Nice Ltd (NICE) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NICE Systems third quarter 2007 results conference call and thank you all for holding. All participants are at present in a listen only mode. Following Management's formal presentation, instructions will be given for the question-and-answer session. As a reminder this conference is being recorded November 7, 2007. I would like to turn over this call to Ms. Daphna Golden, Corporate Vice President and Investor Relations and Corporate Development. You may begin.

Thank you, operator. Good day, everyone. With me on the call are Haim Shani, Chief Executive Officer and Dafna Gruber, Corporate Vice President and Chief Financial Officer. Before we start, would like to mention this call contains forward-looking statements in accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Please be advised that 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 2006 annual report on Form 20-S as filed with the Securities and Exchange Commission on June 13, 2007. 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 agreements -- 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 the remainder of 2007 and beyond. Dafna Gruber will present a more detailed discussion of our third quarter 2007 results and will provide financial guidance for the fourth quarter and remainder of 2007 as well as first time guidance for 2008. 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 as reflected mainly in accounting for acquisition related revenues and expenses, amortization of intangible assets, and accounting for stock based compensation. Please refer to the our third quarter 2007 press release for a reconciliation of our GAAP and non-GAAP results discussed in this call. With that, I will turn the call over to Haim Shani.

Thank you, Daphna. (Inaudible - technical difficulties) both on the top and bottom line, capping off another quarter of excellent performance. The Company delivers record revenues of $133 million and record earnings per diluted share of $0.38. This results reflect the strengths of our strategy to deliver solutions that help organizations in the enterprise and the security markets to improve their business and operational performance and ensure safety and security. Key highlights for the quarter were as follows. Record revenues and strong growth for our security business including a growing pipeline of large scale security projects, demand for NICE SmartCenter with its best solutions which focus on interaction analytics, excellent feedback from clients regarding the acquisition of Actimize and the first signs of new opportunities coming in as a result of the change in the competitive landscape.

I would like to elaborate more on these points as well as on the growth drivers behind our results. We continue to see growing demand for our comprehensive solutions for the enterprise sector. More and more customers are seeking out the value-add of NICE's SmartCenter along with our adaptive interaction analytic solution to help them grow the business, deliver outstanding customer service, gather critical business insights and improve operational efficiency. And as we have reported in past quarters, Q3 once again saw voice-over IP related bookings double over the same period last year with orders coming in from outsourcing giant, West Telemarketing, Fredrickson, a financial services outsourcer in the U.K., both of whom I will talk a little more about shortly. Other voice-over IP customers include ANZ Bank, one of the largest banks in Australia, and Kiwi Bank with New Zealand's largest branch network in the country.

Our analytics solutions are providing clear and quantifiable benefits to a variety of organizations in the financial services industry, including those involved with collections. For example, Fredrickson, U.K. provider of debt collection services. Fredrickson selected our adaptive interaction analytics to help them improve the capabilities in collecting consumer and commercial debt on behalf of their clients, which includes some of the largest financial institutions and corporations in the U.K., many of which are listed on the (inaudible) 100. Other such organizations are also turning to NICE to help them drive collections related revenues. We do this by helping them understand how different agent behaviors impact the rate of collections. For example, negotiation skills which are critical to optimizing collections and increasing revenues.

Industry analysts are also taking note. In its recent market report, Gardner gave NICE its highest possible rating and Frost & Sullivan gave us the prestigious 2007 market leadership award noting that, I quote, NICE SmartCenter will help businesses turn low contact center data into prescriptions for better agent behavior and customer service, providing insight that marketing, legal compliance, finance and others could use to help understand what's going on in the contact center. Turning to the Actimize acquisition, which we are very pleased with the progress since the completion two months ago. Actimize continues to bring in customer wins for the compliance, fraud and anti-money laundering solutions. Benefiting from being a part of a global company with an extended footprint as well as from the latitude offered -- afforded by being a stand alone entity within NICE.

The feedback that we are hearing from NICE and Actimize customers about the acquisition continues to be very positive. Last month, in fact, I had the pleasure of hearing such feedback first hand at the Actimize (inaudible) forum which had close to 150 executives from the world's leading financial institutions. The event featured was a patient from former acting Chairman of the SEC, Laura Unger and former representatives of global industry leaders such as Wells Fargo, HSPC and GE. This event created opportunities for Actimize clients to learn about the benefits of the NICE/Actimize combination which constitutes a breakthrough in processing, analyzing and cross-referencing information from customer transactions and interactions. This unique combination will enable organizations to take millions of transactions and interactions and handle huge masses of data to get a full view of what is happening at the different customer touch points across the organization. At the event we received excellent feedback, celebrating our vision from some of the largest banks in the world.

I would like to share with you just a couple of comments from executives that are in charge of monitoring fraud and compliance which I personally helped as follows. This was very much an idea generator for me. I would love to monitor call center activity integrating this product into the Actimize alert agent. And I would like to see Actimize leverage NICE for additional case management offerings for regulatory priority tracking, customer complaint tracking and other compliance and legal functions. We were also happy to see last week that leading publication Bank Technology News ranked the Actimize employee fraud solution among the top 25 industry innovators. Actimize was chosen from among hundreds of solutions being offered to the financial services industry.

Looking at the market dynamics in the enterprise sector, we are seeing a strong momentum in the interest of our solutions and that the shift in the competitive landscape is working to our favor. For example, Washington Mutual, one of the U.S. leading banks selected the IEX TotalView workforce management solution for the first time. We have been saying that we believe that industry consolidation will have a positive impact on NICE at least for the short and mid-term and indeed it is. We continue to strengthen our position as the clear leader in the space with competitors' customers turning to NICE and this can be seen in recent weeks for major competitive displacements. One example is West Telemarketing Corporation, an outsourcing giant with 37,000 employees which decided to standardize on NICE platform and replace its existing system. A couple of other examples include major financial services organization in North America which also replaced competing systems that have implemented with NICE solutions.

Now moving to the security sector. We had several interesting successes in Q3 and our pipeline continues to grow. An example of recent landscape wins includes the $9 million contract from the City of New York to implement NICE Inform in its next generation 911 emergency call centers. NICE Inform, our revolutionary solution for multimedia command and control was selected as part of the city's ground breaking emergency communications project to help improve service to more than 11 million New Yorkers making 911 calls each year. Another large order recently announced was a $4 million deal with government agency in India which selected our solution to help them deter terror and better protect the citizens. We have just started deploying the first sites of FAA NICE Inform project which we announced in the second quarter. We are very happy to receive feedback from the FAA, in which they expressed their appreciation for helping them achieve major milestones and note that NICE performance was, quote, a successful demonstration of how things could work well on a project.

Another couple of interesting application wins we had this quarter came in from the transportation sector. One example is Royal Caribbean Cruise Line, RCCL, which was looking for high end solution to implement across a large number of distributed sites. Royal Caribbean turned to NICE, placing a seven-digit follow-on order to implement our IP security solutions -- solution in over 30 ships. And another example is China's Shanghai Pudong International Airport which also placed a seven-digit order for IP based video solution with content analytics. In conclusion, the excellent performance we saw in the third quarter with Actimize starting to contribute to our business constitutes a validation of our differentiated strategy for growth. We intend to continue complementing organic growth with additional acquisitions and are proud of the tangible benefits the execution of our strategy is bringing to our Company, customers, partners and shareholders. We look forward to delivering even more in the coming quarters. Now I would turn the call over to Dafna for closer look at the numbers and for our guidance for the remainder of 2007 and first time guidance for 2008.

The third quarter of 2007 marked another record quarter for NICE. In my analysis I will refer, as always, to the non-GAAP results. NICE Management believes that the non-GAAP reporting is the best way to evaluate our performance. Revenues in Q3 reached a record of almost $133 million, up more than more than 18% from $112 million in Q3 of '06. Year-over-year organic growth was 15%. A record net income of $21 million in Q3 of '07 demonstrates an impressive increase of 31% from Q3 of '06. Enterprise sector revenues were $96 million in the third quarter, up 15% from $83 million in Q3 of '06. Security sector revenues in the third quarter were at $37 million, representing an extraordinary 27% increase over Q3 of '06. Now that we have three quarters in the bag and good visibility for Q4, we can see that our guidance for mid-teen growth on an annual basis for both enterprise and security sector is materializing. This growth rate is better than most players in our industry and we believe that is -- that reflects our growing market share.

Revenues by geography for Q3 were as follows. The America accounted for $74 million or 55% of revenues. Europe, Middle East and Africa accounted for 90 -- $39 million or 30% of revenues. And APAC accounted for $20 million or 15% of revenues. Book-to-bill at the end of the third quarter were greater than one and we continue to increase our backlog. Gross margins for Q3 reached 63.4% up from 60.6% in the same period of 2006. This quarter, too, we saw the continuing shift in the revenue mix toward software based products. Contributors here are the advanced applications of NICE SmartCenter, Actimize solutions and IP based solutions in the enterprise and security markets. We continue to leverage the -- we continue to enjoy the leverage in our business model.

Operating income in the third quarter of 2007 was $22.7 million or 17.1%, up from $17.8 million which was 15.9% of revenues in Q3 of '06. Net income reached a record of $21 million, representing an increase of 31% from the third quarter of '06. Fully diluted earnings per share in the third quarter was $0.38, up from $0.31 in Q3 of last year. We ended the third quarter with cash and equivalents at $358 million with no debt, up from $356 million on June 30, 2007. These results take into consideration the cash payment for the Actimize acquisition and the contribution of our very successful September offering. In addition, we generated strong operating cash flow of $36 million during the quarter. DSOs at the end of September was 69 days, slightly better than our long-term guidance of 70 to 80 days. For Q4, we expect revenue to range between $142 million to $146 million and EPS fully diluted share to be at the range of $0.36 to $0.40. This brings full-year revenue guidance to a range of $519 million to $523 million and EPS to a range of $1.41 to $1.45.

Looking forward to 2008, we expect revenue and profitability growth to continue. We introduced for the first time 2008 revenue guidance at $615 million to $630 million. And first time guidance for EPS on the fully diluted share to be at the range of $1.65 to $1.75. Before I turn the call over for questions, I would like to invite you to mark your calendars. Our fourth annual investor and analyst day will take place on February 26, 2008, in New York City. In the event, NICE executives and customers will demonstrate how solutions -- how our solutions impact organizations in the enterprise and security markets. That concludes my comments. I will now turn the call over for questions. Operator, please.

Thank you. At this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) The first question is from Paul Coster of JPMorgan. Please go ahead.

Good morning. Can you hear me?

Yes, we can hear you very well, Paul.

Excellent. Few quick questions. First of all, were there any currency benefits this quarter that we should know of or for that matter anything going against you from a currency perspective?

In the third quarter we don't see anything in favor or against us.

Haim, at the beginning of your prepared remarks you said the competitive landscape was changing and I missed really how it had changed. Sounds like you were gaining market share. From whom and why?

I think that the industry has gone through several areas of consolidation over the last, if you would like, months or even years. And we believe that customers are looking at NICE as a major player in our space with very, if you like, stable or vast state-of-the-art technology, leadership, et cetera. And we are starting to see some organizations that in the past -- not necessarily were looking at NICE to start replacing some of the legacy technology. Now, again, these are first signs and we hope this is -- will continue, but it's important that we are starting to see this trend.

Legacy technology is in-house solutions or third-party solutions?

It would be our competitors in the different areas.

Okay. On the security side, can you -- you mentioned a number of multimillion dollar projects now. What the average installation time line for these projects? Are we talking months? Quarters? Years?

It really depends. If we are talking about -- if we look at the $70 million FAA, this will be on the extreme side of several years. And is progressing according to a very long deployment cycle. So this is the extreme. I would say the larger, like the one that we announced they could range in a 12 months give or take range. So this large case -- usually -- there is no usual because it's still a growing but new part of our business, but I would say you could typically expect in the 12 months range for actual recognition of revenue from this project. And it can be linear, it can be with ups and downs, it depends on the size, that the technology is being deployed, so there is no one regular benchmark here.

All right. One last question. The guidance that you've issued, does it include acquisitions? Or is that completely organic from this point?

That's for all part of business that are in our business right now.

No new acquisitions or anything assumed in that?

We were not able to guide based on acquisitions that didn't happen.

Sure. Just the reason I ask is that unless my math is wrong 20% here, you're closer to 20% revenue growth. I guess that's not a true statement of organic growth, though, because it includes the Actimize revenues that wouldn't have been in the same quarters in the prior year, is that correct?

Yes.

Yeah, got it. Thanks very much.

Okay.

The next question is from Daniel Cummins of Banc of America. Please go ahead.

Thanks. First question for Dafna. If my numbers are right, your G&A ticked lower quarter over quarter, yet you closed an acquisition. If you could just give us color on that. And then I'm curious, Haim, if you were pleased with the enterprise result, I think again if my numbers are correct, those numbers are down quarter over quarter. They are not much higher than where you have been for about the last nine months in terms of run rate. I wondered if you would also comment on your, I think 80 to 90% market share in financial trading floors, is that going to be any kind of a headwind for you next year?

Okay. First of all, yes, we are very pleased with the enterprise results. It does represent, if I'm not mistaken, 11% or so growth over last quarter of the previous year and overall it's meeting growth year to date and overall is mid-teen growth year to date. So this is very nice and significantly better than anyone in the industry. In addition to that, revenue is more of a seasonality issue, what is important is the booking, the entry in the enterprise in Q3 was very strong and very positive. So overall, the enterprise sector is doing very well and we are very pleased. Our solution seen to the financial services in general are handling basically two very important areas, one area which relates to compliance, risk management and so on and these are the type of things that whether it's in good times or bad times, people need to comply with and we have record from previous years that even at times were not that great, actually we have seen our business in this respect growing.

Also in other parts of the financial services where, if you like, in the switch part of the customer interaction points and these are areas that even if there is a downturn, people who invest in order to maintain their customer relationship and increase their business, just an example that's what I've given on the use of interaction analytics where we see our technology help collect more money for the enterprise. This is an area which is extremely important. So overall, we were seeing and meeting goals and this is our estimate towards the end of the year, because we already analyzed the entire business and we believe that meeting goals in the enterprise for '07 is the plan and also behind our forecast for continuous growth in the sector in 2008. I think you had also a question to Dafna.

Yes, the result in Q3, the G&A expenses represent a level of expenses on an ongoing basis and all the acquisition related expense is part of the acquisition cost which are accounted separately from G&A.

Well, I was referring more just to the run rate. You did have some days of business in the quarter, right, for Actimize and I was just curious why G&A wouldn't have ticked up somewhat.

The level of G&A expenses in Actimize is relatively small. It was a private company. And so we didn't see -- we don't have a big impact from that part.

Okay. Thank you.

The next question is from Daniel Meron at RBC Capital Markets. Please go ahead.

This was -- this had been referred to before, but Haim, maybe you can give us some qualification of when you think the bulk of these security deals that you have been winning recently will start finally flowing in? And is it fair to assume that since a lot of these deals you already have the cost base already there, we should see some uptick in the margins related to the security division?

As I mentioned on the security deals, some of them have actually started to materialize as you have seen with the significant growth of the business specifically this quarter and we will start seeing them from now into next year. And hopefully we will have more of this. As I mentioned we are working on others on the pipeline.

And to your next question, the majority of the expenses that are directly related to the deals, we will not recognize in year and also the cost of being delayed as well.

Okay. Got you. And then also on the recent offering, you did mention you may think about M&A down the road. Could you give us a sense of whether there is something that is -- when you think that something like that could happen or are you waiting for that deal to kind of be kind of digest that first before you make the next move?

Actimize deal is progressing very well. Obviously I cannot be specific on anything because this is our traditional policy and our teams are continuing to work on looking at the different alternatives, both in the security or I'll say more in the security than the enterprise sector. We have a growth strategy. We are (inaudible) is a combination of organic growth and strategic acquisitions and we continue to execute from this strategy, so it's not necessarily related to the Actimize acquisition, but we ask to make sure if we find something it's along our criteria for what fits our strategy and what makes sense financially.

Is it fair to assume that you will wait first to see the fruits of that combined acquisition before you make your next move. The next couple months maybe you will (inaudible)?

We are working to make sure that we leverage the synergy from Actimize. It is on track. As I mentioned we are receiving very good feedback. Actimize is primarily kept as a stand alone entity with specific synergetic points. I would say this is not a specific bottleneck for us to execute an acquisition. It doesn't mean an acquisition is imminent or will happen either today or in the near or mid-term future.

Okay. And then last one for me before I yield the floor. Can you -- you may have referred to this before, but as far as the financial vertical, what kind of impact you are seeing there, to what extent does your guidance reflect any caution on this vertical and what can happen into 2008? Thanks.

As I mentioned, our -- so far we haven't seen any specific impact from the financial services vertical on the negative side. I would almost say that a fair amount of the order intake, if we look at some of the very nice orders that we have received in Q3, they are coming from -- some of them are coming from the financial services verticals, primarily on the retail side. As I mentioned we believed that our technology is a technology that is critical both in good times and maybe even more in bad times. So it is delivering very concrete and specific results for our customers. So we're actually quite optimistic. Of course, if there will be a major catastrophe in the world economy we are not immune like anyone else. But overall, so far in working and looking with our customers we believe that the technology offers a very strong ally and also protects some of those organizations against trouble. So we are so far cautiously optimistic, if one may say so. Overall, I think you had another question about the guidance.

Yeah. To what extent you are incorporating either conservatism into the guidance regarding the financial vertical or in anyway.

As we have -- at the end of the day we have many verticals and we have many regions and many geographies and we have a security market and even within the financial sector it is well diversified within the call center or investment banking and other departments. So this is a first look in 2008. Obviously it is still early in the game. This is our estimate so far, based on what we know and what we believe can happen.

Okay. Thank you, Haim and Dafna. Congrats the good execution and good luck going forward.

Thank you very much, Daniel.

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

Thanks. On the Actimize front, what do you think is fueling this market? When you talk to customers heading into '08, what are some of the dynamics that you are hearing from customers that you think is kind of fueling your stronger pipeline and (inaudible) business?

I think the basic areas that we are seeing here are, as we mentioned, there is a major innovation about the ability to have cross channel, multiple channel solutions in areas like fraud, for example, which is a very, very innovative technology and this is on the agenda of many organizations today, both external forward and internal forward. And this technology is an excellent alternative to either legacy, home grown, internal IP based solutions or legacy solutions. So there is a lot of innovation here and a very quick ROI. I would say this is an area which is extremely important today. There are areas like (inaudible) for example, which are new regulations outside of the U.S., primarily of course in the European market where there is a need for technology to assure that there is compliance with these (inaudible) regulations. So overall, these are an example of the type of driving of growth drivers behind the need for the Actimize technology. And as I mentioned, I just met first hand 150 clients of Actimize in New York just a few weeks ago and there was a very strong excitement, A, from Actimize solutions and, B, from the potential synergy of adding additional channels of information so organizations can have a much better understanding of what's happening in their business.

Let me ask you a question for '08. Obviously everyone is very skittish, just given the market on the financial services. But you guys obviously have done very well. When you talk to customers and they are talking about budgets for next year. What anecdotally are you hearing? I mean, any sort of signs of caution or is this a one perception reality where due to the -- you have a product, which customers need, and they are going to allocate budget for them.

The general environment is probably cautious for obvious reasons. I would say that in my one-on-one with customers in our specific space and in our specific niche, I'm hearing examples such as with new technology of analytics, for example, we could save on customer churn X number of dollars which is a major, major benefit. And this would be one of those things that when we go on budget for '08, these are the type of things will put forward in the budget. So again, as I mentioned, I don't want to sound arrogant and to say that we will be completely immune if there will be a major downturn. Don't get me wrong. But obviously as things are progressing now, we are actually hearing that the technology that we have to offer the ROI is strong enough to be on top of the budgets for next year and this is obviously behind our projections. I also want to remind you that the in addition to the financial services industry we have, we are serving other clients, whether it's telco's outsourcing (inaudible) a major growing part in the security business.

And you -- when you look at '08, you gave guidance where (inaudible) visibility, have you seen assumed similar types of coverage ratios relative to trimming the pipeline to deal flow? Dafna, you could tell (inaudible). How do you kind of view '08 relative to very successful '07 in regards to forecasting that? If you could give it granularity, just given the fact you given '08 guidance on certain environment and it's pretty strong.

Yes. Obviously '08 is not done yet and unfortunately we cannot say that the entire '08 is covered with backlog. Our team will have to work very successful -- very hard to make '08 successful. So that is, of course. We have been using similar methodologies of looking at the year ahead based on some industry plan, based on technology penetration, based on analysis of our competitive strengths. And also some of the backlog, like the large security project that we have announced, that obviously will be carried forward and other -- not just the security, security and enterprise which will be carried forward to 2008. Beyond that, there are several trends. As I say, the adoption of the interaction analytics technology, the progress and the change rate of voice-over IP technology, geographical spending. Some areas are stronger than others. And this is behind our estimates of geographies that will be stronger than others. So these are the parameters and past performance of course. So these are the parameters that we have taken into account when giving the first look at 2008.

Thank you. Solid quarter.

Thank you.

Your next question is from Craig Nankervis of First Analysis. Please go ahead.

Thanks. Dafna, are you breaking out Actimize for Q3?

Actimize in September -- it's not Q3, it's only September -- contributed about $3 million to our revenue.

It's about $3 million. And is there any Actimize in the security result that you've made?

No. And by the way, the $3 million was according to our expectations. We announced closing the deal.

Right, right. Maybe then just if you could help walk me through the security spike that you saw sequentially, a great result there. I thought that the larger deals you guys land are recognized over multiple quarters. Is that true or can you just explain why we might have seen the spike.

The large projects we announced over the last few months are not in the revenues of Q3. In Q3, the extraordinary phenomena we saw is that we were able to close and complete certain smaller sized projects that will able to collect acceptance, collect some cash and all the different elements that helps us with some revenues. And that was exceptionally good in the third quarter and this is why we are saying it's -- I would say extraordinarily results in Q3.

Thank you. Also for your '08 top line guidance, are your Actimize assumptions basically unchanged from when you announced the deal, I think it was $55 million to $60 million, wasn't it?

Yes.

So unchanged?

Yes.

That's all I have. Thanks. Great quarter.

Thank you.

The next question is from Shyam Patil of Raymond James. Please go ahead.

Hi. Good morning. Haim, you mentioned that you continue to see positive dynamics in the marketplace. Could you maybe comment how long you are expecting this to occur and if it's due to a specific competitor or if it's more broader than that.

Yes. I see now that I almost have to apologize that we were performing well and looking at positive guidance. Again, we expect it to continue in '08 because otherwise we wouldn't guide what we have guided. Right now we are seeing a positive better mix. We are seeing a growing pipeline in both sectors. We see that our sales people are very busy, working on many deals, which we hope to close in Q4 and also for next year. There is a lot of interest in the things that we do, both from the security and the enterprise. So, we hope it will continue and there are, at least from our part, good signs that this will continue and this is across the board. We look at the Actimize pipeline. It looks very positive. We look at the pipeline of our entire -- of the regions, in our regions we see a lot of activity. So we hope this will continue. As I say, I believe it's a result of both our strategy, the technology that we have in place, the competitive landscape. All this is contributing to our -- I would say cautiously optimistic for the time being.

Okay. Great. Dafna, could you walk us through your gross margin and operating margin assumptions for '08?

The gross margin assumption is to be at the area of where we are now, plus or minus 63%. And operating margin in the range of -- will, our long-term targets which is 15 to 20%.

So slight improvement over '07 or could it come in flattish.

(Inaudible) in four months over time.

And then you mentioned you are seeing positive feedback in the marketplace and from your customers for Actimize. I was wondering if you could comment on what kind of cross billing opportunities you are seeing and how does this compare to what you originally expected. From what I recall the Actimize guidance really doesn't assume much cross selling in '08.

Yes, first of all, this I correct. I was referring to positive comments and that example that I've given was from meeting 150 clients in a Actimize client forum. The positive comments were primarily on the innovation behind the idea of one company providing a full integrated solution for transaction and interactions. If you take, and we have given this example and now we have validated with customers, if you are taking organizations that are fighting both external and internal flow, they see a significant enough flow that could be generated from the call center. And whether it's people cooperating or other reasons and our ability to add to the Actimize analytic engines, the analysis of different trends on the interactions of their clients or internal people, what was said by who, what was the context, how it's related to some activity on a agent screen and combining this with transact -- with, very quickly with transaction information can provide a much broader and much more reliable models to predict fraud -- which is correctly goes to the bottom line and the reputation of the organizations.

So this is the type of feedback we were getting. Obviously, as we are talking about technology, there are technology activities that we will do in order to generate this type of synergy. In addition, also to some referencing of joint customers which we have started to take place in this business introduction and between initial introduction to actual signing and recognition of bills take time and therefore for '08 we think assume much synergy for the time being.

And then switching to the context analytics, can you comment on what the penetration is for pre-installed base and what you think it will take to drive this to say 50%. Is it more of a function of just marketing at this point, better communicating ROI?

Yes. Every customer that started to implement this, we are seeing phenomenal results. The feedback that we were receiving about the technology and valuable position is almost behind -- beyond our expectations. And of course, the challenge now is to scale up. And this is exactly what we are doing. So penetration is very low. Few percentage of the customers have actually deployed it. And there is a lot of room for growth in this area.

Thank you.

The next question is from Roni Biron of UBS. Please go ahead.

Hi. Quick question regarding the gross margin. Dafna, you mentioned that in 2008 it should remain rather steady. Is that more of a result of your increasing involvement in the integration projects? Or should we see that the expansion in software component is starting moderate?

Growth margin is a combination and there are several found combination of different factors positive factors or factors of software based solutions, software only based solutions. And on the other hand, we have the impact of (inaudible) professional services and also on large scale projects sometimes gross margins are lower. So the combination of everything, when we make the integration of all of the different elements, we come to our gross margin assumption. Currently for the near future I see growth margin in the area of 63%. Maybe up or down 1% or more. But this is where we expect to be going forward.

If we look only on the gross margin of the product segment, and including a setting to the side, can you give us a rough idea on how much software there is? And how much can it increase over time?

We are not breaking down gross margin by products. We can assume that over time that software component in our report is growing.

Okay. So the gross margin expansion within the product segment remains intact? It continues to improve and should -- there is no reason it shouldn't next year, right?

It can continue to improve. As I said, different factors, one factor is the improvement because of software. The other factor is the -- sometimes there are negative impacts on the cash flow on the gross margin become -- products coming from larger scale projects.

Okay. And then just another question regarding the integration of Actimize. You can maybe elaborate a bit on the time line and what needs to be done and what are the cost synergies next year.

This is Haim. There is no cost synergy because this was not a cost cutting exercise. This was a strategic acquisition in order to significantly change the landscape, if you would like, for NICE in the coming years. So it's not cost cutting. The milestones, if you like, this is not a full integration as we have mentioned. We believe the Actimize should continue and operate as a (inaudible) entity run by its CEO and there are milestones in terms of customer referrals and joint technology development that these are the type of things that we are actually working on as we speak.

Great. Thanks a lot and good luck.

Thanks.

The next question is from Irit Jakoby of SIG. Please go ahead.

Hi. Thank you. On the security side, obviously the security has much more fragmented market than enterprise. Could you talk a little bit about where you are taking market share?

You will have to be more specific on market share. But what I can say is that we see that the vision that we had with the combination of audio and video and the ability to offer NICE Inform as a very innovative product is really helping us in different parts. We are primarily, I would say, stronger in transportation and command and control center of police and emergency centers. So these are the two verticals, if you like, that the NICE is more active and this is where we see our progress. I would say transportation and emergency centers for police, fire, ambulance and so on.

Okay. Great. And turning again to Actimize, can you talk a little bit about what your plans for doing an integration on the product side down the line?

I think I mentioned before this will be an integration of joint solution that will combine both transaction and interaction providing feeding data into the different Actimize models and I don't want to be more specific because this is, of course, also competitive information, but these are the type of things that we will do in the coming quarters.

Okay. Great. Thank you.

Okay.

The next question is from Jonathan Ho of William Blair. Please go ahead.

Good morning, guys. Great quarter. On the security side, could you give us some color on where you are seeing some of the large opportunities just from a geographic basis and the types of customers that you are seeing opportunities come from?

I'll try to be -- to give you some color but not too much. Because opportunities if we were more specific then some others might try and bid it as well. Obviously one that we have announced so it's easy to talk about is in the U.S. with the NYPD. And as you can imagine, winning such a major project this is not unnoticed by others. We are also active in other geographies, both in EMEA, there are investment in technology there to help government better protect citizens and also in other parts in APAC. I would say like the Pudong airport that we have announced this quarter and we have announced other in previous areas. So I would say that both in the emerging markets there are investments to protect infrastructure and also there is some innovation in the West so it's all over basically.

So regard to Actimize do you see any contribution in the security side of '08 or going beyond for that application.

There are many things that the Actimize platform can help NICE. But right now we are modeling our business and also we don't want to defocus this operation. They are becoming gradually a leader, major leader in their space, creating in some areas a new space. Yes, it can contribute to the security market. But we didn't model it into our 2008 guidance.

Okay. With regards to I guess the software content on your product side, is that driven in part by increased sales like it's building on your platform (inaudible) customers and what type of contribution you expect in '08 I guess from the existing customer base?

I think that Dafna covered the gross margin part of it. But in terms of software, I would say that it's highly likely that most of the sales to our install base would incorporate primarily software based solutions. There can be additional operate and expansion of what I would say (inaudible) voice recording which will have also hardware components. This is still -- still will happen in 2008, but definitely on the enterprise side the selling to the install base will incorporate more and more software or primarily software.

Great, thank you.

Thank you very much.

We have a follow-up question from Daniel Ives of Friedman, Billings Ramsey. Please go ahead.

Just a quick question. What are you thinking for share count for Q4?

The share count for Q4 and 2008 is expected to be at $61 million.

Thanks.

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. In the U.S. please call 1-888-326-9310. In Israel please call 03-9255-930. Internationally please call 9723-9255-930. Mr. Shani, would you like to make your concluding statements?

Yes, 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 the NICE Systems third quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.