Nice Ltd (NICE) 2005 Q3 法說會逐字稿

Welcome to the NICE Systems third quarter 2005 results conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded November 9, 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, 2004 as filed with the Securities and Exchange Commission.

Such factors include but are not limited to changes in technology, in market requirements, declines in the demand of the Company's products, inability to 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 like to turn the call over now to Mr. Haim Shani. Please go ahead, sir.

Thank you, operator. Good morning and thank you all for joining us today for a review of our 2005 third quarter results. As the list showed, our company posted an outstanding financial performance. After announcing record results in Q2, with revenues passing the 70 million market for the first time in NICE history, we are pleased to report another exceptional results achievement with Q2 revenues in excess of 80 million. This is a 30% increase on a year-over-year basis. These results and the other successes of Q3 validate, once again our vision through Insights from Interactions, our ability to deliver on that vision through the enterprise and public and security sectors and also the effective integration of the Dictaphone CRS business is delivering on its promise.

Additional highlights for this quarter include we expended pro forma gross margin to 56.6, compared to 55% in this quarter last year. We increased operating margins to 11.5%. We reported $0.46 per share on a pro forma basis, a 48.3% increase over the same quarter last year. We saw an increase in overall demand through Insight from Interactions with many new orders coming from all sectors and regions.

In Q3, we achieved another substantial milestone in expanding the reach of Insight from Interactions when we announced the introduction of the next generation of business performance for the enterprise. We made this announcement together with SAS the global industry leader of business intelligence. Through this strategic partnership, NICE and SAS will provide the first combined business intelligence and interactions analytic solution which will change the way companies evaluate and understand their business and ultimately improve their bottom line. Our partnership with SAS represents a major paradigm shift in the way organizations all over the world will make critical business decisions. It also validates our growth strategy to be the global leader in providing the next generation of business intelligence. And we are delighted that SAS is joining forces with us to lead an advance to Insight from Interactions revolution.

British Telekom is also looking to leverage the power of Insight from Interactions with their customers. They recognize that NICE Solutions, particularly NICE perform are the ideal choice for them to drive incremental business. Just last week, BT announced that NICE is their key global partner for voice, and Voice over IP multimedia interactions capture and will actively recommend NICE solutions to their full range of customers across the enterprise in public and security sectors. We also saw growing customer interest in the critical value of NICE's solutions at the recent NICE user group summit. Our partners and customers, including Charles Schwab, BlueCross BlueSheild, and Avaya, deliver their key presentations. Also, case studies were provided, discussing various implementations of NICE perform, for example by Saxon Mortgage. At this same occasion we celebrated membership in the NICE user group, crossing the 1,000 mark. All this is a testament to the growing market demand for extracting Insight from Interactions.

We continue to see strong demand for our Voice over IP solutions throughout Q3 with a noticeable trend of increased dollar value per deal. We have closed a number of significant Voice over IP deals, valued at about $1 million in both our enterprise and public sectors and across all regions. These include orders from a leading European investment bank, a leading European security entity with a distributed environment and many small sites, other significant Voice over IP orders include a North American outsourcer, a conduct center for a national insurer and a major retail outfit in Asia. Furthermore, the largest supplier for Voice over IP solutions and services in a strategic apex country has just replaced a competitive offering with NICE's Voice over IP solutions. NICE invented and pioneered Voice over IP recording in the conduct center. Our patented Voice over IP offering is the only mission critical solution which offers the most comprehensive and advanced conduct center and business improvement applications in the market. And all of these deals emphasize our strong penetration and leadership of the Voice over IP market, which has passed from the pilot phase to full deployment and the affirmation by customers around the world that NICE provides the ideal solutions for large-scale implementations over multiple sites with thousands of users.

The third quarter is a special quarter in many ways. It also marks a significant milestone for NicePerform. With its introduction last year, we launched the insight from interactions revolution and today we are excited to report that NicePerform has over 100 sites sold. This is a true testament to the market's recognition of the vital role customer insight plays in an organization's ability to stay ahead of the competition and drive business performance. We were also gratified this quarter by overwhelming market recognition, NicePerform won one prestige prestigious computer award for presenting ground-breaking technology that's poised to change the dynamics of doing business for both enterprises and consumers. NICE perform also won the ICCM best of show award in the Asian performance optimizations solutions category.

In addition, the independent analyst firm Frost and Sullivan singled out NICE as the undisputed market leader of the quality monitoring industry with 33.7 global market share. And leading industry analysts in its quarterly report on the quality coding and quality monitoring industry, also rated NICE as the leading vendor for quality monitoring solutions for the second quarter in a row. In addition to being ranked as the recording industry leader for many years running, with leadership in all geographies and overall worldwide market shares at 26.6%.

We have successfully completed the integration of the Dictaphone CRS business, and the expanded team is ideally positioned to garner more and more wins in the near and the long term. In fact, the effectiveness of the Dictaphone CRS integration continues to exceed expectations with significant orders coming in from all sectors. In the public and security sector, we recently received orders from former CRS customers, including the emergency communications centers of Adams County, Ohio, and two separate deals from the city of Baltimore and the county of Baltimore in Maryland. The Baltimore deals follow on the successful implementation we have there of our next generation digital video security solutions. I would also like to mention, a seven figure order from Harris County, Texas, and a significant deal from a Boston Police Department, each of which was looking to enhance their emergency communications with NICE.

Our public and securities solution are also the premier choice for supporting large city centers and their transit systems. For example, the city of Baltimore and the New Jersey transit. It is important to remember, however, that four years after 9/11, public transit systems in the U.S. remain, for the most part, unprotected. Add to this the influence of the recent attacks in London and it is easy to understand the increased sense of urgency concerning security on mass transit systems. NICE provides solutions, pay pay load for high density systems with a unique implementation of analytics for realtime prevention and rapid investigation. We are winning bids and are beginning to receive orders for the first projects to secure millions of daily commuters in different U.S. cities. These are important projects which promise to be the model for protecting U.S. transit systems and their passengers. With our end-to-end offering of network digital video capture and analytics, security personnel will have the power to identify, risk in realtime, make optimal decisions, and take actions that improve security.

In geographical terms we continue to grow in all regions and particularly in Asia. Our commitment to this important region is stronger than ever with recent expansion of our presence in India and Japan, and acquisitions of the largest distributor in Australia and New Zealand. The acquisition of [Hymamax] high-tech significantly extends our presence and resources to sell our Insight from Interaction solutions and enable us to expand and strengthen our support organization in this principle market and throughout the APAC region.

To summarize, during this past quarter, we have delivered on our Insight from Interaction vision across the board. The powerful growth strategy we created is producing the results we were aiming for and we expect to see more in the near and the long term. Insight from Interactions will continue to transform industries, and we will continue to grow organically and through active mergers and acquisitions in both the enterprise and public and securities sectors. As you know, during Q3 we filed a shelf regular registration to allow us to access the capital markets in connection with our strategic plan for growth. We have identified several interesting opportunities for acquisitive growth to support this strategic vision and I look forward to updating you on such activities in the near future, when and to the extent these opportunities materialize.

Looking forward to 2006, the positive momentum and continually increasing demand for solutions, we are already experiencing, will take us to another record year. We expect double digit growth to continue throughout 2006. NICE remains ideally placed to revolutionize the way enterprises do business, and we're excited by the prospects of heading the Insights from Interactions revolutions and capitalizing on ongoing market growth. I would like now to turn this call over 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 financial results for the third quarter of 2005. As Haim indicated, we had an outstanding record quarter, marking another major results milestone. Revenues were at $82.7 million, up 30% from $63.5 million in Q3 '04. This reflects continually growing demand for our enterprise interaction solutions and NICE reform and general growth in demand for our public and securities solutions.

Looking at the geographical breakdown, in the third quarter, the Americas increased 43% over Q3 '04, to $43.7 million or 53% of total revenue. Europe, Middle East and Africa revenue increased to $25.5 million, or 31% of total revenues. The Asia Pacific region increased 34% over Q3 '04 to $13.5 million from $10.1 million or 16% of revenue. On the market basis, enterprise interaction solutions were $61.9 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 solution, and is just beginning to widely adopt interaction analytics. Public and security revenues increased 43% over Q3 '04, to $20.9 million or 25% of Q3 revenues. Growth in the public and security sector reflects, in part, strong momentum of our next generation security solution acceptance and the completion of CRS integration.

In Q3, product revenue increased to $54.1 million, or 65% of total revenue, compared with $45.7 million in Q3 '04, reflecting solid year-over-year growth in demand for the full suite of our product offerings. Service and maintenance revenue grew to $28.6 million, or 635% of the total, compared with $17.8 million over the same quarter last year. This growth is primarily due to the contribution of the Dictaphone CRS customer base and the traction of the NicePerform solution. Pro forma gross margin reached 56.6%, up from 55% in Q3 '04. Q3 was the first full quarter of combined operations following the Dictaphone CRS acquisition. Bringing operating expenses to $37.8 million, up 27.6% from the same quarter last year. This reflects the full effect of the CRS integration.

Q3 tax rate was just about 18%, which reflect year-to-date tax rate of below 15%. Tax rate for 2005 is expected to continue to grow moderately and we maintain a tax rate estimate at the mid to high teens for the near future. Pro forma net income for the quarter was $9 million, up 65.8% from the $5.4 million net income in Q3 of last year. This increase is primarily driven by sales growth and improved operating margin. The pro forma earnings per share was $0.43, up 48% from pro forma EPS of $0.29 per fully diluted share in Q3 of last year.

We are pleased with the strength of our balance sheet. At the end of the third quarter, cash and equivalents were at $184.9 million, due to the strong cash flow generated in the quarter. DSO at the end of September was 70 days, in line with our long-term guidance of 70 to 80 days. We continued to see strong bookings with book-to-bill greater than one. As a result, we entered the fourth quarter with the highest backlog ever and this leads to significantly improved visibility. We are encouraged by the increasing demand for Insight from Interaction and our next generation security solutions across the board and provide Q4 guidance as follows. We expect revenue to be between 87 and $90 million, and pro forma EPS in the range of $0.53 to $0.57. Further, to the outstanding results of the last nine months and the strong momentum we are seeing in both the enterprise and the public and security sectors, we are exceeding our own expectations and consequently, we are raising our previously announced full year guidance to revenues at 308 to $311 million, from previous guidance of 304 to $309 million. And pro forma EPS to $1.62 to $1.66 from the previous $1.55 to $1.63.

Looking forward to 2006, we expect to see 14 to 18% revenue growth and to continue to enjoy the leverage of our business, while improving margins and driving stronger bottom line growth. We introduced first time 2006 revenue guidance at 355 to $363 million, and first time pro forma EPS guidance of $2.05, to $2.15. Which represent a 24 to 33% increase. That concludes my comments. I will now turn the call over for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] First question is from Bill Benton of William Blair. Go ahead, sir.

Good morning, guys. Congratulations on the quarter.

Thank you.

Yes, no, first I wanted to touch on the margin which continues to improve. I'm wondering where you think that can go and what may be behind what's happening in that line item.

Hi, Bill, this is Ran. I think that the two major effects on the service side both on the revenue and the gross margins are coming from the CRS acquisition customer base and their nice performance solution. We stated before that those two elements are going to contribute more revenue and with higher gross margin. Therefore, we believe that we will continue to see service and maintenance being a larger part of our revenue at the mid-teens -- at the mid-30s and gross margin trailing about where it is this quarter, or previous quarter between 34 to 35%.

Okay. And then on the SG&A again, it came in lower than what I was looking for and obviously you guys have integrated Dictaphone completely now. Are you fully integrated at this point or do you think this is -- we should look at the SG&A line as a sustainable number is there anything that really shifts that around?

First of all, in Q3, you can see the full effect of the CRS. Everything is recorded for the full three months. We are not focusing to have this line stay flat for the next year. It is going to grow because these are the same people that are generating the growth on the top line. We still have only small part of the [Hannamach] the distributor in Australia that we have acquired to get the full effect next quarter and looking into '06, we estimate that we will grow moderately the expenses, while, again, generating higher top line growth, and drive more to the bottom line.

Okay. And then just on the -- can you talk about in general, what the impact was from Dictaphone, if you are able to separate that on the quarterly results. If you could just offer any color there. I wouldn't suspect that the Hannamach acquisition had any additional impact really, but I'm just curious if that impacted the numbers as well?

If we go back to the integration plan that we have presented when we announced the deal, you must remember that we said we are going to integrate or actually recruit the former Dictaphone CRS employee into the different department within NICE, which means that there is no such entity within NICE that is Dictaphone CRS. They are all spread between the sales, support, and marketing teams and we don't have a direct measure of how much exactly each one of them or as a group they contribute. But the bottom line results are very clear. We have been growing higher than what we even forecasted this deal to contribute. So things are going in the right direction.

Okay. Yes. I'll ask one more quick question and I will jump back in the queue. But could you talk about -- obviously you guys had a lot of success in the larger deals, which are highlighted I know in the last press releases. Could you talk about how many seven digit deals you had in total this quarter?

This quarter we had six, seven-digit deals and quite many almost seven-digit deals which is an interesting anomaly so we have quite a lot of 800 and $900,000 kind of deals. So all in all, we see a very good trend in momentum and more and more large deals coming from the different sides of our business.

Obviously good quarter. Congratulations again. Thanks, guys.

Thank you. The next question is from Thomas Ernst of Deutsche Bank, go ahead, sir.

Yes, good morning. Thank you. I wonder if you could address a rumor that's been around sporadically on Wall Street. We heard a lot about the success of the sales of pro forma and we are certainly seeing the revenue and the 100 customers sold. The rumor that's been spread a little bit is that it's having difficulty deploying. Can you address the success rate of perform from a couple of dimensions. First, you reference accounts that have gone the furthest with it. Do you have strong references and then second do you have anybody that's unsuccessful on it, as has been rumored on the Street.

Regarding rumors, it's difficult to say but I think the 100 number is a number that is quite impressive, at least in terms of our expectations. And what is important that some of these -- of these sites, actually extension of people that have bought it initially. So I would say that the overall reaction that we get from customers are extremely encouraging. Obviously -- and we said it more than once, that the perform is a result of, if you'd like, many, many millions, dozens of millions of dollars of research and development, and we have deployed new technology, which we believe creates a significant barrier to entry and it takes its time to be deployed and to freely -- fully integrate it within the customers. So what we are experiencing is a very, very successful market acceptance on perform, and we expect this to continue very strongly going forward with customers using this technology for a wide range of applications, from if you'd like basic recording to complete Insight from Interactions, a voice analysis and so on.

So you have a number of customers that at this point have already -- have already made repeat purchases of perform. That's certainly a testimonial to the success.

Yes. Yes.

What about--?

And maybe I will share with you one of the mass deployment that we have -- that we have introduced, which happens to be an outsourcer is continuously inviting his customers, which are our customers that he's gaining business, competing with others by demonstrating the very successful implementation of Perform on his site and we are talking about the site which handles many, many hybrids of agents working with Perform. So this has been a very, very successful business too for him to increase his business.

And since this is still a relatively young product, I imagine there are some learning bumps at customers but have you had any outright failures where customers have just not deployed and have given up?

I'm not aware of a single one.

Okay. Great. Thank you.

Thank you. Next question from Shaul Eyal with CIBC World Markets.

Thank you. Congratulations on a good quarter and good guidance. Two quick questions from me. British Telekom, Haim, did you replace one of the your competitors because I'm kind of -- I recall that back in June, one of your notable competitors had also had an announcement with British Telekom on the call center side. Anything you can share with us on that front?

Now, what we can share with you is only what is written in the press release which is one sided -- as you can see, it's a one-sided press release by British Telekom which is very important. So they are themselves addressing it, or if you'd like, mentioning it. In their words, it's the key supply supplier or key partner and you can take it from there.

Got it. Fair enough. Ran, can you tell us the public and the securities into the two different elements?

I think that this quarter, as in the past, at the end of the day it is about half going on the video side, the other half is going to the audio first responder side.

I see. Okay. Fair enough, I will come back later on with more questions. Thank you. Good luck.

Thank you. The next question Jonathan Huff of UBS.

Yes, thank you and nice quarter. Can you give us an update on your targets for operating margin, I think in the past you mentioned 15 to 17%. Can you so update us when you think you reach that if that's still a target. Should we look for that towards the end of next year?

Hi, Jonathan, it's Ran. What we presented in, I think in the last year is long-term target of getting to 15 to 20% operating margin, and a '05 target of reaching the double digits for the first time. We are on track for the '05 number. We believe that the long-term, something that we can reach. Whether we are going to update it soon and raise it still time to come.

Okay. Also regarding your announcement with SAS, can you give us a sense of when you expect to have a product or when you expect to have a joint product or when your product will be combined with their product, and what your expectations are in terms of revenue contributions from that relationship?

We expect that throughout 2006, as we have a significant percentage of Fortune 100 and even Fortune 500 customers happens to be NICE customers the same with SAS. So we expect that throughout 2006, we will join the rest of these customers with the joint proposition of NicePerform and the SAS product to provide a joint venue proposition. So this is a gradual, if you would like joint effort by us and SAS throughout 2006.

Can they become a 10% channel for you guys next year or is that too early.

We are not talking actually about a channel relationship. What we are more talking pore about the joint offering with an integration of our solution, rather than necessarily a channel relationship.

Okay. And can that joint offering become 10% of revenues or is it too early to say?

It is still too early to say.

Okay. Fair enough. And last, housekeeping, can you give us the head count, please, at the end of the quarter.

At the end of the quarter, we were just below 1400.

Great. Good luck going forward and thank you.

Thank you.

Thank you. The next question is from Roni Biron of Oscar Grues. Go ahead, sir.

Roni, are you there?

Yes. Can you hear me?

Yes.

You can begin your question, sir.

Okay. Hi, Haim and Ran. Congratulations on the quarter. A couple of questions. First in regards to the CRS and its impact on gross margin. How much of that obligation did you manage to wash out during the quarter and what should we expect in terms of gross margin looking forward?

What we said at the announcement of the CRS acquisition, that the first couple of quarters we will be still selling some of CRS product that bear a little bit lower gross margin than what we are used to have. Through the quarter we have been selling the Freedom, the CRS product. At the end of the day, it hardly affected our gross margin, and we believe that going forward, our gross margin will continue to go up.

Okay. And second question, can you provide some more color on the opportunities that you are seeing in the video side of your business. Do you see more -- the growing security concerns translating into actual revenues and backlog and if so, is it mainly high-end type of projects, that involve analytics or plain recording at this stage?

I would say that we see a combination of everything that you have said. We are seeing a heightened awareness to the benefits of digital technology, ranging from basically coding to networking to analytics to sophisticated storage to the ability to distribute it across the entire security organization and this heightened awareness and also willingness to spend dollars is a trend that we are seeing, particularly in the sector of software transportation. If you would like, a public sector in general, and also in the gaming industry, where the understanding of the benefit of this technology is gaining momentum.

Okay. Finally, is backlog still higher than one quarter?

Yes. As we said, the backlog is highest ever we had, and is more than one quarter of revenue.

Okay. Thank you.

Thank you. The next question is from Daniel Ives of Friedman, Billings, Ramsey.

On Q4, Ran, when you look at the break out product or services, talk about the mix. I mean, would you expect more of a a 65 percentage product or more like 70%. Can you just speak to that?

Yes. We believe that the mix that we are experiencing this quarter and last quarter of between 65 to 67% product and 33 to 35% service and maintenance is the range that we are going to continue into Q4 and probably also into next year.

Okay. And can you address on the Nortel partnership, I mean, your thought process there? I know Nortel, they ended going with the Witness on the Voice over IP and recently Nortel said that they narrowed their top two recording guys to Witness and Varent. So can you maybe just give us some insight from your perspective into what happened on that Voice over IP partnership bake off? Thanks.

First of all, I'm not aware of any bake off, but to be more experience, Nortel has traditionally worked with other companies in terms of their business partner for recording. While NICE has a very strong technical integration with Nortel, with leading customers, NICE has never been a business partner of Nortel in the past. And therefore, if you'd like, maybe other companies should comment on that.

Okay. Thanks. That's. It thanks.

Thank you. The next question is from Jeff Nevins of First Analysis. Go ahead, sir.

If you look out into your pipeline, I was just wondering if you could give me a feel for what region you are seeing the most strength or visibility in so far this year the EMEA region in terms of year-over-year comps has been a little bit weaker. I know Dictaphone is in there so it makes the numbers a little bit harder to compare but is the Americas and Asia Pacific over the next few quarters the area where you feel like you have the most visibility?

This is Haim. No, actually, we are seeing opportunities in all regions. Of course, there can be some different applications within the -- within the different regions. Some could see more opportunities on the public and security sectors. Some would be more the contact center. Some would be more on the basic, if you would like, compliance recording, while other will be looking at more advance analytical solutions but overall, if we are looking at pipeline opportunities, we see -- we basically see exciting opportunities in all regions. This is irrespective of a specific quarter, where revenue can be a little bit up or down, but if you are looking -- if you are talking where we are seeing or do we see growth opportunity, we see them across all regions.

Okay. If you think about just your Asia Pacific region, that includes -- or when we think about revenue that is sold to call centers in the Philippines and India and it's a U.S.-based customer that does come up in the Americas revenue; is that correct?

No. This is incorrect. Everything that is delivered to our Asian customers is reported as Asian business.

Okay. So I guess my last question, and I will hop off here, is when you think about Asia Pacific, is this an area that you think can be doing 50, 60, $70 million in revenue in 2006. I mean just given it's current growth rate that's where it's tracking.

Why we are not separating the toll costs for next year on a specific geographical basis, we have seen a tremendous success in Asia. This is definitely an area where our market share is extremely impressive. We are regarded as the leader in this region in almost every country, and there is definitely a momentum there for a variety of reasons. So, yes, the business there should grow -- continue to grow significantly also next year.

Okay. Thanks, Haim. And one question on the tax rate. Ran, did you say that you expect it to be in the mid to upper teens next year?

Yes. We said it's going to be mid-teens maybe a little bit higher than that.

Okay. Thank you.

Thank you. Next question is from Daniel Meron of RBC.

Thank you Haim and Ran, and congrats on a very good quarter and continued execution. Couple of questions here, number one, you mentioned the M&A, on the M&A front that you made some progress, do you expect more in the technology side, is it more at the market's expense, where exactly do you see the opportunities.

We see the opportunities across the board. They can arrange from a geographical expansion into enhancing our technological offer into a consolidating, either direct or adjacent spaces in both the security and the enterprise sector.

Okay, thanks, Haim. Any timing of that? Is it a matter of months, a few quarters out?

I would not repeat the obvious answer. That if we had anything to report, we would report it to date and as long as we don't report, we do not have anything to report.

Thank you, Haim. And any changes within the competitive landscape right now? Any impact that you see whatsoever from the move that [INAUDIBLE] did with Verity?

We are still studying this move. It's very hard to say what will be the long-term implications of this but in the short and near term, it's -- there's no real direct connection to what we do, again on the short and near term. Longer term, it's very difficult to see.

Thank you, Haim. Maybe Ran--.

Just to comment on this, I had to go and look in who Verity is. So it's not a company that we are meeting on a day-to-day in our attempt to generate business. Again, I -- on a longer term, everything can happen.

Okay. Thanks. And Ran, maybe can you provide a breakdown between video segment and the first response centers within your product line security division?

Yes. Similar to what we had in previous quarter. This quarter, again, it's about half out of the public and security going to the video side and the other half going to the first responders and the other public customers.

Thanks, Ran. And last one for me. Can you talk about the product road map for the -- on the security side with Analysis product and what kind of partnerships or road maps you see in that product, the time frame for launching this product and all that?

Can you -- can you repeat the question? I didn't get it, Daniel.

Yes, can you provide some sort of an update on the progress with the video -- sorry with the contact center and this First Response product line for analysis there? You discussed this before, as probably a first half segment 2006 opportunity?

Okay. I understand. We are on track with our execution on this.

Okay. Any new partnerships or additions to what you have right now? In what context? Aside from Motorola that you have right now, do you expect to expand the partnership in this arena?

For example, if you look at the British Telekom announcement they have also included the public sector part as an area that they are looking to expand the business with us.

Okay. Thanks, Haim. And congrats again on the very successful quarter.

Thank you, Daniel.

Thank you. We have a follow up question from Bill Benton of William William Blair. Go ahead, sir.

Thanks, guys. Ran, could you just give us some idea on what maybe specifically happened on the tax rate front, is that the Dictaphone impact?

No, it's a combination of the mix of our product, the geographic that we sell in and to certain extent, also the Dictaphone side. All in all, we are looking at just below 15% tax rate effectively for this year, maybe a little bit higher, about 15 plus next year.

Okay. And then on the acquisition side, could you just give us an idea how the pipeline has maybe changed over the last quarter or so, since you talked about -- I mean, is it a lot -- explain the things falling off are you concentrating on a few things or does it continue to grow?

We are screening and evaluating different opportunities on a daily basis. We have a specific group that is focused on executing this part of our strategy, and therefore, it's obvious we do have a pipeline and more and more opportunities flow in. Once we have focus on one of them and decide this will be the one and will be at a point that we can report about it, we will be happy to share it with everyone.

Okay. Are they tend to be larger or smaller? Are they changing?

All sizes. We see small ones, mid sized, huge ones. All different kinds.

Okay. And then on the NicePerform side, could you talk about maybe any change in the win rate anecdotally that you are seeing from prior quarter.

I would say that our win ratio remain about the same. Having said that, in the last year, our win ratio went up dramatically and today we are winning most of the deals where we face competitors. So it's something that make us very happy to maintain this high win ratio.

I think if we just go back to basic mathematics, and you look at the increase in product revenue, that NICE had from Q2 to Q3 and our focused product revenue increased from Q3 to Q4, as, of course, a significant part of it is in the enterprise sector, one considers we are talking about many millions of dollars of product revenue increase two quarters in a row. And just need to look at least the public companies that are reporting, look at their product revenue and I think you can make the decision yourself.

Great. Thank you. And then just on the -- the affiliate contract, obviously that's a great upgrade opportunity for the Dictaphone business. How do you -- looking back in that customer base, how do you size kind of maybe additional opportunities in that? I'm trying to get a general sense of, would that have surprised you how quickly that came on and if you kind of -- as you relook at that, say that that's a much bigger opportunity than you would have initially expected.

Well, it is -- the execution is faster than what we expected from a strategic point of view. Obviously, since we have bought a competitor and we were already active in both the public sector and the enterprise sector, this is not a market that surprised us. This is a market that we have been there, we are active, we have entered the significant British market when we acquired PCS or [INAUDIBLE] and also with our partnership with Motorola. So we knew the dynamics of the market. We knew the trends. We also knew how we can influence by consolidating a competitor and becoming the clear cut leader and how we can influence this market and drive growth. Of course the execution was, as we said, slightly better than what we initially expected.

Final quick one, can you talk about how big Avaya was this quarter?

Our business with Avaya continues to grow quarter by quarter, and year by year. So we are seeing more and more business and Avaya of course is a growing business from -- on comparing year-to-year and we expect both us and Avaya expect this to continue and grow.

Okay. Great, guys, thanks again.

Next question is from Mike Latimore of Raymond James & Associates. Go ahead, sir.

Yes. Congratulations on the quarter. In terms of the NicePerform you said 100 sites, I believe, deployed. Do you have that number from three or six months ago?

The last number that was publicly announced by us, was if I'm not mistaken and I have to apologize because I'm talking from my memory right now was either 12 or 16. This was the last time that we have announced a number--.

Two quarters ago.

Two quarters ago.

It was about 15.

15 or 16, but I'm talking now from memory.

Great. Thank you. And then the -- it sounds like your forecast for '06, you expect product growth to be similar to the overall revenue growth of the Company?

Basically, yes.

Okay. Great. How about within the enterprise segment, do you have a breakout there between, say, the quality monitoring and compliance as a percent of revenue?

No.

Okay. And let's see, VoIP, Voice over IP, it sounds like business is going very well there. Any more quantitative information around that in terms of number of customers or percent of revenue or anything like that?

I think what is important in the Voice over IP is the fact that we are seeing the significant jump in the number of large orders that customers are deploying. As we said, we had a combination of 7 digit and mainly, 9.99-type of orders in the last quarter, both in the public sector and also in the enterprise sector. So this is now, it's real, it's now and we are leveraging our install base, our relationship with install base that are gradually starting to deploy Voice over IP. I think this is the most important trend that we are seeing and -- and we are very happy.

Great. And just last question, the -- in -- the Dictaphone customer base, can you just talk a little bit about the -- receptivity there to the NICE product, versus the traditional product.

I think overall, customers are happy with this transition. A few examples which I mentioned during the call, of customers and we are actually seeing quite a lot of customers of Dictaphone customers looking to renew the technology, and are expecting or accepting our offering and offering the technology, the product, the service, the people, and this is received very well.

Great. Thank you. Very nice quarter.

Thank you.

Thank you. The next question is from Avshalom Shimei of HSBC.

Haim, I just wanted to ask you, regarding the SAS agreement, is that one -- delivered it has the similar potential for the IBM or Motorola agreement, bigger potential? Similar Potential?

I think without touching the numbers, I think what is important about the SAS agreement, this is an [INAUDIBLE] from the industry leader in business analytics of our vision. Those of us that have followed us for years remember when we talked two or three years ago about Insight from Interactions, about the combination of unstructural data and structural data to provide enterprise with the full solution or the full analysis of their customer interactions, and what is important of this announcement, is the fact that for the first time a leading company in the analytics, which has hundreds or thousands or many thousands of customers has actually endorsed and together with us, are going to provide an integrated solution to the customers. So I think this is the real importance. Of course, there's the business implications of this in the coming months and years, but from a strategic point of view, this is a very significant endorsement beyond just distribution or stuff like that.

So I will take it is that you do believe that this agreement has a great potential, if you compare it to previous agreements that you had in the past like Motorola and IBM, or even more than that?

I'm -- I'm not talking specifically about the financial implications. I'm talking about the strategic importance of this, that obviously in the future will be translated also into business.

All right. Fair enough. In regard to enterprise market, are there any particular region or two regions that stand out out now in terms of the growth potential for 2006?

As I said, we are seeing opportunities in all regions. If we take aside the macroeconomic situation, and we look specifically in our niche areas, and markets, we see opportunities across the board. What is different is, of course, the -- specific areas or countries. We are seeing areas where compliance recording is going to be and the change to Voice over IP will be the driving force for growth. In some areas we see the heightened awareness around security and in other areas it will be just macroeconomic growth of the region. So all in all, we are seeing opportunities for growth in all regions. So I wouldn't say that one specifically is -- stands out. Of course, as we said, Asia traditionally by now has been the fastest growing region because of the macroeconomic situation there, and it might continue to be so also in the coming years.

All right. And just in regard to India, since you have scored very nicely on the outsources segment do you think there's a lower potential for 2006 there or maybe higher for some reason, compared to 2005?

As I mentioned, we have sold by now over 100 sites of NicePerform. While this is an impressive number, if you look at the industry, around us, the number of sites, customers, whether they are in Asia or in other places, of course, the potential is significantly larger than that. So we still have a long way to go.

I was referring to India in specifics. That includes--?

This includes also India. This answer also is relevant for India.

All right. And Ran, just the share count for your guidance for the end of 2006, if you can give us?

We estimate that the average share count for '06 is going to be around 22 million.

All right. Thank you.

Thank you.

Thank you. There are no further questions at this time. Before I ask Mr. Shani to go ahead with his closing statements I would like to remind everyone that a replay of this call is scheduled to begin in two hours. In the U.S. please call 1-866-276-1485. In Israel please call 03-925-5930. Internationally, 972-3925-5930. Mr. Shani.

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