Nice Ltd (NICE) 2006 Q4 法說會逐字稿

Welcome to the NICE Systems fourth quarter 2006 results conference call and thank you for holding.

All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded February 21, 2007.

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 20F 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 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 and its performance during 2006 as well as our strategy and outlook for 2007 and beyond. Ran Oz will provide a more detailed discussion of our fourth quarter and fiscal 2006 results and provide for the first time financial guidance for the first quarter of 2007. We will conclude with a question-and-answer session.

Let me remind you that unless otherwise noted on this call, we will be commenting on our non-GAAP results of operations and non-GAAP guidance, which differ in certain respects from Generally Accepted Accounting Principles. Please refer to our press release for a reconciliation of our GAAP and non-GAAP 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 to review our 2006 fourth quarter and full-year results.

I am pleased to report that the steady growth trend predominant in the past few years continued in the fourth quarter of 2006, with NICE achieving record results. In Q4 2006 revenues reached $120.4 million and our total revenues for the year were $418.1 million, representing an annual increase of more than 34% year-over-year.

Furthermore, our net income increased from $34.6 million in 2005 to $61.1 million in 2006, representing an annual increase of 77% year-over-year, making this year NICE's most successful quarter and best year ever in both top and bottom line. These outstanding results were the outcome of the growing demand for our Insight from Interactions solutions and demonstrated success of our long-term growth strategy and business model in both the enterprise and security sectors.

The Company's organic growth was complemented by the three successful acquisitions we completed this year. FAST, with its innovative security market IP video solutions, as well as IEX and Performix [believing] workforce management and business performance solution providers for contact centers.

These acquisitions, which are proving to be even more successful than our initial expectations, have substantially broadened our capabilities and increased our presence in all key markets in which we operate. The integration process is well behind us, we have extended our range of offerings, providing new opportunities for our customers and adding the value to those already using them.

More and more enterprises now realize the strategic importance of customer interactions, which are being handled by the contact center. NICE is the only company in the industry offering the complete range of solutions addressing these needs.

Following the IEX and Performix acquisitions, we had a number of outstanding wins for our offerings, including Scottish Power, an international utilities company serving five million homes and businesses chose our NICE Perform workforce management and business performance solutions for implementation at all six of its contact centers aiming to improve efficiency, customer satisfaction, and quality of service.

Discover Financial Service, a Morgan Stanley business unit, extended its range of solutions to improve its outbound [inaudible] workforce management, marketing results, as well as contact center management. Also, [Uni Car Mart] and Netherland's base insurance company which chose our solutions primarily to reduce overhead costs while maximizing profitability.

NICE Perform was one of our major growth drivers in 2006. As you are aware, NICE Perform crossed the 10% mark of the Company's business enterprise in the beginning of 2006 and during the fourth quarter, NICE Perform exceeded 20% of total enterprise business. On an annual basis, NICE Perform orders have more than doubled from 2005 to 2006.

Recent new NICE Perform customers include Partner Communications, the Orange brand in Israel, and an existing NICE customer now added NICE Perform with its analytics capabilities to further improve its contact center services and efficiency. Another exciting win came from First American Text Services, which implemented NICE Perform for centralized management and analytics over a voice-over IP network.

It is important to understand, however, that we are still only seeing the beginning of the trend of organizations extracting and analyzing information from unstructured multimedia sources. To date, the vast majority of our customer base still use our [inaudible] generation liability recording risk management and quality management solutions.

2006 was also a year in which IP-based technologies became increasingly common with wider deployments and larger-scale deals. NICE recently introduced active voice-over IP recording in IP environments and developed an active voice-over [inaudible] recording protocol based on [inaudible]. Revenues from voice-over IP solutions roughly doubled from 2005 to 2006.

Many financial institutions chose our voice-over IP solutions because of our unmatched reliability and scalability for mission critical distributed voice-over IP environment. Examples include OXFA Insurance [inaudible] in Japan which chose NICE voice-over IP solutions for four sites. And [Vandy], Canada's largest independent financial advisory network that chose to implement NICE voice-over IP solutions at three remote sites.

The industry continues to recognize our market leadership in the enterprise sector. [Inaudible] recently confirmed once again that NICE is the global market leader.

This market leadership was also reflected in our ongoing and strengthening relationship with partners in the industry. I would particularly like to mention our close relationship with Avaya, which extended our partnership in 2006 to deliver IP-based contact center solutions and now also distributes our leading IEX workforce management solutions.

One example of how this partnership quickly translated into business was the recently announced sale through AVAYA to the leading Indian outsourcer, Reliance BPO, to enhance the performance and streamline management of up to 10,000 contact center agents.

Now I would like to turn to the security market. In 2006 NICE Securities Solutions were chosen by an increasing number of public authorities and private entities seeking to ensure cities and safety and security, demonstrating over and over again our leadership position in this area.

I would like to walk you through the four security segments we target. In the transportation sector, NICE is the de facto choice for [inaudible] surveillance and content analytics around the world.

We recently announced wins with three major airports, all in the fourth quarter of 2006. Reagan Airport in Washington, Pearson International in Toronto, Canada, and Bangkok airport in Thailand. The last one was a seven-digit order for implementation across multiple sites.

NICE is also deeply [inaudible] choice in the [inaudible] sector, playing a vital role in enhancing the safety and security of millions of daily commuters around the world.

In the U.S., Massachusetts Bay Transportation Authority implemented our video content analytic solutions to enhance passenger security. The New York MTA selected NICE for its new [way] control center.

In Europe, U.K. network [inaudible] placed a seven-digit order for improved safety, reliability, and efficiency. And in APAC, China's Ministry of [inaudible] chose NICE to provide video security solutions for the new China-Tibet railroad, a headline project with unique technological requirements.

2006 was a year of strong momentum in APAC. In addition to the projects at Bangkok airport and the China-Tibet railway, we saw Beijing and [inaudible] add more and more metro lines with our realtime digital video surveillance solutions following our initial announcement earlier in 2006.

In the homeland security and first responders market, we saw an increase in the different types of emergency service providers and city authorities selecting NICE Solutions. We provided the city of Dallas, Texas, with a solution to improve emergency response and service in the city's uniquely combined emergency and information communication centers.

Kansas City police and fire departments and Douglas County, Colorado also purchased NICE integrated solution for capturing and analyzing first responders interactions to improve interoperability and emergency communications.

In the government sector, we see growing interest in our solutions. Among others, we provided voice-over IP solutions for the Polish Border Guard and installed a content video recording and analytic solution in the Eiffel Tower.

In the private sector, we were selected for several banking and critical facility security projects. 2006 also saw a clear global trend in the gaming sector switching from analog to digital recording systems including analytic.

Another important element in our success in 2006 was the expansion and addition strategic partnerships with major players in the security market.

We [added] for FAST the acquisition the highly successful partnership with Honeywell. We broadened our existing cooperation with Motorola to include IP-based solutions and among others added Lockheed Martin to our outstanding list of partners.

I would like now to discuss our outlook and key growth drivers for 2007. In today's competitive environment, customer centric enterprise executives realize that customer interactions are key to business success.

As a direct result, more and more contact centers are evolving into becoming the heart of the enterprise. This strategic shift is supported by three major drivers for our enterprise market.

Managing contact centers has become increasingly complex in recent years. It is a dynamic and competitive market with multi-channel customer touch points, additional selling requirements, multiple communication channels, varying call volumes, and high agent depletion rates.

As such, enterprises and contact center executives are looking for ways to address critical business issues from operational to strategic, seeking insight into the customer needs and in turn aiming at improving their performance. This complexity which requires the comprehensive solution meeting a clear and growing need is our first major growth [inaudible].

NICE offers the broadest and most powerful business performance set of solutions, include KPI-based and lifetime management applications for contact centers and enterprises.

The second driver in the enterprise sector is interaction analytics. NICE Perform, with its multi-dimensional analytic base solution, is the undisputed leader in this emerging field.

NICE Perform is driving business performance in a growing number of contact centers and enterprises. These recognize the strategic value of extracting information from customer interactions.

Since its introduction two and a half years ago, NICE Perform is well on track to become the mainstream solution in this field and we expect to see more and more enterprises and contact centers adding NICE Perform.

We are now taking this success to a new level and providing even greater venue to our customers with the introduction of NICE SmartCenter, which we announced earlier today. NICE SmartCenter leverages the synergies of the combined capabilities of NICE Perform, IEX TotalView, and Performix and is the combination of the joint effort undertaken by the domain experts in these three areas.

NICE SmartCenter is the solution for contact centers placing the contact center at the heart of the enterprise. It offers an innovative solution for managing contact centers and driving business performance.

Contact centers can now benefit from the synergy between the entire spectrum of NICE SmartCenter, best-in-class capabilities, which are [inaudible] together with an open service oriented architecture [inaudible]. With the addition of [inaudible] interactive analytics, customers can proactively identify trends, anticipate opportunities, adjust processes to meet business objectives and take [right-time] action.

NICE SmartCenters [inaudible] their office a powerful proposition for managing contact centers and provides strategic value to the contact center -- to the enterprise.

The third driver is the growing demand and adoption of voice-over IP-based solutions. We see voice-over IP being used with different business models.

These include branch recording, agent from home, [inaudible] distributed environments and hosting, all increasing our addressable market. The unique capabilities of our solutions ensures strong demand for our offering in 2007 and beyond.

Moving to the securities sector, we expect to see continued growth for 2007 in all segments of the security market, homeland security and first responders, transportation, government and the private sector, as well as in all geographic areas. We see a shift towards more advanced technologies to enhance safety and security levels as evident for many of the advanced projects we have announced to date.

The first growth driver in the security market is implementation of multimedia analytics, including video, audio, radio, and data. Our analytics solutions enable real-time proactive and reliable care of safety and security issues.

The second is IP and particularly VoIP, video-over IP, which will drive advanced video solutions. We expect it to play a major role in the security market as it does in the enterprise market.

Finally, an integral part of our ongoing strategy is to continue to complement our organic growth with additional acquisitions. In recent years, we have developed a proven track record for proven strategic acquisitions.

This has positioned us as the clear leader in the enterprise and security markets. For these acquisitions, we have provided real added value to our customers and shareholders.

To summarize, 2006 was an outstanding year for NICE. Our undisputed leadership position has created significant pressure in the enterprise sector. One competitor has recently decided not to compete any longer and another one had to make a move in an effort not to stay behind.

Moving into 2007, we will continue to leverage our market and technological leadership. Given the consolidation in the market, we anticipate that many customers will be faced with a period of uncertainty and we at NICE, with our clear and secure [inaudible], stable and already scaled up organization will be their preferred choice.

We expect that this change in the marketplace will already affect our first quarter and therefore anticipate a higher than originally planned Q1. Although very early in the year, we are already slightly increasing our 2007 annual guidance.

As we have already announced, Dafna Gruber will be joining NICE as Corporate Vice President and Chief Financial Officer in the second quarter of 2007. Dafna, who is with us today listening in to this call, brings over 14 years of financial and business experience in the high tech industry.

This is also the last time that Ran will be participating with us in the earnings conference call. Ran will remain with the Company during the next quarter to ensure a smooth transition. I do not have to repeat our appreciation for all that Ran has contributed to NICE and I'm sure all of you join me in wishing him all the best in his new position.

Before I turn the call over to Ran, I would like to thank all of our employees worldwide who through their hard work and dedication made 2006 another great year for the Company.

Ran, please.

Thanks, Haim.

I'm very pleased to provide you with the analysis of the financial results for the fourth quarter and fiscal year 2006 as well as our guidance for the first quarter of 2007 and outlook for the rest of the year. As Haim indicated, we continued to report strong, steady results for the quarter and the year.

Results for the fourth quarter and full-year 2006 continued to demonstrate the leverage inherent in our operating model, where top line growth, complemented by our operating performance, drove even stronger bottom line growth, a consistent trend over the past four years. Revenues for the fourth quarter were at $120.4 million, up 33.7% from $19 million in Q4 '05.

Revenues for the full year totaled $418.1 million representing an increase of 34.4% over the $311.1 million recorded in 2005. This includes 12 seven-digit deals in the fourth quarter and 41 for year 2006.

This revenue growth follows an increase in demand for our enterprise interaction solutions, which were $91.8 million in the fourth quarter 2006, representing an increase of 33% year-over-year and $309.4 million for 2006, representing an increase of 30.3% over 2005.

Revenue growth also reflects the increasing demand for security solutions, where revenue in the fourth quarter were $28.5 million, representing a 35.7% increase over Q4 '05 and $108.7 million for the year, representing an increase of 47.3% over 2005. Year-over-year organic growth was close to 16% and for the quarter approximately 13%, in line with our historical organic mid-teen growth rate, reflecting the ongoing momentum in our core markets.

In Q4 we enjoyed again book-to-bill greater than one for the 11th consecutive quarter resulting in a strong and growing backlog that gives NICE better visibility than ever before.

Revenue by geography for 2006 was as follows: In the fourth quarter the Americas accounted for $74 million and $248.6 million for the year; Europe, Middle East, and Africa accounted for $30.3 million for the quarter and $113.5 million for the year; APAC accounted for $16.1 million for the quarter and [$56] million for the year.

Q4 gross margin was a record 64.3%, up from 57.7% in the same period of 2005. 2006 full-year gross margin increased to 60.4%, up from 56.7% in 2005.

The increase in gross margin is a direct result of a continued shift in our solution mix towards software-based products, both in the enterprise and security markets. And on the service side, more professional services and an accumulation of maintenance income contributing to higher profitability.

Based on the first quarter seasonality, we expect Q1 '07 gross margins to be slightly lower than Q4 margins. We recorded an increase in operating margins reaching new highs with operating margins reaching 17.9% for the fourth quarter and 15.1% for the year.

Our 2006 effective tax rate was just above 20%. We expect the near-term effective tax rate to continue to be in the range of 20 to 21%.

Net income for the fourth quarter was $19.7 million, up 60.2% from the $12.3 million reported in Q4 '05. Net income for the year was $61.1 million, up 76.6% from the $34.6 million reported in 2005.

Earnings per share in the fourth quarter of 2006 was $0.37, up from $0.28 in Q4 '05. The fully diluted earning per share for 2006 was $1.17, up from $0.84 in 2005.

We ended the fourth quarter with cash and equivalent of $296.1 million with no debt, up from $244.2 million on September 30, 2006. Net cash provided by operating activities for the quarter was $28.4 million.

DSOs at the end of December was 68 days, slightly lower than our long-term guidance of between 70 to 80 days.

As Haim mentioned, Q1 '07 revenue is expected to come in higher than we originally anticipated given the recent market dynamics. We expect revenue to be between 114 and $118 million and non-GAAP EPS in the range of 27 to $0.31. Accordingly, we are raising our full-year 2007 revenue guidance to be 487 to $502 million and EPS to $1.36 to $1.46.

Before I turn the call over for questions, I would like to invite you all to join us at our third annual investors and analyst day to take place on Tuesday, March 6 in New York City. Featured speakers at the event includes among others executive customers and partners from Avaya, Dallas-Fort Worth Airport, Eiffel Tower, GemPac, formerly GE Capital International Services, Dobson [inaudible], and Douglas County, Colorado.

With this being my last quarterly result call as CFO of NICE, I would like to take this opportunity to thank the NICE employees and management team for the very interesting and stimulating years. I would also like to extend my appreciation to all of you investors and analysts I have been walking with throughout the years here at NICE. I'm sure that you will also enjoy walking with Dafna Gruber.

I will now turn the call over to questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Sam Doctor of JPMorgan. Please go ahead.

Thank you. This is Sam Doctor for Paul Coster. I had a couple of questions.

You have had an excellent pace of contract wins in the recent past and yet the 4Q revenue, you beat expectations modestly. Presumably that could drive strength for fiscal '07. [Can] you mentioned it for 1Q your reason you guidance [already] because you've got customer uncertainty related to [inaudible].

So given the [timeline] that you've seen, would you expect that you're benefiting your market share gain should excluded through the year?

I think that, this is Haim and thank you.

As you said rightfully so, we have enjoyed a very strong 2006 with a strong momentum. And as Ran said, we have continued to increase our backlog and had another book-to-bill higher than one in terms of booking in the quarter.

[Inaudible] if you would like gives us the strength at this point of time still early in the year to give what we feel is a nice guidance with nice growth rates with a very strong first quarter leveraging both the opportunities that we've mentioned and the overall momentum that the Company has. And although it is still very, very early in the year, we've already gone to a slight, again, increase in the annual guidance.

As the year moves along, we will, of course, continue to see how the situation develops and [inaudible] progress. Right now, we are, I would say, quite optimistic about our plans, about our market share, about our continuous leadership and we intend to provide our customers with, as I mentioned before, with a clear road map, a stable organization, organization that is already scaled and we hope and believe we will be the preferred choice of customers when they make new investments.

Thank you.

At some point, the proposed [inaudible] combination will be complete and presumably integrated. At that point, how does your strategic position compare with theirs? You know, once they're through all the uncertainty that's going on right now?

Again, I would like to focus on NICE and not so much on the other side. I believe that we have such a gap already open in the market and we plan to continue and extending it and large it.

We have just announced, a few minutes ago, the SmartCenter, which is already placing us with innovative integrated solution of all the elements, best of breed, best of class in every category of the contact center. With an innovative, we will lead the contact center industry with the [inaudible] based architecture among our systems and others.

Therefore, of course, in technology in our business, no one rests for a second and we intend to focus on providing, as I said, best of breed solutions and continuing enlarge the gap that has already been developed in those other in the market between us and the competition. We believe that, hope and will work very hard the next two years this gap will even be enlarged.

Okay. Thank you.

Thank you, Sam.

Thank you. The next question is from Yair Reiner of CIBC. Please go ahead.

Congrats on the quarter and regard from Shaul who couldn't be on the call today. Also, Ran, best of luck in your new project. You're going to be very much missed as you probably well know.

Just to follow on the last question. How do you see the consolidation in the market kind of changing the pricing environment? Do you expect that pricing pressure is going to, I guess, continue to decrease as we look out and over the next year or two, or do you think it's going to stay more or less as it is now?

It's a good question. I believe that the enterprise part of the -- and you refer, of course, to the enterprise part of the business.

The enterprise part of the business has been a very competitive environment so far. We've always seen competitive pressure in this market. There's been several players

Consolidation for the leader of the market, we think that consolidation is not necessarily a bad thing. And as the leader in the market, this is how we view the situation.

But, of course, as we said, this has always been a competitive market and we have one based on our technology and leadership and services and solution and we hope and believe we will continue to win on this basis in the future.

Very good.

Moving to the video side of the business, we've seen a lot of very large global systems integrators. Another technology company's grown increasingly interested [into] entering this market.

How has this changed your opportunities? How has it changed the competitive landscape?

The video market is a very, very large market. It has a wide range of relevant technologies, markets, sectors, and so on.

As you could see from our strategy, we are looking at the enterprise and the security sector and within the security sector, we are looking at multimedia solutions which incorporate video, audio targeted at a different sectors. And in this respect, we think that we have unique technology, domain expertise and also a very large customer base to leverage.

Okay. Thank you for that. Ran, one question for you.

Looking at the operating model now. If we look at the operating expenses for 4Q, should that be considered kind of the baseline where we look for 2007, or is there anything incremental, positive or negative, we should be looking for at the beginning of next year -- or this year, rather?

Okay.

Usually what we see is a Q4 operating expense as being the base entering into the new year and of course as we are growing on the business side, on the revenue side, we are going to impart also our infrastructure, meaning the ability to support higher revenue, deliver more services will require more people and will gradually increase the expenses. This is part of our model.

While saying that, we, of course, going to maintain our operating model that drive a higher proportion of each incremental dollar into the bottom line.

Very good. Thank you, guys.

Thank you. The next question is from Roni Biron of ING. Please go ahead.

Hi, Haim and Ron. And congratulations on the strong result and outlook. A few questions for me.

First, in regard to the opportunities that you are seeing as a result of the consolidation in your markets, do you see more opportunities right now arising in the enterprise sector? Is it the security sector, or is it both?

We see opportunities in both sectors. As I said, the major growth drivers are not necessarily related to any consolidation, but to market dynamics which have outlined during the call ranging from our broad set of solutions that address strategic shift in the place of the contact center, voice-over IP, analytics and other driving forces in the homeland security area.

The consolidation in the marketplace add just another layer or another type of opportunity for us to grow in the future.

Okay. Two P&L questions.

Regarding the discrepancy you're having right now between GAAP and non-GAAP revenues, when do you expect it to close and should we expect a decline in deferred revenues as a result?

On the revenue side, what we have experience during 2006 is some differences that resulted form the acquisition of IEX where some of their revenue under GAAP cannot be recognized and in order to present the real run rate of the business, we had to present the non-GAAP. Going forward into 2007, we estimate to have additional $2.5 million of revenue that fall under this category.

Okay.

And finally, in regard to the mix between products and services, how do you see this trending in the coming year? And the same goes for the respective gross margins.

We believe that the mix between product and services will remain essentially similar to what we have seen in the recent quarters, meaning product being 60 plus percent and services being at between the mid to the high 30s.

As it relate to gross margins, we have not updated our long-term gross margin, but we do see room for improvement in general looking on an annual basis of gross margin. Q4 was a peak in terms of high performance on both the revenue -- on both the product and services. We do expect services to trim down a little bit to be at the low 40s while product remain at the 70 plus percent.

Okay. Thank you and good luck.

Thank you.

Thank you.

Thank you. The next question is from Daniel Meron of RBC Capital Markets. Please go ahead.

[Inaudible] Haim and Ran, on a very strong momentum. And Ran, good luck at [Besik], and welcome aboard Dafna. A couple of questions here.

First of Ran, maybe you can give us a sense on how we should look at the cash flow in the next quarter or so. This quarter was extremely strong. Can you give us a sense there?

I would say that the Company operation, our cash flow is expected to be at 20 plus million a quarter. Again, there are some shifts from one quarter to another which relate more to timing of payment and collection, but on average we do expect the average quarter to be around $20 million in the coming year.

Okay. Thanks. And a more big picture question.

First off, Haim, you mentioned some benefits from the recent changes in the competitive dynamics following the merger of [Variant and inaudible]. Can you give us some specific examples?

Did you already see customers turning to NICE following in this move and the uncertainty that is arising from the combination of two overlapping product lines? That's number one.

Number two. What kind of strategic moves is NICE looking to do? You mentioned earlier some thoughts in the security business. If you can just give us some more color in that way. Thank you.

Yes, I would say that in 2006 we've already seen a shift of very large customers deciding to stop using competitive technology and moving into NICE. The few that we could announce was customers like EDS and Convergsys that happened to be the largest outsourcers in the industry, and they have made after a very elaborate test of every technology that is out there in the market.

And despite the fact that they have been using competitive products for many years, or maybe not despite, because of the fact that they have been using competitive products for many years, both of them has decided to stop using them and to move into NICE. This is something that we have announced.

We have had more than that. We have just in Q4, for example, one of the seven-digit orders that Ran was referring to was a major financial institution in EMEA that has decided to standardize on NICE despite the fact that it had competitive products. We believe that this trend will continue and might be even accelerated, if you'd like, in 2007 and going forward.

So this, I hope I answered your first question. As to the second question it was, can you repeat it again?

Yes. Just give us a clearer sense on what is the next move on a strategic basis and the security business.

Are you looking more into video? Are you looking more into first responders? Are you looking for more adjacent markets like wiretapping?

What kind of move should we expect in that way? And also, what is the long-term growth rate that you see in that space?

Yes, I mean, the good news is that we have a very specific plan, the bad news is unfortunately I cannot share with you the details. But to be most serious here, yes, we have said now since we have completed the IEX and Performix acquisition, we've said all long that once completed and once the consolidation would be successful and once the results are clear that this has been a very successful strategic acquisitions, our priority will be to enhance our security business not only organically, but also towards strategic acquisitions. And this is our first priority.

Having said that, it doesn't mean that we completely close our eyes in the enterprise sector and if and when there will be a specific opportunity, we'll definitely consider it. But if you ask our clear priority is in the security sector and, unfortunately, I cannot be more specific than that.

As we've mentioned, we have four areas that we target and we believe that in each one of them we see opportunities to enhance our growth also through acquisitions.

Great. Thanks, Haim And last one.

Just the long-term growth rate in the security business and in the enterprise. Is it pretty much the same rate?

We believe that both of them enjoy, or will be able to enjoy a continuation of the mid-teens organic growth rates. And as always, with markets that some of them at least are at the beginning stage, it's difficult to know for sure the production of content analytics both in the security and the enterprise is just at the very beginning and how much and how fast it will accelerate growth, this is difficult to predict. But right now our forecast is for both markets to grow in the mid-teens.

Thank you, Haim. Good luck going forward.

Thank you, Daniel.

Thank you. The next question is from Daniel Ives with Friedman, Billings, Ramsey. Please go ahead.

Hey, guys. Congrats on the quarter.

A question on the video deals, what are the sales cycles? What are they looking like? What are the average time it takes to kind of aim some of these bigger deals from the six-figure and seven-figure deals?

The selling cycle is, I would say, close to the traditional seven-digit type of deals that you see also in the enterprise. They're quite long. I would say that they very rarely it would be less than six months, the selling cycle between identifying an opportunity and actually getting a purchase order.

And also deliveries it takes time because in sometimes the security projects involve, might involve either construction or adding additional products from other component or integrators. So therefore, the actual deployment between PO and deployment also can take time. So this [inaudible] long in terms of, I would say, from the initial identification of opportunity until you actually see the revenue being reported.

Okay. And [inaudible] the final question.

[Inaudible] companies had problems with acquisitions, integration, but you do not. What do you think it is in your formula or sort of [inaudible] when you look at companies, why you've been so successful in regards to integrating acquisitions, not having some of the pitfalls other companies do? Thanks.

Okay. First of all, I appreciate the compliment and thank you for this compliment. We have to be humble here and, yes, we believe that we have been successful.

I would say that we have several power meters that have always been informed of us. I would say almost at 100% and we wanted to make sure that the acquired companies want to be part of NICE.

We had always the management team that have joined us have not, if you'd like, cashed out and ran away in 99% of the cases, but actually decided to make NICE their home. If you look at the number of executives we have from companies that have joined us, the leadership position, we have the ability to offer them a career at NICE, make them part of the team, and this has always been part of our strategy.

Make sure that the management team wants and will stay with us and work with us on making these acquisitions or these strategic integration a success story. This is one part.

The other part has been with the valuation. We have been aggressive with acquisitions, but aggressive to the point of maybe number of acquisitions that you're doing so on, we've always tried to make sure that we are not overly optimistic on the synergy derived and make sure that the synergies is not paid up front to the shareholders of the acquired company, but rather the synergies, if and when derived, will be more given to the NICE shareholders.

So in terms of building the financial models, this is how we worked out so far and we plan to continue and do that in the future. In addition to that, I believe that we had, because of what I've said in the first part, which is making sure that management of the acquired companies become part of NICE, we made sure that there are specific integration plans very clear from day one, not day one after the acquisition, but day one from the minute we start talking about this is an opportunity and we know exactly where we are heading, what will be the plans, and there are no surprises at the later stage.

This formula so far has worked very well for us and we plan to continue and maintain it in the coming years when and if we will continue to do acquisitions.

Thanks.

Thank you. The next question is from Mike Latimore of Raymond James. Please go ahead.

Thanks. Great quarter [inaudible]. Two questions.

One is, as you look to '07 and beyond, do the small and mid-sized markets become increasingly important to your growth plans?

And then secondly, in terms of your NICE Perform deals, what percent roughly of those deals comes from your established base versus 2006?

Good question. Yes. I mean the answer is yes, yes, yes. Practically, the SMB market is an important market for us.

We think, I mean the good news is we think we have a scalable technology which can offer growth and even if some people would start as a small solution, they can continue and upgrade and remain with the same technology and platform. So within our portfolio, we have dedicated solutions for the SMB market and also, if you'd, like focused the teams that are looking and working on this specific part of the market, which is, I agree with you is an important part.

NICE Perform, I would say, comes from both segments. We have a very large install base, we have a significant part of customers with legacy technology upgrading in this way or form or other to the NICE Perform, and we also see very interesting wins, like I have just mentioned before, of customers that didn't have NICE and decided to standardize on NICE, either replacing legacy technology from other companies or some greenfield.

So I would say NICE Perform, I don't have the exact split in front of me, but it's a substantial part comes from each segment.

Mike? Yes. Thanks.

Okay.

It seems we can't hear Mike, so we'll move to our next questioner, Rami Rosen of Oscar Gruss Please go ahead.

Thank you. Good morning. Congratulations.

My question also relates to the NICE Perform. Haim, can you discuss in general or particular ASP trends for that and if you see the margins going up for that specific application?

I think I don't need to -- in this quarter, I think discussing ASPs almost less relevant. You can obviously see that our margins has improved. It comes from primarily software.

As Ran said, one of the reasons, not the only one, was softer sale and, as I said before, the market has always been competitive. We don't see any change in the competitive nature of the market at least until Q4 and therefore there's nothing special to report on ASP.

The only thing we can report is that we had more of NICE Perform deals that have higher content of software with higher margin as well as the contribution of the IEX TotalView sale.

Okay.

Do you see any competition, existing competition or developing one for the NICE Perform, maybe following the merger between [Variant and inaudible]?

No one is alone in any market and definitely in market that demonstrate high growth rates and nice opportunities. So obviously our traditional competitors, the two that you have mentioned and others, all of them are trying to target our markets, trying to target our solutions, try to follow-up on our steps.

Is we have just announced more than an hour ago now, we've also announced, we have announced the SmartCenter that takes the value of NICE to the contact center far beyond NICE Perform and each one of the components that we have to offer or the products that we have to offer separately, we think now that with the SmartCenter, which is based on innovative new architecture and very advanced value-added services and structures, services and implementation, methodology, we think that if you'd like, we're raising the bar again and hopefully we'll continue to enjoy a major [get] against our competitors in the coming years.

Thank you.

Just a clarification. Ron, you mentioned 12 seven-digit deals during the quarter?

Yes.

Okay. Thank you, guys, and best of luck to Ran.

Thank you.

Thank you.

Thank you. The next question is from Bill Benton of William Blair. Please go ahead.

Good morning, guys.

Just in terms of the absolute dollar on cost of service and cost of product, they actually declined sequentially despite the revenues going up as far as I can tell. Could you give us some color on to why that might occur?

Again, Bill, can you clarify the question?

It appears as though your pro forma cost of sales on a dollar basis for both products and services declined sequentially despite the fact that revenue went up. I'm just trying to understand why that might have occurred?

It's very simple. We talked about the shift in our product mix, which means that we've been selling more on dollar basis while actually the software part was the growing, which means that the actual cost of delivering those product went down a little bit.

Okay. So a shift towards more software sales there?

Yes.

And then on the service side, why would that have occurred?

Usually on a short-term basis when you deliver much higher volume of services while maintaining the same base of people, you get to a much higher gross margin. Although everyone tend to think that where you drive a higher gross margin is product on an incremental basis, additional $1 of revenue in services on top of the existing usually drives much higher return to the bottom line. This is what we experienced this quarter.

Okay.

And then just looking at the security segment, I realize the results were up considerably year-over-year. It was a little bit lower sequentially. I know you guys have announced a lot of great big deals lately.

And so I think Haim talked about long deployment schedules, but I'm trying to generally understand how you guys view the current security environment. Has it gotten more competitive? Are deals harder to come by in general? How should I think about that?

I think we have experienced very good momentum both on the revenue and the booking side. Meaning, if we look at the number of deals that we won in Q4 or in 2006, it represent much higher growth compared to 2005, which means this is going to be the base of what we are going to deliver coming into 2007.

The cycle of delivering those big security project is also long, not just winning them. Meaning, if we take for example, a year and a half ago we have announced the win of Changi airport in Singapore.

It took more than a year to get SPO, it took much more than a year to complete the delivery of such a project. So now when we look back, somewhere between two to three years ago, we started working on it. In '06, we have enjoyed the revenue of this project.

Okay.

And then just finally, on your plan for maybe more security acquisitions, it sounds like that's at least a focus area at this point. I know you don't want to talk about specific segments, but could you, you talked about strategic acquisitions.

Can you help define that in terms of are you looking primarily to enhance your distribution or is it a technology enhancement? Where are you looking mostly to gain maybe some leverage on a strategic basis?

We operate in four sectors within the security market and we think that in terms of [those] opportunities in areas which we think we can enhance our position, it actually includes both, meaning this is a very big market. It's significantly bigger than our business today, and we think that we can strengthen our position by a combination of both product areas that will allow us to provide bigger portfolio and also some areas of distribution like, for example, and we have a very good example, [inaudible] acquisition of FAST.

Not only that we have gained access to some IP technology, video IP technology that we didn't have, we have also gained access to the partnership with Honeywell that proven to be very valuable in 2006. So these are the type of things that we are looking for.

Okay. Great guys. Thanks.

Thanks.

Thank you. The next question is from Joseph Wolf of UBS. Please go ahead.

Thanks.

Just wanted to finish up on the new product. I'm wondering if you could give us any timetable for this integrated offering.

And then perhaps wrap up, a lot of the comments you've been making about the consolidation in the sector. Could you just go to whether these new product offerings are driving companies towards moving to next generation opportunities that the SmartCenter offers, or is this more of a case where sort of the whole pie is expanding and you're getting more market share in there, or do you see a lot more cases like the convert to [inaudible] where you talked about where the existing market is moving towards replacement cycle?

First of all, hi, this is Haim.

I would say to some extent it's all the above. The SmartCenter capabilities will be available for next quarter and it's going to, we believe, together with all the components of the SmartCenter, is going to make our solution more attractive than before and companies buy either because they have a very clear obvious need that they need to replace something with something which is better or sometimes and technology solves for them a problem that they know they have, but they were not aware that technology can do that.

And when we as vendors, as companies that offer solutions convince them that with new technology they can have a better solution for the problems. I'll take you through a concrete example.

If you look at the deal that we have announced with Partner, Partner has been a customer of NICE for some time. They have used our technology for compliance -- not compliance, but for recording in order to make sure that they either can settle disputes and improve the quality of service through our quality monitoring solutions.

Now with the new capabilities of NICE Perform, they've added a significant layer of analytics which now can help them address a business need that has always been there. If I'm a [CO] of a company, I'm always worried that customers will not leave me, that customers will remain with me rather than go to competition and now with the new capabilities of NICE Perform, we are actually creating for them a solution that in the past did not exist.

We are addressing a problem that existed, but the solution itself was not there. We believe that with the SmartCenter and with the vast technology that supports the SmartCenter and product, we will basically address both, replace legacy-old technology of ours and competition and also create new markets or new solutions that did not exist in the past.

Okay. Great. Thank you.

Okay.

Thank you. The next question is from Jeff Nevins of First Analysis. Please go ahead.

Just a question on the service gross margin. Where do you think that could go to? I mean will it go sustainably north of 50% in the next 12 to 24 months as you shift your model a little bit, or is it going to be capped kind of where it's at today?

Hi, Jeff, this is Ran.

We expect the [inaudible] of gross margin for services to be at the low 40s. Having said that, we know that in Q4 we demonstrated we can be much higher than that, but this is just something that be sustained for a very short period of time.

In order to deliver high level of services and to ensure the quality, we will have to ramp up this side of our business even further and we expect the gross margin to be at 40% level.

Okay.

And the deal metrics, you had mentioned 12-million deals in Q4. Ran, do you have the sequential and year-over-year comparison for that number?

Yes. [overlapping speakers] Which means that some of them were much more than just $1 million. For 2006 in total we had 41 deals. If we compare it to 2005, we had 33 deals.

You have the fourth quarter year-ago, Ran?

Yes, it was 11.

Okay.

And then just the last question is, you had a lot of stock option exercises, produced a lot of cash in the quarter. Was there anything that went on in the quarter out of the ordinary that caused a lot of people to cash out a little bit?

Yes. We had six years ago a grant of option that will get to end of life kind of, which means that people will lose their options if they are not exercising them.

And that's the reason that during Q4 and maybe those that still remain outstanding in Q1, we'll exercise them. Otherwise, they will lose their options.

Thank you very much.

You're welcome.

Thank you. The next question is from Irit Jacoby of Susquehanna. Please go ahead.

Hi. Thank you.

Can you just repeat the enterprise and security revenue? I think I missed that?

Yes. Enterprise revenue for Q4 was $91.8 million and the security was $28.5 million.

Okay. Great.

And out of the 12 seven-figure deals, can you [inaudible] and say how many were security and how many were enterprise?

I don't have the exact breakdown in front of me, but the majority was enterprise.

Okay. Great.

And the final question, just to follow-up on what was asked earlier about the SMB market. Is that a space where you see a different set of competitors or a different dynamic?

No.

Okay. Thank you.

Okay.

Thank you. The next question is from Ari Bensinger of Standard & Poor's. Please go ahead.

Yes. Thank you.

Given your growth prospects and the jump in Q4 operating expense, can you disclose your hiring and particularly as it relates to sales force and what your plans may be in '07?

We have right now around 1800 employees, if I'm not mistaken, and we will continue to hire employees in all disciplines of the Company, service, sales, R&D, of course, and also the relevant infrastructure to support it.

Our employees work very hard to make it a very successful company and, obviously, in order to continue and grow, we will need to increase the spending so this growth is supported. So this is in terms of plans for 2007.

All right.

And if you know some good guys, we have a very nice referral program.

Thank you.

Okay.

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 participants that a replay of this call is scheduled to begin in two hours time. In the U.S., please call 1-888-326-9310. In Israel, please call 03-9255-930. Internationally, please call 9723-925-5930.

Mr. Shani, please go ahead.

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

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