Nice Ltd (NICE) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NICE Systems conference call discussing fourth quarter and full 2013 results. And thank you, all, for holding.

(Operator Instructions). As a reminder, this conference is being recorded, February 5, 2014.

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

Thank you, operator. With me on the call today are Zeevi Bregman, President and Chief Executive Officer; Dafna Gruber, Chief Financial Officer; Eran Liron, 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 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 fourth quarter and full year 2013 results and the Company's guidance for the first quarter and full year 2014. 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 differs 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 difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release.

And now I'll turn it over to Zeevi.

Welcome, everyone, to our fourth quarter and full year 2013 earning call.

We are pleased with the very strong finish to 2013 in both booking and revenues, which was driven by continued market demand and the strong performance of our analytics-based, advanced applications. We reported revenue growth in all business segments and geographies for both the fourth quarter and the full year. In our Financial Crime & Compliance segment, we reported 55% revenue growth for the fourth quarter and nearly 30% revenue growth for the full year. Our booking surpassed the $1-billion mark for the first time, which represented a double-digit growth compared to 2012 and resulted in our book to bill ratio being greater than 1 for the year.

Non-GAAP total revenues for the fourth quarter were a record $271 million, up 13% compared to the fourth quarter of 2012. Full year, non-GAAP revenue increased 7% to $951 million. Non-GAAP EPS for Q4 was $0.75, and full year non-GAAP EPS is $2.58.

In 2013, we continued to further execute on our strategy, while making significant advancement in technology to help provide our customers with the capabilities to better operationalize big data and transform their businesses. With our analytics-based, advanced applications, real-time solutions, cross-channel analytics, and our solutions that support the full lifecycle of an event, we are giving our customers the tools they need to help them become more operational efficient, customer focused, performance and revenue driven, security aware, and compliant. In fact, compliance continued to be a major driver for our business, and we expect this to continue into 2014 as well.

Helping to support these business transformations are large, integrated solutions sales. Booking of advanced applications, which are the foundation of these large transformative deals, grew more than 20% for both the fourth quarter and the full year. In addition, advanced applications represented over 50% of new business for the fourth quarter and close to 50% for the full year.

Our customers are also increasingly looking to the cloud to help them meet their business needs, and most of our solutions are available in the cloud. During 2013, we had an over 50% increase in annual contract value of our cloud orders. We expect to continue to see strong growth in our cloud business in 2014.

In our Customer Interactions business, we reported a solid quarter.

In 2013, we focused on the launch of our Customer Engagement Analytics platform, which is a major milestone in the evolution of our business offering. This internally developed cloud platform enabled our customers to combine interaction and transaction analytics across multiple channels. For the first time, it enables our customers to have a complete view of the entire customer journey across touch points and to connect in real time multiple touch points of interactions, such as connecting the Web and the mobile channels to the contact center.

In Q4, we signed an 8-digit deal with a major telecommunication company that will be deploying our Call Volume Optimization solution on this platform to help them better understand why customers are calling, the path at which customers arrived at making those calls, and to prevent the next call, all to help reduce call volume. This solution will be integrated with our performance management solution to drive continuous improvement by thousands of employees.

We plan to continue to launch additional solutions for our Customer Engagement Analytics platform with new analytics and reporting capabilities to further enhance the tools to analyze the customer journey.

Earlier I mentioned that compliance continued to be a major driver for our business. Our trading floor segment had a record year in 2013, and the main reason was that banks continue to invest in compliance due to regulatory pressure. In Q4 alone, we closed key deals with top-tier banks for our Proactive Compliance Suite for trading floors. In addition, we are seeing demand for our Proactive Compliance solutions for Consumer Protection. For example, in APAC, we won a few deals with leading, global insurance companies to help them comply with these regulations.

Other 2013 innovations in the Customer Interactions business include our Workforce Optimization suite for the cloud, giving our customers the choice to more quickly deploy our Customer Interactions solutions in the cloud for a lower total cost of ownership. We are also seeing momentum for our Real-time Authentication and Contact Center Fraud Prevention solutions, which use voice biometrics and our patent-pending passive enrollment technologies. In Q4, we closed additional orders for these solutions. One such deal was with a bank in EMEA, which bought the solution to improve security in the contact center, reduce average call time, and improve customer experience. A major driver for the win was our patent-pending passing enrollment technology, which we believe provide us a significant competitive advantage.

In our Financial Crime & Compliance business, we had a very strong finish to the year in both bookings and revenues. We reported revenue growth of 55% for the fourth quarter and 28% for the full year. We saw strength across the board in all solutions and regions.

The strong performance we witnessed was the result of strong market demand around our compliance-related products and fraud platform, new generations of our software being made available to our existing clients, our unique market position, and great execution across the business.

Significant enforcement actions, threats, and the growing and expanding market continue to be the key drivers for this business. And industry events are a driving force as well. Just this past fourth quarter, there were headlines about the large consumer credit and debit card data breaches at major retailers, drawing more attention to potential fraud losses. These types of headlines continue to increase demand and drive sales of our fraud solutions.

Also driving sales are the newest versions of our financial crime solutions and platforms, which are prompting customers to upgrade their existing products and enhance the coverage and functionality they get from us. We added functionalities for Dodd-Frank swaps coverage and for futures and options trading surveillance analytics. This resulted in an upgrade cycle that drove some Q4 deals, and we expect more deals like these in the future.

During 2013, a major US bank transformed its financial risk platform around our solutions. It included many of our AML and compliance models. This resulted in our largest business ever from a single customer. In fact, including this deal, we had three customers generate an 8-digit deal for us in 2013.

In our Security business, revenue were up 4% for the year. We had strong, record bookings in the fourth quarter and the full year, and we expect this translating to revenues in 2014.

In PSIM, we signed a strategic deal with one of the largest bank in Latin America. It was a 7-digit deal for our Situation Management solution, as the bank is looking to improve its security operations efficiencies by reducing false alert costs, optimizing response time, improving the effective work time of the operators, and optimizing branch security and maintenance routine operations.

Mobile video is an area that is gaining traction. We have developed a mobile video solution and won our first deal in Q4. The customer is a municipality that will be using the mobile video solution for its new bus fleet. The solution would significantly enhance the customer's investigative efficiency by automatically offloading this video recording wirelessly and integrating them in various other video and audio sources to create a unified event timeline.

And, lastly in Surveillance, we are pleased to be helping secure the operations of several major events in 2014, including the Winter Olympics in Sochi and the Super Bowl. For the Super Bowl, several of our security solutions and analytics tools were used by New Jersey transit to help protect and secure the safety of the event.

In Intelligence, we had a record quarter for booking. We closed a few 8-digit deal in the quarter, two of them with two separate agencies for a government in Latin America. Both of these deals were competitive replacements. For these customers, we are providing an end-to-end solution for lawful interception that included collections, analytics, and the application layer. The solution will cover all telephony and IP networks.

In summary, 2013 was another year of success marked by increased innovation and financial growth. The innovation resulted in many new products and technologies that have already achieved initial success in the market. Financially, we reported further growth in revenues and booking, driven by strong growth in our analytics-based, advanced applications. Our double-digit growth in booking led us to cross the $1-billion mark in booking for the first time in our history. I'm very pleased we were able to reach these significant milestones, and I would like to thank the NICE team for their hard work and effort in helping us to get there.

2014 is expected to be another year of profitable growth driven by strong market demand for our products and technology and a healthy backlog and sales pipeline.

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

I am pleased to provide you with some more data on our financial results and business performance for the fourth quarter and full year 2013, as well as our outlook for 2014.

Revenue for the fourth quarter was $271 million, up 13% from $240 million in Q4 last year. Revenues for the full year 2013 increased 7% to $951 million. Fourth quarter revenues were up 18% sequentially. This is in line with the shift in our business model in which our business has become more weighted toward the second half of the year and even more so in the fourth quarter. We expect this seasonality to continue.

Customer Interactions revenues were $169 million in the quarter, up 7% from Q4 2012, bringing full year revenues to $594 million, up 3% from 2012.

Financial Crime & Compliance ended the year very strong with Q4 2013 revenues of $55 million, up 55% from Q4 2012. And, for the year, revenues were $163 million, an increase of 28% from $127 million in 2012.

The Security revenues were $47 million, similar to the fourth quarter of last year. Full Year Security revenues were $194 million, up 4% from 2012.

For the full year 2013, Customer Interactions accounted for 63% of total revenues, Financial Crime & Compliance 17%, and Security 20%.

Moving to the regional breakdown, revenues in the Americas in Q4 increased 12% from the fourth quarter of last year to $175 million. Full year Americas revenues increased 7% to $598 million. Revenues in Europe, Middle East, and Africa increased 22% to $64 million compared to the fourth quarter of last year. Full year EMEA region revenues increased 5% to $224 million. Revenues from Asia-Pacific region increased 6% from the fourth quarter of last year to $32 million. And full year APAC revenues increased 8% to $129 million.

For full year 2013, the Americas accounted for 63% of total revenues, EMEA 24%, and APAC 13%.

Product revenue accounted for 43% of total revenues in Q4 and 40% for the full year. Maintenance revenues accounted for 34% in Q4 and 38% for the full year, up from 36% for the full year 2012. Professional services, including staff and hosting, accounted for the remaining 23% of revenues in the quarter and 22% for the year.

Gross margin in Q4 was 66.5%, compared to 67.7% in Q4 last year. And, for the full year, gross margin was 66.5%, slightly higher than in 2012 and in line with our model.

Operating margin for the fourth quarter reached 19.8% of revenues and 19.3% for the full year. We expect to continue to gradually improve our operating margin as we expand our business.

Income taxes for the year represented 15% of pretax earning -- of pretax income -- sorry. For 2014 and thereafter, we expect to be impacted by a major change in the tax legislation that was recently adopted in Israel. Beginning in January 2014, Israeli taxes increased from a range of 12.5% to a range of 16% on our business. We therefore expect that our effective tax rate going forward will be in the range of 18% to 19%.

Earnings per share were $0.75 in Q4, compared to $0.70 in Q4 2012. For the full year, EPS was $2.58, compared to $2.48 last year.

Cash flow from operations was $47 million in the fourth quarter and $155 million for the full year, excluding the one-time tax payment of $31 million reported in Q3 for the release of trapped profit and the settlement of a multiyear tax audit. This is up 15% from $135 million in cash from operation in 2012.

Our total cash and financial investments were approximately $443 million at the end of December 2013.

Headcount at the end of December totaled 3,584 people, compared to 3,399 people at the end of December 2012.

During the fourth quarter, we bought back almost 1 million shares for a total consideration of close to $40 million as part of our share repurchase plan. During January 2014, we purchased an additional 335,000 shares and almost completed the share repurchase program announced last year.

Our board has just approved a new buyback program to buy up to $100 million, which we will begin executing in Q1 and plan to continue throughout the rest of the year.

In line with our dividends plan announced last year, NICE's board of directors approved a dividend payment of $0.16 per share. The record date is February 18, and the payment date is March 4, 2014.

Going forward, we expect first quarter 2014 total revenue to be in the range of $230 million to $240 million and fully diluted earnings per share to be in the range of $0.58 to $0.63. We expect total revenues for the full year 2014 to be in a range of $1.10 billion to $1.35 billion and fully diluted earnings per share to be in the range of $2.73 to $2.85.

This guidance already takes into account -- they include an effective tax rate I described earlier with a negative impact on earnings of approximately $0.10 per share.

As for buyback, the guidance takes into account the shares purchased until today.

That concludes my comments. I would now like to turn the call back to Zeevi.

As announced yesterday, I have decided to retire from my position as President and CEO. I have been with NICE for close to five years and have enjoyed the opportunities and successes that I encountered during this time. NICE is the industry leader with strong market position, solid financials, and great people and technology.

I am very pleased with the nomination of Barak Eilam as my successor. Working with Barak for many years, I have witnessed firsthand his talent, skills, and many achievements, and I am confident that Barak, together with NICE strong management team, will continue to lead NICE on the path for future growth and success.

I will now turn the call over to the operator for questions. Operator?

(Operator Instructions). Daniel Ives, FBR.

Zeevi, it's been a pleasure working together.

Could you talk about acquisitions, especially with the freed-up cash and just building cash on the balance sheet? I mean, is there a more of maybe an urgency or maybe a change in terms of doing deals in 2014 versus 2013 just given where the Company is?

First, thanks for your initial notes.

Secondly, we are continuously looking at the right opportunities for acquisitions to complement our offering and enhance our strategy. We have to look for deals that we believe are the right deals for us. I don't think that we expect a change in this strategy going forward. So I believe that the new management will continue to pursue acquisitions down the road.

Could you just talk -- ? I mean, obviously, Q4 a strong quarter. And 2013, you were some up, some down. But it seems like a lot of momentum going to 2014. Does it compare going into 2014 versus going in 2013, like, just in terms of opportunities, pipeline, the feel internally. I know you just had the kickoff meeting. Maybe just from a high level. I appreciate it. Thanks.

We did have a great kickoff meeting, and the atmosphere and the energy and the level of engagement, level of presentations, the content, the solutions - was extremely high and positive with high energy.

When we look at the pipeline, our pipeline today is larger than the pipeline last year. And we are still confident and have shown you the guidance that the next year is going to be another year of growth and profits.

Great. All right. Thanks.

Jonathan Ho, William Blair.

Congratulations on the strong results.

I just wanted to start out a little bit with your cloud business. You guys talked about some pretty strong growth there. I just wanted to understand, number one, if you could give us maybe a sense of how large that business is today. And then, number two, does this start to impact sort of the revenue growth rates as people elect a SaaS model versus the traditional license model?

In terms of the SaaS, we had said below 10%. This is where the SaaS business is. Indeed, it's growing fast.

In terms of revenues, obviously, the transformation of the business to more SaaS model has an impact -- a short-term impact on revenues. And we believe, long term, the Company will benefit from this position. And, therefore, we are continuing to pursue it aggressively.

Got it. And then, just in terms of the Financial Crime & Compliance business, obviously, very strong growth for the quarter and also for the year. How should we be thinking about the growth rate going in 2014? I know you guys don't necessarily provide segment-level guidance. But would it be sort of similar? I mean, would you expect a significant deceleration, or would it sustain sort of the current levels?

We currently -- we see a momentum in the business, and we expect the business to continue to grow. We believe that the growth rate will be more... actually, we don't believe -- we are forecasting that the growth rate will be more moderated this year, but we are still expecting a very strong growth rate in this business.

Got it. And then, just lastly, on your Security business, I mean, this seemed to be one that was a little bit slower during the quarter. Can you just give us a sense of what happened there -- whether you're expecting this to pick back up or whether this is just sort of timing of large deals?

I think we said it on the script. But the quarter was flat on a revenue level year over year, but it was a very strong booking quarter. And the book to bill for the quarter and for the year was larger than 1. And we expect that -- therefore, we are expecting to translate this booking into revenues next year, and we are expecting it to grow.

Great. Thank you.

Greg Mcdowell, JMP Securities.

Great quarter.

And, Zeevi, congratulations on your retirement.

I only have one question for you, Zeevi. As you pass the CEO title and reflect back on your time as CEO, can you talk a little bit about how the business is evolving? And, as you give advice to Barak looking ahead, what do you think Barak's biggest opportunities and biggest challenges are as he takes the helm? Thank you.

First, thank you for the initial notes.

Secondly, when it comes to NICE evolution over the past years, financially, we expanded the business in all parameters. And, by the numbers -- you have the numbers -- but fairly significant growth over the past four years. And, qualitatively, we increased -- we launched many new products and introduced many solutions to the market. And we have been transforming the business model into integrated solutions that aim... we developed a lot our analytics-based integrated solutions business and created the scalability within the organization for future growth.

When it comes to the future, I believe that Barak will share his strategy in three months. I'm still -- by the way, I didn't -- I'm still the -- we have a transition period, which is going to be lengthy. And this is right now the focus that we have is ensuring a smooth transition. I didn't give -- I'm still -- I will be in the position. It will take up to three months. And, right now, the focus is on ensuring the transition.

In terms of the focus, I believe that we have tremendous opportunities within our market. In terms of the value proposition that we have, if it's compliance, if it's customer experience, if it's security and safety, and if it's driving business results, demand is not going to disappear. On contrary, it's going to increase --- in Security it is probably unfortunately -- so we have plenty of opportunities within the market. When it comes to technology, products and install base, I think that we have a strong foundation to capture on. And I believe that these are the major opportunities that (inaudible) presented for us.

In terms of challenges, we are obviously -- we are in the technology business, and we have to be ahead of everything all the time, which we, I'm sure, I'm confident that Barak will continue to lead the Company in this direction and ensure that the Company will continue to be ahead of the market on competition.

Great. Thank you very much.

David Kaplan, Barclays.

Congratulations, Zeevi, and good luck in the future. I know it's -- I'm glad you said a lengthy process, but nonetheless --

Dafna, you talked a little bit on the call about the seasonality, and you see that continuing. When I look at the guidance that you guys gave for 2014, the full year guidance was a little bit ahead of where consensus was, ahead of these result. But, yet, the first quarter seems to be on the weaker side. So can you talk a little bit about what's changing or what has occurred that the seasonality has become so much more pronounced?

Yes. Actually, we've been talking and experienced seasonality over a certain period of time, so nothing is really new here.

I think that, if we look at 2013, this is where we experienced a significant impact of that, where the first three quarters of the year were relatively flat in terms of revenues. And we had a major jump in revenues in the fourth quarter. This is a clear result of the transformation in our business to sell more analytic-based applications. We are selling much larger deals that combine a few technologies together. These deals are driven not only by compliance and regulation but also because of the need to be more efficient or to improve aspects of the customer satisfaction. While these deals are very interesting and include a lot -- and we have a lot of new technologies to support it, in terms of the sales process within the organization, these are usually longer sales cycle and have... there is a compelling event at the end of the year to conclude it.

So this is the major reason why we're seeing more and more business pushed to the end of the year. I must say that I know that there were a lot of concerns last year regarding our ability to prove that this assumption is correct, and I think, with the results of Q4, we definitely show that this is a clear trend.

Another element is the fact that the more complicated the deals are, it takes longer time to -- even when we get the deals, some of the deals take much longer to conclude in terms of deploy and get the acceptance and recognized revenues. And this is also a reason why we see a certain shift in the business.

So, overall, I think it's a clear trend we'll continue to see this year as well, also based on our budget and plan.

And, to your comment regarding the first quarter, we're showing that -- in the guidance, we're giving nice growth in Q1 2014 compared to the first quarter of 2013. And we are definitely focusing on growth. I believe that growth year over year would expand as we move forward in 2014.

Okay. So, when you talk about -- so, again, just to be clear, so do you expect 2014 in terms of the first three quarters being relatively flat and the fourth quarter being the big quarter -- is that to occur again in 2014? That's the first part of the question.

The second part of the question also is the mix of sales because I think where you really saw the big bump came actually from the product segment and not so much from the services segment. So is there also a renewal of licenses and renewal of seats that are taking place in that fourth quarter? And are you kind of grouping those all together in that quarter?

No. Actually, the service and maintenance parts are pretty stable. They grow over time in quite, I would say, a predictable way. The big swing is on the products. And, as I said, the more we close deals towards the end of the year, we see an increase in the product line. And we are definitely focusing the same phenomena for 2014.

Regarding the growth throughout the year, what I said is that, last year, it was kind of flat. I think that, this year, we would show a gradual or moderate improvement throughout the year with a big portion of the revenues of 2014 to be generated in the fourth quarter.

Great. Thanks very much.

Shyam Patil from Wedbush Securitites.

Congrats, again, Zeevi, on your accomplishments, and best of luck with the retirement.

First question. Zeevi, you talked about the Customer Engagement Analytics product in your prepared remarks. How should we think about the ramp for that product, I guess, first, in terms of bookings and, then, revenue. When do you think it becomes a 5% to 10% contributor to either revenue or bookings?

When we look at the Customer Engagement Analytics product, it's a cloud-based platform. So, therefore, the ramp-up in terms of revenues is going to be slower than the ramp-up in terms of the bookings. When we look at booking, we are seeing we secured -- we started to secure business. We are seeing (inaudible), and we are seeing a pipeline of fairly large deals. It provides a lot of value to the customer.

In terms of the pickup of the product, we are in the initial stage of the launch and the deployment. It will take time to get to 10% of the revenues. And it will take some time once we're getting more experience with the product -- and deployment -- we will be able to provide more details.

In terms of the market opportunity, we believe that the market opportunity to this type of solution is very large, and the adoption depends mostly on our execution.

And, then, in terms of the bookings growth, I know you don't guide to a bookings number. But how are you guys thinking about bookings growth for 2014 versus what you guys saw organically in 2013?

We are not guiding on booking growth. And, as we move more to the cloud, also, booking is a more tricky element. When we look at the -- as we said, between 2012 to 2013, we had double-digit growth in the bookings.

Is it reasonable to expect a similar kind of performance this year, do you think?

I think yes.

Okay. And then just my last question this afternoon on the tax rate. I know it's a moving target. But is the rate you're guiding to for 2014 the right way to think about it kind of further out as well?

Yes. 18% to 19% should be used as the range going forward.

Great. Thank you.

Jeffrey Kessler, Imperial Capital.

Again, it was great working with you, Zeevi.

I have a couple of questions here. First, with regard to -- besides the revenue model, what other cost factors come into play as you move from a wholly standard bookings model to a SaaS model? What are the types -- ? What costs come in at the front end, and what lesser costs, obviously, are we expecting on the back end? Or how would you characterize that?

We already -- if you're following our announcement, we already announced that most of our services are offered on the cloud. They are available on the cloud, and we, I think, last quarter announced the opening of our hosting center in EMEA -- a world-class hosting center in EMEA. When we are having our hosting center, most of the up-front costs on a CapEx basis are coming with the opening of the center. And then the fixed costs are depreciated over time. When it comes to the... then there is the per deal elements, and this varies -- in terms of the costs and the amount of services that we are providing, there are differences between the different products and between different customers and size of customers.

So it's difficult at that point to give an exact model.

Okay. With regard to your excellent numbers coming out of Financial Crime & Compliance area, obviously, this area is attracting a lot of -- this is a very high-profile area. It's attracting a lot of competition. So it's like Navigant and (inaudible) and a number of the accounting firms. What do you believe that your -- both your tactical as well as your technological advantage is in competing with these other firms that either have begun to move into it or have already been in it for some time?

So, first, on the Financial Crime & Compliance business, we are the world leaders in providing these services. In compliance, it serves well to our benefit because people really would like to take a proven technology and derisk. And therefore we are seeing part of the momentum is coming from us being already the market leader in this field.

When it comes to what is unique about our capabilities and solutions, it's the fact that we are providing point solutions and sophisticated analytics solutions that, on the one hand, can cater themselves for point solutions but, on the hand, can also be expanded and serve the entire enterprise, different departments, different cases, and different models. And the fact that we are not -- this is not only services offering; it's based on a strong product, provides us a lower total cost of ownership and lower time to deploy when new regulation is coming. And this is a key factor because, when the new regulation is coming, people are usually late to deploy, and then they have to deploy things in, fairly fast time. And our product approach with the customization tools and the policy managers on top of it enable us to provide the solutions with the appealing time to market.

So the combination of being the market leaders, the technology and the product approach altogether are making us a natural choice for the large and leading financial institutes for this type of technology.

Great. Thank you. And, again, good luck.

Ladies and gentlemen, I'd like to hand back to Zeevi for any further remarks.

Thank you, everyone, for joining us today. And have a NICE day.

Ladies and gentlemen, that concludes our conference call for today. Thank you for joining us, and you may now all disconnect. Thank you.