Nice Ltd (NICE) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NICE Systems Second Quarter 2004 Result 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, July 28, 2004. This call contains forward-looking statements in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be advised that the Company's actual results could differ materially from these forward-looking statements. Additional information that could cause actual results to differ materially is contained under the subheading "factors that may affect future results" in the "operating and financial review and prospects" section of the Company's Annual Repot 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, in market requirements, decline in demand for the Company's product, inability to timely develop and introduce new technologies, product and applications, difficulties or delays in absorbing and integrating acquired operation, 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 these forward-looking statements. The Company undertakes no obligation to update these forward-looking statements.

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

Thank you, operator. We are pleased to report another quarter of strong growth. As you recall, in Q1, our security-related business was the growth engine. However, this quarter, the strength in revenue came from our enterprise customers. The contact center financial trading floor segment showed a 17% sequential increase in revenue. This increase was by particularly gratifying considering it appeared in the quarter preceding the introduction of the major new suite of products for the contact center market.

Judging by our pipeline of potential business, the strength in demand will continue. This positive picture was also reinforced at our annual customer event this week in Miami. As a matter of fact, we are conducting this call from Miami and we are delighted by what we have seen in the past two days. Attendance was a record 340 customers representing people from allover the world. This number was 70% more than last year and 50% more than what we actually originally expect. This represents a large proportion of the 544 Nice User Group members, mostly from Fortune 500 companies. We were gratified by the support of traditional strategic partners such Avaya and our new ones such as IBM who sponsored this event. They devoted a great deal of time and resources to help us make this event a major success.

As you saw in the press release, we use this occasion to officially launch a completely new suite of solutions called Nice Perform. This has the most powerful capabilities on market today. Most exciting of all was the reaction to Nice Perform from customers attending the event. Nice Perform was designed from the ground to enable executives in the contact center and in other parts of the organization to quickly identify and address critical business issues. As we have been explaining for some time, a tremendous amount of the valuable information lies [either] within the huge qualities of unstructured multimedia interactions such as phone calls and wed-based communications.

If these interactions are captured and analyzed, key decision makers can gain powerful insights into market dynamics, including their customers' attitudes and intentions. We realized that some of other industry players are already adopting our terminology in the marketing in their marketing and unless you look very deeply, it might sound pretty much the same. However, what our competitive can't do is offer the seamless integrated holistic solution that we have spent years to develop. Our system combines multiple data sources in a fully integrated architecture with centralized data warehousing which allows interoperability of all the data sources to address a variety of business issues. Nice Perform provides state-of-the-art multidimensional analytics and visualization techniques that enable users to easily identify trends, deviations, or abnormalities that requires an action.

As impressive as these applications are, it's also important to explain that the underlying foundation is a brand-new series of powerful high-density capture and archiving platforms that process interactions in a format that is optimized for analytical applications. These new platforms are so important because, obviously, you cannot analyze what you haven't captured and these captured platforms are very cost-effective for this purpose.

Most of the presentations here in Miami, more than 20, were given by customers for customers and I just like to take a moment to give you a few examples of what we heard. Our customers who had been using the Nice Perform systems shared their experience and feedback. We hear them talk about using the system initially in the more traditional way in areas that help them to improve agent performance. In fact, one of them reported that scores improved from 58% to 82 to facilitate dispute resolution to improve customer satisfaction. Customers share best practices with their peers in getting the most out of our system's capability. But their most gratifying comments related to the new and innovative ways that our customers are using these new capabilities.

Picking just one example, the Vice President of Service at FedEx Custom Critical, described their experience with Nice Perform. She explained that they are the largest expedited delivery service in the world. They have to keep track of 1,300 trucks owned by independent contractors and 99% of their business is done over the phone. She explained that they were interested and they were -- things that they were looking at Nice Perform across the enterprise were initiatives in areas such as identifying new skills requirements to help in the recruiting process, improving driver satisfaction and lowering attrition, gauging the effectiveness of sales and marketing campaigns, implementing proactive issue resolution, and further need for new services, aid in developing a new order system. Just one example of the measurable ways that Nice Perform can improve business performance is the FedEx Custom Critical reported to the Group that there will be [inaudible] that drop as a result of the decreasing in fright [inaudible].

After speaking with the broad cross -section of our existing customer base here this week, I am more confident than ever that Nice Perform has the capability to completely to inform the way our customers make critical business decisions. We have the broadest set of advanced capture platforms ranging from traditional telephony to patented voice-over IP solutions and we have the most advanced application suite, released and customer tested. Our relationship with traditional partners such as Avaya are stronger than ever and we are excited about the new relationships such as IBM that will help us across the entire enterprise.

Returning to the results of the quarter, one of the primary reasons for the strong growth is the excellent relationship we enjoy with our partners and especially Avaya. We achieved record revenue from the Asia-Pacific region in the second quarter. Our trading floor business has also being good. Of course, voice-over -IP continues to fuel growth as well, both in the Cisco and the Avaya environments. And now we have just completed training of the IBM sales force on our voice-over-IP solutions.

Turning to the other side of the business, our close collaboration with Motorola on a new trunked radio solution has gone very well and Motorola will be launching the product soon. We are excited about some large scale of opportunities that are in the pipeline for potential business listing. Our relationship with IBM continues to improve. We are an official voice and video partner with IBM and we have been appearing at various events with them in that capacity. We're seeing the level of activity and momentum beginning to build and we recently received our first large order as a result of this relationship.

Before we get into the outlook for the rest of the year I'll turn the call over to Lauri to go over the financial results. This will be the last time you will hear from her at NICE and we want to thank Lauri for her many valuable contributions to the Company and to wish her well in her new job. I'd also like to take this opportunity to welcome Ran Oz who will officially become our new CFO on September 1. Many of you already know Ran from Ceragon and those that don't will have the opportunity soon. He and Lauri are both here in Miami collaborating on a smooth transition. Go ahead Lauri.

Thank you Haim. Let me start with the usual breakdown. The geographic breakdown of revenues for Q2 was the following -- Americas accounted for $30.1 million or 49% of revenue compared with 48% in Q1. EMEA accounted for $21.9 million or 36% of revenue compared with 39% in Q1. Asia-Pacific accounted for $9.2 million or 15% of revenue compared with 13% in Q1.

On a product line basis, contact center trading floor's revenues were $48.9 million or 80% of the total. Digital video revenues were $6 million or 10% of the total. Other security-related revenues were $6.4 million or 10% of the total.

Product revenue increased sequentially to $44.2 million or 72% of total revenue while services and maintenance revenues grew to $17.1 million or 28% of the total. Product gross margin increased slightly to 64.3% in Q2 and gross margin on services was about the same as in Q1 at 28.4%. Total gross margin reached 54.3%, up from 53.8% in Q1.

On a GAAP basis, net income was $4.5 million in the quarter compared with $5.9 million in Q1 of this year and $1.4 million in Q2 of 2003. The per share comparisons were 24 cents compared with 32 cents in Q1 and 9 cents in Q2 of 2003, all on a fully diluted basis.

We sold the assets of the COMINT/DF business in the fourth quarter of 2003. The net income from continuing operations this quarter was again $4.5 million or 24 cents per fully diluted share compared with $2.6 million or 14 cents per fully diluted share in Q1 2004 and $1.2 million or 8 cents per fully diluted share in Q2 of 2003.

The non-GAAP net income from continuing operations, which excludes special charges, was the same as in Q2, $4.5 million or 24 cents per fully diluted share compared with $2.6 million or 14 cents per fully diluted share in the first quarter of 2004 and $2.1 million or 13 cents per fully diluted share in the second quarter of last year. Net operating cash flow from continuing operations in Q2 was $8.1 million.

Turing to the balance sheet, cash and equivalents at June 30, 2004, totaled $135.8 million, up from $127.2 million at the end of March. DSO at the end of June were 69 days, the same as of the end of March. Now I'll turn the call back to Haim to discuss the outlook for the balance of the year

In Q3, we expect revenue to between $62 million and $64 million and fully diluted EPS in the range of 25-27 cents. We are maintaining our previous guidance for the full year of 2004. We have noticed a definite strength in demand recently We are receiving excellent feedback and strong interest in our new suite of solutions. We are finding that the more our customers learn about this new capability the more potential they see for improving performance within the contact center, in other areas of the enterprise as well.

Also, we have a new consulting group that will help customers identify additional opportunities to improve business processes, make better faster decisions and improve performance. In addition, we also believe that the availability of new security-related products and strengthening channel relationships will also lead to higher sales from this segment during the second half of the year and beyond. And now we will be pleased 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 "*" followed by the "1" on your touchtone phone. If you wish to decline from the polling process, please press the "*" followed by "2". Your questions will be polled in the order they are received. One moment please. The first question is from Jonathan Half of UBS. Go ahead sir

Thank you. Hi Lauri and Haim. Can you please maybe comment on Nice Perform a little bit in more detail? From the comments made by the FedEx executive it appears that they already bought or at least are testing the product. Can you may be comment on when do you expect to recognize revenue from the new product? And also maybe give us some sort of -- quantify the magnitude of the opportunity aesthetics and for the products? Thank you.

Okay. First of all, in terms of when do we expect to recognize revenue. As we said, our expectation on this is going to be very marginal in 2004 and, of course, the rest will be 2005 and beyond. In terms of quantifying, obviously, I will not go into details -- on the financial details with the specific customer, but all I can say that the reaction that we have received so far -- and this is not just from FedEx -- as I said, we had 344 customers attending this event from Fortune 500 corporations and they have gone through detailed demo and also they spoke to FedEx and WPS executives and the reaction is very clear that this product -- this technology is very relevant, way beyond the traditional contact center compliance in quality monitoring. At this point of time, it is, I would say, a little bit for us premature to quantify the exact potential, but overall we think it can have a major impact on the ways corporations communicate with their clients.

Okay. Can you -- it sounds from the comments that you made that your visibility or backlog, I don’t know how you measure it, has improved. Can you really comment how it is today as compared to how it was may be three months ago?

I would say that in terms of order intake for the second quarter, we had the best ever in the Company history.

Great and just one housekeeping from me, what was the headcount, please, at the end of the quarter?

1,034.

Okay. Thank you very much and good luck.

Thank you.

Thanks Jonathan.

Thank you. Your next question is from Will Emmanuel (phonetic) from HSBC. Go ahead sir.

Yeah, hi Haim and Lauri. Can you just give us some idea in terms of additional marketing costs associated with the launch of new products that are going to be incurred in Q3?

Thank you. Thank you very much for asking this question Will. The right question. Yes, as I said, we were expecting attendance of a little bit over 200 customers, we have attendance of over 340. The reaction that we have received for the overall, I would say, branding, the positioning has been overwhelming and as a result, of course, we have decided in the third quarter to make some, I would say, one-time marketing investments in order to really capture on these mid and long-term opportunities. Exactly the numbers I would not disclose it for the benefit of our competitors, but obviously they are in the several 100s -- in the six digit area.

High six digits?

Significant enough.

Okay. And can you say something about the pricing model of the new product?

On the pricing model -- will be combination of products, license, and also services. So this will be more in the modulus we believe again for those advanced customers that they will receive from us a combination of license or product and also services for implementation because the implementation in different organizations and different vertical markets are going to be again different and will require some customization and other [technical difficulty]

Selling into the enterprise arena, anything that you have been seeing in that respect?

I want to repeat what I've said; we had 17% of sequential growth in our sales into the enterprise sector from Q1 to Q2.

And did that trend kind of continued into the beginning of the third quarter?

So far what we see is that -- as I said, we are very pleased with the progress we are making in this market.

Okay. Thank you very much. Good luck.

Thank you.

Thank you. If there are any additional questions, please press the "*" followed by the "1" on your touchtone phone. If you wish the cancel your request, please press the "*" followed by a "2". One moment please. The next question is from Robert Cass (phonetic) from SUNinvest. Please go ahead sir.

Hi, Haim and Lauri.

Hi.

Nice quarter. I have a question, what's going on in your non-enterprise business and when you would expect that to start seeing an uptick? And on the security side, in particular, if you can give a little more color what's going on in that market versus your competitors and when you see the end markets, Haim, to get more aggressive [in buying] security?

Yeah, it’s a very good question. The security side, it has basically several components. On the video side as we have mentioned several time, at this point of time we’re very focused on the high-end of the market, the larger security of the larger video surveillance implementations, whether they are airports or the large casinos and so on. This high-end sector of the market at this point of time is still small, it's growing, but it's still small. From what we've seen in terms of adaptation of the technology, the benefit that this technology gives to customers, we are optimistic that this segment will grow. Of course, how fast and when, it’s a little bit difficult to predict, but overall we think that in terms of the penetration of digital video technology in this high-end sector it's still very, very small. So there is still a lot of room for growth for this sector. In terms of the mid-range of the market, we have recently announced product that will also be relevant for much larger segment, which is the mid-range of the market and this product will be available towards the end of the year and we would like or hope to see our business also growing in this part of the market

Will you be going after different channels, go after the mid-range of the market?

Yes

Can you talk a little bit more about that?

Haim Shani Excuse me?

Can you talk a little bit more about that? The channel ports for the mid-end and the size of the mid-end market and who you would compete against in the mid-end?

We are now working with -- again without disclosing specific names, but we are working with several, I would say, relevant and focused channels to the mid range of the market. One of the benefits that we bring or we believe that we bring that we can take in terms of price performance, or [actually] absolute price will be closer to the competitive product that are out there, but with capabilities and with features that are, I would say, higher than most of them. And again, we have just launched this product. They are not available yet for shipment. We received very good reaction and we are actually now in proposals for several large opportunities with several of the channels, both in Europe and in the United States.

I have another question. Can you review what your year guidance was and where it stands now?

Yes. Our year guidance was top line growth of 10-15% compared to 2003 and EPS of 1.10-1.15 and we maintain the same guidance.

And now I have implications that you have a very strong feeling or our confidence that Q4 is going to be a very strong quarter, even stronger quarter?

This is very much in line with lots of the [quarters] that we have seen for the last few years including last year of the modest growth of Q3 and a very strong Q4.

Excellent. And, Lauri, can you sort of break out the headcount price with the scenarios, how many sales people you have versus sort of service?

Sure. The professional services group including the consulting group that Haim mentioned, was 322 staff at the end of June and the sales force was dropping to 220 at the end of the quarter.

And are you hiring more people now, what's the status there?

There might be a very-very modest hiring, but overall we are not planning to make any significant increases.

And in terms of the margin on the services side, do you expect them to remain at this level or this sort of [inaudible] out or are you able to -- are you working on higher value-added projects right now to charge more per sales person?

If we are talking mind and long-term, we believe that there is a room for improvement also in this area as a result of, I would say, higher value-added projects, but this is mid and long-term, not necessarily on an immediate quarter deviation.

Okay. One last question. How do you sort of describe your company in terms of being hardware and software now and where do you see [it being] in two years? How much hardware you are going to develop?

In terms of hardware, per say, we have a very, very small development team of capture platforms where we think there is a competitive advantage compared to, I would say, other alternatives there in the market. But just to give you some color, out of the other 200 and something R&D people that we have, probably 85% are handling software development and we think this ratio will continue.

Thanks very much, good luck.

Thank you.

We have a follow=up question from Will Emmanuel (phonetic) of HSBC. Please go ahead sir.

Yeah. Just a quick one on the new product. Given that it's a little bit different from products you have been selling previously; to this menu, you have new channel partners or what different partners or in-house personnel do you have to sell this product?

Yes, it's a very good question. I would say that the product is leveraging, of course, distinct relationship that we have with our existing customers. So we are not launching product or a solution that takes us to a completely new market. However, within the customer base, within the contact centers, we are offering, we are enhancing our solutions across the enterprise, getting or coming out from the contact center to many departments. As a result, we see a continuous hybrid model, but we will work -- continue to work with our additional partners, also with our additional customer, but also we are going to enhance our relationship with other type of partners such as IBM. And Senior executive from IBM just addressed the -- if you would like, the crowd here yesterday sharing his vision of where IBM together was NICE can go and what benefit it can give to the industry.

So, it will be a hybrid model of our traditional partners, existing expertise we have in the Company, additional -- I would say, additional competent that we have -- competence that we have in the Company. For example, we just recently hired the Vice President coming from one of the CRM companies, just joined as Vice President of Sales, just joined us a few days ago to add some more focus and competence and experience in this direction. So I would say it's all these elements together is the direction of where we are heading.

Okay, thanks.

Thanks.

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 that a replay of this call is scheduled to begin in two hours' time. In the US, please call 1-866-376-1002. In Israel, please call 03-925-5950 and internationally please call 9-723-925-5950. Mr. Shani.

Okay, I would like to thank you everyone and looking-forward to see you in Q3 earnings call. Thank you and have a nice day.

Thank you. This concludes NICE Systems' second quarter 2004 results conference call. Thank you for your participation, you may go ahead and disconnect.