Nice Ltd (NICE) 2013 Q2 法說會逐字稿

Welcome to the NICE Systems conference call discussing second quarter 2013 results, and thank you for holding.

All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded, August 7, 2013.

I would now like to turn this call over to Mr. Marty Cohen, VP Investor Relations at NICE. Please go ahead.

Thank you, operator. With me on the call today are Zeevi Bregman, President and Chief Executive Officer, and Dafna Gruber, Chief Financial Officer.

Before we start, I would 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 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 in the section entitled Risk Factors in item 3 of the Company's 2012 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 25, 2013.

During today's call, we will present a more detailed discussion of second quarter 2013 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 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.

I'll now turn the call over to Zeevi.

Thank you, Marty, and welcome, everyone, to our second quarter 2013 earnings call.

We delivered solid results for the second quarter. We continued to execute on our strategy, and we are well-positioned for a strong second half of 2013.

Non-GAAP total revenue for the second quarter was $225 million, up 4% compared to the second quarter of 2012. Non-GAAP EPS for Q2 was $0.61, representing an increase of 7% compared to the second quarter of last year.

The highlight of the quarter was the strong growth in new booking of our advanced applications, including some very important deals that we will discuss later in more detail. In the second quarter, new orders of advanced applications grew more than 20% compared with last year's second quarter, and represented nearly 50% of total new bookings.

The strong growth of our advanced applications is the result of our continued successful efforts to expand our offering to our existing customer base with our growing portfolio of advanced applications. One of our key assets is our more than 25,000 customers, including some of the largest and leading organizations in each vertical that we serve.

We continue to partner with them, as they take on additional NICE solutions to help them ensure compliance, enhance operational efficiency, increase revenues, improve the customer experience, and safeguard people and assets.

The increase in new bookings of advanced applications was also reflected in the strong growth of our cloud solutions. We will continue to expand and enhance our cloud offering, which reflects our commitment to our customers by offering them additional value and flexibility.

The consistent and rapid growth that we have seen in our advanced applications is the result of the growing demand from our customers to unlock the value of the Big Data being generated by the consumers of these same organizations. This growing demand has led us to focus on innovation and acquisitions that help us continue to expand and enhance our portfolio of advanced applications, and our Big Data platform and technology, specifically our Customer Engagement analytics platforms which we spoke about last quarter.

Our Customer Engagement analytics platform provides our customers the ability to improve customer experience and business results by better understanding their customer's behavior and preferences, with our cross-channel analytics solutions that sit on top of the platform. This platform takes full advantage of Big Data by leveraging the Hadoop infrastructure, as well as having predictive capabilities.

We are enhancing the capabilities and accelerating the parts of the development of our Customer Engagement analytics platform with the acquisition of Causata, which we announced earlier today. Causata is a provider of Big Data real-time and predictive analytics technology focused on the Web channel.

From our own survey, as well as from our customer feedback, we know that more and more consumers are accessing the company website before or even during their call with the contact center. Still, many organizations are managing their customer touchpoints in silos.

The integrated solution from NICE and Causata will provide greater visibility into the consumer's activities on the Web, and will enable our customers to provide a seamless customer experience across the Web and the contact center. In addition, Causata's Hadoop-based predictive analytics and machine learning capabilities will allow us to further enhance our real-time decisioning and guidance capabilities.

In our Customer Interaction business, the second quarter was characterized by strong bookings in advanced applications, and more specifically, by an increasing shift towards deals where multiple applications was sold, rather than just individual products. This shift is a result of an increasing number of customers, especially in the Americas, looking for solutions to transform their organization around CEO-led initiatives, like ensuring compliance, improving customer experience, and improving operational efficiency.

Our solutions, which are tied to our customer's operation, enable the organizations to align the company around common goals and measurements, help drive cultural changes, and our critical components in providing the analytics and decisioning required for the transformation.

An example of one such transformational deal that we won in the second quarter was with a North American telecommunication company. The deal was around an initiative to improve customer experience. The deal, with a total contract value of 8 digits, included our Customer Feedback Performance Management, Real-Time Process Optimization, and Incentive Compensation Management solutions.

While each product was selected based on its specific capabilities, we demonstrated the significant value of a combined suite in aligning the entire organization to help improve customer experience. This was a key differentiator for us in this competitive win, and a reason that we replaced a number of incumbent solutions.

In addition, the above deal-win demonstrates that improving customer experience is garnering rapidly increasing attention among our customers, and further validating this was the Q2 bookings growth in our Voice of the Customer solution, and the growing interest in our Customer Engagement Analytics and our Real-Time Authentication solution.

Another initiative that continued to gather momentum is around compliance and regulations. There are increasing regulations around swaps, risk limits, fee disclosures, and major interest rate benchmarks, to name just a few. In addition, there are continued enforcement actions by the CFPB- a regulatory body formed under the Dodd-Frank Act. Moreover, with the Senate's confirmation of the CFPB agency's director, CFPB enforcement activity is expected to substantially increase in the immediate future.

Our proactive compliance solutions are meeting the needs of the growing regulatory environment and helping our customers transform their trading floor and contact center operations around compliance. The solutions that form the suite embrace our capture, analytics and real-time technologies, addressing all parts of the compliance operation. This includes data collection, historical record-keeping, data retrieval, call and transaction analysis, customer profiling and reports of corrective actions.

We are seeing good traction for these solutions, and we secured our first deal for retail banking proactive compliance from a major US bank.

And then there is the transformations we continue to see around operational efficiency. This has led to multiple application sales within our workforce optimization portfolio of solutions like in the deal win I spoke about earlier. And, to further strengthen our capabilities around employee engagement, which is critical for these transformations, during the quarter, we added collaboration and gamefication features into our product portfolio.

Our leading industry position is reflected in the new 2012 market share report by DMG Consulting, where NICE was recognized as a leader in Contact Center WFO for the third consecutive time. Maintaining our leading position and growing our market share are only possible thanks to our ability to deliver to our customers solutions that address their actual business needs.

In our Financial Crime & Compliance business, we posted a strong quarter of double digit growth in booking. The strong performance continues to be driven by significant regulatory activity, investigation and continued fines on banks and other financial institutions. One example of a new regulation is FATCA. While the effective date for FATCA was pushed back by six months to mid-2014, during the quarter, we added two more deals related to this new regulation. One deal was with a US financial institution, and the other was with an international one.

As the regulatory climate continues to intensify, institutions continue to look for new and more efficient ways in which packaged software can help them prevent financial crime, and comply with regulations. Fraud remains a key focus area for our customers, and we continue to see increase in the growth of our fraud solutions. In fact, we were positioned as the category leader in the 2013 Chartis RiskTech Quadrant for Enterprise Fraud Management solutions for financial services.

Also stimulating demand among financial institutions is the need to consolidate global risk management. Customers are striving for consistency in approach, which is often required by the regulators, as well as cost reduction. This has led to increasing sales for our Enterprise Risk Case Manager solutions, which provide a holistic and coordinated approach to case management and investigations throughout the global organization.

And last, in our Security business, we saw strength in the banking and in the critical facilities verticals. We continued to expand our banking video solutions internationally, as we won a deal to deliver our branch banking video module to an international bank. This is a module we introduced about a year and a half ago, which includes new capturing devices tailored for ATMs and branches, and multisite management dashboard, and a smart ATM integration.

In the Critical Facilities vertical, we were chosen to implement NICE Situator at a large Built-Operate-Transfer project for a new military training center. An alternative was considered, which called for the system integrator to develop a PSIM solution from scratch, yet we were able to convince the integrator that our solution provides a higher return on the investment, while meeting the high security needs. Once again, this serves as a proof for the validity of our "solution" approach, and its advantages over custom deployment.

In our Intelligence business, technological challenges continue to drive governments to be more open to external solutions. As a result, we continued to see demand for Target 360, our intelligence flagship solution. Target 360 is a unified platform for communication interception, voice and data pattern analysis, and investigation. It helps our customers fight organized crime, drug trafficking, terrorism, and other national security threats.

In summary, we reported solid results for the second quarter, which was marked by strong new bookings growth in our analytics-based advanced applications. As a result, we believe we are well positioned for a strong second half of the year. The bookings growth of our advanced applications is the result of the increasing demand from our customers to operationalize Big Data.

We continue to focus on innovation to further expand and enhance our Big Data platform in analytics, and our portfolio of advanced applications, so that we can continue to deliver great value to our customers.

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

Thank you, Zeevi. I am pleased to provide you with analysis of our financial results and business performance for the second quarter of 2013, and our outlook for the third quarter and full year.

Revenues for the second quarter were $225 million, up 4% from $217 million in the second quarter of last year. Customer Interaction revenues were $146 million, up 4% compared to $140 million in Q2 last year. Financial Crime & Compliance revenues were $34 million, up 7% from $32 million in the second quarter of last year. Security revenues were $45 million, up 1% from the second quarter of last year.

For the second quarter, Customer Interaction accounted for 65% of total revenue; Financial Crime & Compliance, 15%, and Security, 20%.

Looking at the regional breakdown, revenues in the Americas increased 2% to $135 million, compared to the second quarter of last year. Revenues in EMEA increased 2% to $56 million, and revenues in Asia/Pacific region increased 14% to $34 million, compared to the second quarter of last year.

For the second quarter, the Americas accounted for 60% of total revenues; EMEA 25%; and APAC, 15%.

In the second quarter, product revenues accounted for 37% of total revenues, and maintenance represented 39% of total revenues. Professional services, including SaaS and hosting, accounted for the remaining 24%.

Gross margin reached 66.9%, compared to 66.1% in Q2 last year. Operating margin reached 19.4%, up 60 basis points from 18.8% in Q2 last year. Earnings per share was $0.61 in Q2, representing an increase of 7% compared to $0.57 in Q2 2012.

Second quarter cash flow from operations was $35 million, compared to $12 million in the second quarter of 2012. In the first half of the year, we generated $93 million cash from operations, which is a 14% increase compared to the first half of 2012. Our total cash and financial investments were approximately $503 million at the end of June, 2013.

Headcount at the end of June totaled 3,450 people, compared to 3,360 at the end of June last year, and 3,399 people at the end of December, 2012.

During the second quarter, we paid about $15.3 million to repurchase approximately 425,000 shares as part of our share repurchase plan. In line with our dividend plan announced in February, NICE's Board of Directors approved a dividend payment of $0.16 per share. The record date is August 22, 2013, and the payment date is set for September 9, 2013.

As you know, we just announced today the acquisition, the technology acquisition of Causata. As a young, startup company operating in a SaaS model, the acquisition will have a very negligible impact on 2013 revenue. We expect the acquisition to be slightly dilutive to the third quarter 2013 earnings per share, and have no impact on fourth quarter profitability. And we are not changing the range of our full year 2013 earnings per share guidance.

We expect the third quarter 2013 total revenues to be in the range of $225 million to $240 million, and fully diluted earnings per share to be in the range of $0.56 to $0.66. We have not changed our annual guidance. We continue to expect total revenues for the full year 2013 to be in the range of $940 million to $970 million, and fully diluted earnings per share to be in the range of $2.55 to $2.65.

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

Yes. Ladies and gentlemen, your question and answer session will now begin. (Operator instructions) We do have our first question, and it comes from the line of Shaul Eyal from Oppenheimer. Please go ahead, Shaul.

Thank you, operator. Good afternoon, everybody. Zeevi, with all the good news about contract wins and booking levels, I believe that the Company last quarter, I'm thinking you talked about booking levels of around -- exceeding fiscal 2013 with booking levels of around $1 billion, or even above that. Are you still holding to that view?

Yes. We forecast to end the year with more than $1 billion in booking.

Got it. Thank you for that. Dafna, the product, this -- this quarter, kind of a little soft, when I'm looking at my model. What's behind it? Is that just a product mix? It's just -- is it just going to be one-off, or is it more of a trend that we should be expecting for the second half of this year?

Yes, it's basically a combination of the two. There is an impact of the business mix on that specifically in this quarter, but we also need to remember that because of the complexity of the advanced applications we are selling, there's more professional services, and so we see gradual change in the ratio of products to professional services. That's one thing.

And also, as we've mentioned in the past, the lag time between booking and revenue is lengthening due to the growth we have seen in advanced applications, and these deals, because of their complexity, take longer to recognize. And this is the main reason we are seeing more seasonality weight at second half, and especially Q4. And the impact is mainly -- and the greatest on the product revenue element.

Got it. So as we think about the second half, with respect to the product line, are we still expecting growth for products -- let's say, second half over first half?

We expect a growth in products second half over first half. But there are -- this is at least one additional component, which is very positive, and it does not even mention -- and this is the uptick in our cloud business. The cloud business is categorized as services, and not a product, and there is a certain cannibalization here.

Got it. Maybe one final question, if I can squeeze in. Zeevi, with the technology acquisition that you did this morning, can you maybe explain to the audience on how that kind of bodes and kind of fits with -- respect to the remain of your Big Data strategy, so to speak? Thank you.

This is enhancing and expediting some of the implementation and deliveries within our Big Data strategy. As we are -- understand from our customers, there are more and more cases where people are calling the contact center after visiting or browsing the website of an organization. And actually, we are hearing from our customers even that they are doing it while -- now, still browsing the website while calling the contact center.

And what the technology of Causata is enabling us is to really integrate the two worlds, and provide a seamless customer experience from the Web to the human channel, if it's a call contact center or a store. And we can look at the customer journey, understand what are the recent activities that the customer has done or is still doing on the Web, and tailor the service throughout the call to the right agent, and improve the overall customer experience and the business results of our customers.

Thank you. That's helpful.

Thank you for your question. The next question comes from the line of Daniel Ives from FBR Capital Markets. Please go ahead.

Hey, guys. This is actually Jim, for Dan. I guess, could you guys just talk a little bit about the Actimize business, and just general trends you see in there, in the regulatory environment?

Yes, sure. Actimize is enjoying the wave of the regulation that is coming on. When we are looking at the business, we can see that the -- went back to growth in the first quarter, in this quarter, in the first half, and we're also seeing the booking is solid. And the growth is coming mainly from around the regulations, and around understanding that there is a need to streamline the activities and make them really an enterprise-wide offering and an enterprise-wise technology.

So if you are looking at regulations, Dodd-Frank -- and preparations for Dodd- Frank has a positive impact on our activity, specifically other regulations like FATCA is being implemented. AML is -- we usually characterize it, but it's basically regulated-driven. So we are seeing a strong demand there as well.

And when we look at the international market, the regulations in the groups like EFMA in Europe are also affecting areas like intraday, where we have a very unique technology. So we are still looking for a very strong demand on these areas.

The other area that we are seeing demand is to the Enterprise Risk Case Manager. The Enterprise Risk Case Manager is a tool that is deployed enterprise-wide, and enabled to do investigations. Of course, the organization collects data across the organization. We are seeing more and more enterprise-wide deployment of this tool. We're also seeing in other areas of Actimize from a growth in activity, and this is around fraud. And managing fraud on an enterprise-wide solution.

Okay, thanks for that. And just getting back to your acquisition, with respect to M&A, are you guys still interested in looking at other things at this point, and what would be the focus?

We believe that we can complement our innovation and our growth with the growth that is coming inorganically and from acquisitions, those innovations that can come from acquisitions. As a result, we continue to look at the companies and businesses that will complement our business.

We continue -- there are no major changes in this strategy. We continue to be looking carefully about valuations, looking carefully about strategic feed, chance of integration, and the overall long-term return to the shareholders of these acquisitions.

Thanks very much. Good luck going forward.

Thank you for your question, Daniel. The next question comes from the line of Jonathan Ho from William Blair. Please go ahead.

Good morning, guys. Just wanted to get a sense of the macro environment, and whether you could talk a little bit about deal closure rates, as well as the pipeline of opportunities.

If we look at the global macro environment to the extent that we can measure it, then we are a small company in a large world. But the way that we can measure it, we are seeing signs of improvement in the US, and maybe we are seeing Europe is stable, but we have a good business in Europe, and we believe that there, we will grow this year, and the APAC is okay.

When it comes to specifically, we are -- early in the quarter, we saw some softness in the public sector in the US, and I think that it has recovered in the second half of the quarter.

Got it. And just in terms of the deal closure rates, have you seen customers start to normalize in terms of that, or is it still a relatively challenging environment there?

The environment is still challenging. However, there is no deterioration, so it's really already within our model and the forecast of our salespeople.

Got it. Just in terms of the analytics side, are you seeing sort of an uptick there now, in terms of an increase of the percentage of your revenue that's coming directly from these advanced analytics solutions? Or is there any sort of metric that you can give us, in terms of what that might be looking like today in terms of contribution?

We are not envisioning contribution. What we are highlighting is the percentage of new business that is coming from advanced analytics based solutions. We said it would grow 20% compared to the second quarter of 2012, and it's now representing around 50% of our overall new business.

Great. Thank you.

Thank you for your question, Jonathan. The next question comes from the line of Greg McDowell from JMP Securities. Please go ahead, sir.

Great, thank you very much. I was hoping to drill a little bit into the Causata acquisition that you made. And I was wondering first, do you share any customers with Causata, and could you maybe talk a little bit about their customer base and what sort of goals they focus on? Thanks.

They have several customers. We -- I believe that we do not -- we are not sharing customers at the moment. We do share some customers that are in their pipeline. So some of their pipeline customers are existing customers of ours, and this is the deal. If you can repeat your -- the second part of your question?

Oh, it was the vertical component of Causata. Were they focused or strong in any particular verticals?

It's -- I don't think that there is a particular sector that they are strong. It's more that they are -- the strength is there with -- in the Web. It's more a horizontal offering within the Web domain. So it's in the website. And this is something that, for us, we are integrating, and this is how we are generating the value.

Great, thank you. And one more quick question, and I know you don't like to give the book-to-bill metric on a quarterly basis anymore. Are you still pretty confident that, for the full year, your book-to-bill ratio will be greater than 1?

Absolutely.

Great. That's all I have. Thanks.

Thank you for your question, Greg. The next question comes from the line of Matt Hedberg from RBC Capital Markets. Please go ahead.

Thanks for taking my questions, guys. Just looking at sort of the full year and Q3 guidance, I think at the midpoint, if my math is right, it looks like it would assume about 17% sequential growth in 4Q. It's a little bit above your -- call it your 3-year average, maybe closer to 7%. And you've mentioned, you know, whether it's strong bookings in advanced applications, cloud solutions, maybe the US government or the US vertical improving.

But I guess I'm wondering, are there any large deals in your pipeline, maybe in 4Q specifically, that gives you increased confidence in that kind of growth?

Correct. We have a very healthy pipeline for Q4, including several large deals.

That's helpful. And I think, Zeevi, you mentioned, customers are buying multiple apps today, versus maybe individual products. Is there any way that you can help us understand maybe how many apps the average customer is buying today, versus maybe a year or two ago?

It's really -- it's not -- if you look at the large deals that we closed this quarter, and we're analyzing them one by one, we can see that each of these deals, it was based on a solution or a platform that is a combination of several solutions that are tied together.

So -- and more -- and the solutions are more holistic in terms of the use case that they are serving. And it's difficult to measure it on a percentage, as we -- we still have a lot of small businesses that are single product, single solution, within each quarter.

Great, thank you.

Thank you for your question, Matt. We have another question, and it comes from the line of David Kaplan from Barclays. Please go ahead, sir.

Hi, everyone. Zeevi, you just touched on what I guess we would call a bundling of product. Can you talk a little bit about cross-verticals? Are there particular verticals where you see more applications purchased per customer, or are there -- I guess, talk about verticals a little bit. Start with that.

We are -- it's actually, it's interesting, because the verticals are pretty much aligned to the different use cases that we are delivering. We are seeing a strength in the telco market, and this is mostly around customer experience. And so the telcos, solutions in telco for customer experience, we are seeing strength. And when it goes to the financial sector, we are seeing increased interaction and in business around compliance solution, and also, some customer experience initiative.

So this is these two areas. And e-payment is, again, around customer experience, and sometimes operational efficiency. And I guess these are the main verticals.

So just to clarify, are you seeing more applications purchased per customer, or is it just the verticals seems to be widening?

No. When we are providing a customer experience, we are -- the way that the -- what we are seeing is that we are addressing more and more a transformation in the customer that are led by executive -- sometimes it's CEO, sometimes it's the COO -- led initiative. For example, around customer experience. And then, what they -- we look for us into our business consultant, how can we help them to improve the customer experience in transformational way?

So it goes to how we should look at them pre-engagement and making sure that the employees are engaged in the working measure, and working in this area. We are looking at, that the employees are compensated in this area. We are looking that the entire organization is measured around the KPIs that are required to make this transformation, and we are providing the analytics and the decisioning that is required to this transformation to take place.

All this together is a combination of different products that are integrated, and these are creating the transformation within the customer environment.

So the -- moving more to a such transformation, in terms of the value proposition, is basically increasing the volume of the -- the size of the deals on one hand, and also increasing the number of products that we are tying together in order to provide a solution to the customer.

Okay, and this is probably going to be for Dafna a little bit. How does the -- how does that business change? First of all, how does it impact renewal rates of contracts, once the year, two years of the original contract runs out, and how are those renewal rates, one? And two, how is that going to impact, or will that impact the balance sheet or deferred revenues going forward?

So first, in terms of -- some of these solutions, whether they are cloud based or solve them on premise, when we are looking overall in the renewal rate of our -- both on the recurring maintenance, and on the SaaS, it's very high. It's in its 90s. So we are -- we have a high renewal rate. And the fact that we have -- we are tied more and more into the operations of our customers means that our solutions are more sticky. And we expect -- we are generating also more value. And we don't expect to see any change in the renewal rate.

Okay. And on the balance sheet impact, Dafna? Anything?

The balance sheet, the SaaS business has a certain impact on the balance sheet. Depends on the structure of the deal. I don't expect any major impact on the balance sheet.

Okay, great. Thanks.

Thank you for your question, David. There are no further questions on the audio platform.

Thank you, everyone, for joining us today, and have a nice day.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining. Have a great afternoon.