Nice Ltd (NICE) 2014 Q1 法說會逐字稿

Welcome to the NICE Systems conference call discussing first quarter 2014 results, and thank you, all, for holding. All participants are 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 on May the 8th, 2014.

I'd 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 Barak Eilam, Chief Executive Officer; Dafna Gruber, Chief Financial Officer; and Eran Liron, Executive Vice President Marketing and 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 2013 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 26th, 2014.

During today's call, we will present a more detailed discussion of the first quarter 2014 results and the Company's guidance for the second 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 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.

Before I turn it over, I'd like to remind you that we are hosting an Analyst Day on May 19th and 20th in conjunction with our annual user conference at the Cosmopolitan Hotel in Las Vegas. The special program that we're having for analysts and investors will include meetings with NICE executives, presentations from customers, product and technology sessions, and access to the solutions showcase. If you haven't registered and would like to do so, please e-mail at us at ir@nice.com.

I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. I'm excited to be talking to you today for the first time since I transitioned to the CEO role in early April.

In my many years at NICE, I have been fortunate to experience different roles within the company, such as product development, sales and marketing, and services. I started 15 years ago in R&D in our Customer Interactions business, then moved to product management, and after that, I managed the compliance solutions for the financial services industry.

I later built and led the Interaction Analytics business unit, which was the unit that was the foundation for the Company's entry into developing and selling analytics-based advanced applications.

Finally, I spent the past five years in the US first as the head of sales for the Americas and then as head of the Americas region. This period in the Americas provided me with a lot of exposure to our top customers, significantly broadening my perspective on our markets, opportunities, and areas of future growth.

I want to take this opportunity to thank Zeevi for his leadership over the past years, a period during which the Company evolved in many areas that today serve as the foundation for our future.

I believe what sets us apart is the combination of the great assets we bring to the table, namely the established and ongoing relationships we have with our thousands of customers, including numerous leading global brands, our industry-leading products and technologies, our world-class go-to-market organization, our winning culture, our domain expertise, and our strong financial position that enables us to invest in the Company's future growth.

Together with the management team, I look forward to leveraging these great assets and navigating NICE to exciting new heights of success.

Being very close to the field and to our customers over the past several years at NICE, I've come to realize the many opportunities we have. The markets in which we operate are all growing as organizations are facing increasingly complex and data-rich communications that constantly evolve. Our domain expertise, platforms, and many analytics-based solutions are well positioned at the core of this evolution. These position us well to grow our business and expand our addressable markets.

In the coming weeks and months, I intend to spend my time on two important areas, which I believe are critical for NICE as we leverage our assets and opportunities that I have already mentioned: One - to further define NICE's long-term growth strategy; Two - to thoroughly review our operational model. I'm committed to flawless execution that will drive growth in an efficient, effective, and profitable manner.

We expect to grow both organically and inorganically. We'll drive innovation with clear value to our customers in order to facilitate organic growth. We will also bank on our M&A competencies and experience to more aggressively complement that growth with acquisitions. Such acquisitions will augment our product portfolio, accelerate our time to market, and open up additional areas of growth.

Let us move on discuss to the quarter. We generated non-GAAP total revenues of $229 million in the first quarter of 2014 and EPS of $0.57. While results came in slightly below expectations, I strongly believe in the solid fundamentals of our business.

In line with the continuing change in our business model towards advanced applications, we expect to continue to see a seasonal pattern where the larger portion of revenue are recognized in the second half of the year and especially in the fourth quarter. We witnessed this seasonal pattern in 2013, and we expect this to be even more pronounced throughout 2014. Our current pipeline supports this trend.

Analytics-based solutions across all of our markets continue to play a key role in our growth and our ability to expand our addressable markets. These solutions represented approximately 50% of total new bookings compared to less than 40% in Q1 last year, further demonstrating our success in focusing our efforts on this fast-growing market. In addition, an increasing amount of our advanced applications are being deployed in the Cloud.

In our Customer Interactions business, we continue to see customers purchasing multiple applications at once, leading to large and integrated portfolio sales. These large portfolio deals reflect the need for organizations to reduce complexity, improve the customer experience, improve overall business results, and to help these organization transform their businesses.

Analytics are a key driver in these large portfolio deals, especially in two of our largest verticals, financial services and telcos. Within these two verticals, we see that our customers are very driven on improving customer experience and reducing customer effort while also adhering to regulatory compliance.

We have stepped in with our customer engagement analytics platform, which provides organizations with the tools to help them better analyze and understand the customer journey across the various communication channels.

Our Financial Crime and Compliance business delivered another very strong quarter supported by the strength of our ongoing relationships among top financial institutions globally. We continue to see demand being driven by an expanding compliance and regulatory environment in the financial services industry, along with the strong desire to reduce costs by preventing fraud. As such, we continue to see growing market in the areas of anti-money laundering, trading and brokerage compliance, and various types of fraud prevention.

Furthermore, the fast-growing alternative payment market is another growth opportunity for us, and we already won several deals in this segment.

While our pipeline is strong and well distributed across all our lines of businesses, it was particularly strong quarter for anti-money laundering solutions, driven by continued regulatory activity as well as by an upgrade cycle of our AML solutions.

In our security business, security-related incidents and headlines continue to drive demand for our solutions, helping to support a strong pipeline of large deals. Due to the nature of security deals, which often tend to be very large projects with revenue recognition taking place over many quarters, the business remains very lumpy from quarter to quarter, sometimes creating large fluctuations in revenues.

In the physical security area, we continue to develop new uses for our situation management solution. We have long been implementing it in critical facilities, such as airports, transportation systems, and sporting events. Recently, however, we have witnessed some additional mission critical uses, such as two deals related to traffic management and interest from enterprise customers for the protection of their facilities and operations.

In summary, I'm excited to be leading a company with a great set of assets and excellent growth opportunities in evolving and growing markets. NICE has a smart, hardworking, and dedicated team to capitalize on those opportunities and strongly motivated by these opportunities to more aggressively and speedily move our company forward, to look for additional growth opportunities, both organically and through acquisitions, and to take head on any challenges we face. We have the domain expertise, the products and solutions, the market leadership, and the talent to succeed.

As I take on my responsibility as CEO, I look forward to working with all of our stakeholders: our customers, partners, employees, and shareholders. And finally, I look forward to seeing you at our Analyst Day taking place in conjunction with our Interactions user conference later in May.

I will now turn the call over to Dafna.

Thank you, Barak. I am pleased to provide you with an analysis of our financial results and business performance for the first quarter of 2014 and our outlook for the second quarter and full year.

Revenues for the first quarter were $229 million, up 2% from $225 million in Q1 last year. Customer interactions revenues were $139 million in the quarter, up 1% from Q1 2013. Financial crime and compliance had another very strong quarter, growing 24% year on year to $43 million. Security revenues were $47 million, down 11% from Q1 2013. This business continued to be very lumpy. Q1 last year was a very strong quarter with 17% growth year over year from the year before.

Moving to the regional breakdown, first quarter revenues in the Americas were $148 million, increasing 2% from Q1 2013. Revenues in Europe, Middle East, and Africa increased 7% from last year to $53 million. Revenues from Asia-Pacific region decreased 6% from the first quarter of last year to $28 million. For the quarter, the Americas accounted for 65% of total revenues, EMEA 23%, and APAC 12%.

Looking at revenues by business line, product revenues accounted for 34% of total revenues in Q1. Maintenance revenues accounted for 41%. And professional services, including Cloud, accounted for the remaining 25%.

Gross margin in Q1 was down to 65.4%, resulting from the business mix and comprised of higher proportion of service revenues. This resulted in a decline in operating margin to 18.2% of revenues, although operating expenses remained largely unchanged year over year. During 2014, we expect product revenues to resume growth and lead to higher gross and operating margins, and we are targeting an increase in operating margin in 2014 compared to 2013.

Tax rate in the quarter was 18%, up significantly from 16% in Q1 2013, as a result of the change in Israeli tax law we discussed last quarter. As mentioned last quarter, the change in tax law has a negative impact in earnings of approximately $0.10 per share for 2014 compared to previous year.

Earnings per share were $0.57 in Q1 compared to $0.61 in Q1 2013.

Headcount at the end of March totaled 3,624 people compared to 3,584 people at the end of December 2013.

Cash flow from operations in the first quarter is always strong and reached $58 million, similar to the first quarter of last year. Total cash and financial investments were approximately $469 million at the end of March 2014.

During the first quarter, we bought back 624,000 shares for the total consideration of approximately $26 million as part of our share repurchase plan. During Q1, we paid forth on the dividend of $9.7 million. And in line with our dividend policy, NICE's Board of Directors approved a dividend for Q1 2014 at a payment of $0.16 per share. The record date is May 27th, and the payment date is June 10th.

Turning to guidance, we expect second quarter 2014 total revenues to be in the range of $230 million to $240 million and fully diluted earnings per share to be in the range of $0.55 to $0.62. We expect total revenues full-year 2014 to be in the range of $995 million to $1.025 billion and fully diluted earnings per share to be in the range of $2.68 to $2.80.

That concludes my comments. I will now turn the call over to the operator for questions.

(Operator Instructions). Daniel Ives, FBR.

Yes, hey, guys. Congrats on CEO and your first call. Could you sort of compare where were a year ago in terms of that 1Q versus this 1Q? Obviously, outlook pretty similar for the year versus where we were three months ago, but maybe we could just talk about coming into the year with a slightly soft revenue but obviously a good backlog and maybe compare and contrast where we were last year, obviously finished the year off strong with second half numbers.

Yes, I think we're starting -- we started this year with a greater backlog compared to last year. And also, if I look at the situation right now with our pipeline now compared to the pipeline that we had at the -- this period a year before, we are in a better position in terms of both pipeline and backlog.

Okay. And maybe now, obviously, with the new leadership, talk about your philosophy in terms of acquisitions. Obviously, you specifically mentioned about organic and inorganic. Maybe just from a high level, talk to us about your philosophy with acquisitions, how you're thinking about it, obviously not specific holes, but maybe philosophically how we should think about the new NICE with you as CEO.

Hi, Dan. It's Barak. Thank you for the question, and very nice meeting you. So, first of all, as I mentioned before, we're definitely going to look more aggressively into acquisitions. We believe that there are always some great opportunities out there. And we have some interesting pipeline of acquisition that we plan to try and capitalize on.

In terms of the different domains, without obviously being very specific, we definitely see potential synergies in the different directions that we have in different analytics-based solutions. And there are many opportunities that can augment our offering. That's one part.

And second is that part of our offering, moving more and more into the Cloud, we will look to accelerate on that front as the acquisitions.

Okay. Real helpful. Thanks.

Thank you.

Shaul Eyal, Oppenheimer.

Thank you. Hi, good afternoon, guys. And, Barak, congrats, and welcome onboard. Product revenue coming below our estimate and, Dafna, I'm absolutely going to get you're your commentary and qualitative direction about it. But, how should we be thinking about it for the second quarter and the remainder of the year. I know you said it's about to resume growth. Is it going to be similar to what we have then in the second or third quarter of last year in terms of absolute numbers? And also, is that a reflection of the growth you're seeing on the SaaS and application front that are recorded under the service line?

Hi, Shaul. And thank you for the questions. So, I'll answer the first part first. So, first of all, yes, absolutely similarly to what we saw last year. And as we believe that the trend will be even more pronounced this year, bigger chunk of the revenue will come on the second half of the year. And the pipeline that we see definitely supports it.

And it's a combination of several things. And you mentioned the Cloud. Cloud is definitely one of the large application projects. In the second part, it takes more time to recognize this revenue and deliver the projects and, obviously, the large projects that we see on the security front.

And you take all of it together, we definitely see the trend shifting more and more of our revenue into the second half of the year.

Got it. Dafna, from a foreign perspective with the US dollar continuing its slide versus the Israeli shekel and aside from all Israeli operations, how are you hedged going forward?

Yes, well, it's a good question. I don't know if all listener are aware of the fact that there is a continuous deterioration of the dollar against the Israeli shekel. And that on the long term has an impact on our activity and mainly forced us to look for lower-cost alternatives.

Our policy is to hedge all the time six months on average in advance so we would not be caught by surprise in the next quarter by the shekel and the shekel-dollar. But, over time, it's -- the current low rate of the dollar forced us to take some steps and to move into lower-cost areas.

One final question, if I may. I know Dan Ives already asked about Barak's M&A philosophy. Maybe from a broader perspective, so this quarter coming below expectations revenue guidance for the year, EPS slightly below, Barak, should we be treating this quarter as what it's being called, a kitchen sink quarter, or in other words a new CEO steps in, taking the opportunity to kind of slightly reset the outlook while beginning to convey his own message, implement his own strategy going forward? What's the thinking along these lines?

Yes, I think that what we saw in Q1 is mainly the result of the transition of the CEO, which is natural. And when I stepped in about a month ago, I reviewed thoroughly the business. And I'm taking a more cautious approach. And our guidance taking that in account, both for the second quarter and for the second half of the year, but believe that moving forward will not see further impact of this transition and the business remain very strong with strong fundamentals.

Fair enough. Good luck, and congrats again.

Thank you very much.

Shyam Patil, Wedbush Securities.

Hi, good morning. Congrats, Barak, as well. Welcome aboard. First question is on the customer interaction business. Looked like it came in a little bit -- it seems like that's where the slight weakness was in the quarter. Just curious if it's concentrated in any particular application areas, whether it's recording or workforce management or analytics and also if you could talk about just your bookings for the quarter overall for the Company and just outlook for that particular segment. Thank you.

I think that, if I look at compared to our previous expectation regarding the specific quarter, then and I would say that we were missing several millions on the security side. As I mentioned earlier, the financial crime and compliance had a very good quarter. And on the security, we're showing some decline year over year. It has a lot to do with the fluctuations in this business. And I do expect the security business throughout the rest of the year to be much stronger, but we were missing several millions mainly on that front.

Okay. And then in terms of linearity by quarter for the year, I know you're expecting more to come through the back half. But, how should we think about the third quarter versus the fourth quarter?

I believe we'll see the same phenomena that we've seen in 2013, where there is a major increase in revenues in the fourth quarter of the year. Last year, we had -- the third quarter was slightly better than the second quarter, and most of the increase came in the fourth quarter.

Great. Thank you.

Jonathan Ho, William Blair.

Hello? Hey, guys.

Yes, we hear you.

Okay. Just wanted to understand a little bit about the upgrade cycle that you mentioned regarding sort of the financial crime and compliance business. Could you give us a little bit more color on what you're seeing there and perhaps what's -- what we should be expecting in terms of the growth rate for the financial crime and compliance segment?

Yes, specifically, as I mentioned, we have a very large and strong customer base in the financial industry using legacy anti-money laundering solutions. And the combination of the changes in the regulatory environment in this specific domain as well as some technology updates, it's a great opportunity for the upgrade and [refer] cycle in this particular market, plus obviously adding some capabilities and augmenting that with the other parts of our solutions. We believe that this business will continue to grow in a similar rate to what we've seen so far.

Got it. And then can you talk a little bit about pipeline and the selling environment? Just want to understand if there's any sort of change relative to the win rates or whether there's been any delays in terms of closing deals. Just want to get a sense from you what the overall environment looks at, especially as you start to look into the second quarter.

We don't see any dramatic change or any significant change in any of the markets where we operate. Most of the trends, if not all of them, are the same. There can always be one or two deals slipping between one quarter to another because of buying decisions or a certain compelling event. But, all in all, not a big change in the trends, which I believe all of them are very positive.

Great. Thank you.

Paul Coster, JPMorgan?

Yes, thanks for taking my questions. If you believe that the business is going to be more backend loaded than in the past, why is it that you're trimming full-year guidance?

I'm sorry, can you repeat the last part? I didn't hear it.

If you believe the business is more backend loaded than in the past, why are you trimming full-year guidance?

We -- as I said before, when I stepped in and we had a slow Q1, when we look on the second half of the year, we believe that the business is solid and will come. What we don't believe, given the transition and everything, that we can catch up on the gap that we have from Q1, given the transition. But, all in all, for the second half of the year, we remain very optimistic about our business. If you look at the amount and the change that we've done, it's basically taking account the slowness in Q1 and the guidance we gave for Q2.

Okay. The other thing is I'm not entirely onboard with this argument that business is more seasonal now because I note, for instance, that services were a record in this first quarter, right, $149 million I think it was -- well, slightly down from the fourth quarter, but significantly up year on year. And Dafna in the past has talked about bigger deals having a longer kind of revenue recognition cycle to them, which yields more visibility and smooths out some of your revenues. So, I'm not quite understanding why it is that you're suddenly becoming more seasonal when those trends and including the introduction of SaaS-based business model would be working the opposite direction.

Yes, so, let me try to explain. So, on the services business, including Cloud, you're absolutely right that we have a certain level of business. But, when it comes to the products, and this is the place where we see the bigger chunk of becoming much more of a backend loaded because of decisions, the larger projects, the time that it takes to recognize these projects, this is where we see the seasonality, mainly on that front.

Okay. Thank you.

Thank you.

Tal Grant, UBS.

Hi there. Just a couple of questions from me. On the Cloud revenues, could you tell us what percentage or your revenues are from the Cloud, or if not, instead of giving a 10%-wide range, 0% to 10%, could you say 0% to 5% or 5% to 10% maybe?

Second question is on the security business. I know there's a World Cup this year. You did Sochi last year. Did you get the contract for World Cup?

And finally, on dividends, are you planning to move to a sort of earnings-based payout ratio, or will it continue like this, $0.16 a quarter? Thanks.

Okay. So, on the first question regarding the SaaS business, the Cloud business, it's still a small portion of our revenues, between 5% to 10%. And -- but, it's growing very nicely quarter over quarter, still from a low basis.

Regarding the specific question on World Cup, I cannot give specific comment on that, but I can say that we are very focused and were focused in the past, as you've mentioned, on the Sochi Games. And this is -- and large sports events are very much on our agenda.

Regarding the dividend policy, we are looking into what should be -- we just completed one year of dividend payment. And we are looking at the right way to address it going forward. There's no specific different decision on that at this point.

Maybe just to add -- and thank you for the questions. Specifically, on the second part, the second question on the World Cup, I cannot comment specifically on this one, but we believe that we have great offerings for these large sporting events and are very focused on that, making sure that we are protecting every large sporting event globally.

Okay. Thank you very much.

Thank you.

Jeffrey Kessler, Imperial Capital.

Thank you. Could you explain a little bit the nature of the backlog on some of these large projects that will basically turn up in the fourth quarter? Is that backlog going to -- firstly, is the margin on the backlog in line, above, or below corporate? And number two, what is the nature of the types of projects in that backlog?

So, overall, compared to Q1 of last year, our backlog is stronger. That's one thing I can say about the backlog. Second, what we see over there is a combination of many large projects. It's on the -- it's in the different areas of the business. Many of them are analytics based and advanced applications type of projects, which are in deployment. And as a result, when a deployment will get over and be in production, then we can start recognizing the revenue. And this is why we give this outlook for the rest of the year, more leaning towards the second half of the year.

Okay. Could you also elaborate on your comments regarding replacing some older anti-money laundering solutions with an upgrade cycle? What are -- what's your -- in a sense, what's your ROI on this? What is the cost to do this? And what are you going to be getting? What's the client going to be getting for the upgrade that you're putting in?

So, we see in the last I would say 12 to 18 months a change in the approach, both from the regulatory perspective and from organizations with respect to anti-money laundering. Most if not all financial industry institutions have a certain system in place. In many of them, they have our system. But, it's outdated in the sense of being in compliance to the changes in the regulation.

So, the logic, the reason a compelling event for the upgrade cycle is to get into the latest and greatest and make sure that they comply with these regulations. For us, obviously, it's a great opportunity to provide them with much more reach, enterprise wide approach, and also the ability to provide them and integrate it with other solutions from our offerings on the enterprise level, both on the compliance and the fraud side.

Okay. Thank you very much.

Thank you.

David Kaplan, Barclays.

Hi, everyone. Just a couple of questions on expenses. First of all, gross margin this quarter was a little bit weaker than we were looking for. Can you talk about what happened there? Was that specifics of the quarter? Does it have to do with deal slipping was something that Barak mentioned earlier, or has something changed in the business?

And then the second question is on the stock-based comp. It's about 7% of OpEx this quarter, in line with last quarter but much higher than the previous. So, has there been a change in the compensation policy for employees? And of that stock-based compensation, how much of it is -- are grants, and how much of it are options? Thanks.

Okay. So, first of all, regarding the gross margin, the gross margin is lower than we previously saw and also slightly below where we want to be. It's the result of the mix. And it's mainly because the higher part of the gross margin has been contributed the most by the product revenues. And that was slightly lower than what we've seen in the previous quarter, where the service and especially the professional service, including SaaS, remained very strong. So, on the overall -- with the overall mix, it takes margin down.

We also had certain impact of specific deals with lower gross margin on the product side. We had this as well. What we see in gross margin is not the indication for the future. And we do expect some slight improvement in gross margin and to see gross margin which is similar to what we've seen last year. That's on the -- on that part.

Regarding the stock-based compensation, there's no major change in our policy. And we have a certain mixture of options and RSUs. Usually, top management is being compensated by some combination and is compensated by stock options. And the rest of the team, which is a very small portion of our employees, are getting compensation by equity, but the -- below top management, it's mostly RSUs. But, as I said, there's no major change in our policy.

Okay. Great. Just, Dafna, you mentioned getting back to more normalized gross margin. Do you mean in the near term, or are you talking about longer term? And I guess the other part of it, the other reason I could've thought that there would be a little bit of a change in the mix has to do with acquisitions and the -- and squeezing out as much synergy as there could be in those acquisitions. I'm sure some of them are relatively still new, and you're not yet fully accretive. Is that the right way for me to think about it? And then that's it from me.

I think that in terms of -- [back to] acquisitions and gross margin, it would be highly dependent on the type of acquisitions we're going to do. My comment regarding the improvement, I believe that, in coming quarters, it was the end of the rest of the year. We'll see higher part of product revenues, and that will drive gross margin, even in the short term, slightly up.

Okay. Great. Thanks very much.

Greg McDowell, JMP Securities.

Great. Thank you. And certainly looking forward to your user conference in a few weeks. I just have one question. I would love to talk about your business on a geographic basis. And specifically in Q1, what regions were disappointing for you, or where did you see sort of that softness?

And number two, as we think about the lowered full-year guidance, has there been a change in any particular region or geographic region that has sort of led to the lower full-year guidance? Thank you.

Yes, so, if we expect -- first of all, thank you for the question. Looking forward to see you in the Analyst Day.

Specifically, with regards to the geographies, we don't see a major change in trend. And I don't believe that, just based on Q1 -- we have seasonality, of course, but I don't think it drives a certain change in our view of the different geography.

If you look on this particular quarter, actually, EMEA had a very relatively strong quarter. We saw slightly a decline in Asia, and we saw flatness in the Americas. But, overall, I think, based on Q1 and one quarter, when we look forward in our pipeline, we don't see a major change in trend.

Thank you.

Thank you.

Thank you. That concludes the question-and-answer session. I'd now like to turn the call back to Barak Eilam. Please proceed.

Thank you very much, all, for joining us today on the call. We look forward to see you all very soon. And we'll talk again soon. Thank you very much. Have a great day.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.