Nice Ltd (NICE) 2008 Q3 法說會逐字稿

Welcome to the NICE Systems third quarter 2008 results conference call. Thank you all for holding. All participants at present are in a 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 November 12, 2008.

I would now like to turn over this call to Ms. Daphna Golden, Corporate Vice President Investor Relations and Development. Ms. Golden, please go ahead.

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 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 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, product and applications, difficulties or delays in absorbing and integrating acquired operations, product, 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 third quarter 2008 results and financial guidance for the fourth quarter of 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 our third quarter 2008 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. Good day. Thank you all for joining us for a review of our third quarter 2008 results. I am happy to report that Q3 was another strong quarter for NICE. Revenues reached $163 million, coming at the high end of our guidance and up 23% over Q3 2007. Earnings per share reached $0.43 up from $0.38 in the third quarter of 2007. Our strong performance throughout the third quarter in both the enterprise and security sectors is a clear reflection of our ongoing leadership position.

At all times and especially in times of uncertainty, NICE solutions are critical as they help organizations around the world nurture and protect their most valuable assets. Customers, people, and property. Commercial and security organizations continue to turn to NICE for vital solutions that tackle the issues at the top of the business and secure the agenda, while enabling them to operate in a cost effective manner. This is clearly illustrated for the very exciting and strategically important security-related announcement we made just a few hours ago.

An EMEA government agency, which to date has been using NICE voice-based solutions has placed an order of over $20 million expanding its use of our solutions. This is a major milestone for the Company. A, because it's the single largest order we've received to date, and B, because it reflects the success of our strategy to offer and implement large scale end to end security solutions, leveraging our unique and comprehensive range of advanced security technologies for city center protection. We believe NICE is the first Company in the world to provide such a comprehensive revolutionary solution with the capability of integrating so many technologies all under one unified view being managed through the city's command and control center. It's a new way to ensure personnel -- personal safety for the public and we are proud to be the ones behind this revolution. This forward-thinking customer will be utilizing the full gamut of their advanced NICE technologies such as IP-based surveyance with content analytics, license plate recognition and face capture, as well as handheld GPS-based video terminals and mobile video sensors to monitor criminal activities in the city. These solutions will be integrated to provide the full picture from every angle of the city's security status at any given moment.

In addition, for the most effective investigation capabilities and for complete incident reconstruction, security personnel at the command and control center will be using NICE Inform, our multimedia command and control solution. As you know, the security industry is a massive multibillion market with governments and corporations around the world in both established and emerging markets investing billions of dollars to protect people in essence. We believe that NICE has a lot of room for expansion in this huge market.

NICE has a large installed base of the leading emergency command and control centers in the world and we are the only Company that offers an integrated multimedia capture and management solutions that combines radio technology, IP data, GIS and video. Our goal is to capitalize on these assets that is our extensive install base and our unique and innovative offerings to enable us to continue winning large scale multimillion dollars projects for protecting large city centers, critical facilities, and transportation systems. Overall, in Q3, we experienced strong momentum with significant growth illustrating once again the strength and diversification of our business model.

Another significant proof prohibit and milestone is the $50 million project we announced as recently as in July this year. We believe that the major wins I discussed with you today and in recent quarters are just the beginning, setting the ground for potential upside in our security business. Now, let's turn to the enterprise side of our business.

During the entire third quarter, we continued to generate a significant amount of business. The turmoil in the financial services and other markets is translating into a greater reliance on our systems. In times when everyone is worried about their personal finances, the first quarter making is to find out what's going on with their savings. Our customers have told us that they are seeing a significant increase of 20 and even sometimes 200% in call volumes coming into the call centers' branches and back offices. The call center systems are running at full capacity and NICE solutions are successfully handling the heavy load in situations that clearly have zero tolerance for less than perfect performance.

One example I would like to share with you comes from one of our customers in Japan, one of the country's largest financial institutions. This customer has implemented a multimillion dollar project with NICE to help ensure compliance with financial liquidations in both the contact centers and back offices. Last month when the Japanese market substantially dropped, the number of calls they got into the call center and back offices increased dramatically to near record levels. In this case, as in others, the NICE Systems handled the overload seamlessly. Another example comes from the (inaudible) investment division of a large US-based investment firm. This customer has been using our interaction analytic solution to categorize their customer course by topic and to better understand why customers are calling.

The firm found that people were understandably much more concerned about their retirement plans and as a result, the firms call volume has recently more than doubled as compared with their day-to-day average. Based on the insight gained from the NICE interaction and analytic solutions, they were able to understand which specific topics were foremost on the clients' minds and quickly make changes to internal processes and to provide support where needed. NICE also offers additional solutions critical in helping organizations protect against fraud, ensure brokerage compliance and fight anti-money laundering, all very valued issues in which in fact are more critical in these days of financial turmoil and we are seeing this both in the US and even more so in the rest of the world.

A year after closing the Actimize acquisition we continue to be very pleased with the progress of the business and how our joint efforts are coming together, we are now seeing significant opportunities for cross-sell selling between the sales teams. Last week, we announced our first joint solution revolutionizing trading surveillance and research with the industry's first integrated transaction and voice analytic solution. Leveraging NICE and Actimize technologies, we are now offering a unique cross-channel compliance solution which helped reduce risk and cost. At the recent Actimize NICE client forums, our clients highlighted that this unique offering may help them substantially improve and automate the surveillance processes, enabling more effective user flavor and other resources, providing cost savings and significant reduction in the time to respond to the growing demand of regulator inquiries.

To conclude, Q3 2008 was another strong quarter for NICE. When pairing our clear industry leadership with our robust financial position, we believe that the present economic environment creates many opportunities that will further strengthen NICE leading market position in the future. Looking ahead to 2009, our plans call for continued growth on both the top and bottom line. However, given the overall volatility in the markets and the general economic gloom focus, we have decided to adopt a more cautious approach. Although our business remains very strong, we feel it would be irresponsible for us to provide formal guidance for the full year ahead at this point of time. We ended the third quarter with record backlog, a healthy cash flow and we continue to see a strong order pipeline, all serving as key foundations for long-term growth moving ahead into 2009 and beyond. I would now turn the call over to Dafna, please.

Thank you, Haim. Our business generated record results in Q3. Revenues for the third quarter were up 23%, reaching a record of $163 million up from $133 million in the third quarter of 2007. Net income in the third quarter reached $27 million, up 27% from $21 million in Q3 of last year. Earnings per fully diluted share were $0.43, up from $0.38 in the third quarter last year.

Looking at our order intake, book to bill was greater than one and we ended the quarter with record backlog. Organic growth for the quarter and for the first nine months of 2008 were 13%, in line with our targets. Enterprise sector revenues were up 23%, reaching $118 million from $96 million in the third quarter last year. On an annual basis, enterprise sector revenues were up 23%. Our enterprise sector growth is characterized by an increase in revenues for applications, as a result of our clear shift in our business towards becoming a software application Company. As we evolve our model into selling product, professional services and maintenance over a multiyear period, the service portion and especially the maintenance part of business continues to grow.

Security sector revenues reached a record of $45 million, representing an increase of 22% over $37 million achieved in the third quarter of last year. On an annual basis, security sector revenues were up 24%. We continue to achieve important milestone in the security business. Moving ahead, we see signs indicating that the security sector will continue to show strength and even potential upside.

Moving on to the geographical analysis, the Americas accounted for 54% of revenues, or $88 million, up 19% from the third quarter of 2007. New York, Middle East and Africa accounted for 31% of revenues, or $50 million, up 26% from the third quarter of last year. APAC accounted for approximately 15% of revenues, or $25 million in the third quarter up 29% from the third quarter of 2007. Gross margin for the quarter reached 64.8%, up from 63.4% in the same period last year.

Our profitability continues to grow while in line with our plans, we continue to increase R&D investment during the quarter in order to further enhance our innovative solutions and differentiating industry leading position. Operating expenses in the third quarter were $75 million or 46% of revenues. We continue to benefit from the leverage in our business model. Operating margin reached a record high of 18.6%, 1.5% up from 17.1% in the third quarter of 2007. We achieved a record amount of cash generated from operations in the third quarter of 2008 at $32 million, or over $90 million in the first nine months of the year.

Our cash, cash equivalents, deposits and marketable securities reached a record of $455 million at the end of September, with no debt, further demonstrating our competitive advantage and level of flexibility, especially nowadays. In the current environment, we believe we are in a unique position to leverage the attractive acquisition opportunities the market creates to further expand our business.

Looking at the interest income, we manage our cash using a very conservative approach and as a result, our interest income as obviously been significantly affected by the decline in interest rates and we expect this trend will continue into the fourth quarter as a dramatic decrease in global interest rates continues. In addition, during the third quarter, with record -- we recorded an expense of $3.9 million net of taxes in accordance with FAS 115 relating to losses and impairment on investment in certain corporate bonds. This is less than 1% of the total cash balance at the end of the quarter.

DSO accounted for 64 days in the third quarter, better than our long-term target of 70 to 80 days. As for the guidance, as Haim noted, we continue to see very strong demand for our solutions, however, have decided to take a more cautious approach and are widening our guidance range for the first quarter. We expect revenues to range -- at the range of 161 million to $168 million and non-GAAP earnings per fully diluted share in the range of $0.42 to $0.49. Looking ahead, given the current macroeconomic situation, we believe that at this point in time, it will not be wise to provide specific guidance for 2009. It is important to point out again that our internal plans at this time assume continued growth. That concludes my comments. I would now turn the call over for questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Shaul Eyal of Oppenheimer. Please go ahead.

Thank you. Good afternoon, guys. Congratulations on a very very encouraging quarter. Couple of quick questions on my end. Obviously Haim, in recent years, you guys have spoiled us, and -- you guys providing guidance for the following year in the third quarter. Is it an ultra conservative stance you are taking here? Is it based on any finds you guys are seeing, any delays, any pushbacks you see on contracts and when talking about growth, is it -- are you planning for high single-digit, double-digit, how should we be thinking about it?

Okay. Thank you for the congratulations on the quarter. Yes, the general, I would say, environment outside of our own business is, we all read the papers and we are living in this world. We feel that despite the fact that our own business is strong, I would even say that almost ironically that in the fourth quarter we are seeing a very strong pipeline in most of our business despite the fact we're seeing today to give the guidance for the full year of 2009, it is not, not very responsible. So our business is strong. We will -- we ended this quarter with record backlog. We have won the largest deal ever in the history of the Company. We are seeing more deals of this nature in the future in our pipeline, but despite the fact, as you know, 2009, the end of 2009 definitely looks far away and when I see our colleagues focusing, have such a gloomy focus for their own business, I feel it is a little bit premature to do it at this point of time. So it's less so related to what we see.

In fact, you know, I can even tell you a story that was not on the Street, but just coming over to this, to this call, I got a call from the President of one of our regions telling me that one of our partners on the enterprise side just got a deal of $2 million for our solutions. And this deal has been sitting there for quite sometime, enterprise business takes between six to nine months. This is the type of organization that his name is on the press and you would be surprised probably to hear that at this point in time this organization is giving to NICE $2 million. So in terms of our pipeline, if things were normal days probably we would have guided, I would say, a very nice growth path, nice guidance. We feel that today we should wait a little bit before giving a full guidance for 2009.

Financial, retail, or automotive institution? Just trying my luck here.

Some of this--.

One of the above, fair enough. Haim, help me understand, Lehman going back, (inaudible) what was the immediate impact on your business, whether it's from the trading floor, on the pure call center, and what could be the implication for renewals or maybe any absence of renewals as we move into 2009?

There can be two scenarios, one which will be a very positive scenario and one which will be less. If you ask me, I would probably go for the more positive at this point of time. As I said in the past, obviously when a Company is completely out of business, that's one story, but without going through the details of Lehman, even with the context of Lehman, some of the operations have been -- have remained and therefore those operations that remained would need our technology, but obviously this is in Lehman specifically would have been completely insignificant in terms of the relative business for NICE. So that's not an issue.

On a more broader scale, when these companies merge and combine, we have seen in the past, and we are actually seeing it today as we speak that NICE being the high end standout, this can sometimes create more opportunities because once they standardize on technology, and this is where they get actually quite a lot of savings, we are replacing either legacy technology that can be either from us or from competition. So in the past, that's what we have seen, where there have been consolidation and I have good reasons to believe that this is going to continue. So almost ironically, this situation can create sometimes accelerate opportunities rather than stop them.

Fair enough. Capitalization, final question on my end, what's the kind of thinking on buyback, given the great cash flow generation and obviously pristine balance sheet?

Right now, our entire -- we believe that unless there is a major change in the economy, that in the first half of 2009, we will be faced with excellent opportunities. We remind you the highly accretive aggressive acquisitions that we have done in 2002 and '03 with Telus and Dictaphone, and we believe that this is or might be around the corner and therefore the cash will be needed to move quickly, leveraging these opportunities that are now being evolved in the market as we speak.

Thank you very much. Good luck. Congrats.

Thank you.

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

Yes, my question is when you think about the quarter and you compare the months, can you kind of walk us through any changes throughout the different months of the quarter and could you just also speak to what you've seen so far in October? Thanks.

Yes, we -- I think I was quite clear in, hi Daniel, I think I was quite clear. I did say that we have seen strong business throughout the third quarter, including the last days of the third quarter we have received very nice orders in the enterprise sector. So that's basically what I said and, right now we are giving guidance based on the activity. We are now in the middle of the quarter and we have given guidance, which is very respectable, so that's as a result of what we are seeing.

Okay, and then just a final question. When you think about what's happened with taxes or interest income, assuming, an environment that stays like it is, would you still be expecting to show operating margin expansion sequentially from 3Q to 4Q?

This is our plan to further increase our operating margin.

The answer is yes.

Yes.

Okay, thanks, guys.

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

Yes, thank you. Dafna, can you give us a little bit more information on the impairment charge, what it was caused by. Can we see any more of them? And secondly, was there any foreign exchange currency impact this quarter?

Yes. As for foreign exchange, the way we manage our business and our hedging strategy, eliminate in the short-term once we give guidance, eliminate the effect of exchange rate on our numbers, so I can't be very specific on that. Obviously the strength -- the dollar growth over the last few weeks helps us a lot. As for the impairment charge, the -- we recorded the losses on paper that we believe have filled some orders that are other than temporary loss. We maintain our investment portfolio on the available for cash method, and only when there is a decrease over certain percentage in the value of the bonds, we look at it as something that we need to provide for in the P&L and that's a combination of certain corporate bonds we held. This is the charge for certain corporate bonds we held.

Okay. Haim, you mentioned earlier on that there's more city center deals in the public safety and security sector. Would that include deals in the pipeline in the US and how are state and local budgets impacting the pipeline for those kinds of contracts here?

Okay, good question. I would say that the most sizable ones are outside of the US and the -- in terms of full city surveillance, so that's what we are seeing. In the US, it is smaller in terms of the size of the deal themselves. However, and this is important, on the emergency side, and this is something that is interesting, we believe that on the emergency operability, interoperability of command and control center, the 911s, the communication side, we are actually seeing a very healthy activity and we think that there is a good chance that this will still fall under the combination if you would like of infrastructure, maybe combination of infrastructure, implementing the recent -- not recent, but implementing the recommendation of the committee of 911. I myself happened to attend the conference where some senior leaders from the House of Representatives had made a discussion about it, so at this point of time, we're seeing healthy activity on the emergency center interoperability command and control systems.

Okay. My last question is, there's been some negative data points regarding the rates at which VoIP will be deployed in the enterprise here in the States anyway. How is that impacting your business, if at all?

I would say that right now, and I've constantly said it in the past, we need to know really the details in order to understand the basics of the trends in the marketplace. There is obviously general VoIP technology which affects phones in the office, which is less relevant to what we do, and, A, this has been implemented, or if you would like, many phones have already been there. What we are seeing in terms of VoIP is actually the ability to help consolidate call center operations and this can enable them to save quite a lot of money by consolidating from large number of service in several sites to actually -- to a maximum three sites sharing costs, administrative costs, systems, servers and so on. So in our case at this point of time, the VoIP element is less related to what the phone you have on your desk, but more the infrastructure, the interconnect variety of call centers and so far, this has not been impacted.

All right. Thank you very much.

Okay, thank you.

The next question's from Daniel Meron of RBC Capital Markets.

Hey, Haim and Dafna, congrats on the continued execution despite the difficult backdrop. Haim, the checks we've done so far actually continue to show that you're having a lot of strength in your business, but your guidance for the fourth quarter is sort of flattish. Can you maybe provide a little bit more color on why you are assuming that we won't see a lot of seasonality, positive seasonality this quarter, and then maybe also provide a little bit more sense with why you're looking for EPS to be flat when your operating margins are still ticking up in this environment? Thank you.

Yes, it's very simple. As I said, we have decided to expand, if you would like, the range of our revenue guidance, still coming in more or less in line with our plans. As you have seen actually in this quarter, we were successful in doing a little bit ahead of plans by few million dollars, so overall, our plan is more or less in line with what we have thought so far. So in this respect, I don't see any flattish, obviously we have decided, as I mentioned before, an example that I gave previously to Shaul, we are taking a slightly more, if you would like, conservative approach in terms of the multiples that we are putting and the probability just because we are listening to all our colleagues around us and we decided to be a little bit more conservative in the overall spend. Obviously we will try to show to the highest number possible, but we failed to take a little pit more cautious approach at this point in time, not so much because of our own business, but the general environment around us.

And on the operating margin side, is this mostly related to the financial income being weaker even on a sequential basis?

Yes, absolutely. That is a major reason we -- the numbers are a bit lower. We've seen a significant decrease and because of the diversity we keep in our investment portfolio, we are now putting a lot of money, and zero, equal to zero interest rate and that's definitely affect the total interest rate that we expect in the coming quarter, we want to keep our cash. We were very successful in that so far and that's the main and only reason why numbers that will be closed.

Like every citizen of the world would prefer at this point in time to be -- very very limited risk in terms of our portfolio. This has proven very well so far that out of this turmoil of the last few months, the impact that was on our balance sheet was less than 1%. We have taken a very proactive approach in advance, we prefer to lose a few points of interest, but keep the majority in the bank and this is the impact. We think it's a reasonable price to pay.

Okay, that's fair. When you talk about growth in 2009, is there one specific segment that you would do better? Is it you think that Actimize will see more business as we head forward with regulation, more security just across the board?

Well, obviously we don't know exactly, but I would say that at this point of time we see several, if you would like, growth drivers. One, we believe that there will continue to be spend and expansion on the securities side. Across the globe, but I would say probably with slightly more focus on emerging markets, so this is, I would say, we are seeing it in our pipeline. We have identified activities, so we believe this will continue to drive growth in our business. We believe that the regulatory environment will continue to change and to be more challenging and therefore people will need to comply with regulations in a variety of, in a variety of manners. This can create opportunities both for our compliance recording for Actimize and now for the recently announced combination of both transaction and voice capture and analysis.

We also believe that there are areas that are quick wins. I can give you an example maybe of the big bank that we just talked to him just a few days ago. His budget for 2009 was cut dramatically and the only project that made it to the list for 2009 was NICE analytic project, the only one, except the maintenance. And why is that? Because it's a quick win. It's anyone -- everyone is worried about its customers. Everyone wants to do more business with existing clients. And even if you are a big bank and you have to, protect capital equipment, but if you have to spend a few hundred thousand dollars and as a result, you are able to generate or to assure more business with your existing client, reduce churn, you can still afford it. So it's a real case, a real story, significant capital budget, the only one we have done, we have demonstrated results and the only one that's made it to 2009 was the NICE analytic story. So we believe we are seeing more of this both in our fourth quarter and going into 2009. So this is the area, maintaining, protecting our customers, reducing churn, improving operational efficiency, compliance and regulatory, and I would say more emerging market driven security solutions.

Last one for me, on the competitive side, now that you guys are one of the strongest companies in the industry, do you see more business coming from your customers, more demand for NICE both in the security and enterprise side?

Not sure I understood the question, but I think I understood you asked if you expect our own customers to continue and buy from us. This was the question?

No, on the competitive standpoint, NICE is obviously one of the strongest companies in the industry.

Thank you.

Do you see -- you're welcome. Do you see your competitive positioning improve right now? Do you see less of competition because they have to pare back their resources and maintain their cash while you guys can still expand your footprint? How should we think about it going forward on a strategic basis?

As I said in the call, first of all, our data points that move our leadership position, whether it's in product market share and many other (inaudible) sales, but on an overall most strategic thoughts -- although I would say very strong financial position and our ability to continue and invest and expand, I think, and this is in both security and enterprise side, I think this creates an opportunity for us to emerge from this environment even stronger.

Okay. Very good. Good luck going forward.

Thank you.

The next question is from shyam Patil of Raymond James and Associates. Please go ahead.

Hi, guys. Congratulations, all things considered. On the enterprise business, when you look at the financial services piece of that, has that on an organic basis grown about in line with the overall growth rate of that business?

Yes. Yes, basically and -- yes. Not sure what else can I say, just yes.

Okay, and has that been fairly consistent across geographies as well?

Again, yes. A year ago -- sorry for being cynical, I can't resist the temptation but a year ago, some people expected NICE business to deteriorate because of the financial. We explained why this is not going to happen to be the case and throughout the last four quarters, apparently I think we made a point now with the actual results, so the answer is yes, again, and I explained the reasons.

Great, and then could you just talk a little bit about the backlog. I think the past few quarters, you've mentioned that it's about two quarters worth of revenue and then just a follow-up on that. Typically when you -- typically in a given quarter, how much of that revenue comes out of the backlog?

A major part of the revenue focus is already covered by backlog. We have a backlog of two quarters, or more than two quarters now and when we start the quarter and especially when we give guidance, a significant part of the revenues for the quarter are already in hand.

But to avoid any misunderstanding, our sales force needs to work until the very last minute obviously, to generate bookings to continue and to close the backlog and we still have some portion, which will still be a book and ship during the quarter. But obviously much, much lower than the entire quarter.

Okay, and then just my last question, Haim, you talk about M&A, keeping your eyes open for something in the first half of '09. Are you still expecting, higher probability of doing a deal in security business and could you just talk about what areas you might be interested in there?

First of all, yes, security's a priority, but we wouldn't rule out that there will be also opportunities in the enterprise sector, especially in today's environment. So there can be an opportunity on both sectors. I think the security market is a very broad market and around the video surveillance area, there are many, I would say adjacent. I cannot be very specific, but in the -- these are surveillance, in the adjacent spaces, there are many opportunities that we are currently looking at.

Great, thank you.

Your next question is from (inaudible). Please go ahead.

First of all, could you repeat what was your revenues from security sector in the third quarter?

Could you repeat the question, please?

What was your revenue from the security sector in the third quarter?

$45 million.

$45 million. I want to go back to your cash position just to be clear. Could you give us a breakdown and if there is any unique investment or in which duration your portfolio invested in?

We have -- we maintain a very diverse portfolio, approximately less than half of it is investment, invested in deposits, bank deposits, treasury bills, and the second half or less than half is investment -- invested in corporate bonds, all rated at very high rates. As far as I can say that we maintain -- our policy is to hold securities on the available for sale (inaudible) and the deviation between the book value and the value at the end of the quarter, the deviation is very few millions.

Yes, okay. So I guess the duration is pretty short, one, two, three years.

Yes, the duration is short. It's between -- it's less than two years.

Okay, okay. Second question, could you elaborate on what your plans regarding to salaries and option plans to your employees in the near future?

We are now working on the 2009 budget, so we haven't made our final plans on this -- in this respect.

So I guess if we, if we guess it was -- it's going to be around 2% as it was in the last years?

I don't believe that you really expect that I will announce the merit increase in the entire Company in this conference call. And by the way, I'm not sure it was 2%. I don't know where you got this figure from, but we never announced the figure of merit increase and we definitely not plan to announce it in a conference call.

Okay, thanks.

The next question is from [Marie Jacoby] of Susquehanna. Please go ahead.

Hi, thank you, and congratulations, again, on the good execution. Just a follow-up question with respect to backlog. I think you mentioned that backlog has actually increased and is now over, more than two quarters. Is there a shift in the mix of the backlog? Are you seeing maybe more security versus enterprise in the backlog?

Yes, obviously with the $20 million, over $20 million order that came at the very last days of the third quarter. Obviously this increased, the security part has increased, but overall the backlog has increased totally.

And if you were to separate the enterprise backlog, how, -- how -- would you be able to comment on, is that--?

Also very good booking in the enterprise sector in the third quarter, so not sure that there is a major difference.

Okay, and then I think you also mentioned that you expect to increase profitability in 2009 regardless of what the actual growth that you end up contemplating. Is currency a big advantage right now?

Yes, currency is an advantage.

If head winds last this last year and hopefully it's going to turn into tail winds in 2009 as things look right now.

Okay, and last one for me, I think you had an announcement of new -- a new product from Actimize. Can you elaborate if that's a product that's already been selling and where you see that incremental opportunity?

Yes, this is a new product which we just launched, actually shared it with customers just a few weeks ago in the joint events that we have done for the NICE Actimize client base. This is a very unique combination where one could integrate the voice-related data, using our analytics, key words and understanding of different specific topics and issues, with the case management that Actimize has, which layers on variety of transaction base layers and the combination of the two can help compliance officers and other personnel to do very quick, if you would like, ad hoc investigations, combining, as I said, both case data and the related voice call. So this is very innovative. We started to discuss it and to share it with customers and hopefully we will go into relevant pilots in the coming future.

Okay, thank you. That's it for me. Good luck.

Thank you.

Thank you.

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

Hi, Haim and Dafna. Regarding, your product margin was lower this quarter despite the ongoing shift towards software. Do you sense any pressure on pricing and what should we expect for both product and services margins going forward?

The major impact here is that the, actually the volume of software as opposed to hardware based product, we saw some decline, but that's quite a minor one and overall we see a trend of improvement in the product margin over time. And it's -- it does not -- no specific price pressure which is different from what we usually see this quarter. And regarding your service margin, it was very high, more than 50%? Yes. The service margin continues to be better than we want. We still have some adjustment to do in terms of increasing our service capabilities, we are somehow behind and we have plans to increase the staff on the service side and this is why probably 50% is not where we plan to be. Also we were able to generate more on the maintenance side and obviously the maintenance is a very profitable business for us. Maintenance was very strong in the quarter and that's another reason for improvement on the service side.

The overall, the gross margin expansion should continue.

Yes, our target is for gross margin in two years' time to exceed the 65% and we are well into these plans.

Okay, thank you.

The next question is from Brian Ruttenbur of Morgan Keegan. Please go ahead.

Yes, thank you very much. The question I have, a lot of mine have already been answered, but if you were to have flat revenue, would you be able to leverage that to the bottom line even with lower interest rates in '09?

We are not planning to have flat revenue this point in time.

Okay. Hypothetically then, if you had flat revenue, would there be more leverage to the bottom line, would you have higher net margins than you would this year?

I think it's difficult to say because we don't know exactly what's going to happen in the interest rate line. I think what's important to know is that we plan to continue to expand our margin. That has been our plans over the years and this year, if all goes well, we'll see improvement compared to last year, even this quarter operating margin is up 1.5% compared to the same quarter of last year. So overall the plan is to continue to increase our margin. It's difficult to say, to give input on the bottom line because of the uncertainty and fluctuation in interest rates in the world.

Okay. Thank you very much.

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

Hi, good morning. My first question is on the services revenue. Can you talk a little bit about sort of the mix there and whether we should expect it to persist at sort of this higher level in the fourth quarter and going forward, and were there any sort of one-time effects that caused it to be a little bit higher than on the maintenance side?

There's nothing, if you like, special about this quarter than our model going forward.

Okay, and so with regard to the contract win that you just announced, can you give us a little bit more color on whether this was an open competition? And also, are you expecting any sort of follow-up contracts after this?

First of all, within this customer, as I mentioned, this is an existing customer that government agency that used our technology for voice-related application, and this is an excellent example of leveraging one part of the business to generate additional business in the related areas. As to follow-up, just follow-up, I want to remind you that just a few months ago, less than -- it was July, if I'm not mistaken, 15, we have already announced the $15 million contract, large contract in the security side, so this comes, we're breaking the record in a very short period of time.

We are expecting of course, there's never a guarantee because we move from actual results to pipeline, but we definitely have, as I said at the beginning of the year, we are seeing for the first time eight-digit contracts and here we are announcing eight-digit contracts every few months. So the pipeline of large projects for both the fourth quarter and 2009 continue and hopefully we will continue to execute on the strategy of winning and delivering large contracts.

Great. Can you update us on the progress of the FAA contract that you guys won a little bit back and just sort of the progress that's there?

Yes, excellent question and very good progress. We are actually I would say ahead of our plans and we expect this to continue. So if it is -- while it was expected to be spread over seven years, it can still be spread over seven years, but we feel that it is going to be much more, if you would like, the first few years we will deliver a significant part of it. So it's moving along very well. I think the customer is satisfied with the results and we are also.

Fantastic. Thank you.

Thank you.

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

Yes, thank you. You guys have executed and become a more software application Company and the services revenue growth is more pronounced than we had modeled. I'm just wondering if you can give us a sense of a split maybe between our professional services and maintenance and what you maybe consider the services division becoming more recurring revenue in nature?

The major part of service revenues is coming from maintenance. It can vary between 60 to 70% and the rest is coming from professional services, so there's definitely -- and this portion of maintenance business keeps growing.

Thank you.

The next question is from Kirk Materne of Banc of America. Please go ahead.

Yes, thanks very much. Maybe this is a little bit of the inverse question earlier, on your services business it sounded like there wasn't anything unexpected in that in terms of how it trended this quarter. I guess my question would be more on the product revenue side. You're down a little bit sequentially. It sounds like the backlog's building and when you look at the fourth quarter guidance, assuming that the majority of your services is maintenance, so you would think that could at least hold steady, if not grow a little bit. You're not really forecasting a whole lot in terms of product revenue growth. And I'm just trying to get my hands around, am I thinking about that correctly? I realize you all are being conservative, which I think everybody would applaud, but I'm trying to get a sense on what we should be expecting in terms of the sequential growth in the fourth quarter, how much is coming from services or how much is coming from product relative to your guidance?

You'll have to be a little bit more specific here. There are two trends here. One, is us becoming more and more software company, we are glad to see that we are able to build a much bigger portion of recurring business, but there's also a shift which is strategic and important that when we deliver now our solutions, and this is especially true and if you remember, I did tell you that in previous quarters we have seen significant growth in our analytic solutions, not only, but also the solutions are now there is some shift between what the customer is buying, he's buying a combination, which there is a bigger portion of professional services as part of the solution. So if you compare -- would compare it to previous years, you might see some shift between product and professional services, but from our perspective, it's a one-time payment of the customer, which represent what his budget is to pay for the project. So you're seeing both things in parallel.

I understand it might be misleading but if the past, a customer -- a voice-logging product for 100, now he could buy a project which includes analytics and additional services, analytics, where the services would be a relatively higher percentage than in the past. But from our perspective -- one time in terms of solution and this -- I'm not sure if we have reached the status quo. Maybe there will be some percentage point more going into this direction.

So it's -- I know it might look as if the product revenue is declining, but we shouldn't look at it at this way because it's more the combination of order and professional services, which is the one time a customer is willing to pay for a NICE solution and the combination of the two is actually growing.

Okay, and that's helpful. Thanks, Haim. Maybe the one follow-up on that from a margin standpoint. The customers are still paying you for a solution I understand that. I guess, is the contribution margin still going to be the same, obviously professional services carries with it a lower gross margin. I guess from a profitability standpoint, is it just how you're allocating it? It's not really a change in the profitability? I'm just trying to get a sense on as you add more service oriented deals, one would think that that would make it a little bit tougher for you guys to actually grow your gross margins.

Yes, we believe this is more exactly how we allocate and overall, we think that we will continue to increase the overall margin of the Company. The combination of both, as I mentioned. The maintenance and overall budget that we are able to generate from the customers.

That's it for me. Thanks for taking my question.

Thanks.

The next question is from Dan Cummins of Lime Rock. Please go ahead.

Thanks. I wanted to ask a question about I guess it's a financial strategy question relative to the acquisition plans. It's probably going to be a buyers' market for a while. Is it necessarily the case that you'll want to or have to use cash or could you not use some stock just to help conserve cash, number one, and number two, can you tell us -- I mean you pretty well hinted what are the kind of things you're looking at on the security side. Could you grow faster through acquisition on the IT side for enterprise, including with video technology? Thanks.

I'm not sure that I -- sure that I understood 100% the question. In the past, we've done deals where we use cash. We have done cash we have done only cash. We have done deals where it was a mix, so it depends on the situation. Obviously we are not very excited about the valuation of the Company at this point of time as one can imagine, so, again, it really depends on the specific situation. In general, we are -- I would say the last few years our record shows more of a cash deal and sometimes there was a small percentage of equity, for a variety of reasons including some, tying in people, so everything now is possible.

Especially these days, being able to finance deals very quickly with cash, it's a clear advantage.

So that's a good point. In terms of the -- I'm not sure that I understood your question about the IP video and enterprise. If you could elaborate a little bit what you mean by that?

Well, in terms of the acquisition plan, it seems to touch primarily on security technology in the near term. But it would seem to be the case that there's probably opportunities for you to grow the video over IT business faster through acquisition in the near term, and as I said, appearing to be a buyers' market on the M&A side. Do you have any plans to really muscle up and try to get to scale in video?

Yes, when I said security, obviously security is a major cornerstone of our security business, so when I refer to security, I refer to technologies in the video surveillance as an example and when we define security, what we mean by that is security which is used or security solutions that are used both to protect government agencies, transportation, and also private sector.

Okay. Could I have just one follow-up on the Cisco data point relative to what they said they have seen in specifically for October and going back to Kirk's question about product revenue, is it possible we'll see negative comparisons on product revenue in the near term? I obviously want to get the stock prepared for something like that.

Look, everything is possible, so I would not hold out any scenario. Right now our guidance is that we will continue to grow our business both in Q4 and also in 2009, so obviously we have taken a much more conservative approach because, more so because of what we are hearing from the outside and less from what we are seeing in our own business. Everything is possible. Right now we believe that our business will continue to grow both in Q4 and in 2009.

All right, thank you.

Okay. You're welcome.

The next question is from Nick Andrews of Lazard. Please go ahead.

Hi, guys. Just a couple questions on the securities side. First, on the $20 million contract, when do you expect that to start hitting revenues?

During the next 18 months. We'll start seeing some very small revenues in Q4. Majority will come in 2009 and some would be left for 2010.

Okay, great. And on the FAA project, can you give us a little bit more statistics around the rollout there? How many airports, et cetera?

Not sure that I have it on top of my hand. I think we have definitely crossed the 100 mark.

Yes, yes. It's way over 100 airports that are already have been deployed or are in the process of being deployed.

Have you seen any changes to the speed of rollout?

Yes, it's been accelerating -- it's faster than our internal plans.

Okay, great. And tax rate was a little higher than expected this quarter. What should we expect for the tax rate going forward in 2009?

The guidance for tax rate is between 20 to 21%, so it's a bit higher than previous quarters, but in line with our long-term targets. And always some fluctuations, so many elements that can affect that. I don't see it as, as a, something unique or different from where we want to be.

Okay, great. Finally, on the impact of the dollar, what should we expect going forward on the impact of margins for 2009, I guess a better way to ask it is how many quarters are you guys hedged right now, so when would we start seeing an impact of the dollar?

We usually carry a quite significant hedge for the existing quarter and the coming quarter and we are less hedged throughout the year and we are targeting growth in our profit next year, so, this is what I can say at this point. Growth and profitability. And definitely the dollar impact, the dollar has very good positive impact on that on these plans.

Okay. So in Q4, we should see limited impact and then starting in Q1 and Q2, could see a greater impact, is that?

Well, 2009 I hope we'll see good impact, but who knows what's going to be the exchange rate at that point in time. The way we manage it is we try to have as little as possible impact on our bottom line and take all the time, the necessary steps internally in order to keep our profitability targets.

Great, thanks.

Thank you. There are no further questions at this time. Before I ask Mr. Shani to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the US, please call 1-877-332-1104. In Israel, please call 03-9255-900 and internationally, please call 9723-9255-900. Mr. Shani, would you like to make a concluding statement?

Yes, I would like to use this opportunity to thank the entire NICE team globally and also the NICE partners globally. Their hard work and dedication made it possible to deliver these outstanding results in a very challenging environment. I am looking forward to speak to all of you again in our fourth quarter earnings release next year. Thank you.

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