Nice Ltd (NICE) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Ohna and I will be your conference facilitator for today. I would like to welcome everyone to the NICE Systems first quarter 2004 results conference call. All participants are at 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 5, 2004. I would now like to turn over the call to Miss Rachela Kassif. Please go ahead.

Thank you, Ohna. Good morning or afternoon to everyone.

This call contains forward-looking statements according to the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Please be advised that the company's actual results will differ materially from these forward-looking statements.

Additional information that could cause actual results to differ materially is contained under the heading "Factors that Could Effect Future Results". [Inaudible] in financial [inaudible] prospects section of the company's annual report on Form 20-S for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission. Such factors include but are not limited to changes in technology, end market requirements, declining demands for the company's products inability to timely develop and introduce new technologies, products and applications, difficulties or delays in our absorbing and integrating acquired operations, products, 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 or performance of the company to differ materially from there forward-looking statements. We undertake no obligation to update these forward-looking statements.

Now, I would like to turn over the call to Haim Shani, President and CEO

Thank you, Rachela. Good morning everyone.

We had a good Q1 with normal seasonality affecting our sequential comparison. Our revenues were up 13% from the first quarter a year ago and we reported 14 cents per share from continuing operations, a cent more than the analysts estimate according to First Call.

Revenue from our security-related businesses grew 15% sequentially, mainly as a result of very strong performance in public safety. We expect this performance to continue since we are just beginning to see the first signs of consistent business coming from our expandable relationship with Motorola.

As you recall, from our last call, our digital video business won a deal with a major U.S. airport which was identified in a subsequent press release as an upgrade at the Dallas-Ft. Worth airport. Then in March, we announced our largest digital video deal ever for $3 million again at a major U.S. airport that we can't name at that moment. Now, in the last few weeks, we have booked the largest [ELKO] deal for us in Europe as well.

We are becoming the clear leader in the market for large airport and transportation facilities security systems, and this is expected to remain a major opportunity for us over the next several years at least. Yesterday, we announced two new NICE Vision products as part of our latest release of our suite of digital video solutions.

NICE Vision Alto is a mid-range solution designed to fit between our NICE Vision Pro and Harmony products to offer greater channel capacities than competing products and provide the flexibility to monitor incidents with varying resolution, frame rate and image quality. We expect this product to appeal it a wide variety of needs, particularly in Europe.

NICE Vision NVSAT. That's a new competitive standout for IP network systems by providing smart digital monitoring in a distributed environment. It enables faster detection with on-location content analysis and more reliability for local storage in case of [inaudible] downtime with the same flexibility to change the resolution, frame rate, and image quality.

This product was created specifically for the transportation and facilities markets where high quality video must be transmitted over long distances. This includes airports, rail and toll road systems as well as unmanned site and high risk multi-site facilities. NVSAT also supports the full range of NICE Vision content analysis capabilities.

Even though our greatest strength is at the high end of the market at large, complex digital video projects with sophisticated analytic requirements, we now have a full suite of products with the flexibility to serve a broad spectrum of market needs that will make us less dependent on adoption rates at the high end part of the market.

Also being able to offer a complete suite of compatible products is a competitive advantage even though we still intend to focus on the high end where margins are higher, due to less commoditization and [fewer] competitors.

Our relationship with IBM is progressing. We have been providing them with training on our products and we have been making joint calls to customers with them around the world.

Our analytic software for video is in an advanced stage of testing in various locations such as U.S. military bases, U.S. transportation authorities and U.S. power plants. The combination of this and other developing strategic relationships, as well as the new products we are launching, cause us to be optimistic about the performance of our security-related businesses as the year progresses, and over the next several years.

Turning to the contact center business, we had a very, very strong quarter in Europe. This last increase in service revenues helped offset the impact of the normal seasonal weakness and long sales cycle that we are seeing on large deals.

According to the most recent reports on Data Monitor which has been considered the authority on our market for a long time, we are the [inaudible] market share leader, we hold the number one position in every geographic region of the world and we are number one in contact center. [Inaudible] after the TCS acquisition, we don't need an industry report to tell us we are also number one in the financial trading floor market.

While the Data Monitor figures are a quarter behind, we believe we have continued to retain the number one position, based on the fact that we continue to increase our competitive solution at key customer sites.

I'm also referring to outdated [inaudible] and talking about policing [inaudible] competitors, sharing products that either don't work or don't satisfy the need. These customers are household names but we obviously aren't going to risk embarrassing our customers by identifying them.

Another point I want to emphasize is our relationship with Avaya continues to be outstanding, and we believe we will continue to generate a local business together with them in the coming quarters and years. Voice Over IP continues to be a strong growth driver and we continue to benefit from our relationship with all major infrastructure company.

At the end of this quarter, or during the quarter, actually, we had added additional 40 Voice Over IP customers. The emphasis we place in this area early on has proven to be very important in putting us ahead in this area.

We will talk a bit more about what we see going forward after Lauri goes over the Q1 financials.

Before I turn the call over to Lauri, I want to thank her for doing such a terrific job for the past 3 1/2 years. This is a much different company than we both joined within a few weeks of each other back then, and Lauri was an important factor in the improvement we have seen.

Some of the accomplishments of Lauri and her team include upgrading our systems and controls, improving our working capital management and helping ensure that we have a extremely smooth integration of the TCS acquisition. We wish her well in her new position but I want to emphasize that she is still here until August in order to affect the smooth transition once her successor comes aboard and of course she is still available to help and answer your questions.

In addition, our finance department has many excellent and highly experienced people who continue to do their usual fine job. One such person is Eran Porat who we're promoting now to Vice President of Finance.

Now, I'll turn the call over to Lauri.

Thank you, Haim.

NICE has made significant progress since Haim took over and being part of it has been a tremendous experience. I believe that the company has even more exciting opportunities ahead and making the decision to move on to a new challenge was difficult one.

I will certainly miss all the wonderful and talented people at NICE and as Haim said the finance team is made up of really outstanding individuals who have lots experience and a deep understanding of the company and I will be timing my departure so as to ensure a smooth transition.

Now moving on to the usual items. The usual geographic break downs are as follows: Americas accounted for $28.2 million, or 48% of revenue, compared with 49% in Q4, [Imaya] accounted for $22.8 million of revenue or 39%, compared with 36% in Q4, [Apac] accounted for $7.3 million or 13% of revenue, compared with 15% in Q4.

As Haim noted product revenue declined primarily due to normal seasonal factors. Service revenues continued to grow, reaching 29% of total revenue in Q1. Gross margin in Q1 was 53.8%, a major improvement from Q1 last year which was 50.2% but a decline from the record in the fourth quarter due mainly to lower volumes and a slightly less favorable mix.

Currency exchange rates impacted the comparison of operating expenses in Q4. Sales and marketing expenses in Q1 increased as planned, however, other operating expenses were about the same as Q4 excluding the effect of currency fluctuations. On a net basis, exchange rates did not affect the year-to-year comparison.

On a GAAP basis, net income was $5.9 million in Q1, compared with $1.9 million in Q4 and $209,000 in Q1 of 2003.

The per share comparisons were 32 cents in Q1, compared with 11 cents in Q4 and a penny in Q1 of 2003 on a fully diluted basis.

As you will recall, we sold the assets of the COMINT/DF last quarter, so net income from continuing operations on a GAAP basis in Q1 was $2.6 million or 14 cents per fully diluted share, compared with $1.6 million, or 9 cents per fully diluted share in Q4, and $39,000 or breakeven in Q1 of last year.

The non-GAAP net income from continuing operations which excludes special charges, was the same in Q1, or $2.6 million, or 14 cents fully diluted compared with $7 million or 39 cents fully diluted in Q4, and $483,000 or 3 cents fully diluted in Q1 of 2003. Net operating cash flow from continuing operations in Q1 was $7.7 million.

Turning to the balance sheet, cash and equivalents at March 31st totaled $127.2 million up from $107.3 million at year-end. In addition to net operating cash flow, the increase in cash also reflected the exercise of stock options, the proceeds of the COMINT/DF sale and payments of a disputed amounts in [TALIS], partially offset by payment in respect to the dictaphone settlement.

Day sales outstanding at the end of March was 69 days, compared to 74 days at the end of 2003. This represents a record low DSO for the company.

Now I'll turn the call back to Haim to discuss the outlook for 2004.

As I described in the last call, we're in the process of transforming the company, from primarily a contact center product focus company to an enterprise solutions focused company. This evolution will affect all areas of the company and our challenge going forward will be to continue to execute well in our current areas of focus while expanding our horizon.

Important milestones will be officially production of our new enterprise interaction analytics solution in a couple of months. We have been getting a tremendous response from customers who have had a chance to review the solution and who are really excited about it.

We realize that you see a lot of press releases in our industry that sound very much alike, but we believe that when you have an opportunity to [steer] a solution, it will be apparent that this is a step beyond the current technologies and solution for being stuck together from several different sources, of those whose limited functionality being described using the latest industry buzz words. We continue to be flattered as once again the industry is embracing our terminology in this respect.

You have been hearing us talk about interaction analytics for quite a while because we have spent enormous effort getting a wealth of feedback and input from our customers as part of this major initiative. We look forward to sharing the details with you soon, and believe this will position us to again benefit from the first quarter advantage in 2005.

Meanwhile, in Q2, we expect revenue to be between 60 and $62 million and EPS in the range of 22 to 25 cents. This represents both sequential and year-over-year revenue growth, and the strong improvement in EPS excluding special charges of between 57% and 79%, even as we continue to invest in our strategic initiatives. And now, we'll be pleased to take you 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 follow the by the one on your touch-tone phone. If you wish to decline from the polling process, please press the star followed by a two. Your questions will be polled in the order they are received. Our first question comes from Jonathan Half of UBS. Please go ahead, sir.

Thank you. Nice quarter, Haim and Lauri. Can you just clarify, did you say, did you give guidance for Q2 gross margin is between 57 and 58%?

The EPS growth compared --

Oh, okay. Okay. Great. Can you discuss what your expectations are for gross margin as we go through the year?

They will continue according to our plan of course we're expecting gross margin to continue to increase. As we said, there is an effect of volumes of course, as volume changes, it should also improve the gross margin, and some potential mix change, but overall, from Q1, we are expecting a slow continuous improvement in gross margin.

Okay. Can we see gross margin back at Q4 levels in Q2? Given the fact that the sales levels will be roughly the same?

Again, it depends on the final mix between obligation, services, so we cannot be sure exactly to -- you know, we expect improvement in the gross margin from Q1 to Q2.

Okay. Can you share with us a little bit more information regarding the enterprise analytical solution? You're saying, I think you said that it will be released in a few months. You know, when do you expect to begin recording, record revenues, you know, what sort of magnitude of revenues should we expect in the Q3, Q4 time frame?

Unfortunately, we are trying to balance between the short and the long-term interest of our shareholders, and this is the balance between exposing all the pieces and keeping it as, if you would like, as a, to make it such that our competitors will have a less amount of information, because many people are trying to understand exactly what we do. So I will not be able to be more specific than I just said.

But as I said, with things that, what we have in hand and the feedback that we are getting position us in a significantly different and broader space than we currently operate in terms of the benefit to customers and to the enterprise. But I cannot be at this point in time more specific.

Okay. That's -- the last housekeeping, what was the head count, please, at the end of the quarter?

It was 1,030.

1,030. So you actually, were you down sequentially?

No, from continuing operations, it is up.

Oh, right. Because -- right, because you sold the assets. Okay. Great. Good luck going forward.

Thank you.

Thank you. Again, if you wish to ask a question, please press the star followed by the one on your touch-tone phone. And if you wish to cancel your request, please press the star, followed by a two. Our next question is from Shual Eyal, CIBC. Please go ahead.

Hi, good afternoon, Lauri and Haim. A couple of quick questions from me. Lauri, any way we can break out the 20 million that we have [inaudible] net increase on the cash?

Sure. We have 7.7 million coming from operations. We have 8 million coming from the proceeds of the exercise of options. We had 4 million from the sale of the COMINT/DF, 4 million in the computer [inaudible] and that was offset by 3-plus million of payments to dictaphone.

Thanks. That's great and helpful. With respect to the revenue mix, for the second quarter, any color you can provide us with at this point?

As always we start without [inaudible] exactly to how the next quarter or actually how the previous quarter is a difficult task. We are expecting both the contact center market and [MD] security business to grow.

Which one, analytical division, between them which one will grow faster, there are several opportunities, quite significant in the contact center business, the same in the security side, so exactly which one will at the end of the day materialize, as you know, we are always basing our assumptions for the revenue on some statistical mix and analysis, it is difficult to know to tell you.

So what I can say is more on a longer term that, repeating what I've said, we are seeing traction in the security side of the business. We are also seeing opportunities, quite large ones in the contact center space so which one will materialize first and what will be the exact mix on a quarterly basis is difficult to say.

Fair enough. And then another quick question. I think about four or five weeks ago, one of your Israeli competitors announced an additional contract with a U.K. governmental agency. Was NICE part of the bidding process?

I don't know specifically which company you refer to, and we don't, I don't know, I have no idea what specifically you are talking about so I cannot comment on it.

Okay. And the final question from me. You know, Haim, we talked a lot about kind of, you know, the transition becoming more kind of a software kind of analytic company, you know, yet at the same time, I know we feel a lot of excitement also on the securities side, and you know, how do you see transitioning? What are the actions that you are taking to portray the story as being more soft, you know, more analytic driven?

I would say that we are not working on stories we are working on the actual work which is -- as I've said in this call, there are [inaudible]. We are testing, the analytics, so an example of the video side in major transportation authorities, in major military base in the U.S., in the major plans of utilities facilities, and what we are trying to do is to really build the benefit for the customers and work with them on the real benefits, how it helps, how it becomes an operational system, both in the securities side but of course in the other side.

So our focus is not so much on telling the story but building it together with the customers, and you know, we believe in long-term and once this has happened, then of course, people will understand, and realize what we are doing. So our major focus is I would say a combination of internal steps and with working with clients. This is mainly what we are trying to do, and this is also explained to investments in customers facing activities that you will see.

How would you kind of portray the progress that you have done with, you know, last quarter, you talked about it, you also mentioned it obviously in operating expenses likely going up and you know indeed that was the case. How would you portray the progress that you achieved in the past couple of months?

I didn't hear you.

How you would portray, how you would define the success or the progress that you have you seen in the transition?

Okay. I think we're progressing according to our plans.

Okay. Fair enough. Thank you very much and good luck.

Thank you.

Thank you. Our next question is from will Manual at HSBC. Please go ahead.

Hi there, Haim and Lauri. Just firstly you mentioned in the statement that one reason for the Q1 weakness was to due to the long sale cycles on some large deals. Have those large deals now come in?

You're talking if they have come in since Q1?

Yeah.

Some of them are in a very advanced stage, yes.

Right. But you haven't actually completed them? There was, you thought you might get in Q1?

That is not what I said.

Okay.

I said that Q1 came more or less within the range of what we were expecting.

Right.

That's basically, in Q1 traditionally after we closed the, we had a very, very strong Q4, in the contact center space and talking about orders, so we didn't expect that in Q1 we will have the same large deals that we had in Q4. So that is why the reference to a large deal are taking long so you know.

Right. And how big is the large deal for you? Around the million dollar mark or is it more now?

The large deals, we usually refer to things that are around the seven figures, plus or minus, yes.

Okay. Probably something for Lauri, could we get breakdown of the split between contact center and security?

In Q1, contact center and trading floors accounted for 72% of revenue, digital video, 12%, and public safety/government, 16%.

Okay. That was great. Is the public safety stuff, is the margin above or below the company's average margin?

The company's average, total gross margin?

Yes.

It is above.

It is above. All right. Okay. Thanks a lot.

Thank you. The next question is from Delon Green of SK. Please go ahead.

First let me thank Lauri for the job she did at NICE and I wish her good luck in her new job. And my question relates to the Voice Over IP space and mainly regards to your competitive advantages in that space, if you could provide some color on it, please?

As I said, we had the, both the, we have both the new addition of the new customer in this space. We also have, as you might be aware, we have a [inaudible] technology in this area.

And in terms of the exact competitive capabilities that we see, although our competition, I would not like to go over the same presentation in order not to give out competitors, a clear idea how we position ourselves but we see the customers really appreciate the, if you like, the scalability and reliability, and our experience in the area of recording, if you like traditionally recording which has been transported to the new Voice Over IP technology.

Do you think you can maintain your market share within that space relative to what you had in the traditional space?

I hope that we will improve it.

All right. Thank you.

Thank you. The next question is from Robert Cass of Signvest. Please go ahead.

Hi, Lauri and Haim. Nice quarter. I have a question about your services revenue. Is that usually a leading indicator of the number of jobs you're working on, contracts you're working on? And the margins went down a little bit on this quarter. Is that a trend? Do different type of contracts have different margins? Where do you see the service revenues going, what sort of a booking?

Our overall service, the overall margin as we said was a mainly as a result of a combination of different mix and volume. And so that is one item.

In terms of our service revenues, this is an indication that, and we've talked about it before, that we are providing now more than just a [coding] platform. What we are providing is software application solution, and therefore the implementation, the process management around these larger than before, and we expect this to continue.

Now, it can change of course from quarter-to-quarter, we can have from time to time a job or several jobs that has much more of this component, or less, but we are now in the area of the 30% of revenue, which is a number that we thought if you like back then, three years ago, we are now hoping to get close to this number. Again, from quarter-to-quarter, the range we'll make will change but we think that the 30% is a reasonable number.

How many service employees do you have now?

307.

307, so that's up quite a bit sequentially, right?

No that is up from 299.

299. Okay. And are you stocking up in the U.S.? Where are you stocking up in the service business?

I would say that we are now, without being too much, too specific, it is not so much of stocking up, it is also a combination of change of the mix, it is change of the mix, and also, the type of people that we are adding and also, we are seeing growth in the [APAC] region and as a result we are, if you like, building our infrastructure there to support our partners in this region. So why you might not see it in the actual financial results quarter, overall, we think that [APAC] will continue to grow, we have a tremendous market share there, and we hope to at least maintain it, but, and even to continue to grow market share in this important [inaudible].

How much do you expect your new products to impact your business in this year?

We expect the majority of the impact to be in 2005.

Thank you.

Thank you. We have a follow-up question from Jonathan Half of UBS. Please go ahead.

Thank you. Lauri, I just wanted to clarify something. In the first three quarters of '03, you had, you still had the COMINT business is that correct?

We had the COMINT business in all of 2003, but when we reported Q4, we presented all the figures excluding COMINT except on a net basis right before our net income.

So actually Q1 last year, if you do the apples-to-apples growth rate, it is actually a little bit above what you note in your press release?

It is 13%.

Pardon?

Our calculator gave us 13%.

That includes the business you sold in Q1?

Comparing 58343 to 51842.

Right. But the 58.8 includes the COMINT business you sold?

51.8 does not include the COMINT business.

Okay. I wasn't aware of that. Okay. My other question is Haim, you can give us a sense of what you're spending on SG&A or maybe just in selling, and maybe also give us a sense in R&D, on the new product for the enterprise analytical solution?

I would say of course a significant part of our research and development is in both areas, in both in the video side and in the contact center side is dedicated for launching our new technology, while of course maintaining our leadership in the [captured] platform, and storage and management and so on. But this is significant number of people that are working daily, are working and are we continue to work on the new technology.

We are also considering in terms of infrastructure for support, training and so on in the field for these purposes.

Can you give us, when do you expect to begin generating revenues or recognizing revenues?

I would say that we hope to see the impact of continued technology toward the end of the year but mainly towards 2005.

Okay. Thank you.

Thank you. The next question is from Walter Ramsley of Wallace. Please go ahead.

Congratulations. Great quarter. I had a couple of questions. On the last conference call, the company put out guidance for the entire 2004 earnings of $1.10 to $1.20. Does that still apply?

We don't see any reason to change it.

Okay. And the relationship with IBM, could you go into that briefly, and characterize how big of an impact that could become?

IBM is a very big company and has of course can effect or help our business both in the enterprise world and in the security world. That's the good news. Of course, it takes effort, it takes marketing, [inaudible] in order to benefit from this relationship. And the timing of it, we will see extra impact of this, we hope to start seeing it towards the second half of the year and next year.

Okay. And then one last thing, the breakdown of the products for the first quarter, the contact center, digital video, public safety, is that just for the product sales or does that include service as well?

That's a breakdown of the total revenue including service as well.

Great. Thanks very much.

Thank you. If there are any additional questions please press the star followed by the one on your touch-tone phone. If you wish to cancel your question, please press the star followed by a two. One moment, please. We have a question from Igrati Monius of [inaudible]. Please go ahead.

Hello Lauri and Haim. I'm just curious, do you think to raise money in the near future in the secondary or in debt?

Obviously, we are, I'll have to give you the standard answer, unfortunately, but we are of course not putting down any possibility, and everything we will consider when it is relevant and if relevant for strategic and long-term growth.

So only the standard answer?

Yes.

Okay. Thank you.

Okay.

Thank you. There are no further questions at this time. Before I ask Mr. Shani to go ahead with his closing statement I would like to remind participants the replay of this call is scheduled to begin in two hours. In Canada and the U.S. please call 1-888-I'm sorry 1-888-269-0005. In Israel, please call 03-925-5950. Internationally, please call 972-3-925-5950. Mr. Shani?

Yes, thank you everyone and Lauri and myself look forward to have our [inaudible] calling at end of the July 2004. Thank you all and have a nice day.

Thank you, this concludes NICE Systems first quarter 2004 results conference call. Thank you for your participation. You may go ahead and disconnect.