Nice Ltd (NICE) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NICE Systems second quarter 2006 results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn this presentation over to Ms. Daphna Golden, Director of Investor Relations and Corporate Development. You may begin.

Thank you, operator, and good day, everyone. With me on the call are Haim Shani, Chief Executive Officer, and Ran Oz, Corporate Vice President and Chief Financial Officer. Before we start, I would like to mention that 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 "Forward-Looking Statements" in the Company's 2005 annual report on Form 20-F as filed with the Securities and Exchange Commission on May 17, 2006.

Such factors include, but are not limited to, changes in technology and 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; growth 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.

During today's call, Haim Shani will present our strategy and overview of our business, and Ran Oz will present a more detailed discussion of our second quarter 2006 results and financial guidance. Following our comments, there will be an opportunity for questions.

Let me remind you that, unless otherwise noted on this call, we will be commenting on our adjusted results of operations which differ in certain respects from generally accepted accounting principles. Please refer to our press release for a reconciliation of our GAAP and pro forma results discussed on this call. With that, I will now turn the call over to Haim Shani. Haim?

Thank you, Daphna. Good day, and thank you all for joining us for a review of our 2006 second quarter results. I'm pleased to report that this was another record quarter for NICE, with revenues coming in at 97.7 million and earnings per diluted share at $0.28, both at the high-end of our June 22 pre-announcement.

These results reflect very strong market demand for our Insight from Interactions solutions, coming in from all regions and all market segments. In addition to the strong performance on the Security side, also strong this quarter was demand for our Enterprise Interaction Solutions, which showed dramatic growth relative to the same quarter last year. This strong demand continues the trend we saw during the first quarter of this year.

We have completed the acquisitions of Performix and IEX and are well underway with the integration process according to plan. Following on success with previous acquisitions, we're confident that once again professionalism on all fronts will deliver successful results. This is a very exciting time for our industry and for us as well. As we introduced a paradigm shift in how strategic decisions are made to improve performance at the Contact Center and enterprise levels.

Organizations are focused on improving effectiveness and efficiency. They're looking for ways to leverage the message of market and customer intelligence that comes into the Contact Center every day. They're looking to provide proactive versus reactive customer care. They want to apply KPI driven management principles and procedures. And they are still seeking the best way to adapt to the new Voice over IP world and to address key challenges in regulatory compliance and corporate governance.

The combined offering that we had with NICE Perform, IEX and Performix Solutions is the answer to this and other related needs and challenges. Together, we helped Contact Center and enterprises achieve operational efficiencies as well as strategic effectiveness. And by offering a modular solution and the opportunity to implement each as a standalone, as plug and play or as an integrated whole, the breadth and depth of opportunities for improvement is unlike anything that is seen before.

Over the past several weeks, we have met with many customers who are planning to implement the combined offering and its various options. In fact, we see customers planning to replace the Legacy Solutions they had in the Contact Centers through a joint purchase of NICE with either IEX or Performix Solutions or both. Many more customers are being addressed together by collaborative sales teams. And we have many partners who have already hit the pavement and presented this new paradigm and expanded solution.

Needless to say, the market response is extremely positive. In fact, I had the pleasure of receiving this first feedback firsthand from a great many customers at our recent NICE User Group summit. This was a very exciting event for us with over 420 customers, NICE customers in attendance. The overwhelming message is that our market is indeed changing.

Our customers need the tools and solutions to help them meet the challenges of change and the offering we are introducing with IEX and Performix Solutions address these very needs. This summit was a wide-ranging event sponsored by some of the world's leading companies such as Avaya, EMC and Microsoft and with NICE partners and customers, such as GE, Liberty Mutual, Coca-Cola and Charles Schwab delivering key presentations on the topics that are foremost on our customers' agenda.

At this same occasion we also held our first NICE User Executive summit which was attended by senior level executives from NICE customer companies that are worldwide industry leaders. They all came in to discuss the growing demand for generating insights from customer interactions to improve business performance and increase competitiveness. Nice Perform continues to enjoy wide market acceptance. Six months ago we announced that Convergys has selected Nice Perform for tens of thousands of agents replacing two Legacy systems they had in place.

Now, EDS, a leading global technology services company, has decided to standardize its global Contact Centers on Nice Perform also replacing Legacy technology. Another important recent event was the unveiling of powerful new capabilities with Nice Perform for Contact Centers and enterprise, especially as we introduced our regulatory compliance and risk management suite for corporate and investment banking.

For the first time, the power of interaction analytics is being harnessed to address the key challenges such as preventing insider trading breaches, ensuring best execution and detecting irregularities. We are already seeing the first orders coming in from world's top tier banks.

We also introduced this quarter the Voice-over IP recording gateway, a breakthrough Voice-over IP technology for branch recording and IP trunking. This technology enables organizations to implement centralized recording in their main sites and to capture customers' interactions coming in from dozens of remote offices.

The deployment of Voice-over IP continues to represent important opportunities for NICE. In fact, our Voice-over IP business more than doubled over the same quarter last year, representing over 10% of our enterprise business. More and more large scale orders are coming in. For example, one of Scandinavia's largest banks placed the following order to expand its implementation of NICE Voice-over IP solutions as it was looking to centralize its recording for all of its European branches.

In the public safety and security market, we are seeing that the need to better protect citizens from potential threats continue. In the US, the Federal Aviation Administration is tapping into its Homeland Security budget to improve aviation safety and security. And for Lockheed Martin, who received a multimillion dollar contract from the FAA to supply advanced analytic tools to help them improve flight planning accuracy at administration-automated flight service stations.

For our first responders customers, we announced last month our collaboration with Motorola to develop a public safety IP trans-radio recording solution. As fire, police and EMS transition to Voice-over IP, this solution offers first responders enhanced support for interoperability among agencies on IP networks. As we are leading IP interactions solutions in all of our sectors, we are ideally positioned to work with Motorola on IP initiatives. This joint solution was recently released for shipment, and the first orders have already been received by Motorola.

As regards to our smart video security solutions, we are seeing increasing demand coming out of Asia Pacific. In Q1 of this year, we announced that Beijing Metro will be implementing NICE smarts video solutions in portions of its city's subway system. And last month, we won another major bid with Beijing Metro. Our technology is now securing commuters on additional lines and NICE has become an integral part of how Beijing will ensure its citizens' safety during the upcoming World Games.

As we continue to expand in Asia, we are winning more and more security business throughout the region, such as a recent win in Japan to protect marine transportation facilities at one of its ports. In fact, we are seeing an increasing in aerospace overall demand and projects for our solutions in the transportation and facilities security markets. As a result, we are receiving more and more orders during the second quarter, for example, from transportation authorities in the US and Europe and two major banks in Western Europe.

In Q2, we experienced strong momentum in our partnership with Honeywell for our video security solutions. Only several months after initiating this partnership, following the completion of the FAST acquisition, we have seen this channel grow significantly, and we are looking forward to many more opportunities and increasingly growing pipeline.

In conclusion, Q2 was both a record and important quarter for NICE. We are well tuned into the needs of our customers in each market and in every geography and are continually providing them the solutions they need to be competitive and lead. This spells into a continual increase in demand for our Insight from Interactions Solutions, accelerating momentum across the board, and ever better results.

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

Thanks, Haim. I am pleased to provide you with an analysis of the financial results for the second quarter of 2006 as well as our outlook for the second half of the year. As Haim indicated, we had another record quarter. Revenues for the second quarter were at $97.7 million, up 35.3% from $72.2 million in Q2 '05.

Enterprise sector revenues were $72.6 million in the second quarter, representing an increase of 33.7% year-over-year. Growth in the enterprise sector reflects, in part, NICE's expanding leadership position in the growing market for interaction analytics solutions and the technology research cycle, which includes the increased migration to Voice-over IP.

In the public safety and security sector, revenues in the second quarter were at $25.1 million, representing a 40.2% increase over Q2 '05. Growth in the public safety and security sector reflects in part the strong momentum of our next generation security solutions and increasing budgets that are driving new related projects.

Q2 saw our strongest booking ever. We completed Q2 2006 with a book to bill greater than one for the ninth consecutive quarter, even with such strong revenues. And we enter Q3 with a strong backlog that gives better visibility than ever before.

Revenue by geography for Q2 '06 was as follows. The Americas accounted for $56.9 million, a 55% increase over Q2 '05. Europe, Middle East and Africa accounted for $27.8 million, and APAC accounted for $13.0 million.

Gross margin for Q2 was the highest ever, reaching 59.8%, up from 56.7% in the same period of 2005. Product gross margin also reached a record at over 70% for the first time. The increase in gross margin is a direct result of the continuing shift in our product mix towards software based products, including NICE Perform Voice-over IP, quality monitoring and video analytics.

Operating expenses were at $43.8 million or 44.8% of revenues, down from 46.9% in Q2 '05. This improvement is a result of the leverage of our infrastructure. We recorded an increase in operating margin, reaching new highs with Q2 operating margins at 14.9%.

Net income for the second quarter was $14.6 million, up 99.6% from the $7.3 million reported in Q2 '05. This reflects the leverage of our business model, where a top-line growth of 75% in the quarter translated into a much high growth in the bottom line.

Earnings per share in the second quarter of 2006 was $0.28, up from $0.18 in Q2 of last year [post] Street. The company's balance sheet continues to be strong with cash and equivalents at the end of the second quarter at $421.1 million with no debt. This follows the approximately $30 million that was paid for Performix during the quarter and does not include the $200 million NICE paid for IEX on July 6th.

DSOs at the end of June was 69 days, slightly better than our long-term guidance of 70 to 80 days. Following a very strong first half of 2006, the increasing demand for our Insight from Interaction solution and the growing backlog, we are raising previously announced full year guidance for 2006, with revenue at $408 to $417 million, up from $395 to $405 million. And pro forma EPS at the range of 1.06 to 1.15, up from $1 to 1.06 per fully diluted share post Street.

We also provide first time Q3 '06 guidance as follows. We expect revenue to be between $108 to $112 million and pro forma EPS per fully diluted share in the range of $0.27 to $0.31.

That's concludes my comments. I'll now turn the call over to questions. Operator?

[OPERATOR INSTRUCTIONS] The first question is from Bill Benton of William Blair. Please go ahead.

Good afternoon to you guys. Good morning to everyone else. Congratulations on another strong quarter. I just wanted to check in on, I guess, the gross margin first, obviously that increased pretty substantially. And I know you talked about software being a big part of that. So I suspect that we should think about that as being kind of a sustainable level going forward?

Yes. We believe that this level is sustainable. And coming into Q3 result announcement, we'll talk more into the outlook of 2007. But for the near-term, that's definitely the level we should expect.

Okay. And then R&D increased sequentially. Is there anything that you're signaling there? Are you doing anything incrementally there that's notable?

The increase in R&D is a combination of the addition of Performix that added many talented people to our R&D side and more investment that we are doing to make our advantage over other players in our market more visible.

Okay. Avaya I guess talked about increased activity in VoIP in call centers, and they also talked about larger systems that seemed to be selling better than small or medium-sized systems. Can you comment on whether that is consistent with kind of-- obviously the VoIP side is obviously consistent with what you're seeing. I didn't know if you could comment maybe further on that whether you're seeing an acceleration there and also what you've got in larger systems versus smaller systems?

Hi Bill this is Haim. Obviously, we are seeing the same trends and our results are a reflection of these trends -- increased demand, larger systems -- this is actually where we come to play, this is where we have the clear advantage. We are the leading in the market in large system, large scale implementations. And if you would like, these are the macro trends behind our results so far and also going forward.

Okay. How much -- how important was VoIP? I know there is a lot of different - you've got the NICE Perform, you've got VoIP, you've got other drivers in the business. How important is a VoIP driver specifically? Is there any way to kind of give us some sense of that importance?

I'm not sure how to quantify, I can only qualify. The voice is a major opportunity because it does two things. A, of course, it churns faster older technologies, and B, it opens the markets for new applications that did not exist before, especially, in the back office and other areas.

So overall voice is a driver, if you like, both short-term to replace legacy systems and also longer term in terms of new applications. So it is definitely a nice and important driver, not the only one because we are enjoying several, if you would like, growth drivers, this is one. The other is being directional analytics, which we are leading the market and basically set the tone and this is again a new direction that the contact center is -- the contact center and the enterprise is heading. And the overall contact center business performance, which is the combination of NICE Perform and IEX and Performix -- the combination of the three is also a very strong growth driver moving forward.

So we cannot separate each one with a specific number, but this is definitely behind A, our results so far and also our guidance for the future.

Okay. Could you give us a sense on what percentage of your base has maybe migrated to VoIP as kind of an indicator?

A very -- still a very small percentage. The vast majority of the enterprise today existing in the installed base is still TDM.

Okay. And then if you could comment on how the current conflict over there is impacting your business if at all, obviously you guidance is strong, so I suggest it's not much right now?

Are you talking about the current conflict in the Middle East?

Yes.

There's no effect whatsoever on our business.

Okay. Thank you very much.

Okay.

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

Thank you. Hi, good afternoon, guys, and good quarter. Congratulations on the guidance. A couple of quick questions from me. Haim I want to start first on the competitive landscape and kind of -- it's a question being asked, not because I have nothing to ask, but we need to try and understand what's happening, because I think that we could be seeing some sort of a shift.

Last Thursday, one of your main apples-to-apples comms announced results that were okay, at the best. What are you guys doing that is different from these guys? Is that a product issue? Is that a technology? Is that an execution issue? What's happening on the competitive landscape?

Hi, Shaul. Thank you. I would not like to comment on a specific company, but I can say that obviously our results and the growth in our results and the growth in the enterprise numbers overall, I guess, indicate that we are increasing our market share quite significantly. This comes almost from pure mathematics.

From a strategy point of view, we have set up a strategy a few weeks ago basically in terms of where we're heading. We have launched Insight from Interactions. Initially, vision, then we have backed it up with tens of millions of dollars of development in R&D, which translated into a significant major suite the NICE Perform. This was very well accepted by the customers. And we're seeing customers simply buying it and replacing legacy -- either replacing legacy competitive products or upgrading their own -- the previous versions of NICE.

I have also talked about Voice-over IP, which is a trend. We have patented technology -- a very strong patented technology around Voice-over IP, which again is adopted very well by the market. So this is probably behind our results. We've also set up a reasonably strong operation around the world in all regions. So we are not dependent on only one specific geography. And so I would say we have a relatively good coverage of the entire region. So I guess these are behind our results.

Fair enough. While I have you maybe on that --same company. It also kind of announced last week some stock options issued that it was looking into, given the fact that everything is absolutely fine fundamentally very, very flawless, have you guys looked into your own kind of stock options, so there could be like nothing in the -- coming in the future just to make sure?

We don't have any issue with stock options. NICE had always had very strict procedure of granting stock options at board meetings and based on the last known price.

Okay. That's good. Haim, you mentioned before kind of the -- I think the new product, the branch Voice-over IP recorder. Just want to understand is that a product that you guys developing by the request of your customers? Are you being kind of pushed into the market or this is something that you're coming up with it from an innovative kind of standpoint and kind of going ahead, going with it into the market?

Combination of the two together. In terms of the underlying demand or the underlying need for a solution, obviously it comes when talking to customers, understanding what are their needs, what are the issues in terms of efficiency, how to address without going too technical?

How to address issues with the new IP trunking and how to have a much more efficient management of recording in a centralized location. So the need, if you'd like the underlying need, is by talking to many of our customers. The technology itself is, this is the head, if you would like, or the ideas of our engineers, who have innovated in terms of technology to address this need. So it's a combination of the two.

Got it. I guess one final question. Just want to make sure that I heard correctly on the public safety, was it 25.1 million for the quarter?

Yes.

Got it. Was this kind of slightly down from last quarter if I'm correct? And if so is it just, a shift given the fact that Perform was a good performer this quarter?

I think that growing 40% over the same quarter last year is something that we would sign for the next coming years.

Okay.

We are not [inaudible - cross talk] sequentially.

All right. Thank you very much. Congratulations.

Thank you.

We're now going to move on to Paul Coster, JP Morgan. Please go ahead.

Yes. Good afternoon gentlemen. A couple of quick questions of Ran, first of all, the tax rate going forward. We were a little bit caught out by that. What should we expect through the remainder of this year?

We expect to have kind of 20%, 21% tax rate. We said that with the effect of the last two acquisitions, we are going to face a slightly higher tax rate.

Okay. Got it. And what was the CapEx this quarter and just going forward?

CapEx is usually on a quarterly basis around $2 million. This quarter specifically, it was slightly shy of 2 million at 1.9.

Okay. Your prior guidance or your target was to achieve 60% gross margins. Well, you seem to have hit your target. So can you provide us with an update on your long-term objectives in terms of the business model here?

Yes. Well, our long-term target was to be across the 60%. So we still have some basis points to achieve. On the tariff side, we intend to come after Q3 and not just give an outlook for 2007 with a very clear plan and targets, but also to set the right targets in terms of metrics on the gross margin and operating margin that we would look for.

Okay. Got it. How important is the pending litigation on VoIP technology, I think late this summer?

We have a very significant patent, as I said. And since we believe that these patents are enforceable, we have initiated this litigation to make sure that our rights are protected. So, of course, if this will be approved by the court, it means that we have -- that our rights will be protected and it's very important.

What is the -- sorry, Haim. What is the timing for the litigation?

We expect this to be concluded not later than the end of the year.

Okay. Great. I'm set. Thank you.

Thank you.

Our next question is from Daniel Meron of RBC. Please go ahead.

Thanks, Haim and Ran, and congrats on a very good performance and outlook. A quick question Haim on the updates regarding your partnerships that you had with SAS. Also you had a product launch with Motorola, if you can give us a sense there. Also on other fronts, what are your strategic thoughts on partnerships? How do you view that? Do you think that you can expand more with IBM? I believe that you just had a contract signed with them that you announced just recently.

I mean all these partners are extremely important. We have, I would say, partners, which support our existing day-to-day business, and we have partners that will support our expansion into new areas such as the SAS relationship, so each one has a little bit different flavor.

SAS was a major sponsor this year of our summit. They had a booth there. We had many joint meetings with customers. And we are now starting to see, if you would like, the plans for the initial implementations of this joint vision. So this is one example with IBM, I would say, probably on the same direction.

And with Motorola, we had an ongoing business relationship, which is generating immediate business, ongoing business, on the TDM front, on the voice TDM front. And now, we have extended this partnership also to Voice-over-IP. So as they move -- as they condition their technology we are a significant part of this move.

So this is where we are, obviously looking into the future as we expand our product portfolio. As we expand our product reach, we might be looking to have additional partnership cooperation. Partnership is not necessarily a distribution agreement, partnership can be also technological alliance.

And this is something that we are actively doing. Speaking right now to several, if you like, potential new partners that are relevant, and if and when we'll have something to announce, we will.

Great. Thanks Haim. And maybe can you provide some color on where you stand as far as M&A strategy? Are you taking a pause here for a quarter or two or do you continue to looking for more acquisitions at least with the same scale that you've seen so far?

We'll answer you half jokingly that we don't have time for a pause. Seriously speaking, obviously we have now concluded two very important acquisitions in the enterprise sector, which positions us, we believe, in a -- very strong in this part.

And in terms of priority, and I would say more proactive we are looking to expand our security portfolio and security offering, also through organic growth and acquisitions. So this is something that we are proactively looking at. I won't exclude also acquisitions on the enterprise front if and when on a more opportunistic basis they will occur.

But in terms of our first priority for, I would say, the coming future, it's obviously going to be more on the security side. I would say that more of a general answer -- our strategy remains the same to combine organic growth with strategic acquisitions. Nothing has changed in this respect.

Great. Thanks. And Ran, a couple of questions on the financial side. The mix of services versus product was a bit tired this quarter. How should we look at it in the next couple of quarters?

We believe that going forward and more long-term, it should stabilize around 65 product and 35 service and maintenance, give or take.

Okay. So this quarter would -- what accounted for the strength of this quarter?

As you know, we have experienced a stronger quarter than we had originally anticipated. And we gave a preannouncement before the end of the quarter due to the demand that we were facing. This is also the reason we have raised our guidance for the rest of the year.

Great. And then, also this quarter, I thought that the products' gross margins were slightly -- the product gross margins were strongly up but the actual cost of goods was down. Was it -- is it because of higher share of software within your product?

Yes.

Okay. Thanks, Ran. Good luck going forward.

Thank you.

We'll now move on to Joseph Wolf of UBS. Please go ahead.

Thank you. Just a quick question. If I look at the guidance and the raised guidance, could you give us a sense of -- some of it is obviously driven by the success in the second quarter. I'm just wondering if you could kind of tell us how much of the success in 2Q is rolling over into 3Q as being optimistic and how much is just, in fact, that you beat the second quarter? And related to that and in connection to the prior question, could you tell us where the upside surprise came to your guidance in 2Q based on either market segment or product?

Okay. If you go from the mathematic direction you'll see that the raised guidance for the second half of the year is definitely coming from stronger results in the second half of the year and not relating to what the actual Q2 was already, which we already reported.

I think that you'll see also that growth that we are forecasting to have in the second half of the year versus the second half of '05 is going to be significant one. The fact that we're putting such a high guidance is based on stronger booking we experienced in the first half of the year, which give us much better visibility into this half and stronger pipelines and opportunities that we are facing. Does this answer your question?

I guess vaguely, yes. I just - if I look at the midpoint of the range and I look at where consensus was it seems to me the midpoint of the range is kind of what people were already expecting, and that was after the pre -- after the positive preannouncement.

You probably need to ask the people that come up with the midpoint of the analyst expectation. What we gave is a raise which is significant compared to our previous guidance, which is much higher than just the Q2 results.

Okay. Could you maybe spend some time going through some of the details where there was some surprise from where you were looking into the 2Q when you gave guidance? And how it came out?

Yes. We saw surprise or upside coming from both sides of our business. We didn't expect neither the enterprise to grow at 33% nor the security to grow over 40%. So on both sides we see the upside and that's the reason Q2 came in, I would say, more than $5, almost $6 million higher than the original guidance.

Okay. Thanks.

Anything else?

No, I'm done.

Okay. Our next question is from Brian Ruttenbur of Morgan Keegan. Please, go ahead.

Yes. Just one quick question -- a lot of my questions have already been answered. Great quarter, by the way. Just wanted to know what your internal growth was in the period?

The organic growth in the company through the years was about mid-teens. It's really hard to calculate it in every given point of time, given the fact that most of the acquired companies become organic part of NICE. But we can definitely say that in the last two quarters or the first half of 2006 the organic growth was much, much higher than the normal level that we experienced. It was definitely above the 20%.

Okay. You just said mid teens, and then you said 20% and historically you've been 8% to 10%. I'm a little confused what organic growth is.

Organic growth for the company in the last several years was around mid-teens. It can be 13%, it can be 14%, it can be 16%. It is moving from one quarter to another. Specifically in the last two quarters it was much stronger than that.

Okay. Well, thank you very much. I appreciate it.

Thank you.

Our next question is from Mike Latimore of Raymond James & Associates. Please go ahead.

Yes. Good morning. A very nice quarter. Just to clarify a comment earlier. You said that your Voice-over IP deals on average have a higher ASP than your TDM based deals?

I don't, this is Haim, I don't recall that I said so. All I said is that the potential in terms of Voice-over IP is for two things, one is to replace legacy systems and b, to enable new applications and that still the vast majority of our installed base is TDM. As to the ASP this is a question that I don't recall I was asked before.

Okay. I just thought you said in reference to Avaya being larger deals that -- around VoIP that you were also seeing larger deals around VoIP.

Correct. This is also true. But we didn't discuss the specifics of ASP. I - I - Avaya in other environments I was seeing -- I'd say much more Voice-over IP deals than in the past and this is something that contributed to our growth.

Okay. Great. And then just sort of excluding the impact of the IEX acquisition would -- should we assume the enterprise/public safety mix remains roughly what it is this quarter going forward?

I would say that in the second half of the year, we would see the contribution of IEX taking the enterprise even higher, more towards the 75% of business. But in the longer-term it will probably go back to around 70/30.

Got it. And then in the IEX market, the workforce management market, would you expect the highest growth rate to come out of sort of enterprise/large company deals or a higher growth rate to come out of the small mid-sized business market?

I would say that the growth will come from, A, the IEX product line or business gaining market share on its own by having the most advanced and -- reach in terms of feature functionalities for multi skills and complex environments, which is one part, and the second part, it will grow from the synergy and the leverage it will have from the NICE distribution organization primarily outside the United States but also in the US.

In terms of a large company versus a small company, it seems like there's more penetration in a large market. So I'm wondering if maybe the growth rate probably has a smaller base, out of a small mid-size might exceed that opportunity in a large market?

Not necessarily. First of all, I agree with you there is an opportunity in the mid-range, obviously, but you'd be surprised that even in the large market opportunities, A; still our customers that have many operations there and, B; we have now a tendency of replacing legacy systems that are much less in functionality and companies are now turning much more to IEX to replace quite a lot of legacy systems that they have. So even if it's penetrated, it's penetrated by in many cases nonfunctional systems.

Okay. All right. Thank you.

We'll now move on to Dan Harverd of Deutsche Bank. Please go ahead.

Hi, good afternoon and congratulations on the quarter. There were a couple of times that you mentioned the replacement and upgrade cycle. Where do you think we are on that cycle and how long can it last in the enterprise side?

I mentioned this primarily in the context of Voice-over IP and as I said in terms of Voice-over IP specifically, still the vast majority of the Contact Center has TDM. So obviously we're just at the beginning.

So you're saying NICE Perform as a driver for upgrades or is it primarily Voice-over IP or to what extent are the two intertwined?

Okay. First of all, they are combined, of course, because NICE Perform Analytics runs analytics coaching, quality monitoring and so on runs on top of both TDM and Voice-over IP. So they are connected. But in terms of business drivers - there are too different business drivers. One is the Voice-over IP as I said or the convergence from TDM to Voice-over IP.

And the second is the value -- the business value that NICE Perform combined with Performix and IEX brings into the Contact Center operation analytics and so on which is a new vision, a new technology, a new solution to our customers and the penetration there is again, it's just at the beginning.

Okay. Just moving on to the subject of large deals. In the past, you've given some metrics on those, do you think you could give an indication of what percentage of the business is being driven by large deals? How you define a large deal in dollar terms?

The metrics we usually used when asked was mainly how many seven-digit deals we had. This quarter, we had 13 deals which is I think the highest ever -- definitely much higher than previous quarters -- and this is only one element of the growth that we see in our business.

Okay. And Haim I just want to move back to the question of consolidation. Obviously, you've made a relatively large acquisition recently in the call center market. Future acquisitions within the enterprise space, do you see acquisitions of that size and up or are they more likely to be smaller in size going forward?

I'm not sure that I would be able to qualify that [inaudible - accent]. I would say that our primary focus at this point of time is to expand our security related business through strategic acquisitions. This is I would say on the short and midterm. Within the enterprise side, we've just completed two acquisitions. We think we have a very strong opportunity for our technology combined solution and so on. On a longer term basis, I would not rule out that we will continue to expand also through strategic acquisition.

Okay. And then just one final question from me. The operating cash flow was a little bit weaker than in recent quarters, so what was behind that and is this just a quarterly blip or should we see this as the level going forward?

I would look at it more on the first half of the year being about $30 million of free cash-flow from operations, which is about our run rate. It's just a matter of collection moving from one quarter to another.

Okay. Thank you.

Thank you.

We'll move on to Daniel Ives of FBR. Please go ahead.

Yes. One question. On the New York City MTA contract, the video surveillance piece, have you won that contract? And if so can you maybe just give us details in regards to timing or is that in pieces or competition? Thanks.

We cannot give any specifics on customers unless we have announced it in public. So since we didn't make any announcement on this specific customer, I cannot comment on a specific customer. The only thing that we said that in the City of New York we are -- in the area of New York, if you would like we are seeing some of our video technology being deployed. We did not specific which customer was it.

Okay. Well just as a follow-up on the video surveillance, without naming [them], can you maybe talk to the competitive environment on video surveillance? I mean, there's a lot of smaller players fragmented, just how that environment's changing maybe just insurance on the overall transportation or video surveillance market? Thanks.

There are quite a lot of -- you mentioned correctly there are several players in the video surveillance. There are a few that are public -- very few that are public, many others are either part of larger organizations like GE, and also smaller privately held companies. So this is at this point of time a relatively fragmented market.

We have a very focused approach on -- focusing on growing areas, areas where we can leverage our scalable solutions, those that implement analytics and also very high-end technology, as well as our voice -- our video over IP technology that was acquired from [inaudible - accent]. And this is primarily; not only in critical facilities, transportation and gaming and in this I would say high-end part of the market. We are seeing a lot of demand, a lot of growth, and a lot of momentum in the business. But obviously we are not alone, there are other companies competing for this segment.

That answer your question?

Yes, I'm good. Thanks.

Okay

Okay, we have a question from [Jack Nevins] of First Analysis. Please go ahead.

Good morning. I wanted to just hit on a question from an earlier caller about the organic growth. By my calculation it looks like in the second quarter your organic growth accelerated quite significantly.

The organic growth from first quarter of '06 is maybe around 10%, and this quarter it accelerated to the upper 20s. I mean, it appears as if there was some sort of deal movement from Q1 to Q2, could you provide any color as to why it appears as if your organic growth did accelerate so significantly in the second quarter?

Again, we don't know exactly how you calculate and as we said, carving out the exact organic growth is always difficult, because we are integrating the acquired companies into our business, in many cases, like we've done both with [Pallet] and Dictaphone in the past. We've actually replaced many of the technology with the NICE platform. So an exact calculation of the organic growth is difficult. But from a qualitative point of view, yes, we have seen an acceleration in the second half and more so even on the second quarter in our growth in general. And this was attributed both for organic growth and through the acquisitions. I guess that the strategy that we have set for the company was well accepted by the customers. And there is [inaudible - accent] it's as simple as that. More Voiceover IP, more NICE Perform, more customers adapting [indiscernible]. Also competitive wins, the combination off all three contributed to this organic growth.

Okay. So there was nothing from the first quarter that slipped into the second quarter that appears significant?

No, it's not, no.

Okay. And then just following up on that, you look out into the September quarter, and I know my calculations here, they're not perfect. But what implies if organically you're expecting the September quarter to be about flat maybe even down a little bit once you add in IEX and Performix which will add to the tune of $13 to $15 million in the September quarter. Is that how you're thinking about the outlook for the September quarter?

We do believe that Q3 is usually flattish and slightly up -- in this case we actually do see an increase. Not just that Q2 was higher than expectation. We do believe that above this anomaly we can see Q3 even exceeding it. When we gave the first-time guidance for Performix and IEX together, it was for $28 to $30 million for the second-half of the year, meaning less than half of it in Q3. So there is still room for sequential growth, although we usually look at more year-over-year that would present a significant growth over Q3 '05.

Okay, fair enough. Thanks for the answers.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Daniel Ives of FBR. Please go ahead.

Hey, guys. I assume you [inaudible] the right geographic breakout. Can you give those numbers again?

Yes. America accounted for $56.9 million and --

Because I think what you have, let's say, you said EMEA 27.8 and the A-Pac 30?

13.

13. Okay, good. Thanks.

Sure.

Thank you.

And we have another follow-up question from Jack Nevins of First Analysis. Please go ahead.

Final question, guys. On the security segment, what's your, I guess kind of a prognosis on what's happening out there? I mean, obviously it grew quite significantly, you have [fast video] in there, which helped some of the growth. Do you see that sector growing 25% plus over the next several months? Are there any challenges or opportunities that are changing anything in the landscape?

It has grown quite significantly compared to the first half of last year. We expect it to continue and grow and this is of course part of our guidance for the second half of the year or for the full year. In terms of the dynamics, the dynamics are still there. I mean, the governments and cities are -- need to protect citizens and invest in technology, first responders need to upgrade their technology to address many challenges.

So if you'd like the growth drivers and the dynamics that affected the growth so far. I don't think they're going to change neither next quarter or not in the next few years. So in this respect, corporations and governments and cities and states will continue to invest in technology to improve their security.

Okay. Thanks.

Thank you.

There are no further questions at this time. Before I ask Mr. Oz to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours' time. In the US, please call 1-866-276-1485. In Israel, please call 03-925-5930, and internationally please call 972-39-255-930. Mr. Oz?

Actually, this is Haim Shani, operator. I would just like to use this opportunity to thank all of NICE employees for their hard work and dedication to make this the most successful quarter for the company and it's only with their real motivation that we were able to achieve these great results. 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.

Thank you. This concludes NICE Systems second quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.