Nice Ltd (NICE) 2005 Q1 法說會逐字稿

Welcome to the NICE Systems first quarter 2005 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 4, 2005.

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.

I would now like to turn over the call to Mr. Haim Shani. Please go ahead sir.

Good morning and afternoon to everyone, and thank you for joining us today for a review of our 2005 first-quarter results.

On the heels of a fiscal year with the highest revenues in the history of our company, we just completed another strong quarter. We are pleased to report that we came in at the top end of our guidance range both in top and bottom-line results. We grew our revenue in Q1 by 13% on a year-over-year basis to 66.1, and we reported $0.29 per share from continuing operations, a 107% increase over the same quarter last year. This growth reflects strong demand for Insight from Interactions both in the enterprise and in the public and security sectors.

Also this quarter we accelerated momentum of our consolidation strategy with the acquisition of Dictaphone’s CRS business, which strengthens our leadership position in our key market sector.

Additional highlights from the quarter include -- we expanded gross margin to 55.3 compared to 53.8 in this quarter last year; we reported 5.8 million of net income, a 121% increase over the same quarter last year; we saw an increase in overall demand and a strong bookings momentum with a book-to-bill ratio of over 1.

In addition, we also started recognizing revenue from our flagship insight from interactions enterprise solution - NICE Perform.  The first installations are now in production and we are continuing to add more and more NICE Perform customers.  For these customers NICE Perform is a powerful tool that helps them understand customer and market dynamics and helps them drive performance, and these are key success factors both for their call centers and for the enterprise.   NICE Perform, as a fully integrated end-to-end offering, addresses the full spectrum of interaction management needs.  These include risk management and compliance, quality monitoring, performance management through content analytics, customer feedback, and coaching.  Another aspect of NICE Perform’s competitive advantage is the speech technology which is an integral part of the solution, which means that advanced analytics are performed not only on key words, but are derived from a variety of additional sources such as call flow analysis, customer feedback, business data and screen events.  This contributes to the effectiveness and accuracy of the analysis and allows our customers to extract from their interactions insights that can help them address major business issues.

Among recent wins of NICE Perform is Home Depot, which recognized the unique benefits of NICE Perform for extracting insight from interactions. Last month we announced a significant order from the National Bank of Canada to replace an existing installation of a competitive system; and from leading U.S. outsourcer, Precision Response Corp, which will implement NICE Perform at six of its major contact center sites.

Over the last quarter we also continued to see strong demand for our voice over IP solutions. Just a couple of days ago, you probably saw Avaya’s press release announcing the deal with Wynn Resorts in Las Vegas, which selected NICE for this joint project to supply our insight from interactions solutions for optimizing customer service.

We have extended our leadership position in voice over IP this quarter with orders from 56 additional customers in a variety of call centers and financial institutions, including HP, Ace Insurance, Contact Energy and New World Telecom. Our robust and reliable voice over IP contact center solution supports all the leading telephony vendors and, in particular, is fully integrated with the suite of Avaya’s IP environments. It is helping hundreds of organizations migrate to voice over IP with confidence, ensuring reliability and reducing total cost of ownership. And this leadership was recognized by the industry again this quarter. TMC’s Customer Interaction Solutions magazine presented NICE with the 2005 IP Contact Center Technology Pioneer Award.

And NICE’s leadership with IP goes beyond voice. Last month we announced collaboration with CISCO on intelligent information networks to bring voice and video onto a common IP infrastructure for retail bank branches. This collaboration is driven by NICE’s solution portfolio of multimedia content analytics, and will provide insight into customer interactions across three major areas.

For security we are offering video-based insights that include access and intrusion detection. For operations we are offering voice and video-based insights such as queue control. And for marketing, we are offering voice and text-based insights into competitive information.

In April we announced the agreement to acquire the assets of Dictaphone CRS and since the announcement we are progressing well and moving forward towards closing. We are happy to report that the response from CRS employees, customers and channel partners has been excellent. They are excited about joining the industry leader.

We believe that the acquisition of CRS is great news for us. It significantly increases our market share and solidifies our competitive position in each of NICE’s key sectors. It increases our existing customer base to 23,000, which provides a very large base for opportunities to upsell our insight from interactions solutions both for the enterprise and public and security sectors. The CRS business in NICE will become profitable almost immediately. And through this transaction we will continue to grow.

Turning to the public and security sector, NICE continues to provide the solutions that are vital to governments and public institutions in their effort to ensure the security of the public. In April we announced a multi-million dollar order from NAV CANADA, Canada’s aviation regulatory body. NAV ordered our advanced interactions management solution for air traffic control, and intends to implement it in 70 sites in addition to the 70 already deployed. This means that all of NAV CANADA’s ATC operations now utilize NICE solutions.

Last month we also announced a multi-million dollar deal with the Fire Department of New York. In fact, first responders across the U.S. are turning to NICE more and more to fill an urgently-needed gap in existing communication systems.

In Q1 we launched our advanced video networking solution, which adds the capabilities of long-distance transmission over an IP network to real-time distributed video analytics. The solution now allows command and control centers to monitor multiple remote sites from one location, in addition to enabling smart monitoring and automatic alarm management. This results in better security, and reduced overhead, manpower and maintenance costs.

During the last quarter we also released our mid-range video and analytics solution. This is the first solution that offers advanced video content analysis for the mid-range video market. And with the introduction of this option, we now have a full suite of solutions with the flexibility to serve a broad spectrum of market needs.

In geographical terms, the fastest growing region in Q1 was APAC, with over 50% growth over Q1 last year. For example, Telecom New Zealand, IBM in India and DHL in China are using NICE to extract business insight from customer interactions. Moreover, from the list of the top 14 outsourcers in India, as ranked by Datamonitor, 10 are NICE customers, including Convergys and Epicenter Technologies. And this is in addition to Sutherland and Wipro, which we previously announced.

These outsourcers, along with many others throughout APAC and the rest of world are recognizing the value-add of our solution to better serve their clients and callers.

To conclude, as the results and achievements of the first quarter demonstrate, we are clearly advancing and expanding the insight from interactions market, both in the enterprise and public sectors. We are growing our company organically, and we have just grown our market share, revenue stream and selling opportunities through the strategic acquisition of Dictaphone’s CRS business. We have critical assets that we are leveraging to our advantage and we are executing a strategy that is continually strengthening our leadership position.

With that, I'll turn things over to Ran for a more detailed financial review.

Thanks, Haim. Good morning and afternoon, everyone. I'll begin by giving you some of the usual metrics and then make a few comments.

As Haim indicated, after a great year in fiscal 2004, NICE overcame normal first-quarter seasonality and got off to an outstanding start in fiscal 2005. We had revenues at $66.1 million, up 13.3% from $58.3 million in Q1 ‘04. This reflects the general growth in demand for our insight from interactions solutions.

Looking at the geographical breakdown, in the first quarter the Americas increased 10% over Q1 ‘04 to $31 million, or 47% of total revenue. Europe, Middle East and Africa revenue increased to $23.5 million or 35% of total revenue. And Asia-Pacific region increased 59% over Q1 ‘04 to $11.7 million from $7.3 million, or 18% of revenue. The higher gain in Asia-Pacific reflects our growing market share in a less penetrated region, particularly driven by the trend towards outsourcing.

On the market basis, enterprise interaction solutions were $52.2 million, or 79% of revenue. Growth in the enterprise sector reflects, in part, new budget availability to accommodate regulatory and compliance legislation. Public and security revenues were at $14 million or 21% of Q1 revenue.

In Q1 product revenue increased to $47.3 million, or 72% of total revenue, while services and maintenance revenue grew to $18.8 million, or 28% of the total. This is compared with $41.4 million and $16.9 million in Q1 ‘04.

Total gross margin reached 55.3%, up from 53.8% in Q1 ‘04. Net income for the quarter was $5.8 million, up 121% from the 2.6 million net income from continuing operations in Q1 of last year. This increase is primarily driven by sales growth and improved operating margins. The earnings per share was $0.29, up 107% from the EPS from continuing operations of $0.14, which excludes income from discontinued operations of $0.17 per fully diluted share in Q1 of last year.

Turning to the balance sheet, cash and equivalents at March 31, 2005, totaled $185.1 million, up from $165.9 million at the end of December.

DSO at the end of March was 69 days, better than our long-term guidance of 70 to 80 days. We continue to see strong bookings with book-to-bill greater than 1. As a result we entered the second quarter with a backlog which is greater than one quarter of revenue and our visibility is improving.

Let's look at how we see the financial impact of the Dictaphone CRS acquisition on NICE. The transaction will close towards the end of Q2. Since the closing date is not yet certain, we expect that the acquisition might have an effect on the top-line in Q2, depending on the precise closing date, and will have a minimal effect on Q2’s bottom line.

We reiterate the guidance we introduced during our acquisition conference call last month of 295 to $300 million revenue and pro forma EPS at $1.50 to $1.60 per diluted share for the year.

We are introducing guidance for Q2 excluding the Dictaphone CRS acquisition as follows -- revenue between $67 and $70 million and continued improvement in profitability to allow $0.32 to $0.36 per fully diluted share, which represents an increase of 33 to 50% over Q2 '04.

As we continue to execute on our plan, we are maintaining good momentum across all business-lines, channels and geographies. We are expanding market share in our key sectors, growing the insight from interactions market place, and accelerating company growth both organically and through strategic acquisitions.

That concludes my comments. I will now turn the call over for questions.

(OPERATOR INSTRUCTIONS).

(OPERATOR INSTRUCTIONS). Daniel Meron, RBC.

Congrats on a great quarter. Just moving from the numbers to more strategic level. Can you talk a bit about the impact if any of the eTalk acquisition by Autonomy a couple of weeks ago, and if there is any impact on you guys?

We have announced our strategy of insight from interactions which derived from the very large installed base of systems around the world. We have developed the strategy and basically, if you would like, set the cornerstone of where things are going. And we understand that some companies will now try to follow this strategy. For obvious reasons, we believe that the strategy of an integrated full suite that NICE has developed over the last few years and now launched is going to be extremely difficult for people coming out of the industry and trying to, if you'd like, build this presence and consolidated approach, especially coming out of two companies. But, time will tell.

Moving to the video segment, you mentioned that you launched this product I guess a month ago or a couple of months ago. Did you start seeing any revenue from that product? And also, on the NICE Perform, did you start recognizing any revenue from that product?

We have launched the midrange product for the video towards the end of the quarter and we have already started to take orders for this product. And as to the NICE Performer, as we have mentioned in the call a little bit earlier, yes, we have started to recognize NICE Perform revenue this quarter. And it is now operational in those sites, of course.

Can you give us -- you mentioned some 16 or 17 sites up to now. How many of them have been recognized so far?

As we view this as very competitive information, we prefer not to go into specifically more details for obvious reasons. But, I think the important point is that this product is now becoming more and more mainstream. We have started to recognize revenue and there are customers using it in their daily operations.

Last from me, moving to the geographic strengths that you have seen, Asia-Pacific. Is this more of a quarterly thing? Obviously, it is a trend. But, the strength in this quarter, is it something to expect next few quarters as well? And also, if you can talk a bit about the other regions as well?

Obviously, on a year-over-year comparison, you can actually see the effect of the investment that we have made because the investment that you make in building your market presence, distribution and positioning in the region, you don't see the results in a matter of days or weeks or even months. So, on the year-over-year you can see the effect. Going forward, we believe that the Pacific region is a very important region for us. We are investing there. We have recently opened our offices in India. So, we believe that this region will definitely continue to grow.

Dan Harvard, Deutsche Bank.

Congratulations on the results. First of all on the NICE Performer, are you seeing demand coming mainly from the installed base or is it all from new customers?

I further lost (indiscernible). Can you repeat the question please?

Are you seeing demand for the NICE Performer coming mainly from the installed base or is it also from new customers?

It is across the board. The one that I did mention on a public basis right now, which is Home Depot, is of course a new customer. And also the Bank of -- the Canadian Bank of Canada was a replacement of the competitor. So, we are seeing the demand coming across the board (indiscernible)

And as, I guess, you are beginning to learn how your customers are using NICE Perform, are there any additions or changes that you see as necessary in the product, and is there any target for a next release of the NICE Perform?

Like any major product with a major addition to the industry, we didn't (ph) finish our job -- there will be like again -- like any (indiscernible) product there will be more releases and more options and more opportunities. I mean, we employ here hundreds of R&D people; we don't intend to send them home.

Any target dates?

No. I mean, once this suite has been now launched, it will follow, if you'd like, the normal course of new releases, new options. We have a tentative (ph) target date, but it's not something that we have announced.

Just on the gross margin, obviously, it's strong on the product side and slightly weaker than it had been the last few quarters on the service side. What was driving that change in the margin mix?

We had a ramp up on the (indiscernible) which is the infrastructure to support the expected revenue on this side (inaudible) the NICE Performer customers up and running. And we expect service margins to moderately grow in the coming quarter and get back to at least where they were at the end of last year.

And then on the product side, should we expect to see continual margin improvement?

Yes.

Scott Greiper, Unterberg.

Very good job on the quarter. Question -- I didn't quite hear when you were describing your VoIP solutions, and you mentioned, I think, that there were 56 customers, leading off with HP. Can you just repeat your comments?

Yes. I mentioned that we had additional this quarter 56 sites. I quoted several customers such as HP, Ace Insurance, Compact Energy and New World Telecom. And I also quoted the latest announcement made by Avaya a few days ago of the joint (indiscernible) if you would like, or the joint project in the (indiscernible) results where NICE as a strategic partner have deployed the voice over IP solution there. So, you heard correctly; the number was 56 additional customers.

And on the NICE Perform where you announced Home Depot, was that previously announced? I know National Bank of Canada was and POC was.

No. This is the first time that we mentioned this customer name, in this call.

Lastly, Heim, I'm wondering what your reaction is to the Department of Homeland Security passing about $150 million in additional transportation security grants a couple of weeks ago, specifically rail, public buses, public transportation. You guys are an emerging player in that sector with New Jersey Transit, etcetera. Are you seeing demand from public transportation agencies, particularly in the U.S., for video solutions?

Yes. We have seen the results and we are also seeing a lot of interest. As some of those that have visited and have (indiscernible) also are customers in the investor day event, we are deploying technology which is new, which is unique, which gives a completely new dimension for insight from interactions that helps specifically organizations like transportation authority. So, yes, our hands are full now.

I think on that analyst day -- this will be my last question -- the representative there from, I think it was New Jersey Transit if I'm not mistaken, talked about increasing their camera deployment this year. Is that happening?

We don't have an authority from them to announce anything except what was announced. So unfortunately, I cannot comment on this.

Ashish Kohli, William Blair.

Let me also add my congratulations on a solid quarter. A couple of questions for you. First, Ran, on the gross margin, the product margin this time was 67%. And I'm assuming that that's being aided by the inclusion of some of the NICE Perform more analytical type product. Can you talk about where you think those margins -- where your overall margin can go over the long run? Is this something that -- today we are at 55% roughly. Is this something that you think can get to 60% over time?

I think that after we launched NICE Perform, we set a long-term target which (indiscernible) of the product will be such that we'll have more of the analytics (indiscernible) from interaction in our product portfolio (inaudible). We can go beyond the 60% gross margin in total 70% of the product (inaudible) which is not something that we know we are going to achieve in the coming year or two. But, this is definitely a long-term project we believe is achievable.

Secondly, in terms of NICE Perform, obviously, you guys are recognizing revenue this quarter. Is there -- without giving any quantitative facts, can you talk about the interest that you're seeing in that demand today relative to say three months ago? Has the interest level increased, remained the same, etcetera? If you can just give us a little bit more information on the traction that you're seeing for that product.

Again, without quantifying it, of course, I can say that there are two trends that are important. One is becoming, as I said initially in the call, more of a mainstream product on one hand. On the other hand, we are starting to see that the, if you would like, the enterprise-wide benefits are starting to get more and more of the attention of the enterprise. This is a process that takes time. It doesn't happen in a day. But, if you're asking me where we are compared to where we were a few months ago, it is definitely the understanding, the awareness of what is the total enterprise value which takes time to introduce is growing compared to where we were before.

One last question. On the casino opportunity, I know on the last conference call you had talked about the replacement cycle. We're still early in the replacement of or transition from analog to digital. But, in terms of when -- obviously, this is a new casino and so it wasn't necessarily a migration from analog to digital. Can you talk about potential other opportunities in the casino market in terms of -- now that you have got wind of the customer as they look to build out some of their casinos in China, what kind of an opportunity does that present for you?

The announcement that was made on the win was (indiscernible) not a NICE announcement, it was an Avaya announcement. We have to be very careful here. So, the announcement was by Avaya and it related to our voice over IP solution. That's just to put the win into the right perspective.

In general, the casino opportunity, I would say as we see it has several market areas. One of course is all the markets in Asia. This for us is a completely new market which we're now starting to develop. I referred to the video product in Asia. So, this is a new market for NICE.

And then, I would say there are two other markets. One is the very heavy regulated market of the casino, which is one part. And basically all the rest. And all the rest can be both in America and in other parts of the world. And each one of them has a different dynamic, I would say. Probably those that will be the last one to drive on the digital bandwagon and implement high-end digital video technology will be the more regulated environments in the States.

The rest -- they're already there. We have talked about the casino in Atlantic City last time. There are other casinos which we did not announce by specific names that we have installed our technology both in Europe and in the United States. This is in the (indiscernible) but not in the less regulated environment. Overall, the casino market is a market which is -- which has still a very high potential for our technology over the next few years.

Roni Biron (ph), Oscar Gross (ph).

Congratulations on the quarter. Most of mine have been answered. First, can you provide us with any -- with the split between the video sales and the public safety sales?

(inaudible) the previous quarter would say that about half of the revenue on the public and security side (inaudible) public safety. So, there's no -- any major change in (inaudible)

In regard to your video solutions, can you comment on the progress that you are seeing in terms of the trends in the industry and the prospects for large deals such as airports and other potential customers?

We are seeing the very, I would say, (indiscernible) pipeline in terms of large projects for video across the world.

Jonathan Half, UBS.

Can you discuss the pricing environment, and specifically if there are any differences in pricing between different regions on your various products?

Nothing of any substance. This industry has been very competitive, at least from the time I am in it. And there's no -- nothing of any significance in terms of the pricing which is new.

So, your pricing is dollar based globally, or is it in Asia different?

I would say a significant part of our pricing is dollar based. We also have the euro in the euro countries. We have also some areas that are -- the pricing is euro based.

When you look into your backlog, is there any specific area where you see better visibility or better growth? And then maybe if you can discuss between your two business segments, the enterprise and the public, what you are expecting in terms of growth rates for those two segments in '05, please?

The order intake, or if you like, the booking for the first quarter was strong for both divisions. So, there was not anything significant in terms of one was strong and the other one was weak. Both booking in both areas in both divisions was strong compared to what we have seen in the past. And therefore, going forward there are two very exciting opportunities in two sectors. Very difficult to predict which one will be a little bit faster than the other one (indiscernible) also grow but at a little bit lower rate. On a quarterly basis it's difficult to know.

The percentage of growth that we have predicted for the year excluding the Dictaphone made some assumptions on both of them growing. And statistics will say which one will in the end grow faster than the other. But, from a macro trend, there are enough macro trends to drive growth in both sectors. So, whether it is out in producing new technologies, whether it's demand for compliance, for security, marketing. So, which one (indiscernible) will be a difference of the pure percentage between one and the other, we'll have to wait for the end of 2005.

Regarding NICE Perform, I understand that you don't want to give any specific information. Can you just say if the number of customers that you added this quarter was higher or lower or equal to what you have added in Q4?

We believe that as it is now becoming more of a mainstream product, we have given, I think, the initial indication that this product is moving. We're making momentum. We have also quoted new names that we have added, including such a household name as Home Depot. So, we think that this is a very successful product and making a lot of progress.

And then just some housekeeping. What was the headcount at the end of the quarter, please?

About 1100.

So, it was about flat compared to the end of Q4?

It was growing slightly.

The tax rate was a little bit below what I was modeling for. What should we be modeling going forward, specifically for Q2?

We are looking for somewhere in the range of (inaudible)

That's for the year and for the quarter?

Yes.

What should we expect the share count in the second quarter, assuming roughly the same share price? Which I hope is not correct.

That is the part that we are not in control, but it's probably going to be a little bit higher than the 19.8 we had this quarter. Probably in the range of 20 or (inaudible)

Finally, Haim, can you repeat the comments you made regarding India and specifically the customers you mentioned? I missed that part.

I mentioned that out of the 14 -- 14 outsourcers that have ranked (indiscernible) by Datamonitor, 10 are NICE customers. I have mentioned names like Convergys and Epicenter Technologies. And I said that this is in addition to (indiscernible) which we previously announced.

Thomas Ernst, Deutsche Bank.

This is actually (indiscernible) covering for Tom. Several of the questions we had have been already covered, but there were a couple we wanted to ask. One of them is if you could provide some level of guidance in terms of amortization and depreciation going forward, even if it's just relative to CapEx?

I don't have it right here in front of me but it shouldn't be different than the level of amortization and depreciation we had in the last several quarters, if you relate to the (indiscernible)

So, we are talking in terms of absolute terms or in proportion to CapEx?

Yes.

Okay. Also, the same kind of question with respect to deferred revenue. I understand that you are not disclosing that in the balance sheet. But, can you provide some level of indication at least some proportion of accounts receivable?

Deferred revenue is not a big part on our balance sheet. We more relate to the backlog which reflects (indiscernible) orders that we have received and to deliver in the next 12 months. We ended the quarter with a backlog that is greater than one quarter of revenue.

Shaul Eyal, CIBC.

Congratulations. Good quarter. Two quick questions. Ran, on the interest income, should we be expecting similar levels in the second quarter?

The interest income is running somewhere in the range of 800 to 1 million in the last several quarters. Assuming the interest rate will remain the same --

Or continue to rise. On the Home Depot, Haim, maybe can you walk us through the sale cycle, the length, how many competitors were participating, were bidding for the contract? Just kind of provide some more insight into it.

I wish I could. Obviously, we got the green light to disclose the name, but I don't think that it would be appropriate from our side to disclose all the buying decisions and so on. I would like to assume that a serious company such as Home Depot has reviewed all the other alternatives in the marketplace.

In terms of the cycle, was it longer? Was it what you anticipated going into the bid?

It was a normal -- I would say a normal cycle like one expects from this type of business.

Including all the usual prospects in terms of the competitive landscape?

Again, I cannot comment anything more than what I said. I just want to assume that, again, a customer like -- a company like Home Depot, I would assume that they have done their homework.

Michael Colodni (ph), Vega (ph) Consultants.

Just a quick question regarding the acquisition of the Dictaphone assets. Can you please elaborate on what will be the influence of the acquisition on gross margins. Do you believe that they will improve?

As we said in the conference call, after the acquisition we -- after announcing the acquisition, we believe that it is not going to have any material effect on our gross margin and we continue to have gross margin in the range of (inaudible)

Avshalom Shimei, HSBC.

Congratulations for the numbers. Just in regard to the number of large deals, if you can supply that and the ASP.

In this quarter we had seven over 1 million deals, and out of them five came from enterprise customers and two came from public and security customers.

Can you say anything about the ASP, the average selling price?

(inaudible) discussed this issue before (inaudible) the ASP between seven digit deals to tens of thousands (inaudible) at the end of the day give you some kind of average that (technical difficulty) no indication to anything, because (technical difficulty) to big Home Depot-like customers. So, it should be somewhere in the range of hundred of thousand, but I don't think you can give a really indication to anything.

Is it fair to assume that in the over $1 million deals, the majority of the implementations were of NICE Performer with the analytical tools, or that won't be the case?

It depends which one of them has their own road map. We believe that all of these customers either already (indiscernible) about to get into the NICE Performer with analytics on the security side. But, it's a matter of time, because the new product offering -- and you take your time for bigger organizations to move forward.

Going back to the gross margin of the quarter, because it was a nice surprise on the increase of the gross margin (indiscernible) segment. Is that growth something to expect to continue the same -- maybe the same trend, or that is a number we should expect to looking forward in the next few quarters?

I would say that on the product side, this is a quite high gross margin. We are not focusing in the coming quarter to (indiscernible). It's going to be about at that level, maybe slightly higher, maybe relate to higher volume. On the service side, once we ramp up on the revenue (inaudible) more closer to where we started (inaudible)

Lastly, just trying to sense the backlog growth rate or the momentum that you see there, the increasing visibility. Would you say that at the end of the fourth quarter, did you have a similar greater than one quarter sales when you looked at the end of the fourth quarter, or was it less than that?

The book to bill in the fourth quarter was more than one and also this quarter was more than one. So, mathematics basically means that we have continued to increase our backlog.

Shaul Eyal, CIBC.

Haim, you mentioned before the big outsources in India, obviously, also in the U.S., going for the NICE Performer. Is it fair to assume that Convergys -- and I think you also mentioned that name -- could be ramped between probably the third largest call center's outsources that you are servicing?

I (indiscernible) to be exact, I referred to Convergys in India as the outsourcer in India. And I listed Convergys as one of the top 14 outsourcers in India out of the 10 that we serve. More than that, I cannot be specific on any customer.

Jonathan Half.

Thank you. Ran, I just wanted to clarify a comment that you made. Regarding the integration of Dictaphone's business, are you guiding that gross margin for the first quarter following the acquisition is going to remain at current levels for product and service, or should we see a step down, and then as you integrate the Company, an improvement?

First of all, we are going to see the full quarter integration of Dictaphone operations into our operation only in Q3. We don't believe it's going to be (inaudible) effect on gross margin. And once we get through it we'll get back at least to where we are today. So, it's not going to be a material change.

And what are you expecting in terms of the increase in operating expenses from the acquisition in Q3?

We haven't gave this -- that guidance. What we gave on the acquisition side (inaudible) the first two quarters it's going to add about or close to $20 million on the top line, and generate on the bottom line $0.10 to the EPS.

And you're saying similar gross margins to the Company?

Yes.

Scott Greiper, Unterberg.

Heim or Ran, I think you were just talking about the number of $1 million-plus deals. And I think you said that there were seven in this quarter -- five enterprise, two security public.

Yes.

What was the number in last year's first quarter?

I don't have it in front of me.

If you could just follow-up with me on that and also the breakdown between the two segments.

Yes.

There are no further questions at this time. I now ask Mr. Shani to go ahead with his closing statement. Mr. Shani?

I would like to thank everyone for participating in this call. This was, obviously, an important quarter for NICE with the strong start for 2005. And with the acquisition of Dictaphone's CRS business, we are expanding our leadership position and are accelerating company growth with increased revenue and global footprint. Our strategy is working and we are excited about our future prospects. We look forward to talking to you again next quarter. Have a good day. Thank you.

Thank you. This concludes NICE Systems' first quarter 2005 results conference call. I would now 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; and internationally please call 972-3-925-5930. Thank you for your participation. You may go ahead and disconnect.