Nice Ltd (NICE) 2008 Q1 法說會逐字稿

Welcome to the NICE Systems first quarter 2008 results conference call and thank you all for holding.

All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded May 14, 2008.

I would now like to turn this call over to Ms. Daphna Golden, Corporate Vice President 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 Dafna Gruber, Corporate Vice President and Chief Executive 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 2007 annual report on Form 20-F as filed with the Securities and Exchange Commission on April 14, 2008.

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 our strategy and overview of our business, and Dafna Gruber will present a more detailed discussion of our first quarter 2008 results and financial guidance for the second quarter and full-year 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 defer 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 our first quarter and fiscal year 2008 press release for a reconciliation of our GAAP and non-GAAP results discussed on this call.

With that, I will turn the call over to Haim Shani.

Thank you, Daphna. Good day and thank you all for joining us for a review of our 2008 first quarter results.

I'm happy to report another strong quarter for NICE. Revenues reached $147 million, coming in slightly above the high end of our guidance and up 25% over Q1 2007. Earnings per share reached $0.36, up from $0.31 in the first quarter of 2007.

The trends in our business remain strong, resulting in strong bookings, a healthy pipeline, and backlog a covering close to two quarters worth of revenues, giving us good visibility into the rest of 2008.

Looking at our enterprise business, as you may recall, last quarter, as well as at our recent analyst day, we elaborated on the main drivers for growth in the enterprise business in the variable position of our solutions.

I'm glad to say that these growth drivers continue to generate healthy business for us as we continue to see strong demand across the different end markets, verticals, and geographies. The first highlighted growth driver was the ever-growing need of organizations to comply with new regulations and manage risk.

For example, the Bank of Tokyo Mitsubishi, Japan's largest bank, recently selected our antimoney laundering solution from Actimize for its subsidiaries and branches worldwide as an important component of their global risk management initiative. The Bank of Tokyo Mitsubishi chose the AML solution for its sophisticated analytics engine that enables quick conversion of a small of data into a confident decision.

Another interesting deal is an order that recently came in from one of the world's largest energy companies. This company purchased our interaction analytics solution in order to ensure compliance with this industry regulations.

Following recent scandals in the financial services industry, last week we introduced a key add-on module for the Actimize solution suite. This module is the industry's first rogue trading detection solution which integrates and then analyzes information relating to employee (inaudible) and compliance issues from across the enterprise. This is done by connecting the dots and calculating the risk that a particular trader or set of traders exposes the firm to.

Furthermore, the need to better monitor millions of interactions at the branch level for compliance and other business objectives has also been identified by Cisco, and we recently launched a robust and cost-effective solution that addresses the special needs of branch recording. Recording at the enterprise branch level is an untapped market that can now be addressed through advanced Voice over IP technology.

Moving on, the second growth driver of our enterprise business is customers seeking to enhance operational efficiencies. As we speak, literally NICE is now holding its largest ever user conference in Dallas with over 1,000 attendees that have all come to see and hear about our work force management and performance management solutions, [Form] IEX. This clearly demonstrates the need and desire of organizations to improve their operational efficiencies cost.

And the third is customers seeking to gain business insights through improved customer retention and overall competitiveness. For example, European outsourcer, Webhelp, selected NICE interaction analytics solution to expand their implementation throughout their 15 sites to enhance the quality of service provided to callers.

It will also be able to provide its outsourcing clients a different understanding of the customer's behaviors, their wants and needs, an important competitive advantage in the outsourcing industry.

Another organization which selected NICE is University of Pittsburgh Medical Center, one of the most renowned academic medical centers in the United States. This organization placed a seven-digit order for our solution for a 3,000 Voice over IP (inaudible) deployment which will enable them to proactively evaluate and improve the quality of service provided to customers calling about the medical center's healthcare service offerings.

Over the past few years, we have been offering more and more software applications. This requires working more closely with our customers and partners. We have already established an operation with advanced support and consulting capabilities in North America and now we are enhancing our capabilities in other parts of the world.

Thus, last month we had an opportunity to significantly accelerate the buildup of our services and support in the EMEA region primarily in the U.K. by acquiring a world-class team of experienced consultancy and support engineers from two of our partners in this region.

Moving on to our security business. This quarter we continued to successful execute on our strategy to target large-scale deals. We continue to see increased demand for our solutions in the security sector primarily driven by accelerated demand for the monitoring and protection of mass transit systems as well as city centers.

We recently announced that Transnet freight rail, South Africa's largest rail operator, decided to standardize on NICE and to implement our end-to-end solution through IP video security in a multi-million dollar solution which calls for deploying our solutions in 617 sites throughout South Africa.

Furthermore, we recently announced that the transit authority of a major U.S. city placed a seven-digit order to deploy NICE Inform. This customer turned to NICE as part of a comprehensive upgrade of the city's transit system security infrastructure to enhance safety and security.

NICE Inform will be deployed at six new command and control centers which will be manned by operators and dispatch personnel who will now, thanks to NICE, be armed with the latest decision support and real-time analytical tools.

Last quarter we shared with you that we had a number of security projects in the pipeline, each exceeding $10 million. I'm happy to report that we are making progress in terms of the sales cycle and are hoping to see them materialize in the coming quarters. We are also making good progress in implementing the large projects which we won last year.

With regards to our innovative offerings, we continue to invest in delivering the most advanced technologies and solutions, which are unique in their ability to address complex security needs. For example, just a few weeks ago we further enhanced NICE Inform's intraoperability capabilities, improved the system resiliency and added more robust storage devices among other capabilities.

To summarize, this has been another strong quarter for the Company in both the enterprise and security business. We're especially pleased with our progress in light of the macro economic environment. We believe that the very proposition of our innovative products and services will continue to drive demand and growth for NICE.

I will now turn the call over to Dafna for a closer look at the numbers. Dafna?

Thank you, Haim.

Our business generated record results in Q1. Revenues for the first quarter were up 25%, reaching a record of $147 million, up from $117 million in the first quarter of 2007.

Revenues were extremely strong in Q1, reaching for the first time in five years a sequential growth of revenues. Thus, we are very pleased with the strong bookings which essential equaled revenues allowing us to maintain a backlog equivalent of almost 2 quarters of revenues. We are also pleased with the number of seven-digit deals which more than doubled compared to Q1 of 2007.

Organic revenue growth reached 14%, in line with our meeting target. Net income in the first quarter reached $22 million, up 32% from $17 million in Q1 of last year. Earnings per fully diluted share were $0.36, up from $0.31 in the first quarter last year.

Enterprise sector revenues were up 31% reaching $119 million, up from $91 million in the first quarter of 2007. Our strong growth in the enterprise sector was mainly driven by the growing demand for NICE SmartCenter characterized by substantial increase in service revenues. This followed the shift in our business toward selling more and more software-based advanced products and applications.

Security sector revenues were $28 million, representing a 6% increase over the first quarter of last year. As we've indicated and seen in the past, revenue growth, especially in the security sector, may fluctuate on a quarterly basis. Having said that, it is very important to emphasize that we achieved strong bookings and backlog in Q1.

We are pleased with the progress made in Q1 with the implementation of large projects that were announced in (inaudible) recent quarters and we expect them to turn into revenues over the coming quarter, leaving us to an annual target of mid-teens growth rate.

Revenue by geography for first quarter was as follows: The Americas accounted for 56% of revenues, or $82 million, up 19% from the first quarter of 2007, Europe, Middle East and Africa accounted for 30% of revenues, or $45 million, up 30% from the first quarter of last year, and A-Pac, 14% of revenues, or $20 million in the first quarter, up 48% from the first quarter of 2007.

Q1 gross margin reached a record of 64.9%, up from 62.4% in the same period last year. The main reasons for the gross margin improvements were the continuous shift in our product mix toward software-based revenue, and secondly, an exceptionally high utilization rate of our service organization.

We already realized a few quarters ago this high utilization rate and, therefore, while preparing our plans for 2008, we have budgeted a significant investment in our service organization. With the recent opportunity to accelerate in one step the buildup of our service organization in Europe, utilization levels will be back to the regular course, therefore, in line with our original plan, we expect 2008 gross margin to range between 63 and 65%.

Operating expenses in the first quarter of 2008 were $72 million. The increase in expenses was due to the impact of less than $2 million associated with the weakness of the dollar against the Israeli shekel and other currencies as well as legal expenses and our continuous investment in R&D and sales and marketing activities. Despite these factors, we have achieved an increase of 33% in operating income year-over-year.

Operating margin reached 15.9% of the first quarter, up from 15% last year. We generated a record of $47 million cash from operations in the first quarter. Our cash and equivalents reached a record of $442 million at the end of March, up from $398 million at the end of last year.

Interest income in the first quarter was $3.7 million compared with $4.2 million in the fourth quarter of 2007. The lower interest rate in the first quarter is a result of the decrease in the U.S. interest rates. The continuous reduction in interest rates might result into lower interest income going forward.

DSOs at the end of March was 63 days, lower than our long-term guidance and goals of 70 to 80 days.

As for the guidance, we are providing strong guidance for the second quarter. We expect revenues in the range of 151 to $155 million and to achieve non-GAAP earnings per fully diluted share in the range of $0.37 to $0.41. On an annual basis, revenue guidance is up at 619 to $634 million, and earnings per fully diluted share guidance is $1.65 to $1.75 per share.

That concludes my comments. I would now turn the call over for questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Please stand by while we poll for questions. The first question is from Shaul Eyal of Oppenheimer. Please go ahead.

Thank you. Hi. Good afternoon, good quarter, guys.

First question, Haim, on Actimize, is it fair to assume that [what] you're seeing the results coming from Actimize are actually better than what you had originally anticipated?

I would say that it's progressing very well. That's probably the best to characterize it. We have planned for the year 55 to $60 million, if you remember revenue guidance for 2008, and we are feeling that we are really making good progress there.

Obviously the year is not over yet, but we are very pleased both strategically, operationally, financially, people-wise. Any parameter that you can judge an acquisition, the initial strategic feat, so basically there is a very strong demand for this type of solutions these days. That's the bottom line.

To some extent, even more than we originally anticipated when we made this acquisition, but we are very excited and pleased, yes.

Got it. Thank you for that.

With respect to the average deal size, would you say that it has been on the rise in the past couple of quarters?

The number of large seven-digit deals that we have is definitely on the rise. As Dafna said, we have more than doubled, actually, even in Q1, which is a traditionally, one would say a traditionally weaker quarter, we have doubled the number of seven-digit deals from Q1 this year to Q1 last year, so, yes, it's a big shift.

All right. Thank you. I may come back for more questions later on.

The next question is from Shyam Patil of Raymond James & Associates. Please go ahead. Mr. Patil?

Hello, can you hear me?

Yes, please speak.

Haim, could you talk a little bit about the backlog coverage ratio? Historically it's been close to one quarter's worth of revenue. I guess this is the second quarter in a row where you've commented that it's closer to two quarters worth of revenue.

I guess on the one hand it would indicate strong visibility into guidance, and on the other hand maybe more conservatism than you've taken into kind of in the past. How should we think about that?

First of all, reaching two quarters of revenue is, almost two quarters of revenue, is a very strong indicator of our business and we are very pleased with that. I would say that as long as our mix between security and enterprise remains more or less the same, this is probably the best it can get, because in our business, obviously, there is people also would like to have the systems delivered.

So probably I cannot see it getting better than that as long as the mix between security and enterprise remains as it is. If we will have a higher mix of security business, obviously, in this type of business there is the tendency to have larger deals over a longer period and, therefore, the backlog can even grow beyond two quarters. But for the foreseeable future, probably this is the best that one can achieve, and we are very happy that we are able to maintain this achievement now for another quarter.

This obviously leads us to a good visibility, and this is behind the fact that we have increased the revenue guidance, the top line guidance for the year, which we are very pleased with that. Demonstrated there is A, good demand, and B, good visibility.

Great.

And then it looks like product gross margins were pretty strong. On a sequential basis, would you attribute that most to lower security revenue? Or what influenced the product gross margin (inaudible)?

Primarily it's not related so much to security or not security, it's more related to the additional software components. So as we are moving towards more software, and this is true in both segments.

When we are talking about the Voice over IP, (inaudible) video over IP dealing with security, it is basically almost a software deal and same with the enterprise. So it's more of a software mix rather than security versus enterprise. And as Dafna indicated, also on the services side is higher utilization.

But since you asked about product, it's primarily the move towards more and more software product and it's relevant in both markets that we serve.

Okay. And then just my last question.

It looks like sales and marketing expenses were up a little in the March quarter. Could you talk about what influenced that and how we should think about that trending in 2Q and the balance of the year?

There will be a gradual continuous investment in sales and marketing, and as we are growing the business, as we feel that we are gaining market share, I think it is healthy to continue and invest and generate more business. So you will see a gradual increase, but overall we will maintain -- we are maintaining our strategy of leveraging our model.

Great. Thank you.

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

Thanks. Hi, Dafna and Haim. Congrats on the continuing execution. A couple of questions here.

First one, Haim, can you give us a sense on the picture across various verticals in the enterprise segment? What is the health of the business and the tone in the business? Thank you.

Thank you, Daniel, for asking this question. Obviously this is a time to talk about the financial services.

I believe that the now with the strong growth of the enterprise sector, and as we always know, the financial services is definitely a part of our significant part of our enterprise. It was very strong. I mean, we are seeing demand for products across all verticals, including the financial services.

Not to paint the picture that we live on a different planet, obviously, some customers have been impacted and not everyone is 100% at the same pace but, on the other hand, there are other customers that are actually increasing their pace, and our solutions are really what they need, either for compliance, operational efficiency, consolidating of data center, saving on personnel, analyzing the customer directions, everything that we talk about is very relevant, maybe even more these days in the financial services, and as well as other verticals like the example, outsourcing we talked about in the call on the healthcare industry so with the example of the Pittsburgh UPMC.

There are many verticals, but financial services is definitely going very well for us as well.

Okay. Great.

And then asked differently, on a regional basis, any difference that you've seen in the U.S. market versus international?

There's no significant difference. I would almost say to our surprise everyone was expecting that the U.S. will be weaker, but to our positive surprise the (inaudible) that we bring to our customers are relevant, including in the U.S., or including in the Americas, so nothing of any significance.

Okay. Great. And then last one for me.

On the security side, you guys have been winning several deals and it definitely seems, based on my checks, that the momentum is increasing, the deal sizes are on the rise. So that's one part of the question, just whether -- can you confirm that.

And then another part of the question is more for Dafna. It's been a few quarters that you've been announcing very major, very large deals but we are still yet to see the revenue recognition kind of come into the P&L. If you can just elaborate on that as well. Thank you.

I would start with the first question. The answer is yes, we are continuing to win deals, and whoever you are checking with you have done a good job and, yes, this is what's happening in the marketplace.

Orders take time. Sometimes they ship the system in a certain area. Sometimes they want a big bulk in one go so it fluctuates. But I think the overall is the same as happened last quarter, you could see 6% and then you might see a quarter of 30%.

So the average is going to be a very healthy mid-teen growth, the best that we can estimate at this point in time, but we feel quite good about reaching our healthy mid-teen growth in the security as a result of recognizing some or significant part of the large deals won last quarter.

I don't know if Dafna want to add on that.

The way that, usually the larger the deal is the more it includes more in addition to products also professional services [were] given and some acceptance requirements on these deals and the way we recognize revenues is usually most of the cases once the deal is completed, or once the main implementation is completed and we receive the acceptance certification and, therefore, it can take time. And that's the main reason that part of, or significant part of these deals is not being recognized yet.

Another example, on the FAA side, you will probably want to hear about, with the FAA we got a [firm] contract last year and now we've started seeing specific orders coming for deployments in different areas for the FAA. We got some sites installed in Q1 and we continue to see sites installed in Q2 and going forward, so we are definitely executing very well on this prospect.

Okay. Very good. Thank you so much, Haim and Dafna. Good luck going forward. I'll get back into the queue. Thanks.

The next question is from Paul Coster of JPMorgan. Please go ahead.

Thank you. Good morning. I've got a few quick questions.

First of all, Dafna, on the op ex side there was this $2 million of unexpected expense related to FX and legal. Can you just break that out and perhaps give us some sense of what the legal expense was?

The expenses were less than $2 million on the foreign exchange, and on the legal side it was a few hundred thousand. The foreign exchange is definitely associated with the weakness of the U.S. dollar against the Israeli shekel, but also other European and other currencies. And the legal expense is due to the -- mainly the trial activity that we are current maintaining against one of our competitors.

And what's the latest expected date for resolving that patent dispute?

It can be, again, depends on the outcome. If the outcome is in the right direction it can be within weeks, but we don't know yet. It's difficult to predict the jury system but we hope it's going to be within weeks.

And as we always said, we believe that we have a very strong case. And if we are granted what we believe we deserve in terms of protecting the Voice over IP recording technology, it's going to be a major milestone for the Company. But we will have to wait for the system to work it out.

Got it.

With respect to competition more broadly, obviously, your main competitor seems to have progressed on integrating their businesses. Has that changed the competitive dynamics in any way? Are you seeing pricing pressure, pricing becoming an important consideration in winning contracts?

Without talking specifically about one competitor, because there are a lot of competitors in this market, some are smaller, the overall market has always been competitive. I don't recall in the last several years that I'm running this business it was always a dynamic market with competition. So there's nothing of major significance in terms of extremely aggressive or unusual discount [pattern].

As to our overall positioning, I believe that we are in good shape. I have to be humble here and give always respect to competition, but as people say, you know, just look at the numbers.

You can see that we are growing the enterprise business very healthy, and in this environment, I assume, although we don't know what are the results of all the other competitors as they're either non-public or (inaudible) or part of the bigger public companies, we estimate that these results mean that we are increasing our market share. That's how we translate or interpret these results.

Okay.

My last question is on the product cycle. Sort of feels like you're in this sort of mode of continuous improvement. We're not going to see major product cycles. Is that the wrong assumption?

How should we think about Actimize and the integration with the larger organization? Are you still going to be running it as a separate business essentially? Two questions there.

Yes. I'm not sure that I 100% see the connection. Let's qualify the, if we are talking about [the] product cycle, if you mean the penetration, there are three major areas that I believe that we're just at the very beginning to qualify.

If we are looking at our interaction analytics, the penetration of this technology is just at the very beginning. What our customers are doing with that I would almost qualify as miracles, things that no one had thought can be done with this technology.

The world is now being spread out that, A, NICE has an extremely strong solution, and B, that it gives a very significant business value. So there is a major upside potential for this business and we are just at the very beginning.

The same goes with the branch recording. The announcement that we have made with Cisco is something which is new. If you look around at most of the branch offices of either financial services organizations and other, most of them are not being recorded today.

Many of them have Cisco gear out there for the telephony and being able to intimately integrate with the Cisco technology on one hand and with the NICE Perform, or NICE technology in the center, I believe is a major -- will be a major solution that will provide a lot of benefit. So, again, in this part, we are just at the very beginning.

As with the Actimize, if you look at the Actimize business, the major competitor to Actimize is actually the internal IT budgets activities that have been out there in many companies, and I believe that they are very outdated.

I think people generally realize that there is now the time to look at the leader, that we lead this industry, and instead of each one developing its own proprietary technology, depending on their own internal IT, Actimize can be a significant generic solution which brings a lot of value and domain expertise. And we are definitely feeling the momentum over there, so again, we believe that this is an untapped market.

As with the integration of Actimize, we are trying to keep the, I would say, the benefit of both worlds. On one hand, make sure that this company or activity runs uninterfered and manages to grow up significantly, and on the other hand, gradually building joint solutions, joint offerings, going to customers.

Just very recently we have been together with Actimize. Joint teams have been presenting to a major financial institution a joint offering which was very well accepted, so we are making progress, trying, as I said, on one hand to keep them focused and on the other hand to gradually build the synergies. And we are making, as I said, making progress in both fronts.

Great. That was an excellent answer to bad question. Thank you.

The next question is from Daniel Ives of Friedman, Billings, Ramsey. Please go ahead.

Thanks. Good quarter.

First off, on those big video deals, the $10 million ones, is that factored into your 2008 guidance, or is that kind of gravy (inaudible)?

First of all, I did not mention specifically video, just for correction. I said security. One can assume that security can include video. Not always. So we have video, audio, the combination, NICE Inform, so some of them do include video and some don't, so just to qualify.

When you say factor, the bottom line is not that much from a revenue perspective. It's more to build the Company growth also for 2009. It doesn't mean that something on a statistical basis can also drop into 2008 numbers but primarily we're looking at them for 2009 revenues.

Of course, depends on when they were materialized and what will be the terms of the agreement. Again, on a statistical level, something can be dropped into the 2008 numbers, but not significant.

Cash flow is real strong. What should the trajectory like that throughout the year look like on cash?

I didn't get your question. Can you repeat, please?

Yes, cash was really strong in the quarter. How should you view that throughout the remainder of the year in regards to trajectory? Should it be a traditional ramp on cash flows?

Cash flow may fluctuate from quarter-to-quarter. The overall assumption should be that cash flow for the year should be very similar to the non-GAAP operating profit. That's the best assumption on cash flow for -- on an average for the year.

Okay. Great quarter. Thanks.

Thank you.

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

Hi. Thank you and congratulations again on a good quarter.

Haim, I think you've mentioned in the past product releases maybe in the back half of 2008 that you plan that might integrate some transactional analytics from Actimize into new products. Can you comment on that?

Yes, this is still the plan. What we are doing right now is we're working with customers, verifying that what we have in mind makes sense and as this is happening, we are planning to do exactly that.

Do you plan release in the back half of the year and do you think this will be a revenue driver still in this year or maybe only in 2009?

I would say that, again, subject to what will be the exact content and the timing for planning purposes, it will probably be more to generate bookings towards the second half of the year.

Okay. Great.

Another question regarding acquisitions, I think it's been a while since you've discussed potential acquisitions, and I wanted to ask also if, you know, what you see in terms of the market environment for acquisitions. Is it better now, or is it a little harder maybe because valuations maybe haven't come down on the private side?

Yes, people are used to the fact that NICE does an acquisition every few quarters, which is good. On a serious note this is the second quarter that we have Actimize on a full basis part of NICE. We are seriously taking a look at the variety of opportunities, both in the security and the enterprise with our own priorities if materialize would probably be to have it on the security side.

Prices have, might have come down, but practically not dramatic. I would say that there's no major shift in the price of assets of non-public at this point of time if one is looking at good assets. That's what I would analyze.

But the price is not the only factor. We are looking at price, we are looking at being able to demonstrate growth, strategic fit, accretive models, and so on. So pricing is not the only factor that we are looking at when we are looking at acquisitions. And, of course, we need also another party to agree to what we want.

Thank you.

Overall I hope that we will be able -- we always said that the cash that we have in the bank is primarily needed to -- for us to continue and do acquisitions. I think we have executed very well on these statements in the last two years, and we intend to continue and do that in 2008 and beyond.

Okay. Thank you. And good luck.

Thank you.

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

Thanks. Just a couple of quick questions.

First, on Actimize, it seems those results appear to be pretty good here. If you could just bring us up to date on how Actimize is doing as it creates bigger presence in the non-U.S. markets. That was my first question.

Second was just in general, a general comment about your sales hiring targets and plans also in non-U.S. markets. And I wasn't clear on what Dafna was saying about the services organization investments. If you could just clarify that. Thank you.

I will start with the last one. We have added to our team, which I think the last one answers your second question, we are seeing definitely a growth potential not only in the U.S. but also in other parts and, therefore, similar to what we have done in North America, primarily North America, which was to build a very strong service capability to support both customers and our partners, especially around our service software offerings.

We had opportunity to acquire in Q1 two of our partners, distributors, U.K.-based, and as a result we were able to obtain a team of service people, consultants that immediately accelerating of the buildup of our service organization. These are people with a lot of experience at NICE on NICE solutions and systems and, therefore, it's a very quick ramp-up. So this also demonstrates to that you we are building our organization.

We're also recruiting people outside of North America. We're also recruiting people in North America, but obviously this is slow ramp-up. We are not running like crazy. We are moving carefully, adding people, and may also maintaining the leverage that we have in our model.

As to Actimize outside of North America, yes, there is lots of activity. We have, I think, announced one major win, which is the Bank of Tokyo, and there are other activities, not everything we can announce, but there are other activities both in EMEA and in Asia that will allow us to proliferate this technology and this activity outside of North America because the demand is there, the need is there, same value proposition whether it's (inaudible), whether it's other local regulations, there's a lot of value for these solutions.

Thanks. Just a quick follow-up.

That was a strong sequential increase there in the Asia-Pacific revenue quarter-over-quarter. Was that largely attributable to Actimize?

No.

Okay. Thank you.

The next question is from Jeff Rosenberg of William Blair. Please go ahead.

Hi. Good morning.

Another op ex question. Could you give a little bit of color on the increase in R&D? Should we expect that to continue? And maybe any further detail you can give on where you're investing there.

Our plans include a slight increase in all op ex components, including the R&D line. It's been very moderate growth for the rest of the year.

Okay.

Along those lines just kind of tactically, given the strength you saw in both sales and gross profit, was it a specific move to try to front end load some of your op ex investments for the year or to be more aggressive to take advantage of the upside? Or maybe just tactically can you talk a little bit about how you tried to manage the expense growth given the strength that we're seeing in the top line?

Well, it's always a challenge to manage the expense in parallel to managing the revenue growth. We have very detailed plans as to how we want to see the rest of the year in both revenues and expenses, and we manage our expenses accordingly.

Okay.

Last question I had is can you remind us of what the geographic breakdown is for Actimize, or was at the time that you acquired it? And then I guess what I'm asking is, I don't know if you have handy the difference in Americas organic growth relative to the 14% that you gave us for the business as a whole.

Not sure that I actually got the question. Can you repeat it again because it was not clear.

It was kind of two questions. One is the, remind of us the geographic breakdown for Actimize, and then I was asking about whether there was a difference in the trend in organic growth in the Americas relative to the 14% number you've quoted for the entire company.

Regarding the breakdown of the organic growth, we are not breaking it down by the different regions, but I can say that there was no big differences in the -- significant differences between the various regions in the organic growth.

And regarding Actimize, again, it's something which we never discuss in detail. Obviously the Americas was significant part of Actimize business, while they were making -- at the time we bought them, and also now, they are making strong moves outside of the Americas as well.

Okay. Thank you.

The next question is from Tom Ernst of Deutsche Bank. Please go ahead.

Hi. This is (inaudible) for Tom Ernst. A couple questions.

You talked about gross margins going up quarter-to-quarter but if you look at the sort of longer term trend do you have a target number that you are sort of aiming toward? And then related to that, if your gross margins have grown sequentially, you've raised guidance on the top line but not, you're reiterated guidance on the EPS line, so how does that second target of growing gross margin?

Regarding the gross margin, what we've said is it's tougher from the long-term target. We just recently said publicly that gross margin target for the next one to two years is to grow to 65%. So that's on the, I would say, mid-term level.

Currently, as I've explained, the margin in the first quarter was exceptionally high. It was higher than our plans, and that reflect on the service side a very high utilization on our service organization. It means that we have a lot of services to provide and our people are working very hard in order to do that, and we are taking and continue to take steps in order to fix it and, therefore, at least on the service side, I expect gross margin to go a little bit down on the short-term.

The 46-plus percent margin on the service is more than where we want to be. We want to be at a maximum of 45%. So I hope it answers that part of the question.

Regarding the second question, we did raise the revenues by $4 million. We are keeping the -- currently, we are keeping the EPS target. We want to see how the rest of the year progresses. And we are very clear that we, in the current environment, can keep our margins where we plan them to be six months ago.

Okay. Thanks.

Second question, on, in the press release you made a comment about the business being strong across verticals and geographies. Can you provide a little bit of color on what specific verticals are strong and which ones are not and the same for geography?

At this point of time, there's no, I would say there's no major difference between the different geographies because the driving factors, or the growth drivers, are practically the same. It doesn't mean that out of the 100 plus countries that we sell, each one of them is exactly the same, but there's really no major, it's the same growth drivers, so whether it's compliance, whether it's mitigating risk, whether it's for protecting customers through the call center, activities, preventing churn, improving operational efficiencies, this is relevant to customers around the globe. So there's no real major delta here.

Okay. Thank you. Congrats on a good quarter. Thank you very much.

The next question is from Alec [Prolatski] of (inaudible). Please go ahead.

Good afternoon and congratulations on the strong results. Actually I have a few questions if you can give an answer.

(Inaudible) regarding depreciation and amortization value, it's a bit higher than we expected, so is the $10 million could be expected in the next [few] quarters?

I'm not sure I heard the last part of your question. You were asking about amortization expenses. I would say that amortization expenses are definitely higher than amortization in Q1 of last year as a result of the amortization of the intangibles associated with the acquisition of Actimize.

That's the main difference in amortization expenses. There was nothing there, however, in Q1 which is different than what we had in Q4 or we planned for.

So could we expect this level in the next few quarters?

Yes, I believe that until the rest of the year that should be the level.

Understood. Thank you.

Thank you.

The next question is a follow-up question from Shyam Patil of Raymond James & Associates. Please go ahead.

Hi. Thanks. Just one follow-up.

Haim, you talked about the Cisco partnership and branch recording a couple times in the call. Can you help us understand a little more quantitatively what the opportunity could be here?

There is obviously a theoretical size. There are several hundred to hundreds of thousands of branches around the world of financial services and other organizations.

It could be banks, it could be insurance, it could be retail, it could be many that at this point in time do not record the calls, and we have identified that if these guys will have a cost-effective solutions they will see the benefit of recording calls either for or compliance or monitoring quality or both.

So the theoretical potential is fairly large. Obviously nothing happens in a day. But this just gives you the theoretical potential there.

Okay. Thank you.

The next question is another follow-up question from Shaul Eyal of Oppenheimer. Please go ahead.

Thank you.

Another question on OEMs and partnerships, obviously, (inaudible). Haim, are you working on adding some OEMs, other partners that could potentially down the road be similar in size to what you guys are seeing with your Avaya relations?

Well, Avaya is definitely, is obviously the largest player in the contact center industry and definitely our largest and most strategic partner, and we're very pleased with the progress that we are making with Avaya.

With respect to other industries and other verticals, we have partners like Motorola and like Honeywell, and we are working very hard to expand our joint offering with them. And as to other offerings, I would say that at this point in time we are building the value proposition of our newest offering, primarily on our own.

Got it.

One final question again on the M&A front but from a different direction. I think we spoke about it in the past after the IEX acquisition. How much are your client customers are being part of the kind of strategic direction with respect to M&A, i.e., are they pushing you?

Are they pulling you to go in and do some of the acquisitions? Are they bringing some potential candidates to your attention that could you go after later on?

It's a very good question. The answer is yes, not on every opportunity. Sometimes when it would be a very innovative direction, not necessarily the customers who think of it up front.

Sometimes I can think of several examples that our customers are hinting or recommending that we take a look at company A and Company B, and as the company grows, like in the last two years, we're getting more and more of these recommendations.

Got it. Thank you very much. Again, good luck.

Thank you.

Thank you. There are no further questions at this time.

Before I ask Mr. Shani to go over his closing statements, I would like to remind participants the replay of this call is scheduled to begin in three hours. In the U.S., please call 1-888-326-9310. I repeat, 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 statement?

As usual, we're very proud of this achievement especially in this macro economic environment. This is always an opportunity to thank our loyal employees that work very hard around the globe, as well as our partners and customers, and I look forward to see you all or to talk to you all in the next, in our Q2 conference call. Thank you and have a great day.

Thank you. This concludes the NICE Systems first quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.