Nice Ltd (NICE) 2005 Q2 法說會逐字稿

Good morning and thank you all for holding. 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 August 03, 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 the call over to Mr. Haim Shani. Please go ahead sir.

Good morning and thank you for joining us today for a review of our 2005 second quarter results. I will begin by providing comments on our second quarter performance, highlighting events and key accomplishments. I will then turn the call over to Ran Oz, for a closer look at our financial performance, and then turn to you for questions.

Q2 was a record quarter for NICE, following through with the strong beginning we had for 2005 with last quarter's results. As we reported in our earnings release, NICE continues to show exceptional growth and leadership expansion in our core markets both in the enterprise and public and security sectors.

We reached record quarterly revenue in excess of $72 million, for the first time in the company's history. This is an 18% increase on a year-over-year basis. This increase is particularly gratifying as it reflects successful execution of our near and long-term strategy to become the global leader in providing Insight from Interactions, and reflects the successful integration of the Dictaphone CRS business.

Additional highlights from the quarter include;

We expanded pro forma gross margin to 56.7%, compared to 54.5% in this quarter last year We reported $0.36 per share on a pro forma basis, a 38% increase over the same quarter last year.

We saw an increase in overall demand for Insight from Interactions with 9 seven digit orders, coming from all sectors and regions.

And we also saw a strong bookings momentum with a book-to-bill ratio of over 1, for the fifth quarter in a row, increasing our visibility.

On June 1st, we announced the completion of the Dictaphone CRS acquisition. We are moving ahead of plans with the integration and are pleased by the record pace that we're achieving. We provided a smooth transition to our newly expanded base of customers and business partners, and are excited by the positive response we have received from them. In fact, we are already receiving orders through former Dictaphone customers.

We are also happy to have on our team today the talented and enthusiastic group of employees who joined us from Dictaphone CRS, and we immediately started benefiting from their exceptional professionalism and diligence.

Q2 was another successful quarter for our enterprise interactions solutions. We are experiencing growing market demand particularly due to the momentum of NICE Perform, which won several awards this quarter. NICE Perform is unique in that it is a hybrid, end-to-end solution that provides 100% capture and monitoring of customer interactions on which it performs the full suite of multi-dimensional analytics, such as word spotting, emotion detection and Agent Coaching.

These unique capabilities go beyond the surface enhancements that previous-generation quality monitoring systems offer. As a result NICE Perform enable us to significantly increase our win ratio and sign major deals with large, brand name customers in the enterprise sector. In Q2 we won a multi-million dollar deal with a top new client in North America. And we displaced a competitive system at a leading UK cellular operator, for a massive deployment in thousands of seats across multiple sites. With the help of NICE Perform this customer is actually reducing churn and improving quality of service.

India's GE Capital International Services also selected NICE Perform to replace a competitive system across several sites in a mass deployment. This trend, where NICE Perform is becoming the standard for outsourcers, is also taking hold in the US, where major outsourcers are selecting NICE Perform to replace legacy quality monitoring systems.

On the voice over IP front, we jointly launched with IPC this quarter the first Voice over IP recording solution for financial trading floors. Our market leading suite of Voice over IP applications is a hybrid solution that addresses all the needs of the trading floor and back office, and enables transparent migration to VoIP. It offers resiliency and redundancy and this is driven by extensive experience we have in leading this market for many years.

I am also pleased to report record growth rate in the Public and Security sector. We are encouraged by the strong momentum of our next generation security solutions. Just last month we announced another significant airport win over the competition for implementing NICE's real-time distributed video analytics over an IP infrastructure. This is a breakthrough project for airport and transportation security, being one of the first major airport security projects that calls for such a large deployment of video content analytics.

Our next generation security solutions are also continuing to support governments and public institutions in their effort to ensure the security of the public. For example, in May we announced that NICE was selected for the City of Baltimore's Anti-Terrorism Project. Our digital video and content analytics solution will allow Baltimore's command and control centers to extract security insight from video interactions by simultaneously monitoring multiple sites, and delivering real-time alerts on potential threats to allow security personnel to make informed decisions and take immediate action.

In fact, following the TCS and Dictaphone CRS acquisitions and further to our strategic investment in home-grown core technology for multimedia analytics, NICE is uniquely positioned to expand the implementation of next generation security solutions. Today, we are the only company that has voice interactions capture and analytics solutions for all media types -including voice over IP, data, radio and in addition - video.

Our end-to-end offering of capture, analysis and complementary applications for Homeland Security, addresses the broadest range of needs from command and control centers, to law enforcement agencies, to first responders. Our solutions enable law enforcement and security organizations to detect and prevent threats faster and in real-time, to quickly and efficiently respond to emergencies, to effectively investigate and reconstruct criminal and security cases, and to continuously enhance operational readiness by examining and improving performance.

We are seeing momentum here with interest from federal, state and local officials. We are gratified by this response, as it further validates our vision to transform security operational methods with the introduction of our vision of Insight from Interactions through multimedia analytics. Now, the fact that we own and develop all these technologies under one company enables us to leverage technology convergence - such as the use of video and voice analytics in public safety command and control.

We continue to experience momentum in Asia Pacific, which is also evidenced by the latest Frost & Sullivan report on Interaction CRM in APAC. In this report NICE leads the Asia Pacific with over 45% market share and is ranked as the largest vendor in 11 out of the 13 countries surveyed.

To sum up, this was a great quarter for NICE with record results. We continue to expand overall market share and leadership of the enterprise sector with Insight from Interactions. We are leveraging the Dictaphone CRS acquisition for the transformation of the public and security sector, with multimedia interactions analytics.

We have created a powerful strategy to grow our company over the next five years. We will continue to grow organically, leveraging on the advanced solutions we offer. And our strong cash position enables us to seek out acquisitive growth opportunities as well. I believe that we have a compelling vision and our strategy is working.

I'd like to now turn over our call to our CFO Ran Oz, for a discussion of our financial performance.

Thanks, Haim, and welcome everyone. I am happy to bring you an overview of NICE's financial results for the second quarter of 2005. As Haim indicated, we had a record quarter. Revenues were at $72.2 million, up 18% from $61.3 million in Q2 '04. This reflects the strong momentum of our enterprise interactions solutions, particularly NICE Perform, and general growth in demand for our public and security solutions.

The company's revenue increase includes additional revenue generated by the early closing of the Dictaphone CRS acquisition, as was announced in the guidance provided in June.

Looking at the geographical breakdown; in the second quarter the Americas increased 22% over Q2 '04 to $36.7 million, or 51% of total revenue. Europe, Middle East and Africa revenue increased to $24.7 million or 34% of total revenue. The Asia-Pacific region increased 18% over Q2 '04 to $10.9 million from $9.2 million, or 15% of revenue.

On the market basis, enterprise interaction solutions were $54.3 million, or 75% of revenue. Growth in the enterprise sector reflects, in part, our growing leadership in a market that is far from saturation regarding the implementation of quality monitoring solutions, and is just beginning to take hold - regarding interaction analytics.

Public and security revenues increased 44% over Q2 04 to $17.9 million or 25% of Q2 revenue. Growth in the Public and Security sector reflects, in part, strong momentum of our next generation security solutions acceptance and the progress of CRS integration.

In Q2 product revenue increased to $47.7 million, or 66% of total revenue, compared with $44.2 million in Q2 '04, reflecting solid year-over-year growth in demand for the full suite of our product offerings. Services and maintenance revenue grew to $24.6 million, or 34% of the total, compared with $17.1 million over the same quarter last year. This growth is primarily due to the traction of the NICE Perform solution and the contribution of the Dictaphone CRS customer base.

Pro forma gross margin reached 56.7%, up from 54.5% in Q2 '04.

Q2 tax rate was just above 13% and is expected to continue to grow moderately. We maintain a tax rate estimate at the mid teens for the near future.

Pro forma net income for the quarter was $7.3 million, up 54% from the $4.7 million net income in Q2 of last year. This increase is primarily driven by sales growth and improved operating margins.

The pro forma earnings per share was $0.36, up 38% from the EPS from continuing operations of $0.26 per fully diluted share in Q2 of last year.

We are pleased with the strength of company's balance sheet. At the end of the second quarter, cash and equivalents were at $169.3 million due to the strong cash flow generated in the quarter, even after the $38.5 million cash acquisition of Dictaphone CRS assets.

DSOs at the end of June was 73 days, in line with our long-term guidance of 70 to 80 days. We continue to see strong bookings with book to bill greater than one. As a result we enter the 3rd quarter with the highest backlog ever. And this leads to significantly improved visibility.

We are encouraged by the strong momentum we are seeing in both the enterprise and public and security sectors, each driven by increasing demand for Insight from Interactions across the board. And further to this success and the fast and smooth integration of Dictaphone CRS, we are raising our annual guidance to revenues at $304 million - $309 million from previous guidance of $295 million-$300 million and pro forma EPS to $1.55 - 1.63 from the $1.50-1.60.

We introduce first-time guidance for Q3 as follows: we expect revenue to be between $81 million and $84 million, and fully diluted EPS in the range of $0.38 - $0.42, which represents an increase of 36%-50% over Q3, 2004.

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

Thank you, sir.

(Operator Instructions)

Our first question is from Shaul Eyal of CIBC. Please go ahead.

Thank you. Congratulations, guys, on the good quarter. A couple of quick questions from me. Ran, what is spec T-1's next quarter growth margins, could be assuming similar margins at this point?

As we said when we guided for the CRS acquisition, for the 1st quarter of full integration of the CRS business, our growth margin will decline slightly and then ramp up again. This is included in our guidance on top line and bottom line in Q-3.

All right. Fair enough. Haim, can you just walk us through, again, the various drivers you see out there? On the one hand, on the public side, public security side, on the other hand, on the enterprise side, what's happening there?

Yes, on the enterprise side, as I said, the NICE Perform is proving itself to be a extremely significant winning, if you'd like, technology and solution suite for NICE and as a result we are expanding our market shares and presence in all regions. This is both a new technology from one aspect as it provides new applications and new benefits for customers, but it also provides them with what they have been doing before, which is the coding and quality monitoring, but with very advanced capability. And, the combination of the two is actually allowing us to capture market share and to move forward with customers, existing customers and new customers.

On the public and security side, we are now seeing an increase in demand from both government and public safety institutions that need to protect themselves against a variety of threats. Whether it is terror, whether it is protection of environment and our technology that allows, in the context of the video, for advanced analystics is now being deployed as well as in the command and control center with our ability to capture, the Motorola's and other radio communication, with the new construction, is also very good solution for this purpose. So, this, if you like, are the driving forces behind what we are seeing the growth rate.

Okay. That's great. I think, Haim, you also mentioned on the voice over IP side, introducing a new solution covering trading flows. Could we potentially be looking at, kind of, a new product cycle or it's going to be mostly an ongoing version?

I would say that this is a fair assessment.

Alright. Thank you very much, I will come back with more questions later. Congratulations, again.

Thank you.

Thank you. We will now take a question from Jonathan Half of UBS. Please go ahead sir.

Thank you. Nice quarter. First question is regarding the breakdown between product and services. This quarter services was higher than I expected. Can you give us a sense of how you see that trending in Q3 and in Q4?

Okay. Let's start from the reasoning behind it. As we said before, NICE Perform Solutions include more services, more high level consulting and you can see the results here, as NICE Perform starts to kick in, we have a higher service element, with much higher gross margin included.

In addition to that, we had, on top of that also, contribution coming from CRS customer base in the first month. We file -- take both of them together. I that assume in Q3 we are going to see quite similar trend. We believe that the ratio between service and maintenance and product, on the other hand, should range between 65 to 70% on the product side and 30 to 35 on the service and maintenance side.

Okay. Thank you. As far your comments in gross margin, is that for both segments, Q3 decline and then Q4 an increase?

We assume that this is going to be the trend. We enjoy the very high growth margin both from products and services in Q2. We will encounter, similar, some decline, slight decline, not a major one, in Q3, which will ramp up again in Q-4.

Okay. Now, on NICE Perform. Can you give us a sense of the percentage of customers that you sold to this quarter, what percentage acquired NICE Perform modules, give us a sense of what you think the penetration into your customer base of NICE Perform is?

Yes. I would say that, that amount dozens, many dozens of sites in a variety of-in different stages of implementation.

Okay. Finally, from me, just a housekeeping question. The amortization in cost of goods, was that in the product COGS?

It was divided. Part was in the product and the other part was mainly in sales and marketing.

Okay. And we should expect a similar level going forward?

This quarter we have only one month amortization. So, going forward it should be a full quarter, which means times 3.

Okay. Great. Thank you. Good quarter and good luck going forward.

Thank you Jonathan.

Thank you. We will now take a question from Daniel Ives of Friedman Billings Ramsey.

Hey guys. Want to dig into the product contribution, I was disappointed there in the fact that if you assumed Dictaphone was at least 400k in product, the product actually declined sequentially. Can you kind of address that, and just address your guidance going forward in regards to what seems like a different shift in investing more services? That's the first question.

Okay. Let's go one by one just to clarify on the Dictaphone side. We did say that Dictaphone is going, or the customer base of Dictaphone, is going to contribute already in Q2, but in no way we had the chance to sell, close the deal and recognize the revenue. Usually, we have between 3 months to 6 months of [inaudible] and delivery to go through. So, yes, we are going to enjoy more and more through time from the Dictaphone side. But, they are not contributing in the current quarter even one cent to the product revenue.

Now if we go into the breakdown of the current results, we believe that we are facing a very good momentum, we see growth coming from both sides of our market and from products, and for services. Therefore, we are very encouraged going forward in terms of what is the visibility we are facing and what is the prospect. That is the reason we raised our guidance in a material way.

The only reason I say that is just going back a few years, I don't see a quarter for a March to a June where there is as little of a sequential increase on the product side, so, I am just trying to understand the product side in June, why it wasn't stronger, but I guess you addressed that. Could you tell about the Dictaphone contribution, just so we can, on apples to apples, understand the organic growth rate?

I will just cover the previous part again as I understand that you have been following us a relatively short period of time. The NICE Perform Solution Suites has a significantly higher services component. So when a customer buys the NICE Perform, he is buying the combination of the product and like with most of software companies, has a much higher service component. So, what you see is the result, is the combination of the jump in the product and services. And, as we said all along, around NICE Perform we will be seeing more value added services and therefore, if you look carefully at the numbers, you will see a significant increase in the gross margin of the service, which reflects the overall solution that the customer is buying, both service and the product.

Now, just to put it on a baseline. We usually compare quarter to the previous quarter last year and not sequentially. Because, in our business, traditionally, we have some seasonality and therefore a good illustration of what the momentum is, is usually to compare to the same quarter last year. This quarter we had just below $2 million contribution coming from Dictaphone CRS. All of it in service and maintenance. I assume that if you compare the products to products last year, you will see the organic growth, both in product and service [inaudible] is quite good.

Okay. Just one last question. When you look at the organic product growth rate for 2005 over '04, what type of product growth rate would you expect? Is it still in that kind of 10% range?

Actually, we are at the run rate of 12 plus, so we feel very comfortable. We are at the high end and above to what we guided at the beginning of the year. Just to go back, we started the year with a guidance of $275 to $280 million in revenue. We are raising it now to 304 to 309. So, I would say that it does represent a very good momentum in our business.

And just some housekeeping. Can you talk about employees at the end of the quarter?

Yes. At the end of the quarter we have close to 1300 employees in NICE worldwide.

Okay. What actually was cash flow in the quarter, free cash flow?

Altogether, we had, on one hand the $38.5 million in cash that we paid for Dictaphone and over $20 million free cash flow, just below 20 coming from a operation.

Okay. Thanks guys. Appreciate it.

Thank you.

Thank you. We will now take a question from Daniel Meron of RBC.

Hi, Haim and Ran. Congrats on a very strong quarter. A few questions from me. First one, can you talk a bit about the competitive landscape, given recent enemy activities, is there any impact that you are seeing there? Also, what do you see as far as competitive pushback on the analysis solution, do you see any changes in their strategy, if at all? And then, also, if we can touch on the strategy in the security business side, both on the video segments, and on the home security and first response market? Thanks

Daniel, I think that I lost your second question. You asked about the competitive landscape in general on the enterpriseside, but can you repeat the 2nd question.

Sure, well my 2nd question related to the security strategy. Specifically on the video segment and what is the reaction that you see there. And, then the home and security market, with the new product cycle that you mentioned, on an analytics side, and if you can also touch on that, what is the impact of the recent events, if at all, on the demand for your Solutions or at least interest in your Solutions.

Okay. Very good. On a competitive side, in the enterprise side, I think I covered it, but just to repeat, we believe that the Perform technology, the very advanced suite that we offer is creating a competitive advantage, a significant one, that helps us to win business over the competition in both existing customers through upgrades and to capture new accounts. We see this trend, it's a very strong trend and we are happy with that.

On the security side, we have, if you'd like, two micro trends. One is the technology revolution, or technology revolution. We are introducing new and very advanced, next generation solutions, and like every next generation solution, it takes its time to educate the market, to introduce, to implement and we are very satisfied with this progress. This is more, if you like, vendor dependent or technology dependant.

On the other hand, of course, there is the outside environment, the recent activities that we have seen in the U.K., the recent tragedy in the U.K., and obviously this type of events highlight again and again the need for the West, of for any country to protect itself. As a result, there is more and more interest on how technology can help to prevent, to analyze, to investigate faster events, and this is obviously is something we are seeing in the market. We hope that we are in the position to address these challenges.

Okay. Thanks Haim. A couple of follow-ups. On the enterprise side, can you discuss, maybe, the win rate that you had of late? And, also, on the security side, what is the product or the project lead time between the interest level and until you see it in your pipeline or backlog?

It of course depends on the size of the project. The larger the project is, obviously, the cycles are longer. They can range from 6 months to 12 months. If it is a large 7 digit or even a few hundred thousand dollars, these things do take time from the initial interest until you deliver the system. It can take between 6 months to a year, easily. This is very common in this market. Hopefully, I covered the security side.

On the win ratio, again, I don't have a specific number in front of me, but what we do know is that we are specifically replacing legacy quality monitoring systems in a variety of vertical markets. This is very encouraging.

Thanks Haim, and congrats on the good execution.

Thank you.

Thank you. We will now take a question from Bill Benton of William Blair. Please go ahead.

Good morning, guys. Congratulations on the merits as well. Couple of questions. Can you just talk about the bookings pattern during the quarter, if that was pretty linear or was that month to month maybe strengthened toward the end of the quarter?

Hi Bill, this is Ran. We do have some momentum buildup in the quarter. It is not a straightforward, linear line, but we have, on the other hand, a very good split between the different months. So, again, we have already five quarters in a row, of look to be of greater than one. We are gaining a very nice momentum here.

Okay. We can kind of presume that booking is better - I guess it would kind of benefit both services and product but maybe disproportionately on the product side?

I think that we had a very good booking on both sides. Both parts we were growing Nicely.

Okay. Then, in terms of the CRS Dictaphone contribution in the quarter, I know you guys had kind of estimated, if I recall, it was $1.5 to $2 million loss at an operating level, is that excluding amortization, I am just kind of curios where that came in relevant to your expectations?

At the end of the quarter, we ended up with just below $2 million contribution of the top line, of the service and maintenance side. Of course, we did generate quite a lot of expenses, and this is the first month of integration. So, it was quite in line with our expectations and we managed to close this quarter, despite the integration cost that we encountered during the first month, with very good results.

Okay. A lot of that would have been in the selling and marketing tier earlier discussion?

Yes.

Okay. Any surprises so far? I guess you closed a month, couple months now I guess, ago, any surprises, positive or negative?

I assume you refer to the CRS integration?

Yes.

I think the word surprise is a little bit taking it too far, but I think we are very encouraged by the momentum, by the enthusiasm of the team that has joined us and we are very optimistic that we can implement those strategies in terms of working together with this team to provide excellent service and products for the installed. So, it's moving along very nicely.

So nothing out of the usual there. In terms of the - Haim, you talked about the win ratio program, I know you said you didn't have a specific number, but would the Perform now, you suggested that it improved, can you offer any sort of magnitude in terms of the improvement, not a specific number but just generally speaking the magnitude to the improvement?

I would say that in most cases that we compete with Perform we'll win. It's that straightforward.

Okay, and the win rate is basically close to 100%, it sounds like, when you're competing against Perform -- with Perform?

Actually, I'm not sure that I would like to use 100% because there's never 100% in business, but I would say that we have a very high -- extremely high win rate when we compete with Perform against any competition at this point of time.

Okay. And then final question, on the lots of rumors obviously in the press on acquisitions or thoughts of acquisitions. Could you just talk in general about the pipeline of opportunities that you're seeing on the acquisition front? Maybe the size of those. Has that changed at all over the last quarter or so?

We are constantly looking at a variety of acquisitions target; this is part of our strategy to continue and develop the business, both organically and through acquisitions. Yes, there is of course a pipeline. There's nothing specifically to report. We have teams that are looking, talking, investigating, making sure that if we have something to work on, it will make sense according to our strategy, but there's nothing specifically to report.

Okay. Great guys, congratulations again.

Thank you.

Thank you, we'll now take a question from Scott Greiper of Unterberg. Please go ahead sir.

Good morning guys. Two questions. You discussed that there were nine, I believe, seven-digit deals in the quarter. What was this level in Q2 last year?

I think that it was somewhere between four to five, but I'm not sure. I'll have to check that again.

Okay. You also said record backlog. Could you quantify that?

It's over one-quarter of revenue, even with new guidance going forward.

It's been one-quarter of revenue for the last couple of quarters. Is it higher ...

Yes, in previous quarter we never guided for 81 to $84 million revenue.

Okay. You raised your '05 numbers. I'm wondering what guidance can you give us on '06 numbers.

We are not going ...

Even if it's just trends?

Yes, we are not going to establish a guidance for '06 at this point in time. Still, we are in a high-tech industry and it's quite faraway to talk about a 1.5 years in advance. We are probably going to establish the guidance in the next conference call. I would say that we believe that the growth should be quite similar to what we've been experiencing in the last couple of years, but still, we are not going to put it as official guidance right now.

Okay. Lastly, I'm hoping you get into a little bit more detail on the two contracts in public and security discussed. First of all, the airport contract, which I assume you are referring to Shanghai, which I believe came in through a relationship with Tyco. Can you describe that? Were they a prime there? How did they bring you win? Maybe give some vision on the size of the order and since it is a pretty important deployment, how has it led to additional airport interest?

Well, unfortunately there are parts of your question that I, for obvious reasons, cannot address publicly. Just to correct you, we are talking about Changi airport and not Shanghai. Changi is the airport in Singapore, but I think the biggest -- the important part here is the fact that it is a very large project in this part of the world, and also in general it's a large project, not only in Asia. And the major reason for them to select NICE was our capability beyond just video recording, but all the analytics capability that we have that are running on top of integrated within our recording as an integrated suite, including our ability to provide solutions in a network video environment. So the combination of real-time analysis on one technology with one management, and the networking was probably the major winning factor. And since this is by now not a secret, I assume that it will raise the interest of other transportation facilities around the world.

Is there any metric you can give as far as how many cameras were deployed or any size -- any sense of the size of the contract?

What we can is only what we said in public for obvious reasons, but it's not a small airport, so -- it's a mass deployment, so you know, it's obviously not just a few cameras. We wouldn't bother anyone with just a few cameras deployment.

Was this and RFP scenario?

We won against competition.

Secondly, on the Baltimore command and control side, give us more detail on what this is and how it plays into the DHS's kind of renewed focus on incidence response, manned control. You know, how do you leverage this?

Since this is part of an antiterrorism initiative by the City of Baltimore, there is also here a limit of what we can discuss in public, but I believe that the main message here is that it's their objective to protect public facilities, and to use advanced video -- digital video, and content analytics to protect public areas within the City of Baltimore. That is the major initiative. We think that we will see more and more of this coming in the coming years across the United States.

Well, congrats on another terrific quarter guys.

Thank you, Scott.

Thank you.

Thank you, we will now take a question from Dan Harverd, of Deutsche Bank. Please go ahead.

Hi, my congratulations also on the quarter. Just to go back to CRS, could you just perhaps drill down a little bit in terms of what some of the milestones are for integration perhaps on sales and marketing, product transition et cetera, and where you stand on those?

Yes, as we said, we have acquired the CRS installed base, we have acquired or joined us the team, both the sales and service team, as well as part of the R&D team. We will continue to support the CRS product, as there is a very large install base, but strategically our objective of course is to gradually transform the install base to use the advanced NICE technology, both in the enterprise sector and in the public sector. And this transition has started to take place, as you have seen with the latest announcement that we have made, and it's now in a phase of implementation and we will see this happening in the coming months and years.

Will you continue to actively market existing CRS products? Or is that phased out already?

No, it's not a matter of phasing out. We have a strong R&D team that has joined us that will be able to support this product, and for those of the customers that need the expansion we will deliver it for them, but strategically our objective is to provide all our advanced solutions for the install base of CRS.

Okay. Ran, a question for you just in terms of how you're recognizing service revenue, if you could give detail on that, and whether some of it goes into deferred revenues.

On the service side, we recognize revenue if it's on a project or on a delivery base when we finish the delivery, finish the project. When it is maintenance ratably over the period of the maintenance.

Okay, will you be breaking out deferred revenues at some point?

Only if it will become material enough to break it down.

Okay then, finally you mentioned a number of million dollar deals, and also a strong backlog. Can you give an indication perhaps in terms of the pipeline what kind of size of seven figure deals you're seeing?

We are continuing to see significant number of seven digit deals across the regions and the sectors that we cover. So we don't -- we hope it's not just one time event in the second quarter, but there is enough pipeline of builds the same size going forward for the rest of the year.

Okay, and then just finally from me, in terms of the relationship with Motorola, which is currently focused on the radio side predominantly, are there any plans to broaden that also to the video side?

This is not something I can comment in public, as the relationship of course. Only asking Motorola together can discuss it and we don't have the ability to do it alone.

Fair enough. Thank you very much.

Thank you.

Thank you, we will now take a question from Roni Biron (ph) of Oscar Gruss. Please go ahead, sir.

Hi, Haim and Ran, congratulations on the quarter. Can you comment on the traction you're seeing for your midrange video product?

Yes, this is of course part of the solutions that we provided already this quarter in our public safety and security.

And once again, I just didn't hear the geographical breakdown, if you can repeat that.

Yes, we had a 51% coming from the Americas, 34% coming from EMEA, and 15% coming from Asia-Pacific.

And the breakdown between CEM and video and public?

We had 75% coming from the EIS, the Enterprise, and 25% coming from public and security.

And was that evenly split between -- relatively evenly split between video ...

Yes, it's about even.

Okay, thank you.

Thank you, we'll now move on to Avshalom Shimei, of HSBC. Please go ahead.

Hi guys, and congrats again for the results. Just regarding the integration of the CRS, you said that there were substantial expenses in the last month, where you consolidated the numbers. Is the run rate looking forward would be lower than that or that's indicative for the run rate for the third quarter?

It's a little bit more tricky than that because what we had in Q2 is only one month of Dictaphone operation on our P&L. In Q3, we are going to have three months. We are talking about 180 plus minus additional employees. So yes, we are going to have a little bit less integration cost, but we are going to have the full run rate of CRS operation on our P&L.

No, I understand that, but from taking it on a proportional level, this one month if I, you know, triple it by three, that would be a higher number than the one you are expecting for the third quarter or a lower one?

It's a little bit higher, but just a little bit higher than what we are going to have for the full quarter ahead.

All right, and just -- maybe you touched it because I joined a little bit late, regarding the jump off the margins under services, can you elaborate a little bit more on that?

Yes, as we said in the past, the NICE perform implementation includes a higher service component as part of delivering of value added solutions, and this is translated both in the total jump in the top line jump off the service because when the customer now buys NICE Perform he is buying it with an additional package of services and on top of it, as we said, this is a higher value added services and this is also is reflected in the higher gross margin of our service operation.

All right, so is this service use indicative looking forward for services in general?

In general we will see services ranging between 30 to 35% of our business, depends on the quarter.

No, I'm talking about the margins of the services.

The margins of the service it's more complicated, it's also related to the mix of the different services delivered in that quarter and the proportion of the cost base. So this is by far the higher gross margin we had for services for a long time. We do believe that in the long-term we can even grow that, but in the short-term we're going to see a slight decline before we ramp up again.

All right, and just regarding the deferred, although you don't give a precise number, can you tell us if the trend of the deferred is following the book to bill trend that you see, that is deferred, are increasing sequentially?

I would say that in general it is, but it's without getting into the real details of every given quarter.

All right, and my last question is actually if you can give some more color regarding the increased visibility. You said that you're seeing full quarter of sales, is that in terms of the timing of what you are seeing? Is that spread over two or three quarters or is that actually referring to the short-term, i.e. looking at the third quarter and saying, "All right, you are seeing most of the sales already on hand"?

Unfortunately, we did not announce a vacance (ph) in the company for the next two months. We still have to work. The answer of course we haven't included visibility the backlog is more than a quarter, as Ron said, but it's split over a few quarters. Obviously, with the third quarter, the highest proportion, but it's not the full quarter. So we still have some work to do in the coming months and quarters.

Good stuff, excellent. Thank you very much.

Thank you.

Thank you.

Thank you, our next question is from Ran Kabin of Clal Finance. Please go ahead.

Hi, Haim and Ron, congrats for the very good quarter. Do you see any competition specifically in the NICE Perform platform? I mean do you see any other Company coming up with a competitive product today or in the new future? And another question later.

As to the future, I assume that companies will try to follow us. There is no vacuum in any market, so as in the future, I assume companies will come and try to deliver similar or at least what they will announce as similar products. On the short-term, the NICE Perform is the result of many years of design strategy and also significant investment in research and development over the last few years, with many, many millions of dollars; tens of millions of dollars that we have invested around this technology. So obviously, to come up with something that will do the same takes time and effort and commitment.

This does not mean that different companies, whether direct competitors or in direct competitors will not try to position through some sort of combination of PowerPoint and other messages what might look to be similar or close to messages. And the market at this point of time, the NICE Perform is regarded as unique. Customers realize that this is a major new strategy. It's not just a technology, but it's a major new strategy into the contact center market, which is backed by technology and customers and referenced customers. So we think that we have a very nice lead there, but there's never a ...

Can you give us a guess of how much time do you think it would take any competitor to make a similar product or ...

No I wouldn't like to outguess anyone here.

Okay, and Ran, what is your operating margin target in the long-term? And can you give us the same sense of how much time it will get you together?

We are targeting to get to 15 to 20% operating margins. Now, it's going to be driven by both volume and mix of revenue. The question of when exactly it's going to happen, it's not going to happen in the coming year, but it's not that far away.

Okay, thank you very much.

Thank you.

Thank you. We'll now take a question from Jeff Evans (ph) of First Analysis. Please go ahead.

I just had two questions. One was on the pipeline. Is it's safe to say that the composition of the pipeline, in terms of geographic regions, is a similar to the revenue mix? And I guess I'm just trying to ask is the AMEA pipeline bigger than the Americas pipeline today?

I'm not sure if I understood. EMEA is 34 or 35% of the business and the Americas is around 50. So not sure that I understood the question, but it's fair to say that the pipeline is distributed more or less according to the geographical mix, although in every given quarter, there can be changes between geographies in terms of the pipeline, but they are not that major.

Okay. And my other question was if you think about the prospects you have out there, and you were to put it in a couple different buckets, one of them being greenfield, kind of new call center expansion, what you may be seeing in India, you know, the other two buckets being just upgrades and the last bucket being competitive replacements, is there a healthy mix or is there any proportion of the pipeline that is greater than any of those buckets?

First of all, we believe that there is a healthy mix. There aren't that many completely new call centers which have been opened. What is interesting in our technology is that first of all the many call centers you might be surprised, they still do not have even the basic implementation of advanced quality monitoring technology. So, some of them have legacy systems and some of them don't even have that.

So, there is a big enough market to sell into just existing call centers whether they are of NICE which might just have recording and now we can offer them move advanced solutions that can range from quality monitoring to the full NICE Perform suite and of course also competitive replacements.

So I would say that we have very healthy mix of these opportunities.

Okay. Thank you

(Operator instructions)

Our next question is a follow up question from Daniel Ives with Friedman Billings Ramsey. Please go ahead, Sir

Yes, just a quick question. Ran, When you look at the at the original Dictaphone guidance that you gave for 2006 just for the run rating it, do you still feel comfortable with that accretion or maybe you can just kind of give an update on how you look at Dictaphone dps accretion '06? Thanks

We don't think that we need to change the original guidance on Dictaphone, we actually experienced a very good integration altogether, going ahead of time. What we said about the first 6 months was a contribution of $20 million and $0.10. This is already included in the previous guidance which we are now raising. It means that we are going in the right direction. As 2006 we are not going to discuss more and establish a full guidance for '06. It was just to give an indication as to what is the potential contribution of Dictaphone business.

Thank

That answer your question?

Yes.

We'll now move on to Daniel Meron, a follow up question from RBC. Please go ahead, Sir

Thanks, guys. Can you maybe provide some more color on possible partnerships or part strategies on the security side and how you see that evolving. Obviously you have the Motorola partnership and the one with Tyco, are you still adding more regional partners or are you going to target larger more international partners?

And also if you can discuss the geographical level. Up to now most of the focus at least it seems this way was more on the US and A-Pac. Are you seeing more traction in Europe, especially given the recent events?

Yes, the answer is yes, yes, yes, We are planning to expand first of all the existing offering through our existing partners, whether they are regional or global and we are also looking at, I would say, a broader partners' portfolio in the security side both in EMEA and in Asia. So we are seeing opportunities to extend the partnerships both from a regional perspective and also I would say more global that they can be based either in the US or EMEA.

Okay thanks, Haim, and Ran and congratulations on the quarter going forward.

Thank you, Daniel.

Thank you. We will now take our final question from Jonathan Half of UBS. Please go ahead, Sir.

Thank you. Can you comment on the video business -- what you are seeing there? Are you seeing any sort of acceleration of that product, given the security events that we have seen? You know, it does seem from the comments you made regarding the breakup you had a good quarter -- the video business. I'm just wondering if it's the beginning of what you think will be an acceleration for that product.

I would say that we had our best order intake in the history of this product this quarter. We hope that this will continue. This hopefully represent the adoption of the market for next generation solutions and with the need for government and the public to adopt advanced technology to protect themselves, we hope that they will continue to see momentum to in this business.

Right, but I assume in Q3 we should expect the non-video business to be a larger portion and not 50-50 split, given the CRS acquisition.

It's still premature to say. But we hope to see both the -- all our security businesses let's say to grow to continue and grow in the coming quarters.

Okay and finally just a question for Ran. On inventories can you comment on - it was up -- I assume it was something to do with the CRS -- can you give us a sense of what is -what's in that inventory, and what we should expect at the end of Q3?

As part of the acquisition of CRS assets, we received the day the CRS inventory receivables and fixed assets which means that in our balance sheet you will see increase in those specific items. I would say that through times it should moderately go down. It not going to be at the same level before because -- one, we are growing our revenue and again it should be a proportion to our revenue and we are supporting a higher number of product lines now.

Thank you and good luck again

Thank you.

Thank you. There are no further questions at this time. I would now like to ask Mr. Shani to go ahead with his closing statements.

Thank you, I would like to thank everyone for participating in this call and we look forward to having you join us on next quarter's call. Have a good day.

Thank you, this concludes NICE Systems Second Quarter 2005 Results Conference Call.

(Operator Instructions)

Thank you for your participation, you may go ahead and disconnect.