Nice Ltd (NICE) 2006 Q3 法說會逐字稿

Welcome to the NICE Systems third quarter 2006 results conference call. And thank you all for holding. (Operator Instructions). As a reminder, this conference is being recorded November 1, 2006. 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 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, loss of market share, pressure on pricing resulting from competition, and the 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 an overview of our business, as well as our strategy and outlook for 2007 and beyond. Ran Oz will present a more detailed discussion about third quarter 2006 results, and will provide financial guidance for the remainder of 2006, as well as first-time guidance for 2007. 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 turn the call over to Haim Shani.

Thank you Daphna. Good day and thank you all for joining us for a review of our 2006 third quarter results. I'm pleased to report that this was a record quarter for NICE, with revenues coming in for the first time at over $100 million with $112.2 million and earnings per diluted share at $0.31. These results reflect the successful execution of our long-term plan, and the continually growing demand for our Insight from Interaction solutions, both in the enterprise and security sectors.

Our vision of how these markets are going to evolve is playing out as we expected. The need for a comprehensive best of breed solutions that cover the spectrum of needs for improving performance, whether in the contact center, the command and control center or elsewhere, is pervasive and growing. And our best of breed offering, along with global services and having a below reaching global footprint enable us to raise the bar even further, leaving the competition behind.

Six months ago, we changed the face of the enterprise sector in which we operate, particularly in the contact center market. With the acquisition of IEX and Performix, we redefined the contact center performance and analytics market. We have already started to see a lot of momentum coming out of this move, and are enjoying the results with new and exciting customer wins and with the rest of market following our lead.

This quarter results are the clearest testament to the success of the IEX and Performix acquisitions, and of our best of breed strategy for the contact center. We fully integrated both companies, and just in the first quarter of integration, IEX for example is already experiencing phenomenal success above and beyond our expectations. With the power of light behind it, IEX continues to take market share away from the competition, as contact centers continue to replace their existing systems with the IEX solution. Our strategy to keep this acquired company focused and accountable has proven itself.

We were very excited to see the number of customers who are turning to NICE for the combined capabilities of our solutions. A couple of accepters include DirecTV and LA County. It was also announced last month that our strategic market partner, Avaya, will now be delivering workforce management solutions to their customers. And in selecting which solution would be the strongest, they opted for what they proclaimed to the market leading solution -- that is TotalView from IEX and NICE Company.

In this sector, the market trends we have been seeing all along are still advancing strongly. There is a growing need to ensure regulatory compliance and achieve quick and effective dispute resolution. Migration to IP-based communication is likewise continually on the rise. Organizations are seeking to solve the many challenges inherent to the complex management of the contact center. They are looking for a solution that enables them to improve performance at all levels -- the agent, supervisor, and the contact center executives, which provides a significant contribution to enterprise performance.

And, we are seeing more and more projects and bigger and bigger implementations of advanced interaction analytics. One of the many examples of this quarter customers come from StaffChoice, one of Canada's leading satellite TV service providers, which selected the NICE Perform to extract insight from customer interaction to increase customer satisfaction, agent performance and operational efficiencies.

It is a very exciting time for us at NICE. We have all the building blocks, the best technology, offering the comprehensive solution for managing the complex needs of the contact center. In fact, I went on the road this quarter several times for extended periods to meet with many of our customers, listen to their needs, and hear their feedback about our offerings. What I saw and heard was extremely gratifying. I will give you one such example.

One of the many exciting visits I made this quarter was to CUNA Mutual Group which is the world's largest provider of credit union services. They had both NICE Perform and TotalView implemented, utilizing advanced interaction analytics, coaching and workforce management. With NICE Perform's interaction analytics capability and integration with telephony systems, they were able to follow the customers through from contact center to contact center and understand their customers better. With our help, they arrived at an action plan to improve the service that customers were receiving and increase upsell and cross sale effectiveness.

CUNA Mutual selected the IEX solution over the competition because of its skill scheduling capabilities and multi-site functionality. The next step for CUNA will be holistic reporting generated from the various data sources that NICE provides their contact center.

Other feedback I got from numerous customers with whom I met is that many of them have performance management on their agenda, as they realize that this can further help them tackle the complex needs of contact center management, and many have planned large-scale implementations for 2006.

Voice over IP is also one of the main macro drivers in the market, and one of NICE's main growth areas. We're seeing a significant increase in voice over IP projects. We more than doubled our voice over IP business over last year, and are continuing to see our market share increase at the expense of the competition.

Why are we [getting] so much of this market share? We have the best technology to help customers migrate to voice over IP, offering hybrid solutions for very complex environments. These solutions are designed for future readiness, and furthermore we have always been ahead of the technology curve. For example, since SIP, Session Initiated Protocol, has been available, we have supported it. SIP, which is used for establishing sessions in an IP network in generic and interoperable among different vendors. This means that end of lifers have freedom of choice of vendor when purchasing their IP phones, gateways and PBX.

NICE has been developing a recorded protocol based on SIP for active voice over IP recording, and this is now being adopted by leading telephony vendors. Some examples from the many customers who turned to NICE for voice over IP recording solutions this quarter are [Acta Life] Insurance Japan, which selected us for our advanced capabilities with complex mission critical, multi-site voice over IP environments; Russia's [Telecom Design]; and Poland's [Fall Back].

The market also recently recognized our exceptional capabilities with voice over IP with the 2006 excellence award coming in from Internet Telephony Magazine. In the security sector, we are starting to see a new trend take hold, where organizations are looking for solutions that are integrated in providing multimedia command and control. We're seeing this in a number of environments, including police, city center, critical public facilities, transportation and intelligence.

By integrated, I mean that this these organizations need to have to in their arsenal capabilities for handling video, voice, IP data, and radio as they endeavor to improve protection of the public from potential threats. We're seeing more and more inquiries for projects with [bit] cycle solutions and on a larger scale than before. This trend is just starting to take old, and we expect to see initial revenues in 2007, and probably more significantly in 2008 and beyond.

At NICE, we are in a unique position to capture this market with our core technology and expanded integrated solution for the multimedia capture and analysis of video, voice, IP data, and radio, synergy of our solution and extensive domain expertise.

We are already the premiere choice for ensuring the safety and security of the public in many cases. Just last month, the Eiffel Tower placed a follow-on quarter for our smart video solutions to help them streamline security operations and protect the monument. This is just one amongst the many high-profile city centers and national monuments across the world, including the Statue of Liberty, that NICE is securing. Time and again, it is NICE that is chosen to protect the world's most important sites.

In transportation, the Massachusetts State Transportation Authority also recently selected our smart video solutions for a large-scale upgrade project to improve security across its mass transit system, including subway, trolleys, buses and light rails. To conclude, you know that when we first became profitable we set aggressive long-term targets, which at that time seemed to be very ambitious. Since then we have continually and successfully anticipated market dynamics, turn vision into strategy, and translated all these into a successful business model. So much so that the results have come in even sooner than we expected.

Over the last two years, we nearly doubled our revenues and tripled our net profits. We will exceed the $400 million mark in the revenues in 2006, and are hoping to reach the $500 million mark in 2007 as we continue to lead our market and enter the new ones.

Having already achieved results, we think the lower range of results set out in our existing long-term model, we feel there is room to go on even further and continue the ongoing improvement in our margins and bottom-line results. As I mentioned earlier, this is a very exciting time for our Company. We believe in the power of insight from interaction. We are excited about the places it is taking our customers, our partners, our Company and our shareholders. I would like now to turn this call over to our CFO, Ran Oz, for a discussion of our financial performance.

Thanks Haim. As Haim indicated, we had a record quarter. Revenues for the third quarter exceeded the $100 million mark for the first time, reaching $112.2 million, up 36% from $82.7 million in Q3 2005. Enterprise sector revenues were $83 million in the third quarter, representing an increase of 34% year-over-year. Growth in the enterprise sector reflecting costs, NICE is expanding leadership position in the growing market for best of breed solutions, which includes quality monitoring, interaction analytics, workforce management and performance management solutions, as well as the increased migration to voice over IP.

In the security sector, revenues in the third quarter were at $29.2 million, representing a 40% increase over Q3 2005. Growth in this sector reflects the strong momentum of our next generation security solutions.

Revenue by geography for Q3 2006 was as follows. The Americas accounted for $66.2 million, a 51% increase over Q3 2005. Europe, Middle East and Africa accounted for $29.6 million, a 16% increase over the same period last year. And APAC accounted for $16.4 million, a 21% increase over Q3 2005.

Year-over-year organic growth this quarter was nearly 15%, and for the nine month period, slightly over 60%, on the high end of our historical organic growth rate of mid teens, reflecting the momentum in our core markets.

Q3 saw very strong bookings. We completed Q3 2006 with a book-to-bill greater than 1 for the 10th consecutive quarter. And we entered Q4 with a strong backlog that gives us better visibility than ever before. Gross margins for Q3 were a record of 60.6%, up from 56.6% in the same period of 2005. The increase in gross margin is a direct result of the continuing shift in our solution mix toward software-based products, including NICE Perform, voice over IP, quality monitoring, workforce management, performance management and video analytics. And on the service side, more professional service and an accumulation of maintenance contributing to higher profitability.

Operating expenses where at $50.2 million or 44.7% of revenues, down from 45% in Q3 2005. And for the first time, we have crossed the 15% operating margin mark with a record of 15.9% for the quarter, compared with 11.5% operating margins in Q3 2005.

Net income for the third quarter was $16 million, up 78% from the $9 million reported in Q3 of 2005. This reflects the leverage of our business model where our topline growth of 36% in the quarter translated into a much higher growth in the bottom-line. Earnings per share in the third quarter of 2006 was $0.31, up from $0.22 in Q3 of last year.

We generated a record operating cash flow in the third quarter of $25.3 million. At the end of the third quarter, cash and equivalents were at $244.2 million with no debt, compared with $421.1 million on June 30, 2006, following the $200 million paid for IEX during the quarter. DSOs at the end of September was 72 days within our long-term guidance of 70 to 80 days.

Further to the outstanding results of the last three quarters and the strong momentum we are seeing in both the enterprise and security sectors, we are raising our full year guidance and provide first-time Q4 guidance as follows. For Q4, we expect revenue to be between $115 million and $120 million, and pro forma EPS -- that's fully diluted share -- in the range of $0.32 to $0.37.

For the year we expect revenues at $413 million to $418 million, up from $408 million to $417 million. And pro forma EPS at a range of $1.12 to $1.17, up from $1.06 to $1.15 per fully diluted share. Looking forward to 2007, we expect revenue growth to continue. It will allow us to enjoy the leverage of our business model, further improving margins and driving stronger bottom-line growth. We introduced first-time 2007 revenue guidance at $485 million to $500 million, and first time forma EPS per fully diluted share guidance of $1.35 to $1.45. That includes my comments.

As you know, last week we announced Ran's planned departure from the Company. It is too early to say goodbye, as Ran will stay on until we bring in our new CFO to ensure a smooth transition. We expect the transition to take place during Q1 of next year. I will now turn the call over to four questions. Operator.

(Operator Instructions). Paul Coster, JPMorgan.

A couple of housekeeping questions first. Ran, perhaps you could just give us some sense of what the tax rate will be in 2007. And also the deferred revenues that were associated with the IEX acquisition, do they roll over into the fourth quarter as well, or is that just a onetime item?

Starting from the tax side, we expect the effective tax rate of the Company to remain about the same level, meaning the rate of 22% to 21% going forward into 2007. And related to the deferred revenue, as you all know, this is the difference between the accounting treatment and the total value of each deal that's being done in the quarter. We do expect to see some differences in the next couple of quarters.

Same kind of magnitude or smaller?

It will go lower and lower as we progress.

The 2007 guidance, which we welcome of course, could you give us some sense of how you came up with that guidance? What are you seeing that gives you that confidence?

Paul, this is Haim. Good morning to you. I assume that you are in the U.S. So, we are saying that there are basically -- we're looking at this from two angles. One of course, as Ran mentioned, our book-to-bill continued to increase, and it gives us some confidence. Obviously we -- or unfortunately we don't have the whole $500 million in our pocket, but we're continuing to increase our backlog, so it gives us a much better visibility than any period in the past. So this is one part of it here.

The other part that I feel is very important is the win rate that we're seeing and the microtrends that are out there that we believe there's still a lot of room for growth, whether it's in the IP, which is accelerating, and we're seeing more and more IP deployments of our technology. The IEX technology is a leading one, and it is continuing to take market share away from all its competitors. This is very important.

Our ability to provide holistic solutions to the contact center, that include the analytics, the recording, performance management, workforce management, all these and are holistic solutions from one vendor. I would say it probably accelerates our -- and all of them are best of breed technology -- accelerate our capture of market share. So, this is in the enterprise side.

On the security side, the microtrends of their investment in technology to improve security is growing. And I believe that we are addressing very specific needs where we have a unique solution. Whether it's in the IP-related -- again, IP in the bigger sector -- whether it's the multimedia command and control. And larger projects, I would say we're now starting to see our sales force and marketing guys are now in discussions on larger projects than we have seen before. And this gives us a comfortable feeling that we have a good chance to meet our numbers again in 2007.

Shaul Eyal, CIBC World Markets Corporation.

Good quarter, good guidance. Really a couple of quick questions from -- on my end. How many 7 digit contracts did you guys have this quarter? Any change in the average size? It seems as if the quantity of the deals are getting bigger.

This quarter we had ten 7 digit deals compared to 6 the same quarter last year. And, yes, I can say that in general the size of those deals in the last several quarters has traded up.

Got it. And would you be willing to provide us with some sort of breakout of the contribution coming from IEX and Performix this quarter?

We do not count them as a separate entities. We gave a specific guidance as to their contribution, and they are definitely well within the plan we had for a $28 million to $30 million contribution in 2006.

Just one final question before I jump back into the queue. With respect to market share dynamics, the contrast in the various wins that you have, are these replacement, are these totally new? What is happening on the market share front?

It's yes, yes and yes. We're seeing an expansion of existing styles. We are seeing, if you would like, a brand-new style. And we're seeing a replacement of legacy quality monitoring and recording companies, and also some workforce management as well.

Bill Benton, William Blair.

Quickly on the service margin side, there was continued improvement there. And you know I don't know if that is a result of the acquisition or maybe some mix of the revenue profile there. If you could just provide a little clarity on what drove some of the service margin improvement and how sustainable it is at these levels.

This is Haim. It's basically -- overall both of course -- the contribution of the acquired companies, the model that we were shifting to higher value added services, and increasing the profitable maintenance business resulting from more and more NICE Perform sites that are out there that are software contracted. So it's a combination of all three.

So it sounds like it is sustainable at current levels?

I wouldn't shoot for a that level. We're looking at more a 40% kind of level, as we were at the high end of our expectation, while the expenses were not in line with that. But around 40% for services should be fine.

And then, with regard to the current CFO search, you said Q1 is when you would be looking to transition. What is kind of the, I guess if you want to call it the pipe leaner, and the availability what you have kind of looked at so far in terms of folks, how does that match up I guess in terms of your expectations at this point?

Well, I don't think that I can do this really over the phone and share with you exactly who I'm meeting at what time.

No, I'm not asking specifics.

I understand that. This is probably one of the most exciting positions in the related industry. As we said, we're getting close to the $100 million mark with exciting prospects, a very interesting business model, and nice growth prospective. And this is not an ad now. So, there are pretty good candidates, and we will probably have, myself and the Board, will have a tough time choosing between good candidates.

Just a final question. Haim, you mentioned that you think you're gaining market share in VoIP. I'm just curious how you measure those gains in market market share from your position?

Well, fortunately or unfortunately, it depends on how you look at it, we are at this point of time the only company in the space that is -- the only public company that is announcing financial results. So, again, there is a limit to what exactly we know, but our estimate, as far as we see in the market -- look at the numbers. It's pretty simple. The numbers I think speak for themselves. And since our book-to-bill is higher than 1, it means that we are even winning deals at a higher number than what we see. That's how we get that.

[Ronny Buron, Oscar Group].

I wanted to -- if you can please address your long-term gross margin expectation post IEX and after you have already exceeded the previous targets of 60%, where are you ending right now?

Well, I mean in terms of what? If you can -- it's not clear --.

In terms of overall gross margin. You mentioned in the past that your long-term targets was 60%. And now in the previous conference call you said you're going to monitor your progress on this front and try to provide an updated targets in the coming quarter -- in the coming conference call.

What we feel is that we are in the middle of a shift in our product mix. It started several years ago when we introduced video analytics and the NICE Perform, the penetration of voice over IP, mainly in the last year, and now the addition of the IEX. So, from being a company that is mainly selling products that are hardware based, we are shifting into selling more and more software applications.

The original target was to cross the 60% mark, which we already achieved. As we said in the call, we believe that there is still more room to grow and improve the product margin. And we will continue to improve it. You can see part of it behind the guidance we gave for 2007.

Thank you. And, Ran, if you could just repeat the breakdown between enterprise and security revenues? I couldn't hear it.

Okay. Enterprise accounted for $83 million. Security accounted for $29.2 million.

Daniel Ives, Friedman, Billings Ramsey & Co.

Congrats again. Competitively speaking on the call center side, can you kind of put your finger on what it is that you guys have done to just accelerate your kind of market opportunity where some of your competitors have come across tough times? Is it just -- with these acquisitions you are just seeing things that other guys haven't, and you have just done a great job integrating it? Is it just the stars have all been aligned? I mean could you just try to talk to that [oil], just given the amazing performance you guys have had over the last year?

This is Haim. It's really going back to the fundamentals of what we discussed. There's no miracle, beside of course hard work. And the standards are the result of announcing, delivering a fairly advanced product line, which is NICE Perform. It's not a Powerpoint product. It is the result of tens of millions of dollars of investment in R&D. It's a combination of a new concept and a new technology, which has been -- the market liked it. And we've seen many deployments, including taking market share from competition.

We have acquired the best company that is out there in the market in terms of workforce management. And it took Avaya less than I think two months after we closed to make the decision to have this as their living workforce management. So this is an example of an endorsement that we have seen. And we're seeing momentum as a result.

Voice over IP is out there. We have patented technology which is -- the patent itself are not that important -- or they are important. What is important is that they are a result of core competence, knowledge and a very strong engineering background in IP that resulted in very good product and very innovative solutions -- scalable, hybrid. You take all of these combined, it's probably the formula that is out there.

Now the contact center is a very important industry, a very strategic industry. The management of contact center is very complex. The executives are facing tremendous challenges to optimize between their people and their processes, their investment, quality of service, ability to upscale to upsell. And this is a complex challenge. If we can help solve this strategic problem, or tactical problem, or the combination of these two, we have an in with these executives, and that is what you're seeing.

And just (indiscernible), does it really seem like in the financial vertical with IEX -- I mean guys are really starting to accelerate your growth in that area with IEX? I mean, I really assume I guess you are starting really quick there.

I would say that the financial sector has always been a strong sector for NICE. We have been providing a significant part of the liability and compliance reporting for the financial sector, both contact center and financial services in general. I mean in the trading environment.

We always been quite strong in the financial sector. IEX of course adds another strength to this area. And we're seeing ourselves in a strong position, both in this sector, in the outsourcing vertical to remind you that Convergys, for example, a few months ago -- a little bit over than a few months ago -- has decided to standardize on NICE after checking all other alternatives that are out there. So, it's not -- the financial sector of course has a very strong reach into strategic segments for NICE, but it's not the only segment. We are seeing our leadership also in other verticals in this market.

Congrats again.

Joseph Wolf, UBS.

I had a question on the momentum in IEX that you mentioned, Haim. You said that others are starting to follow your lead. And I'm wondering if you are starting -- two questions really. One is, can you give us either some internal targets or some metrics that you're using internally for some -- how you expect the cross-selling activity to go with those things that had some strong momentum in the quarter?

And I guess on a percentage basis, how many -- or in some way, how many new leads the combined offering is generating for you? And then on that comment about others following your lead, has your combined offering made others move in that direction, and are you starting to see some new entrants? And I guess finally, are we in the stage of this part of the business where having more competition actually encourages your customers to move that way?

I would say to be -- to try to be humble and honest in the same time. I do believe that we have the best of great technology in each sector in each element that we provide. Meaning that we have the best recording in both TDM and voice over IP environment. We are the clear leader in this sector.

In directional analytics suite, which is part of NICE Perform. We are the first to initiate these. I think we have a tremendous lead out there in the market. Continuing to increase our technology gap and offering, so again, we have the best of breed technology and solution over there.

With our workforce management, IEX been the clear number one in this sector. And they have a very, very strong product line, a very strong product offering and a very strong domain expertise. And with our Performix acquisition, we believe that we have -- Performix, again, are the pioneer of performance management -- technologies and solutions for the contact center. You combine all these together, this is a very powerful proposition. It doesn't mean that others will not come with some Powerpoint slide. This can always be, but beating what hundreds and hundreds of R&D engineers have done over the years is going to be a tough gig.

Daniel Meron, RBC Capital Markets.

Congrats on a very good results and good guidance and outlook. Ran or Haim, can you provide us with some sense of -- from the 2007 guidance, do you see any sector between the homeland security or the enterprise growing any faster than between them? Or are they going to grow pretty much the same pace as they have grown before?

I would say at this point of time, we're betting on both of them. I would say -- as I said there are growth prospects in both sectors. The good news is that there are people and growth drivers, so we are not dependent on only one sector or one area to grow. Both are expected to grow because of influence market momentum of different trends. And therefore, we're expecting both of them to grow. There's no one that is expected to beat the other at this point of time.

Also you mentioned -- you talk before on beating your long-term margins that you set several years ago. And congrats on that. Can you give us a sense on where you see them down the road? Can we see them expand past the high teens into the 20s -- and also on gross margins?

I would say that, as Ran said, 2007 already assumes of course continuing and improving this margin. And as to the longer-term [set], we're now building and looking at our real, very long-term targets. We are talking about targets of a few years. The whole industry is going through some shifts, so we will continue to advance, and first of all reach the high end of what we have projected a few years ago, and then update our very long-term targets.

And last one for me. Can you maybe discuss your plans within the M&A group right now? You mentioned before that the security market that's where you're going to focus most of your efforts. Can you give us a sense on what kind of areas and what you are looking at these days?

As the security sector is a combination of several verticals, as I said, whether it's in transportation, in gaming, in critical facilities, in command and control centers. And it includes a variety of technologies, whether it's audio, video, and the combination of them, management, and so on.

And obviously we're looking at a variety of areas, whether it's technology, whether it's companies that could add on distribution, regional presence, or a combination of this. So, these are the areas that we're looking on the security front.

This is our first priority if we can choose in terms of M&A. I went to repeat what I said in the past that the Company has been growing over the last few years by a combination of organic growth and strategic acquisition. This hopefully will continue. Of course, with acquisitions you need two for that, not only one party is enough. Therefore hopefully we will -- not hopefully, we will continue to exercise discipline here and acquire only when we think it is strategic and makes sense. And our first priority will be in the security side. It doesn't mean that this is necessarily going to be the only sector that if and when we will do acquisition.

Michael Latimore, Raymond James.

Nice quarter. In terms of the prospects for IEX for new deals or replacement deals, what percent of those deals are requesting the combination of the workforce management application and the quality monitoring application?

It's a matter of requesting. First of all the workforce management on the IEX product is a very strong product. And being part of NICE and being part of a total integrated vision, with the combination of the Perform, it's not just a quality monitoring, it's quality monitoring and even more important I would say, or at least as important is the performance management. This is a very strong value proposition. It doesn't mean that the customer necessarily has to buy everything in one gulp. And this is why we have best of breed solutions. But the road map, the vision, the integration capabilities definitely add another point beyond the best of breed advantages. So, I would say it's a combination of the two.

Then, as you look to 2007, I'm just trying to get a sense of what you're thinking about in terms of organic growth rate for the enterprise sector and the security sector separately. Are you thinking about similar organic growth rates there, or is one sort of faster than the other one?

Yes, as I answered the previous question, both of them are expected to enjoy nice organic growth. So, I would say at this point of time, similar. What the end result will be, we don't know. We know only at the end of 2007. But from a planning perspective, we're expecting both of them more or less the same growth rate.

Just lastly, on product gross margin, where does that trend to over time -- 75% or so? Where would you see product gross margins trending?

As I said, we've just now reached our long-term -- our long-term in terms of target in terms of gross margin. We still have some room to grow in terms of the operating margin in terms of reaching our long-term plans. For next year we are already assuming continuous improvement versus this target. And as the years go by we will also be building our very long-term plan, which depends on how we will see the streak of businesses in the Company.

And then, just last, Ran, you mentioned a 40% gross margin on services. Is that kind of a near-term number or is that really where it's sort of tops out?

That's more of a near-term built-in to our assumption for the coming quarters.

Dan Harverd, Deutsche Bank.

Good quarter. A couple of housekeeping questions. Firstly, how would you expect to see OpEx develop over the next few quarters?

We expect OpEx to continue to grow as we continue to grow our top line, and we need to support it on the services and marketing side, and continue to invest in R&D.

Would that sort of be $1 million to $2 million a quarter? Is that the right sort of number to be assuming?

I don't have the exact numbers in front of me.

On your balance sheet, I noticed that the inventory number had come down quite sharply from Q2. Is there any specific reason behind that?

During the last several quarters, we tried to implement a more tightened monitoring of inventory. And you can see it also in other items in our balance sheet, and the result is what you see in Q3.

And just on the depreciate and amortization, that obviously increased because of the recent acquisition. Is the level that we see in the cash flow statement in Q3 the level that we will see going forward?

What we're going to see going forward is somewhere in the range of $3.5 million a quarter net of taxes. In the current quarter what we have is a onetime in-process R&D write-off that is on top of that.

Just finally for Haim, you obviously have very good momentum in the business. You sound very positive in terms of the trend. When you look at your pipeline, the backlog, or the competitive environment, is there anything out there that keeps you up at night -- anything that's concerning you?

There are many. I would say that at this point of time, we hope that the world economy is going to remain at this level. If not improve, at least not deteriorate. So, this is obviously a macro trend that can affect every business, including ours. So, this is one issue that we are always concerned.

We have been very successful so far in building our case, building our business model, building our focus, and we hope we will continue to do that. We are trying to be realistic, not to say aggressive, not to say conservative, realistic. We have good trends, and we hope that this these trends that support our business will continue, we will also continue to meet or exceed our plans.

Jeff Nevins, First Analysis.

Just two or three quick questions. One is the organic growth in the enterprise segment looks like it is actually is growing at a faster clip than the number you mentioned. You said 15%. I know that is the total company, but is it -- am I correct in looking at these numbers in that organic growth in the enterprise is probably still a little bit north of 20% in the quarter? Maybe if you just looked at enterprise.

We didn't calculate it based on different sectors. We do have a -- it is close to 15% for the company as a whole. I would say it's not far away on the enterprise side.

then just two other ones. In terms of market strength, what market from a vertical perspective is giving you the most business these days, if you look at this year versus last year?

There's no major change in --. I'm not sure what you mean by verticals, but both in the -- there's no major change in the different segments in terms of one giving more than the other. Nothing that comes to mind right now. But, if you want to elaborate, I can answer maybe better.

Telecom, financial services, that's what I mean by vertical.

Okay, if that's what you mean, we had the strong business in these sectors last year as well. So, that's no specific change.

Then last question is, on the small and mid-size market, I am thinking about the call center world, less than 150 feet, how has that area developed for you? I know most of it has been through partners. Maybe you could just give a quick overview of has that been contributing a good amount to the growth? Has it been quick or slow to adopt? Thank you.

I would say our major strength of course is in the area where there is the richest, the biggest, where there is most of the money that is out there. Having said that, we do have very nice products, both on the voice over IP side, and also on the TDM that are more tailored to distributors and to third parties.

As you know, we sell a significant part of our business for third parties distributors and partners. This has always been the case, and it continues to be so. So we are seeing our products also in lower segments of the market, as you mentioned -- the 150, 100 and so on.

But it was obvious on in terms of the actual size of the business, the most of the business is generated from the larger organization that can stand enough budget on the whole variety of those solutions. With voice over IP and products like the NiceCall Focus, we are seeing also very nice penetration into the mid-size, if you like, contact center.

(Operator Instructions). Paul Coster, JPMorgan.

I just had a couple of follow-ups. They are to do with addressable market and long-term prospects. It tends to be very difficult to sell an IT-based solution in Japan, and yet you did so, and quite early on in the last cycle of the solution. Is it because it's sort of a voice-based solution and there are a lot of graphics that you were able to do that? And is it resonating in sort of non-English non sort of Roman character countries that this technology can be deployed quite early on?

Are you talking about IP? You mentioned IP because (multiple speakers)

If not IP, IT.

We have our technologies -- again for some of the voice -- we been in this market for quite some time. Asia has been part of our focus for quite some time. We have -- quite a lot of our solutions have been translated to local languages. And the combination of these countries, especially in Asia, we are seeing they are relatively early adopters of the IP technology. And in terms of the application side, again, we have spent quite some time and money and effort on making sure that our systems have been translated to local languages. We've done quite a number of events and shows and working with customers in this part of the world.

But, I would say that long-term, we are just touching the tip of the iceberg in terms of selling applications or selling software applications in this part of the world. There is still a lot of room for growth.

The second question is, I am a big believer that you can take unstructured information and derive intelligence from it. The first deployment though has really been in a very structured environment, which is the call center. Is this technology of interest outside of the call center in the broader enterprise? And have you seen any evidence yet that the enterprise is going to be stepping up to take it, or sort of white-collar type deployment?

Just yesterday I had a one-hour call with one of the leading financial institutions in the world, testing our new capabilities in analytics. And we had a very exciting call about the prospect and all it does. The only unfortunate part is that I cannot share it with you.

It's really a long discussion Paul, but to be very brief. A., we believe that a call center environment is not as structured as one might believe. Again, unless I do not understand your question. But actually they have -- this is a very, very unpredictable environment, and therefore this is actually one of the problems that because the environment is unpredictable and it encompasses many, many different potential directions they, in many cases, cannot find their hands of what is going on. And they are looking at analytics to help them.

Beside the contact center -- of course the contact center has the operational side, but the contact center also provides -- or it is part of the larger enterprise, and therefore there are benefits beyond the operational benefits of the contact center for the business. And we think that there is a long -- we are just again touching the tip of the iceberg. There is still a lot, a lot of things to do there. Just at the very, very beginning. Like you, I am also a believer.

Thank you. Unfortunately, we have run out of time. Before I ask Mr. Shani to go ahead with his closing statements, 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 972-392-55930. 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.

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