Nice Ltd (NICE) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the NICE Systems Q2 2012 earnings call. My name is Stephanie and I am your event manager. (Operator Instructions). I would like to advise all parties that this conference is being recorded, and now I would like to hand the call over to Marty Cohen, VP Investor Relations at NICE. Thank you.

Thank you, operator. With me on the call today are Zeevi Bregman, President and Chief Executive Officer; Dafna Gruber, Chief Financial Officer; and Eran Liron, Executive Vice President, Corporate Development.

Before we start, I'd like to point out that some of the statements made on 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 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 in the section entitled Risk Factors in Item 3 of the Company's 2010 annual report on Form 20-F, as filed with the Securities and Exchange Commission on March 29, 2012.

During today's call we will present a more detailed discussion of second quarter 2012 results and the Company's guidance for the third quarter and full year. 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 the 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. And I'll now turn it over to Zeevi.

Thank you, Marty, and welcome, everyone, to our second quarter 2012 earnings call.

Today, we reported solid results for the second quarter. Non-GAAP total revenues were $217 million, up 10% compared to the second quarter of 2011. Non-GAAP EPS for Q2 was $0.57, representing an increase of 14% compared to the second quarter of last year. Our book-to-bill ratio was 1 and our backlog is strong at more than two quarters of revenues.

At the same time, the macro environment is causing longer sales cycles. This is resulting in slower-than-expected growth in both our core and our analytics-based advanced application businesses. Therefore, we are lowering the range of our 2012 total revenue guidance. However, we are committed to profitability and through effective cost controls we expect a minimal impact on operating margin. We believe that the second half of 2012, which will be weighted more towards Q4, we will continue to deliver growth in bookings, backlog, revenues, and profitability.

We continue to see strong demand for our solutions driven by the need for organizations to improve operational efficiency, enhance the customer experience, increase customer satisfaction, drive revenues, ensure compliance and safeguard people and assets. We saw strong growth in our analytics-based advanced applications business in the first half of 2012 and we believe that it will continue to be a major catalyst for our future growth.

A key driver of the growth in our analytics-based advanced applications is that organizations increasingly understand that they are not sufficiently prepared to meet the challenges and opportunity presented to them by big data. For several years, NICE has provided best-in-class analytics solutions to help our customers extract value from structured and unstructured data. Our solutions capture and analyze data from multiple channels such as voice, text, chat, e-mail, social media, video, and financial transactions. More recently, we have extended our solution portfolio with additional real-time analytics capabilities, enabling our customers to own the decisive moment of each introduction or event.

Analytics-based advanced applications now represent over 40% of our overall nonrecurring revenues.

Let me move on to our Customer Interaction business where we continue to see strong growth in our analytics-based solutions.

We believe that the best way to help our customers achieve their business goals is through real-time cost channel analytics which deliver not only insight, but also recommendation for the next-best action to be taken. Our development efforts are focused on deeper integration between all parts of our portfolio to provide a streamlined user experience and a consolidated view of the customer across different parts of the organization.

We would like to share with you a few use cases of our solutions which demonstrate the way our solutions help our customers achieve their business goals.

One example is how interaction analytics are being deployed to ensure compliance with the requirements of the Dodd-Frank Act for transaction investigations. During the second quarter, we received orders from two of the top US banks for trading floor recording and analytics. These banks are getting ahead of the expected requirement to monitor all interactions, search specific transactions, and be able to better reconstruct the chain of events for investigation. We have deals with other major banks in the pipeline as the Dodd-Frank Act has elevated the level of global interest of our solutions.

We are also using interaction analytics to safeguard assets in a new product called Contact Center Fraud Prevention which combines our interaction analytics and financial crime and compliance solutions. This solution is based on voice biometrics and enables financial institutions to prevent fraud by matching a hold-still voice frame with an existing database of voice prints. In Q2, we won our first deal for this new solution with a top US bank after a very successful pilot in which we exceeded the customer's requirements. The pipeline for this product is growing, demonstrating the value we are providing to customers by combining the technology of our business units.

The integration of Merced is going according to plan. One of the key wins in Q2 was a performance management deal with a major APAC-based bank that was looking to transform customer experience while improving efficiency. This was the first deal, and in fact, a growing percentage of our performance management deals are SaaS.

We are pleased with the performance of our Financial Crime and Compliance business where we are seeing strong product bookings.

Regulatory pressure continued to drive demand, particularly Dodd-Frank and anti-money laundering enforcement. For example, the Senate's recent investigation into US Vulnerabilities to Money Laundering was one of the catalysts for the strong quarter we had in our AML solutions. These solutions address topics that are high on the agenda of governments and financial institutions, namely, organized crime money laundering, terrorist financing, sanctions and tax evasion. We are winning large deals from both government agencies and global banks for these solutions.

In the second quarter, the two fastest-growing segments of the market were Latin America and the US regional banks. We are seeing strong sales and large demand from US mid-market, including from new customers. Given the good health and the recent growth of regional banks, they have more money to invest and therefore they are investing in more sophisticated risk management and financial crime prevention strategies.

As we announced a few weeks ago, Operational Risk and Regulation Magazine ranked us as the number-one solution provider in both the anti-money laundering and the anti-fraud software categories of its compliance software ranking for 2012. The magazine in its survey results article confirmed two trends that we have been witnessing as well. The first, despite restricted budgets, spending on compliance is still healthy thanks to the growing regulatory requirements for transparency, reporting, and consistency. The second, there is a long-term trend towards standartdization across business lines which improves oversight and financial crime prevention and reduces operational cost.

Let me move on to our Security business we had strong bookings in the quarter.

Also here, the strength in bookings is coming from our analytics-based solutions in both our Communication Intelligence and Surveillance businesses. We had strong bookings in our Communication Intelligence business as government agencies worldwide are investing in technology by buying sophisticated analytics solutions to prevent crime and adapt to the cyber era. Demand is coming from both developed countries and emerging markets.

In our Surveillance business, we are expanding the operational use cases for Situator and had several exciting wins in this area. The first is an expansion at Los Angeles International Airport, an existing Situator customer who has been using it to manage security and safety events. After the success of our solutions for managing safety and security, the airport decided to extend the use to manage its daily operations as well.

The second is a large deal with a major North American mass transit agency. This deployment will be one of the largest and most complex PSIM projects we are aware of. We believe that one of the factors behind our success is that we are a product-based solution provider as opposed to being purely professional services based. A few years ago, this agency contractor for a nine-digit deal with a system integrator to build a PSIM solution. Nevertheless, the agency chose to replace this partly-delivered system with our solution, as we were able to prove that our deployment would be faster while meeting all the necessary requirements. Given the magnitude and complexity of this project and others like it, we believe our solution strikes the right balance between sophistication and agility.

In closing, while growth in 2012 will be lower than originally expected, we remain confident about our growth opportunities going forward. We expect a stronger second half of the year and continue to target double-digit growth over the long term. Our growth is driven by a unique and broad portfolio of solutions to address the big data opportunities available to organizations worldwide. Our capabilities around big data encompass an industry-leading portfolio of analytics-based advanced applications. These applications enable our customers to analyze the complete lifecycle of interaction or event and are a powerful driver of demand.

I would like to thank the NICE team for their work during the quarter. I will now turn the call over to Dafna Gruber our CFO. Dafna?

Thank you, Zeevi. I'm pleased to provide you with an analysis of our financial results and business performance for the second quarter of 2012 and our outlook for the third quarter and full year.

Revenues for the second quarter reached a record of $217 million, up 10% from $197 million in Q2 last year. Our enterprise business revenues totaled $172 million, up 16% from Q2 2011. Of that total, Customer Interaction revenues were $140 million and financial crime and compliance revenues were $32 million. Security revenues were $45 million compared to $48 million in the second quarter of last year. As in the past, security revenue continues to be uneven on a quarterly basis because of the nature of large projects involved and, therefore, should be measured over time. Q2 was a very strong booking quarter in security and we believe this business will grow in line with the rest of the business in 2012.

Moving to the regional breakdown, revenues in the Americas in the second quarter of 2012 increased 6% to $132 million compared to the second quarter of last year. Revenues in Europe, Middle East and Africa increased 10% to $55 million compared to Q2 of last year. And revenues from the Asia-Pacific region were $30 million, up 32% from Q2 2011.

For the second quarter, America region accounted for 61% of total revenues, EMEA at 25%, and Asia-Pacific at 14%. Product revenues in the second quarter accounted for 41% of total revenues, while maintenance represented 36% of total revenues and professional services accounted for the remaining 23%.

The 2012 second quarter gross margin reached 66.1% compared to 64.9% in Q2 last year.

Our operating margin for the second quarter of 2012 was 18.8% compared to 18.3% in the second quarter of last year. We continue to focus on operating margin expansion and expect that our operating margin in the second half of 2012 to be higher than in the first half.

Second quarter 2012 net income increased 10% to $35.7 million compared to $32.3 million in Q2 last year. Second quarter 2012 fully diluted earnings per share was $0.57, which was an increase of 14% compared to $0.50 in Q2 2011.

Cash flow from operations was $12 million in the second quarter, bringing first-half cash flow from operations to $82 million and similar to cash generated in the same period last year.

Our total cash and financial investments were approximately $439 million at the end of June with no debt.

Headcount at the end of the second quarter totaled to 3360 people compared to 3010 at the end of June 2011 and 3125 people at the end of December, 2011.

During the second quarter, we paid $20 million, the remaining conditional payment in the acquisition of Merced. In the second quarter, we also paid about $30 million to repurchase approximately 800,000 shares as part of our share repurchase plan. For the first half of 2012, we repurchased a total of 1.8 million shares for $66 million. And since we began repurchasing shares in 2011 and up until the end of Q2, we have bought back a total of approximately 4.8 million shares for $162 million.

Turning to guidance, please note that both the third quarter and full-year guidance take into consideration the share buyback executed so far but excludes future buybacks that may be executed going forward.

We expect third quarter 2012 total revenues to be in the range of $217 million to $225 million and fully diluted earnings per share to be in the range of $0.56 to $0.60. We now expect total revenue for the full year 2012 to be in the range of $890 million to $910 million and fully diluted earnings per share to be in the range of $2.28 to $2.38.

That concludes my comments. I will now turn the call over to questions. Operator?

(Operator Instructions). Daniel Ives.

Yes, my question is, just given some of the headwinds you're seeing, just compare this to what you guys have seen in past downturns, maybe compare and contrast.

Dafna, maybe you will comment because you were here on the previous downturn.

Yes. I think that what we've seen in general is a certain slowdown in our ability to conclude deals. We have a strong pipeline. We had a good booking quarter in Q2, but it is not as we wanted it to be. And also, going forward we see a strong pipeline, but we had to adjust our expectation regarding the deal closure.

I think that in the previous downturn, we've seen a certain rebound at the end of the year because our systems are very critical for our customers. I think that now again, the systems are very critical, but at this point in time, we feel that we need to take a more conservative approach regarding the rest of the year. We do see a strong pipeline, and because of that we believe H2 will be stronger than H1.

Maybe on that, there is a fundamental difference between this macro economy and the 2009, and in this one we are expecting and our expectation is to continue to grow this year, but on a slower pace. So we believe that we are going to grow in 2012 and that we are seeing pipeline and evidence of that.

Okay, thanks.

Shyam Patil.

In terms of the expectations for the second half, were there any -- among the three areas that you guys break out -- customer interaction management, Actimize, and security -- any one of those areas in particular where you cut your expectations more than the others?

No, I think that this is across the different lines, maybe with the exception of Actimize, where we expect a double-digit growth this year.

Okay. Have the expectations for Actimize changed from what you stated last quarter in terms of sequential growth throughout the year and (multiple speakers).

No, they didn't change.

Got it. And with the stock off pre-market, can you maybe talk about whether or not you'd consider raising the buyback authorization?

We currently have a plan for -- that we announced $100 million of additional plan. We executed until the end of the year quarter, about $60 million of the -- we have $40 million to go. When we complete this $40 million, we will announce our plans going forward.

Okay. And this is my last question. Zeevi, in your prepared remarks, you talked about analytics being, I think you said 40% of nonrecurring revenue. Just wondering how big that is on an absolute basis and what exactly you guys include in your definition of analytics. Thank you.

I don't want to make the math, but you can make it, because we extracted what is our maintenance business. So I think the math can be done. I don't want to do it without checking it first.

Regarding what it includes, it includes our analytics solutions across the business line -- in the enterprise space, in the Actimize and in the security.

In order to be maybe a little bit more concrete here, on the customer interaction business we are talking about all analytics-based applications starting with the interaction analytics, performance management, real-time guidance and feedback and all analytic-driven applications. We look at the whole of the Actimize business as analytic-based because it's all based on analytic tools. And certain activities within our security which relates to video analytic, situation management capabilities are also part of our measurement of analytic-based applications.

Got it. Thank you.

Daniel Meron.

First of all, can you discuss the linearity in the quarter? When you started noticing the macro impact, when was that? Was it -- I may have missed it in the prepared remarks. Was it related to any specific segment, region, or any type of customer? Thank you.

I think that most of -- when we noticed it, we noticed it by booking. And what we have seen, and this is something that we have finally saw at the end of the quarter, is slippage of deals on the second quarter towards the third quarter, that quarters in -- we planned to have this booking coming in the quarter and they were slipped, which is something that you can see when the environment, spending environment is deteriorating. So we saw an extraordinary number of deals that are being slipped from Q2 forward.

Since the quarter ended, did you see them come back, or what has happened since then? Do you see that your competition is faring in the same way, or did some deals close after more pricing concessions or going to the competition? How is the internal execution compared to your expectations?

No, I don't think that there is -- I don't think that we lost any -- these are not deals that lost; they are deals that slipped. If we lost to competition, they would not be on the slippage. Some of them we closed early in the quarter, but not all of them, but some of them were closed early in the quarter.

And in terms of the business, we have a very strong pipeline. This year, it is more than before, and this is because the move to the applications space, it moves more to Q4, and it is very back-ended in terms of Q4. And overall there is a strong pipeline and we believe that a lot of this pipeline will materialize because there is a demand, a strong demand also on the executing level for these type of solutions.

Okay, and then how did the internal changes in the sales team and the move into US, the top 60 account management, impact execution during the quarter or towards your target? And how did Actimize fare through this?

If we look at the changes that we spoke about last quarter on the sales force, we are progressing according to plan. A pipeline is being built. Part of this pipeline will translate to booking in Q3, part in Q4 and part next year. But we are continuing the plan on building a relationship and the account management practice within the largest accounts globally.

Okay. And then, as I do the math, ex the acquisition of the thing that is combined a -- add up to about $70 million between Fizzback and Merced ratably, I think that the underlying organic growth is closest to those single digits unless my math is wrong. But can you explain how you think that the long-term targets are impacted? Do you think that there is any change to your long-term plans as far as top-line growth and operating margin expansion? Thank you.

Obviously, first in terms of the acquisition, the impact on the acquisition is really similar to the rest of the business. So the question of organic growth should take it into account, and therefore we believe that the organic growth is mid-single digits, the way that we calculate it.

And when it comes to the question about the long term, we believe that it will grow and each business will grow in double-digit. Obviously, the slower growth this year will have an impact on us on the coming year and -- some impact on the coming year.

In terms of expansion, our model didn't change. And with each -- and we have leveraged the model and with each dollar on organic growth, we expect to have at least $0.25 of leverage.

Okay, thank you. Good luck.

David Kaplan.

Zeevi, you talked a little bit about the sales cycle and it's a little -- I guess longer that it has been in the past. Can you talk a little bit about what that change has been, how much visibility it gives you? And then in terms of thinking about that, where you talked the back-ended sales in Q4; given that new visibility, what is the risk that some of that is going to slip into Q1?

When we are looking at our model, we already -- we have a more cautious model and we have -- we are expecting -- we adjusted our conversion rates to the conversion rates that we are seeing. So this is part of the result of it that is reflected in our guidance for the year. So it's not -- we're giving what we believe is more cautious as opposed to a more realistic outlook taking into account the conversion rate and the macro -- the spending environment.

In terms of the pipeline, the pipeline is very big and very strong. We believe that part of it will materialize. We expect that part of it will be materializing in the third quarter and in the fourth quarter. However, again, we factored in a lower conversion rate than before.

Okay. And I think you've made it clear that the macro slowdown or impact that you're seeing is across the board, but if you just think about it in terms of geographies or in terms of verticals, are there any differences that are important -- that we would be able to figure out because -- given the granularity around the type -- the reporting you guys give at least in the press release, is there anything deeper that we can get to to get a better sense of really what's going on there?

First, as you can see from the report that we had a very strong quarter in APAC and we don't see a slowdown in APAC. So you can -- this is also reflected in the breakdown, the geographical breakdown. I mean we -- it's very difficult for us when we are looking at the numbers and the number of flow and looking at the quarter is to call global trends based on the business that we are making. So, overall, it seems like across-the-board and in all different -- across the board in terms of business line and geographies, everything that we are still -- and we said we are still seeing major growth, maybe smaller than we originally expected in our advanced applications business.

Okay. Thanks very much.

Paul Coster.

It's Mark Strouse on for Paul. Most of our questions have been asked, but I just wanted to talk about how you guys are prioritizing uses of cash. I mean, should we expect continued buybacks? How do you prioritize that versus M&A, particularly if the macro weighs on some of the valuations that are out there?

We are constantly looking at the acquisition opportunity. We are looking at the value and the quality of the business and the synergy to our business and the strategic fit. And when there will be -- once we -- we can reach an agreement, we are acquiring companies and we are going to continue to do that.

In terms of the buyback, we have -- until the end of the quarter, we spent $60 million, slightly more than $60 million of the $100 million announced plan. And once this plan will be completed, we will announce the -- our plan for the future.

Okay, thank you.

Jonathan Ho.

Can you talk a little bit about the competitive environment and whether you're seeing any changes out there or any pricing pressures or anything, just given a tougher macro environment?

We are operating in competitive markets and this was that way in the past and it has continued now. There are no extra -- we always have some pricing pressures, but I don't think that there is anything extraordinary.

Okay. And then just in terms of some of the deal pressures that you guys are seeing in terms of the push-outs, can you maybe talk about what that specifically is coming from? Is it more delays in approvals? Is it more budgetary pressure? Just want to get a sense of across some of the push-outs that you're seeing, what the drivers are there?

It's a combination of some budgetary pressures and some approvals and internal processes. It's a combination. There are some -- when you go case-by-case, you see that the stories are similar, that there is additional processes to be filled and additional proof points that has to be given and additional internal processes that we have to follow.

Got it. And I know you guys don't give guidance for bookings, but just from the perspective of the second half, would you expect the book-to-bill to stay above 1, just broadly speaking?

The book to bill -- we believe that the book to bill will stay above 1 for the year, for sure for the second half, but also for the year.

Great. Thank you.

Michael Kim.

Could you talk a little bit about your level of visibility in security? Dafna, you mentioned some larger projects coming in the pipeline and the impact on the timing of the revenues. Is it your sense that Q3 looks a little bit more like Q2 and we should see most of (multiple speakers) revenue in Q4?

In terms of security, what we have said is that we have growth from large projects in Q2 or some large deals. It was a strong booking in the second quarter. And these are the revenue recognition of these deals will be over time. It still has an impact, but not a major impact on Q3. But down the road, it's a very positive trend.

And when we look at the pipeline, we also see a very strong pipeline for our support -- security product. But these will -- I'm not sure that we mentioned it on the script, in particular; we said more in general.

Okay, and then specific to Situator, you talked about some more diverse use cases. Are you seeing that with other customers inquiring about additional use cases beyond safety and security?

No, what we have seen and this is what we tried to give two examples on the call, is that people are looking at the Situator first for security and they are moving it to being more operation and specifically an operational risk platform.

Okay, great. Thank you very much.

Thank you. There are no more questions at the moment.

So thank you, everyone, and have a nice day. I would like to thank you for participating in our call.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.