Nice Ltd (NICE) 2004 Q3 法說會逐字稿

Welcome to the NICE Systems third quarter 2004 results conference call. All participants are at present in a listen-only mode. Follow management's formal presentation instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded November 3, 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 Prospect section of the Company's annual report on Form 20-F for the fiscal year ending 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 products, inability to timely develop and introduce new technologies, products and applications, difficulties or delays in 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 these forward-looking statements. The Company undertakes no obligation to update these forward-looking statements.

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

Thank you, operator, good morning.

[audio difficulties] sequential revenue growth at the upper end of our guidance. We continue to grow revenue much faster than expenses, and this quarter we achieved the best operating margin in many quarters.

Our EPS came in above the high end of our guidance, and was up 33% versus Q3 of last year. The enterprise sector, which accounted for 77% of total revenue, had another excellent quarter.

We are gratified by the enthusiastic reception for the NICE Perform suite with our customers, partners, and leading industry analysts. We booked eight NICE Perform deals within two months of launching the solution including a significant order from the leading European ISP provider, T-Online.

It's difficult to explain how advanced this new solution really is when every vendor is using similar marketing buzz words. However, we are validating the uniqueness of the solution every day.

We hear from our customers that no one else is offering the scope of capabilities that we have and certainly not in a fully integrated end-to-end solution.

We are very pleased by the market acceptance of NICE Perform, and we believe this new solution will enable us to continue to gain market share and help our customers to gain valuable insight from interactions to drive business performance. As a matter of fact, in one of the first NICE Perform deals we replaced a competitor's existing solution.

There are a variety of industry analysts who published market share data. The most recent Frost & Sullivan report placed our market share at 34.7.

A lot depends on how you define the market. The way we look at the market is actually pretty simple. Our product sales to contact centers and financial trading floors are slightly higher than our next two closest competitors combined.

When you compare our 33 million in product revenue to 14 for one and 16 to 17 for the other, it's pretty clear to see who the leader is.

In addition to our well-known strengths in the financial services area, we are gaining a lot of business in the healthcare vertical market. Several of our new NICE Perform customers are in the healthcare industry.

We believe that NICE Perform will also become the platform of choice for contact center outsourcing companies around the world. One of our first NICE Perform deals was with a large European outsourcer through Avaya.

Everyone is aware that we have always been very, very strong in financial services. We have been building on this strengths to achieve Voice over IP leadership in this vertical market with some large deals with existing customers. I must say, however, that we are just beginning to scratch the surface.

We booked nine Voice over IP deals with existing customers in Q3 but we booked an additional 45 new customers of Voice over IP in a variety of vertical markets via our outstanding relationship with partners.

I am also pleased to say that we are beginning to see more traction in the public sector, public and security sector, which accounted for 23% of revenue in Q3. The sequential improvement in revenue from this sector was 17%, which indicates that we are beginning to see some real momentum.

Included in this category are solutions for video surveillance, command and control systems, first responder communications, and lawful interception. This quarter we had a wide variety of deals from all over the world for such diverse customers as state transportation authorities, central banks, police forces, fire departments, correctional facilities, postal authorities, military installations and air-traffic control sites.

We are starting to see our pipeline growing, and all our hard work in developing and strengthening our channels is beginning to pay off.

Our public safety partner, Motorola, is benefiting from initiatives aimed at improving communications among first responders. As Motorola's solution of choice for recording this type of transmissions, we expect that our pipeline will continue to grow in this area.

Speaking of channel partners, we are very pleased with the continual progress we have made with our partners in both sectors. I can honestly say that we are in the strongest position we have ever been in with each of our partners from Avaya to IBC to IBM to Motorola and others. We believe these relationships will be a strong source of growth in the future.

Now I'll turn the call over to Ran to go over the financial results.

Thank you, Haim.

As Haim indicated, the third quarter tends to have some seasonality, and we were pleased with the sequential revenue growth.

We had Company record quarter with revenues at $63.5 million, up 14% from $55.9 million in Q3 '03, and 4%, from $61.3 million in Q2 '04. We had five seven-figure deals in Q3, four in the enterprise, and one in the public sector.

The geographic breakdown of revenues for Q3 was the following: Americas accounted for $30.5 million, or 48% of revenue, compared with 49% in Q2 '04, EMEA accounted for $22.9 million, or 36% of revenue, the same as in Q2, APAC accounted for $10.1 million, or 16% of revenue, compared with 15 in Q2.

On the product line basis, contact centers trading floors were $49 million, or 77% of revenue, compared with 80% in Q2. Public and security-related revenues were $14.5 million, or 23% of revenue compared with 20% in Q2.

Product revenue increased to $45.7 million, or 72% of total revenue, while services and maintenance revenue grew to $17.8 million, or 28% of the total. This was the same split as in Q2.

Product gross margin increased again to 64.7% in Q3, and gross margin on services increased to 29.2%. Total gross margin reached 54.7%, up from 54.3% in Q2.

Net income was 5.2 million, up 48% from $3.5 million in Q3 '03, and 15% from $4.5 million in Q2 '04.

The earnings per share was 28 cents, up 33% from 21 cents in Q3 '03, and 17% from 24 cents in Q2 '04. This represents the operating leverage and scale advantage we have in contributing bigger proportion from the revenue growth directly to the bottom line.

The non-GAAP net income from continuing operations, which excludes special charges, was the same in Q3, $5.2 million, or 28 cents per share, versus $3.1 million, or 19 cents per fully diluted share in Q3 of last year.

The non-GAAP net income from continuing operations in Q2 '04 was $4.5 million, or 24 cents per fully diluted share. This represents a 47% increase year-over-year and 17% increase sequentially.

We are continuing our pattern over the past several quarter of generating significant positive cash flow. Net cash flow from operating activities in Q3 was 11.3 million.

Turning to the balance sheet, cash and equivalents at September 30, 2004, totaled $146 million, up from $135.8 million at the end of June.

DSO at the end of September was 68 days, better than our long-term guidance.

In Q4 we expect revenue to be between 67 and $70 million, and fully diluted EPS in the range of 44 cents to 49 cents, which is consistent with our previous guidance for all of 2004.

We continue to see strong bookings with book to bill greater than 1, and our visibility is improving in the public and security-related sector. Our preliminary guidance for 2005 calls for revenues between 275 and $280 million, and EPS of 1.4 to $1.50.

Now we'll open the call to Q&A.

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 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. One moment, please, as we poll your questions. Our first question is from Amite Unai of ING Bearings. Please go ahead.

Very, very nice quarter on all fronts. Two questions. One regarding NICE Perform. Can you give us an indication if you recognized any revenues of NICE perform during the quarter, and if not, when should that be recognized?

Hi, Amite. This is Ran. First of all, thank you. We said specifically that we haven't recognized any of the eight deals during Q3, and we don't anticipate any material revenue in Q3 coming from NICE Perform. We do see [inaudible] more revenue driver or growth driver for 2005.

Okay. Regarding your fourth quarter guidance, from my calculations it looks like you're factoring somewhere around 56.5% gross margins. I mean, that's a pretty big increase in gross margin. What do you attribute that to?

If you look at our model and track record, you'll see that beyond a certain point, each dollar of revenue is generating much higher marginal contribution to the bottom line, which means that if you grow from 64 to 65 million, or 67 to 70, as we guided, the bottom line contribution of each dollar is much greater than the average. And this is how we look at our business.

Okay. Thank you. Good luck.

Thank you.

Thank you, Amite.

Our next question is from Jonathan Half of UBS. Please go ahead.

Thank you. Hi. Great quarter. Actually, first question is regarding cash and actually cash and evaluation of market is awarding you. You had about a third, actually about 40% of your market cap in cash, you continue to generate cash, you're trading at a material discount to the peers. I'm sure you're aware of all this. Are you considering, have you considered buying back shares?

Well, of course, hi, this is Haim. Well, of course, looking at all the alternatives we believe that we have demonstrated in the past a very successful M&A strategy and execution, and we think that within the opportunities that are ahead for NICE to grow, both, we have both organic opportunities and external opportunities, and we believe that this will probably be the best to serve our shareholders. But, of course, we are looking at all alternatives as well.

But strategically, the variety of markets and technologies that we operate, we believe that there are quite a large number of opportunities to grow both organically and also externally.

Okay. And then I want just to clarify a comment I think you made. You mentioned nine VoIP deals in Q3, and you also mentioned an additional 45 deals this quarter?

I said nine to existing customers and 45 new customers.

For VoIP?

Yes. It was very strong growth achievement we're very pleased with.

Also when I compare you to your competitors, historically you guys did not have a backlog, while others, or at least one does. It seems from your comments today that maybe that's changing, you're starting to build a backlog. Is that the case and do you see this as a significant change?

We are starting to build a better backlog than in the past, correct, which, of course, gives us more confidence when we look at the future.

Can you give us a sense of what percent of the current quarter that covers your backlog?

Up until now we haven't revealed any figures related to the backlog. We do see a buildup of the backlog in the last year, and we see a nice percentage of the Q4 revenue that are already in our pocket.

Okay. And finally, in NICE Perform, I think you commented that you don't expect to record or recognize material revenues in Q4. Can you give us a sense of what's the obstacle or what you're waiting for in order to recognize revenue, and also give us sort of a sense of what you expect NICE Perform as a percentage of revenues in 2005?

Like with any new technology, we [inaudible] take a more conservative approach. This product was only launched a few months ago, and therefore we start from this respect to take a more conservative approach before we start recognizing revenue. We believe that NICE Perform and all its derivatives can, of course, help to us grow significantly next year.

Could it be 10% of product revenues?

We haven't, you know, finalized a specific number, but the thing with NICE Perform is a wide variety of solutions, including into our traditional contact center market, so we believe it should be a significant part of the business, yes. Great. Again, congratulations on a good quarter and good luck going forward.

Thank you.

Thank you. Our next question is from Will Emanuel of HSBC. Please go ahead.

Hi there. Congratulations again on a great quarter. Most of my questions have been answered. Just one thing on NICE Perform, could you give me an idea of the ASPs of the eight deals you've already done, and would those deals be typical of the size of deals you'd be expecting going forward, or would they be sort of smaller size, these ones?

We always said that the NICE Perform range would start with, I would say, at least six-figure deals. If one would start at the very basic system, it would be on the low end of six-figure deals, and it can grow to seven-figure deals as well. So this would be the range.

It would be highly likely that we'll have a NICE Perform solution of less than six figures, and we hope to have as many as possible of seven figures, but again, this would probably be on the extreme as well.

Right. The deals completed so far, would those be --

They would be in this, more or less in this range, of course.

Okay. Thanks.

Thank you. Our next question is from Daniel Marrone of RBC. Please go ahead.

Congrats again on a good quarter. Couple of questions for you. First, can you give us the spread on video and security and public safety?

Daniel, can you repeat? Can we give what you?

The split on video and public safety.

The split. Yes. Ran.

Okay. If we take out of the total public and security-related, which was 23% in this quarter, out of that, slightly over 10% was the video side.

Okay. So it was less than 10%?

No, it was slightly over.

Oh, sorry. Slightly over.

Over of the total revenue.

Right. And so that's pretty much flat from the past quarter, right?

It's, no, basically the video is growing, but it's about the same percentage. A little bit higher and dollar-wise it's more than that.

And can you comment on linearity during the third quarter?

The linearity during the third quarter?

Right. How was the first month of the third quarter, second and third, and how do you expect it to be during the fourth quarter?

It was a, I would say that Q3 was a good quarter for us. As we already said, the book to bill was high and it was, of course, not spread evenly, but it was spread very well from our perspective, in terms of not all the deals came in the last week or the last two weeks, we had a gradual buildup of the business, and we hope to see the same this quarter.

Okay. Can you comment a bit on the competitive landscape? It seems like you guys are doing better based on this quarter and also on the outlook, better than --

Daniel, you'll coming out very, very difficult to understand. Can you repeat the question?

Yes, sorry. Again, can you comment again on the competition? It seems like, based on this quarter's results and the outlook that you provided, that you're seeing better trends in competition.

We're seeing a strong market for us, as you can see from the results and from the guidance, and it's probably a combination of maybe some market share gains and overall demand for our products.

Okay. That answers my question. Thanks.

Our next question is from Uof Borgen of Poleum Sahar. Please go ahead.

Hi, just one short question, actually two. What's the total current number of outstanding shares?

About 18.5 million shares.

18.5. Okay. And the other part of the question, what's the current number of outstanding options?

I'll have to look into it. I don't have with it me here.

Okay. Can I get back to you on that?

Yes.

Okay. Great. Thank you.

Thank you. Our next question is from Ronnie Braun of Oscar Gross. Please go ahead.

Congratulations on a good quarter. I have two questions. First, in regard to the NICE Perform, what's the period of time in which a typical project is spreading? Is it, we're talking about a few quarters for the first stage of implementation, or even more?

Again, it depends on the size and the magnitude of the limitation because we have a variety of options, so I would say it can range from, I would say a quarter to two quarters would be a typical range, but there can be extremes.

Okay. And the second question is regarding the effective tax rate. What do you expect looking forward?

For the near future we do expect the tax rate to remain at a level close to 10%.

Okay. Thank you 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 request, please press the star followed by the two. One moment, please, while we poll your questions. Our next question is from Shaul Eyal from CIBC. Please go ahead.

Thank you. Haim, Ran, congratulations. Impressive quarter. Two quick questions. Ran, I don't know if you commented on the geographic breakdown for the quarter, I might have missed it.

Actually, we had it, and I can go back to it. We had 48% coming from Americas, 36% coming from EMEA, and 16% coming from APAC.

Okay. Thank you. And Haim, just another NICE Perform-related question, again, with respect to the competitive landscape, In the deals, for example of, okay, you have nine recurring Voice over IP deals, 45 new customers, generally speaking who are the companies that you are gaining share from? Are these some of the system integrators you're seeing out there? CRM, enterprise software? What's the nature of the wins?

The nature of the wins at this point of time is specifically when we talk about Voice over IP, even with the NICE Perform, would probably be the traditional, if you would like, legacy quality monitoring companies, traditional companies that are out there.

Like the usual suspects? The straight vendors? You don't see any system integrator, for example?

System integrator would not be a competitor, per se. The system integrator, can be, if he's offering a competitive product. I can not think of many of these situations, but this would be a very rare case. I can't think of any specific big system integrator that we have competed against when he represented award with a competitive product. It's not something that is a trend or anything.

Got it. And one final question. Maybe for you, Ran. With respect to next year's guidance, what's the share outstanding number that you calculate when applying your EPS for next year?

We looked at a range of somewhere between 19 to 20 million shares.

Okay. That's great. Thank you very much. Congratulations, and good luck.

Thank you.

Thank you. Our next question is a follow-up question from Daniel Marrone from RBC. Please go ahead.

Can you please provide some insight on the relative weakness in the video segment? It's been pretty flat for the last couple of quarters, or even down, and how should we expect it to trend next year?

We actually had a great quarter in video. Not everything is represented in revenue, so I cannot disclose the specific booking numbers, but we had an excellent quarter in the video side.

We had presented our solutions in [ATIS] a few weeks ago with a lot of excitement from our technology. At the content analytic [inaudible], which is, if you'd like, an operational with our system, have been demonstrated well accepted by leading, not companies, by leading entities, including government agencies in the United States.

We are starting to see additional orders after the first installations of content analytics have been implemented, so the extra revenue number of the video, which is actually an increase from last quarter, is not telling you the whole story. So we are very excited with the progress of our video business.

As I said, we had a great quarter in terms of order income, and we are seeing a lot of traction in terms of the acceptance of our high end content analytic base technologies.

When do you expect to have the mid-line product out?

We expect to launch it, basically we're going to see the effect of this product at the beginning of next year.

Okay. And so what's going to drive the growth next quarter? Is it video? Is it enterprise? Or the whole business?

We hope to see growth across the board.

On a geographical level do you see any variances?

What was the question? On geographical?

Yeah, is there more growth coming from Asia or Europe or U.S., anything on that side, or [inaudible] business line?

Again, we hope to see growth also across the board on a geographical basis. This has been the trend that we've seen so far and we hope it will continue.

Going to 2005, is it, again, across the board?

At this point, we don't know.

And what kind of contribution do you expect to have from the mid market video product next year?

When you say contribution, you mean what percentage of the business it will be, or what will be the gross margin?

Well, no, how do you expect it to, I mean, is it going to provide a significant boost to your revenue? Do you think that this is what's missing to provide you with a better suite of solutions? How is it going to contribute on your win rate?

We think that the combination of mid-size product, mid-range product, plus the content analytics influence on the high end, we think that these two together can drive growth in the video sector next year.

Thanks.

Thank you.

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 that a replay of this call is scheduled to begin in two hours time. In the U.S. please call 1-866-276-1485. In Israel please call 03-925-5930. Internationally please call 9723-925-5930. Mr. Shani.

We had an excellent year so far, with revenues up 13% and EPS up 163% for the first nine months versus a year ago. We had very strong bookings with over a quarter's revenue in backlog. We are looking forward to a strong finish to the year in line with our earlier guidance.

We are beginning to see some group traction from the public sector, notably in video and our NICE [track] products. This combined with continued strong performance on the enterprise sector bodes well for 2005.

Our preliminary guidance is for revenue growth similar to this year and continued strong operating leverage that enable us to drop two to two and a half times the revenue growth to the bottom line.

Thank you, everyone, and I look forward to sharing with you our success in the coming quarters.

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