Nice Ltd (NICE) 2009 Q1 法說會逐字稿

Welcome to the NICE Systems Conference Call and thank you, all, for holding. All participants are at present in a listen-only mode. (Operator Instructions) I would now like to turn this call over to Ms. Daphna Golden, Corporate Vice President, Investor Relations and Corporate Development. 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 point out that some of the statements made in this call will constitute 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 regarding the factors that could cause actual results or performance of the Company to differ materially is contained under the subheading forward-looking statements in the Company's 2008 annual report on Form 20F as filed with the Securities and Exchange Commission on April 6, 2009.

Such factors and forward-looking statements are based on the current expectations of the management of NICE Systems Limited only and are subject to a number of risks and uncertainties that could cause the actual results or performance of the Company to differ materially from those described herein, including, but are not limited to the impact of the global economic environment on the Company's customer base, particularly financial services firms and the resulting uncertainty. Changes in technology and market requirements, decline in demand for the Company's products; inability to timely develop and introduce new technologies, products and applications; difficulties or delays in absorbing and integrating acquired operations, products, technologies and personnel; loss of market share, pressure on pricing resulting from competition; and inability to maintain certain marketing and distribution agreements -- arrangements. The Company undertakes no obligation to update or revise these forward-looking statements except as required by law.

During today's call, Haim Shani and Dafna Gruber will present a more detailed discussion of the first quarter 2009 results and the current outlook for NICE. 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. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release.

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

Thank you, Daphna. Good day and thank you, all, for joining us, all of you, for a review of our first quarter 2009 results. In the first quarter, our revenue reached $139 million and earnings per share reached $0.35. The economic environment coupled with uncertainty regarding budget releases with customers led to longer than expected sale cycles in all regions and most business lines with a few exceptions. We've also seen some delays in the implementation of certain orders.

Despite this environment, the conscious cost control measures we are taking allowed us to improve our operating margins and to reach profitability targets for the quarter. We were also able to minimize the impact on revenues to a 5% decrease compared to last year.

There were several notable successes in the quarter. In the enterprise sector, the ACTIMIZE side of the business, as well as our solutions for driving operational efficiencies in contact centers, primarily our workforce management solution, those performed well this quarter. One example of a notable ACTIMIZE win is a major global bank with operations in APAC and Europe. This bank, which recently acquired another bank, was introduced to the ACTIMIZE technology through the acquired entity.

Following a quick due diligence process, they selected ACTIMIZE as their preferred enterprise compliance platform for the entire bank. The bank is replacing existing systems to better meet current and future regulatory demands such as [Mif-fit] and the Third EU Money Laundering Directive. They will be implementing both the ACTIMIZE market abuse and anti-money laundering applications. Furthermore, last week we announced a seven-digit first quarter deal with a major Swiss based bank that is expanding its ACTIMIZE implementation to include trading compliance in addition to an existing anti-money laundering implementation.

On the work force management side of the business, we won a large bid in Q1 with one of the world's major banks, an existing NICE customer. This customer too has recently acquired another company. The customer's recognition of the operational efficiency our work force management system offers was so clear that they made a decision to invest in replacing a competitive system the acquired company was using.

Looking at the securities side, and [note that we won] another mega project in line with our continued focus on large projects. This $9 million deal was secured with the government in an emerging markets country. NICE will help this customer monitor a massive amount of calls and provide alerts on different irregularity patterns.

As a whole, the NICE product portfolio continues to support our customer needs. Two weeks ago we had our largest ever American annual user conference. 900 customers attended this event, sharing best practices, including executives for Microsoft, Avaya, Cisco, EMC, AT&T, Computershare, Conseco, and Overstock.com. This year's event focused on business strategies for driving value in contact centers and enterprises. Many customers shared case studies demonstrating how NICE helped them comply with regulations, improved operational efficiency, and improved customer satisfaction, and reduced churn.

Looking ahead, we believe that the current challenging economic times can aid the unique opportunity to further strength our leadership position and to capture additional market share. Thus, we intend to increase our investment in sales, marketing, and research and development. With a view to support our growth in the near and long-term, we intend to substantially build up our sales and research teams. This will strengthen our feet on the ground and support our go to market strategy.

On the enterprise side, we'll be very soon launching new solutions for the SMB market with a focus on our channel partners. On the high end of the enterprise market, we plan to increase our direct touch with customers by significantly increasing our presence in the field, looking to further promote sales of our applications, and especially our advanced analytical packages which we believe are critical in today's environment.

Looking at the security sector, despite potential weakness within verticals in the private sector, such as gaming, we continue to see major opportunities in the government verticals as governments around the world are taking extra steps to combat traditional crime, financial crime, and reduce or eliminate the risk of terror.

In the U.S., stimulus plans like shovel-ready projects are expected to [pull] this strategy. Infrastructure build outs will be followed by technology and security projects.

As we have indicated in the past, we will continue to strategically focus on and expect to continue winning large scale deals in the security market, primarily in emerging markets. Looking at the near-term, our pipeline in both the enterprise and security remain strong and our sales teams are performing at a very high level of activity in most areas.

Although the overall economic environment remains uncertain, we have been seeing some signs of improvement since the beginning of April, mainly in the Americas, which is by far our largest region. Having said that, we expect that uncertainty will remain during the first half of the year. Subject of course to market uncertainties, we expect the second quarter results not to differ substantially from the first quarter.

We believe that at this time and given current visibility, our primary expectation for moderate growth for 2009 over 2008 seems more challenging and depends on a quick recovery of the enterprise market in most regions and our quick execution of large security projects currently in backlog and pipeline.

To summarize, we believe that our clear leadership position, the critical solutions we offer in today's environment and the investment we plan to make will allow us to continue and strengthen our business. We also plan to leverage our cash balance sheet in excess of $500 million. This will be done by enhancing the Company's position in the market through strategic acquisitions. We believe that NICE will emerge from this global downturn as an even stronger Company.

I will now turn the call over to Dafna Gruber, our CFO.

Thank you, Haim. I would now like to provide you with the analysis of our financial results and business performance for the first quarter of 2009 and add some additional color on our plans.

Revenues for the first quarter were $139.2 million, down 5% from $146.7 million in the third quarter of 2008. Net income in the first quarter reached $21.4 million compared to $22 million in Q1 of last year. Earnings per fully diluted shares for the first quarter were in line with our guidance at $0.35 compared to $0.36 in the third quarter last year.

Our backlog continues to be strong and equal to approximately two quarters of revenue. [Enterprise] revenues reached $103 million in the first quarter compared to $119 million in the first quarter of 2008. Security sector revenues in the quarter grew to $36 million, an increase of 28% from $28 million in the first quarter of last year.

The split by geography was as follows; revenues in the Americas, our largest region increased to $89 million from $82 million in the third quarter of last year, accounting for a total of 64% of revenues. Europe, Middle East, and Africa accounted for $34 million or 25% compared to $45 million last year. APAC accounted for $16 million or 11% compared to $20 million in the first quarter of 2008.

Revenues from services increased to $71 million from $62 million year over year, dominated by professional services and growing recurring portion of maintenance. Revenues for maintenance accounted for more than 30% of total revenues.

Q1 gross margin was 63.2% compared to 64.9% in the same period of 2008. Thanks to our [business] cost control measures, we reduced our operating expenses to $65 million or 46% of revenues down from $72 million in the first quarter of 2008.

In Q1, operating margins increased to 16.8%, up from 15.9% in the first quarter of 2008. Finance income was $2.8 million, in line with our forecast for finance income of up to $10 million on an annual basis in 2009.

Cash generating from operations in the first quarter totaled to $32 million, bringing the total cash and equivalents to a record of $530 million with no debt.

As Haim mentioned earlier, we've been seeing some signs of improvement since April in mainly the America region. Yet, it is too early to anticipate the overall and global trend. Therefore, we're currently basing our internal plans on the assumption that the result of the second quarter will not substantially differ from those of the third quarter. As to our operating plans going forward, given the current outlook, we intend to take additional measures to adjust our expense structure.

These measures will include additional investments in our sales, marketing, and R&D group. These investments will be partially financed by certain reductions in compensation and continuous cost saving initiatives. It is important to note that the overall headcount in the Company will be maintained at the current level of over 2,400 employees and will slightly increase in the second half of the year. Based on the plans I've described, our quarterly operating expenses are expected to be similar with a possible increase throughout the year.

Our profitability in 2009 is highly dependent on our top line performance. We are confident that the steps we discussed will enable us to leverage the current economic downturn to maintain and indeed strengthen our leadership position on both the market and technology fronts. They will enable us to keep the Company poised and ready to address a significantly higher level of business as the [economic] downturn shifts to recovery. That concludes my comments. I will now turn the call over for questions. Operator?

Thank you. (Operator Instructions) The first question is from Shaul Eyal of Oppenheimer & Company. Please, go ahead.

Thank you. Hi. Good afternoon, Dafna and Haim. A couple of quick questions on my end. Haim, in terms of kind of the general commentary and the fact that I know in a way you are indirectly suggesting a revenue kind of reacceleration in the second half of '09. The first half of '09 is going to end by the way [after] this quarter. Are we talking about a temporary pause or are we talking about any indication of developing trends on the negative side?

I think one quarter is obviously too early to tell if this is a negative or it's just one or two quarters. It's extremely difficult to know on a tactical level. On a strategic level we see that are solutions are extremely critical. And looking at the pipeline that we have on the security front and not only on the security front. We don't see any macro trend that should affect our business. Tactically, we have seen in the first quarter of course deals that were delayed. For example, we have seen deals that we were expecting to get on the last days of the quarter and actually materialized in the first month of April, including several significant deals on the enterprise front.

So, I would say too much uncertainty to say how the world will evolve. On the fundamentals of our business, the value that we bring to customers, just to remind you, we had 900 customers, an unbelievable number, 30% more than we expected, joining us in Dallas only two weeks ago. They all -- they received travel budgets to come and hear NICE for three days. So, the need is there. The opportunity is there.

How long it's going to last it's difficult to know. You have seen in the first quarter and we are always cautious, but you've seen in the first quarter a significant jump in revenue on the security side compared to last quarter. We always say that the security should not be measured on a quarterly basis; however, the pipeline that we are seeing on the security, the [last] security is quite significant, so there is definitely an upside in sight.

You talked about -- Dafna mentioned the backlog levels. What were the bookings levels for the first quarter?

Obviously if we had longer sales cycle, the booking was not as we expected. There were less than one, but because we have a very strong backlog, it didn't significantly affect the size of the backlog.

Got it. You also mentioned delayed implementations on several larger contracts. Does that have to do anything with the eight digit contract that's you outlined?

No. I was only telling in this case it was more referring to traditional enterprise business primarily because of budget issues within the customer. Not so much budget but confusion or [way at the rear] grouping within the IT, some delays more on a tactical level. Change of people and so on. This is more of a tactical delay I think which was very relevant in the first quarter. So, this is nothing of any significant -- if you like, planned. It was very typical for the first quarter.

Just one final maybe housekeeping for Dafna. I'm stuck on a reconciliation between GAAP and non-GAAP, termination expense. Can you provide us with more color on that expense?

Yes. We're constantly doing the reallocation of resources and we had -- we had to terminate a certain group of people, a few dozen, in several areas around the world and these costs are related to the termination. However the total amount of employees in the Company at the end of Q1 and also going forward is kept at the same level, so we were actually doing some terminations in some areas and regrouping on other areas and this is what we intend to do going forward as well.

Okay. Thank you very much. I may come back for more later on.

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

Thanks. Hi, Haim and Dafna. First of all, on the pipeline, when did you start seeing the slow down? You guys came to us, I guess somewhere in early February and guided the Street -- and also toward 2009 growth, on low to mid single digits. What happened in the interim as far as the pipeline? Did you see just deals getting smaller in the interim? How should we think about it as you talk about 2009 and the recovery in the back half? What can I --?

Understand the pipeline itself did not change. What changed was the closure rate as we have indicated also in the call summarizing 2008. We were expecting closure rate to be slower than tradition but obviously it ended up slower than we expected. So, it's not that the pipeline changed, it was more the ability to focus the closure rate of the deals. Actually some of them did slip into the first month of this quarter which is a good sign. So, the overall general pipeline of activity and the work we are seeing did not change and still remains fairly high as I indicated in the call. The ability to translate this pipeline into final contracts, purchase orders, and sending the actual software is lower than it used to be in the past.

Okay. So you're basically assuming the same kind of weight in your forecast for the second quarter and hence the lowered expectations that you have?

Unless we see that the pattern that we've seen in April continues, at this point in time we prefer to take as much as we can a conservative and cautious approach assuming this pattern will continue. It can obviously change, hopefully for the better, but it can also go in the other direction. We don't know yet.

So how should we think about the second half? Obviously you -- could we say that we've seen the bottom or is it too early for that? If we did see the bottom in the first and second quarter what kind of recovery should we expect in NICE's performance in the back half?

Again, I believe at this point of time it is a bit preliminary to predict. I believe that again the pipeline that we have on the security side also with the potential recovery that we hope to see in the North America business that we have started to see primarily in April, if all this materializes, we should see a recovery in the business starting the second half. That's our plan.

As you will see, we are aggressive in terms of building the Company capacity. We believe that despite the uncertainty, recovery will come. To tell you it is going to be in the second, third, or fourth, at this point of time it's a little bit premature but we believe that Company has significant opportunities in all markets and in all businesses and therefore we are taking a fairly aggressive stance. While many companies are actually cutting headcounts, we are planning to increase headcounts, both in sales and in marketing and R&D which means that we believe in recovery.

Okay. So, just to follow-up then before I yield the floor, if I understand correct, the reason why you're expanding your sales team and marketing efforts and R&D is really because you see an opportunity to take market share away rather than just trying to fill in or expand the opportunities ahead of you? It's more about taking market share? Is that the right way to look at it?

No. It's the combination of increasing market share but also developing our own market. As you know, we are introducing many new solutions, primarily on the analysis analytics, we announced recently many business packages and we have seen significant success both last year and although it was like most of the business, it was slower than we expected in the first quarter, we are already again seeing momentum there and initial signs of momentum. We believe that the value proposition to customers is significant and therefore in order to develop our business and our market, excluding or not only related to market share, we need and we want to market this investment. If you had seen the business in the United States on the revenue side was strong and I also mentioned a recovery in April. This is a result of a very strong execution that we have done on building our application portfolio. We want to expand it beyond the U.S. also to other markets, EMEA and APAC, where we think the market is ready for that right now. These are part of the things that we will be doing.

Thank you. I'll hop back into the queue. Good luck.

Your next question is from Daniel Ives of FBR Capital Markets. Please, go ahead.

Thanks. How should we think about operating margins? I understand that you're investing and you're cutting into other areas, but when we go throughout the year, you guys are showing good discipline or maybe better discipline. How should we think about operating margins, maybe in a flat revenue growth kind of environment sequentially and for the year?

Obviously the profitability, the operating margin is highly dependent on the top line. On the expense line, our current plan is to keep the current rate that we've experienced in Q1 of operating expenses to keep it through out the year and even increase -- slightly increase the expenses in the second half of the year. This would be based on taking some costs from certain areas and invest in other areas in the sales and in R&D as Haim indicated.

So, you're saying absolute expenses, operating expenses should be flattish to maybe even slightly up second half. That's what you're implying?

Yes. That's right.

So, you're really -- you talk about you're spending more but in actuality, we're going off of the 1Q level, right? Because 1Q level, I thought G&A -- what happened there? How did you do such a good job on the G&A side?

We have a very tight cost - ?

Did Haim not take a salary in March?

We also need to remember that certain expense such as legal cost, for example, last year were high. We were paying for really expensive trials that were already [certain]. We definitely saw a decrease in the level of expenses. We also cut some infrastructure, some -- also the level of the revenues and bookings, also expect the level of expenses to some extent in terms of last year, at least in Q4, we've seen some end of year payments and now it's mostly part of our expenses.

Okay. So, taking the Q1 run rate and then I'll hand it off, so you're basically implying op margins year over year should still be up even in a flattish revenue environment?

Yes.

Okay. Thanks, guys.

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

Hi, good morning. Haim, I think you were asked this question earlier but I didn't quite understand the answer. In regards to when you actually saw the weakness in the first quarter, was it sort of the second half of March or the last week of March? What sort of makes you confident that the April rebound is sustainable?

Yes. What we had seen was we traditionally, like many companies, we have a relatively significant part of the closure, the last days or weeks of the quarter and what was traditionally relatively high closure rates this quarter, due to the factors that I have mentioned was lower than what we expected. It was not dramatically lower, but still it was lower.

April in our major market was good. And again, we cannot be 100% sure that it's sustainable because as we know, this environment is very -- there's a lot of fluctuation. So far, April was good. We hope it will continue, the pipeline itself remains fairly strong compared to what we have both in the first quarter and in last year in the same time. What will be the actual final closure rates while the quarter, there is still uncertainty and therefore we have decided to take what we believe or hope is a reasonable and cautious approach.

Okay. And then regarding the rebound you saw in April, was that pronounced or noticeable for any specific applications or was that across the board?

It was across the board in the U.S., both security and enterprise, all businesses, all market segments.

Okay. And then regarding the backlog. I think last quarter you mentioned that it was two quarters worth of revenue. How much of the 2Q revenue is going to flow out of backlog? How much of that is book and ship?

Typically a major part is coming out of the backlog. That's typical. Q2 should not change dramatically the formula.

Okay. And then as my last question, around M&A, it seems like this has been something you've focused on for quite some time. Is there anything sort of in the M&A pipeline near-term? When you look at the pipeline, how do you sort of segment the larger type deals and the smaller type ones?

Obviously I will not answer your question on the short-term. It was a nice try. But what I can say is the economic environment around us led us to take I would say a very -- we looked around but obviously we took a cautious approach regarding M&A, not because of lack of opportunity. Right now, we feel that it's a more right time to take a move here and we have a very clear limit of the companies that we are targeting, both on the enterprise and security front. We know who we want, obviously we will not do a deal at all costs. It depends also on the other side and on reasonable terms. But our appetite and confidence that we want to now move forward has increased significantly.

Thank you.

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

Thank you very much. First question is on cash generation in '09. Do you anticipate generating what you did in the first quarter times four or is it going to be higher or lower cash generation on a quarterly basis?

I think the cash generation will be highly dependent on the level of -- totalized level, so it's hard to say. Overall our cash generation is somehow very close to our operating margin. The cash that would be generated would be highly dependent on the level of operating the margin we would show this year.

Okay. So, stated in another way, if you were just flat with first quarter, you generated $30 million, $32 million of cash. I think around $30 million to the balance sheet. And that appears to be near a low on an operating basis because you're saying that second quarter is going to be about the same. Third and fourth quarters you anticipate to or hope to increase. Should we be able to model that you'll generate a total of $100 million plus to your balance sheet then in '09, assuming that things don't just deteriorate awfully in the economy?

I believe that's probably too aggressive. I think that if you model the operating margin you should model the cash generation accordingly and I can't comment whether the $100 million is the right number for operating margin at this point.

Okay. The next question, tax rate was a little bit lower. Is it going to be below 18% in the year?

I believe it will be between 18% to 20% throughout the year.

Okay. And can you address the biggest sector weakness in the first quarter?

As I've mentioned, we've seen weaknesses in most businesses around the world. The area which is more than the average, if you'd like, is obviously -- not obviously -- but is in the EMEA business where there's a fairly sizable operation in the U.K. and in Europe in general. Obviously the markets there were hit quite hard. In addition to that, obviously there are some currency changes compared to last year so the combination of the two has made EMEA weaker than others although the delays that I've mentioned were relevant across the board with the exception of the three areas that I mentioned. the ACTIMIZE business, work force management, and government securities.

Okay. And those weaknesses all were on the call center side?

No. As I mentioned, it was across the board. In EMEA, in APAC. It was across the board in all businesses and regions. If you asked me which one was a little bit more than the others, EMEA represents one which is slightly weaker or weaker than the others.

Thank you very much.

[Represent] all our businesses.

Thank you.

Your next question is from Daniel Cummins of Lime Rock. Please, go ahead.

Thanks. Dafna, I wanted to ask you again about the G&A. On a pro forma basis it looks like it declined about $6 million quarter over quarter. Did you say that headcount was relatively steady quarter to quarter?

Yes.

You did? Okay. Is that the new run rate on G&A? I heard what you said about sales and marketing and R&D, Haim, but -- so all of this sort of presumes that you got today a leaner - a fairly much leaner cost structure particularly with respect to G&A. Is that they way we should look at it going forward?

Yes.

Okay. I had one follow-up related to that question on a leaner cost structure. You have a strong balance sheet. The M&A seems to have timed out. Are you willing to price much more aggressively right now in this market to maintain your growth share? Or do you geography the sense that customers wouldn't even budge if there was an induction on price?

Just so I understand the question, if we are willing to what with pricing?

Price more aggressively to maintain your growth share in this market. Looking at your balance sheet --

Okay. I understand the question. I think we have been aggressive for some time. We are typically trying to sell on value and not on pricing. We are not a commodity player. So obviously we are - basically our prices are based on our value; however, since there is customers sharing with us their pains, if needed we would also be more aggressive whenever and we have done it in the past as well.

Alright. Thank you.

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

Hi. This is [Adam Ladium] on behalf of Tom. Thanks for taking the question. It's kind of a big picture question on the competitive front. Your stance on M&A and staffing of market share seems to have grown a little more aggressive compared to the last couple of quarters. Has there been a marked change in the competitive environment for you?

Not something that is significant that we have noticed.

Okay. In terms of verticals, I know financial vertical has been strong. You said there was weakness across the board but can you provide some detail on maybe a certain vertical set where that remained strong?

Yes. The three areas that are clearly strong were our -- not so much verticals. It's more our solutions. Our solution from the regulatory front based on the ACTIMIZE technology for compliance, anti-money laundering, and fraud were fairly strong or I would say it was strong according to our plans. Our solution for the contact center industry for work force management and operational efficiency but primarily around the work force management, again was stronger than planned. And our solutions for governments to protect the national security was also strong and you've seen the increase both on the revenue and the fact that we have announced another mega deal up to $9 million for the quarter.

Across all of these, though the sales cycle did get extended?

Sales cycle growth expanded around the world in every segment but our closure rates were as we expected. That's why I'm saying that in these three areas we had performance as we wanted because the closure rate ended as planned.

Okay. Thank you.

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

Thanks. Dafna, do you have revenue in constant currency, what the revenue growth or decline was year over year in constant currency?

We don't have it as an official number but we assume that if it would have been in constant currency taking into effect the decline in the European currencies, revenue would have been either flat or slightly above.

Okay. Thank you. And then the Q2 revenue mix, would that be similar to Q1? I'd like to understand how you might be looking at the revenue mix if you can at all speak to that?

What we currently focus is the revenue, it's the approximate level of Q1 and probably if it stays very carefully in the same mix although it's early to tell.

Then, Haim, I wonder if you could just comment on your enterprise business? Has there been a change in the mix of the level of follow on business? You're gaining from existing customers versus new customer acquisition? Is there much changed in how that is playing out for you?

There was no significant change in any direction.

That's all I have. Thank you.

There are no further questions at this time. Before I ask Mr. Shani to go over closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S. please call 1-888-254-7270. In the U.K. please call 0-800-917-4256. In Israel, please call 0-3-9255-953. Internationally, please call 9723-9255-953. Mr. Shani, would you like to make a concluding statement?

I'd like to thank you all for your participation. Wishing you a good day and looking forward to talk to you when we announce our second quarter results. Thank you and bye-bye.

Thank you. This concludes the NICE Systems First Quarter 2009 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.