in product revenue during Q2 came from [ INAUDIBLE ] In Asia-Pacific region and an increase in [INAUDIBLE], particularly in Europe. On the last call I mentioned -- who had grown to more than 80 companies. Now this organization has more than 250 members. Just last week we had a customer event in Miami, it was enormously successful. 210 customers and partners joined us for this event. [INAUDIBLE], -- what they view are the benefits of our systems, how their organization rye tans customers and happier employees. We have presented our future technology, and they were received with excitement.

There was one feedback that was common across the board. One message was that our systems are becoming mission-critical to the organization. People view them as mission-critical [INAUDIBLE], CRM systems. I would like to quote you one of the customers from Strategic Global Outsource. NICE is a great tool for [INAUDIBLE], which support in several different companies, allows us to [INAUDIBLE], the rapidly dispersed -- from a centralized location. [INAUDIBLE], for our clients. [INAUDIBLE], recent market share gain for leadership in the area of voiceover ID. As I mentioned last quarter, we've made a major commitment to integrating our solution -- voiceover technology in our entire application the voiceover ID business from the major enterprise infrastructure. We have well over 50 customers using our voiceover IP solution -- another trend we see developing in the -- market is the evolution of [INAUDIBLE], network of [INAUDIBLE], which requires the ability to centrally manage -- leading the way with recording solutions that have centralized administration, support of a viable infrastructures -- enable centralized reporting and centralized storage. The solutions are also helping us increase our market share.

We also see some interesting trends developing in the public safety segment. The one of the biggest problems in this area is availability of treatments, when situations occur that require additional response. This is causing more problems in complete [INAUDIBLE], we are working very hard to compensate relationships with companies that are responsible for achieving this into gracious. Earlier this year, we established specific homeland security that [INAUDIBLE], operating unit strategic relationship with the major companies that will be key to benefiting from the increased spending in in area. [INAUDIBLE], but we're encouraged by the progress we have made. Just one indication of our progress [INAUDIBLE], secure operation [INAUDIBLE], our life vision product [INAUDIBLE], and actually we have recorded the first phase --. To go over the financial aspects of Q2, and then we'll go through the balance of this year for year before taking your questions. Lauri?

Thank you. As usual I'll start with the revenue breakout.

Revenues from contact centers and financial treating floors was $41.3 million, or 73% of total revenue. Security revenue was $50 million or 27% of the total revenue. The geographic breakdown in Q2 was as follows: the Americas accounted for $29.3 million or 52% of revenue. EMEA accounted for $17.8 million or 32% of revenue, and Asia-Pacific was $9.1 million or 16% of revenue.

Product gross margin improved to 60.8% from 58.3% due mainly to selling higher margin NICE products into XPCS channels, a continuation of the friends with a higher proportion of software in the mix and efficiencies. Gross margin on services declined to a more normal revenue of 16.3% from 25.1% in Q1 and some of the service revenue consisted of maintenance catchup. For comparison purposes, gross margin on services in Q4 was 15.2%.

Operating expenses excluding special charges was $26.5 million, essentially flat with Q1. Since the rules now require that the costs associated with involuntary termination and office closures be reported when incurred rather than as a one-time charge, we reported about $800,000 in charges in Q2, and we will have a modest amount again in Q3, though less than Q2.

On a GAAP basis, we reported net income of $1.4 million or 9 cents per fully delighted share. And excluding these charges, we reported net income of $2.3 million or 14 cents per fully diluted share. Net operating cash flow in the quarter was $9.7 million, again reflecting an aggressive collections effort, particularly of older receivables. I should point out that part of this number reflects currency exchange rate gains.

Days sales outstanding declined to a record low of 81 days compared with 97 days at the on the other hand of Q1. Cash and equivalents increased to $87 million at June 30th, only slightly blower below the amounts we had prior to the PCS acquisition.

Now I'll turn the call back to Haim for a discussion of the remainder of the year.

We have a strong pipeline and we're expecting moderate sequential increase in revenue in Q3. Today nearly a third of our revenues new is coming from the [INAUDIBLE] region where the impact of summer holiday is normally greater than in the past. We also believe that we're at the low end of our long-standing guidance of 80 to 90 cents a share for 2003 as a whole. Now we will be happy to take your questions. Operator?

Thank you, sir. Ladies and gentlemen, at this time 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 phone. 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.

Our first question comes from Jonathan Huff of UBS. Please go ahead.

Thank you. Hi, Haim and Laurie. Can you be a little more precise regarding your guidance? When you say "moderate sequential growth," how do you define your growth in Q1 -- I'm sorry -- in Q2 compared to Q1? Was that moderate or should we look for a lower net?

It's a good question. I think the main message is that we have a good pipeline. Q3 is normally a summer holiday quarter, but despite this fact, we think that we will do better in Q3 both on revenue and growth. Exact number as where will be the cutover between Q3 and Q4, we don't know. But as I said, we believe that Q3 is going to be better than Q2 on revenue side and also stronger on the profit side.

Okay. And in terms of the breakdown between service and product, should we expect any kind of change in the mix there?

I don't think so. I think that we are now -- with Q2 we have finding more, say, normal split between products, working to earn the strategic goal of a split of 70-30: [INAUDIBLE] right now we are in what I would call a more normal.

Okay. And as far as the balance sheet, you still -- when do you expect the receivable from the related party to be paid off?

It would have to be within a year from the date that appears on the balance sheet.

Okay. And you also mentioned that you're going to have a charge in Q3, but less than Q2. Do you expect a charge in Q4, as well?

At this point in time, if there is, it will be very small.

Okay. And my last question, please, can you give us the head count at the end of the quarter?

Head count at the end of the quarter was 1,019 staff.

Great. Thank you and good luck.

Thank you.

Our next question comes from Will Manuel of HSPC. Please go ahead.

This question is for Laurie. Can you explain what happened to the financial income?

Okay. Essentially we -- it's one major item, and that is a difference between having a small currency exchange gain versus having a small loss. That gap explains the bulk of the difference. As you know, the exchange rates moved dramatically from March 31st to June 30th on the currencies that most affect us, those being the Shiko, the Pound and the Euro.

This quarter things have been much more stable than previous quarters. Would you expect to see it bounce back in the financial income line if the current trends persist at the end of the quarter?

Would I expect to see them improve from the Q2 level, yes.

Yeah. Okay. Can you give a split of the security division between video and the rest?

Yes. About half of the security revenue, which I mentioned was $15 million, was from the digital video. The balance is from the government public safety-related area.

Right. Okay. Finally, you previously mentioned revenue guidance in the area of 240 to 255. I see no mention of it today. Is that still valid, that range?

As I mentioned, we are looking at the lower end of the revenue guidance.

Right. Okay. That's great. Thanks.

Thank you. Our next question comes from Daniel Moran of IBI. Please grow ahead.

Hi, Laurie and Haim. Congratulations on the quarter.

Daniel, we didn't hear what you said. If you can repeat?

First of all, I want to congratulate you on the performance this quarter. I want to know if there are any news as far as [INAUDIBLE] partners in the video business, if you request give some color on the developments there? You said that that was one of the strengths that contributed to product sales this quarter.

I'm not sure that I heard you, but I believe you said what in the video business?

Yeah, are there any new partnerships there?

Oh, okay. I will say that we announced publicly, of course our relationship with [INAUDIBLE] secure operation, which is an enough partner in Europe with major players on the French market. In addition to that, we have strengthened our relationship with key players in this industry, and I believe that we're starting to see results. I can't give specific names. Detailed information. Major players that are partners and strategic distributors in this market area, and I believe that we are seeing more business and improved relationships working together towards, say, large projects with these key vendors.

Thank you. And the other question is about the mix within the CM division. Are you seeing more business coming from Advanced Solutions besides quality monitoring and recording and moving to other applications?

I think that what we are seeing in the gross margin is the result of obviously more software content. This is something that we said all along that we will see more software applications on top as part of our operating. And I believe that this gross margin improvement is definitely an indication of this trend.

Thank you.

Thank you. Our next question comes from Robert Katz of Israel partners. Please go ahead.

Hi, Haim and Laurie. Great quarter. I have a few questions. For this quarter has your pipeline increased and what is your visibility like for this quarter? How much earned business do you have to do in each quarter?

It's a good question. First of all, I emphasize every conference call and every meeting with the public that our business model remains the same. What I mean by that is the customers are required from us [INAUDIBLE]. It can range from days to a few weeks. This is our business model [INAUDIBLE].

However, of course, compared to the past we see increased percentage of service revenue, which includes, also, maintenance and projects in this amount of visibility is increasing. In the past it was close to zero. Now we can see that over 20% of our business relates to service. However, the bull can have our business remains -- relatively short delivery time, this is what our customers want. This is our business model. And I don't want this to change.

Having said that, we have, as I said, a very good pipeline. And in terms of our booking, we do not publish our booking number. However, we continue to operate in a good book to bill ratio, which is doing okay.

So, if you like, that's what I can say. As I said, from a pipeline point of view, the pipeline looks very promising. But there is any any assurance.

Right. Laurie, sort of a bookkeeping question. Can you break out your employees by services and sales? And what type of gross margins can you attain on the services side of the equation? What would be a target?

Out of the 1,019 total staff, approximately 260 are in professional services, 220 are in sales.

In terms of gross margins for services?

Gross margins are encouraged by the trends that we see and we are hopeful that that trend will continue

Thank you.

Thank you. If there are any additional questions, please press the star followed by the 1 on your touch-tone phone. If you wish to cancel your request, please press the star followed by a 2. One moment, please. We have a question from Toby Fishbin of Lehman Brothers. Please go ahead.

Thank you. Good afternoon. You mentioned that some of the product margin improvement was as a result of cross-selling products to the PCS customer base. Can you give us more information on which product lines are being crossed and which type of customers? And also, what extent of PCS installed base percentagewise has been already covered by this cross-selling activities

Okay. This is a very good question. I am very happy to give you that on this call. The [INAUDIBLE] can range, of course, without disclosing too much competitive information, the [INAUDIBLE] can range from voiceover IP solutions that are sold to the PCS customers who want to expand their solutions of their infrastructure. They can be [INAUDIBLE] environment that used to have the XPCS product and now they would like to add another site and have decided to choose the NICE product, with the suite of publication that is we are [INAUDIBLE] financial environment, including [INAUDIBLE], storage and so on. Customers invested in the technology of [INAUDIBLE] and have -- for the sake of recording for compliance and make a small investment in the very basic quality management solution and now have basically taken the whole suite of applications in an investment of $200,000, and they have [INAUDIBLE].

In terms of the how much we have penetrated and or consumed of the opportunity, I would say that we are just beginning to coast. We have six months of [INAUDIBLE] started to work with one company the first two months of November, December last year we reoperated two different units so that the whole organization started to operate as one company. It is generally total training, the education of the people in sales, the knowledge of the people, we are only starting to see the benefits of these strategies. So, I would say that in terms of penetration, we're really -- we've only scratched the surface. But we have seen an increase already in terms of how much we have sold to the PCS partners compared in Q2 to Q1.

So, I assume, Haim, that there is further potential for product improvement. Is there any way that you can quantify?

I can't give a specific number, but I can agree with you that there is room for improvement because of this trend, yes.

Thank you and good luck.

You're welcome.

The next question comes from Shaul Eyal of CIBC. Please go ahead.

Thank you. Hi. Good afternoon. Congratulations. Good quarter. Two quick questions. Laurie, just housekeeping. Accrued expenses went up about 6 million to about 47 million this quarter. Anything we should be kind of aware about?

No. You simply have a shift from long-term liability up to current. They have become due. That's all.

Okay. Fair enough. And Haim, kind of more of a macro level type of question. I want to pick up on some of the things you mentioned during your presentation. You talked about some sort of increased demand, some sort of voiceover IP pickup within the telephone industry. Can you just slightly elaborate on that? What is it exactly that you're seeing in that space?

If you [INAUDIBLE] the most we are seeing is the customers are replacing their existing infrastructure in telephony, and as a result [INAUDIBLE] infrastructure, which includes also recording. I would say this is at this point in time in back office operation and in the small call centers, but the trend is definitely there, and we expect this to continue to grow significantly. [INAUDIBLE] voiceover IP, generally our feel for the market is we see a continuous demand, if you like, for the type of technologies that we sell. I quoted one customer that told me, "Haim, I see the new systems are becoming mission-critical." We could make an upgrade or we could make a change during the day or during the week. Now it's really mission-critical to the business, and we [INAUDIBLE] Our mission-critical IP system. So this, a trends. We hear it more and more from many customers. This is not only for the compliance part, but basically for the quality management and for the conduct with customers.

Okay. Thank you very much. Good luck.

You're welcome.

Thank you. We have a follow-up question from Will Manual of HSPC.

Hi. Just a quick question on operating expenses in second half of the year. In the first half, you've done a very good job of keeping a tight reign on them and certainly sales and marketing went down in Q2, even with the higher sales base. Do you have any guidance for us in Q3 in the second half? Is it more of the same?

I would say that we have discussed several times that we are building an infrastructure and building a platform for distribution. I think we have reached now the stage where this platform will continue and generate significantly higher revenue without a proportional increase in expenses. So, this is basically our strategy. We think that the fixed cost of the infrastructure is there. And I'm not saying that we will [INAUDIBLE]. But overall the platform is able to support the calls more or less with the same size.

Okay.

Again, from time to time we might have discretionary expense, like an event which we organized in Miami. But these are more [INAUDIBLE] than relate to a specific pre-exhibition of a bigger marketing event. But the overall platform should support significant continual growth.

Okay. Thanks.

Thank you. For any additional questions, please press the star followed by the 1 on your touch-tone foal. If you wish to remove your question, please press the star followed by a 2.

We have a follow-up question from Daniel Moran of IBI. Please go ahead.

Haim, just a quick question on the competitive environment. Do you see any change with the merger between [INAUDIBLE]?

This is a question that reflects or relates to a specific company, and we have made it a tradition in these conference calls not to relate the performance of any specific competitor.

Okay. So, can you give us just an overview of the competitive environment today versus three or six months ago?

I think it hasn't changed much. I think the market as we operate remains a very competitive market. Some competitors are up. Some competitors are down. There are always some more players can make a small gain here. The bigger players can make a small loss there or the other way around. So, overall, it's the same players that are competing. Of course, there are less players now with the merger that you refer to. But overall, this remains a competitive market and everyone is trying to capture market share from us. And we are trying to find another way out.

Okay. Thanks. The other question relates to any trends within certain verticals. Do you see any projects come from the ATC market, financial market or any other vertical?

The A TC market is not a big market for us, so I'm not sure there is any specific trend I can refer to. But there are from time to time projects there. Some years it can be more active. Other years it can be less active. But overall it is not a big part of our business.

And in the financial sector I think that we are seeing our solutions being used by now obviously for compliance in almost every sector. But in this sector we continue to see the customers that have originally used our solution for compliance in risk management understand the benefit of our technologies, the benefit of having captured this selection to better manage the Company. So, this is a trend that we expect to continue.

And one last question. From where you stand, I know you only see a portion of the IP market. But do you see any change in customer patterns, uptick in demand or something like that to NICE?

I don't find myself an expert on analyzing the overall IP demand or spending pattern. What I can see is that -- I don't think that there is a major -- we should take it with a grain of salt. I don't think there is a major upgrade in IP investment in general. I would be very surprised. I think there are specific areas I can't say where customers identify them as more mission difficult [INAUDIBLE]. Other areas. And hopefully we are lucky enough to be in the areas where they continue to spend.

Thank you very much.

Thank you. Once again, for any questions, please press the star followed by the 1 on your touch-tone phone. And to remove your question, please press the star followed by a 2. One moment, please. There are no further questions at this time. I before I ask Mr. Shani to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In Israel please call 039255950. Internationally call 97239255950. Mr. Shani?

Yes. Thank you, ladies and gentlemen, for your participation. I wish you all a happy holiday for those who will take holiday. And looking forward to seeing you in our Q3 results. Thank you and have a nice day.

Thank you. This concludes NICE Systems 2003 second quarter conference call. Thank you for your participation. You may go ahead and disconnect.