Nice Ltd (NICE) 2014 Q2 法說會逐字稿

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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 & Corporate Development.

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 the 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 26, 2014.

During today's call we will present a more detailed discussion of second-quarter 2014 results and the Company's guidance for the third 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 revenue 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. I will now turn the call over to Barak.

Thank you, Marty. And welcome, everyone. I'm glad to be on the call with you today following my first full quarter as CEO at NICE. We made good progress during the second quarter. We completed our management transition and continued to move forward on our operational transformation to help streamline the business and to improve profitability. We are centered on product leadership and go-to-market expansion.

I'm pleased to report revenues of $239 million for the second quarter, which was at the high-end of our guidance range. Earnings per share came at $0.57. Bookings were strong, the pipeline is robust and we are on track to meet our plans for the year.

We continued to see strong demand for our analytic applications. They represented around 50% of our new business for the second quarter and, once again, grew double digits. A lot of the strength in our analytic solutions came in the Americas, which reported revenue growth of 16% in the quarter, the growth in analytic applications coming from both new and existing customers who continue to expand their footprints with NICE.

Also in the quarter we continued to focus on our operational model to identify areas for operational efficiency in both short and long-term. Earlier today we announced a new platform - NICE Engage. It is our next-generation interaction capture platform that is unrivaled in speed and scalability while at the same time delivering a substantial breakthrough in lowering total cost of ownership to our customers. The vast increase in speed and scale of this new platform also brings a major breakthrough as the market's first 100% real-time analytics.

Every interaction including voice, chat, and video in a contact center can now be analyzed for content, emotion, and biometrics as it happens. This level of innovation further defines our market leadership, and we believe that the benefits delivered by this new platform will entice our customers to upgrade. It will provide them faster, smarter, and safer customer engagements in their contact centers.

This new major release of our new platform, NICE Engage, is a big milestone in the evolution of customer interactions business. In May at our Interactions annual user conference, where there were more than 2000 participants this year, we showcased our various analytic applications. The growth and increasing penetration of these solutions in the second quarter validates the value and high-return on investments that customers are getting from these solutions.

One example was a seven-digit expansion deal with a major airline, one of our most successful reference customers and trusted partner that went through a merger. In the second quarter they made a decision to standardize on NICE by replacing a competitive platform and further expanding their footprint with NICE. They took on additional analytics applications as well as our performance management solution to help them improve customer experience and reduce operating costs.

Our analytic applications are also increasingly being deployed in the cloud. For example, an existing long-term customer with several products already deployed in an on-premise model now decided to deploy additional functionality from NICE in the cloud, placing a seven-digit order with us. This major healthcare insurer will be deploying our customer feedback solution to help improve net promoter score and retain customers.

There are actually more interesting aspects to this deal. One of them was around changes in regulations, which are continuing to drive our business. In this case changes in regulation in the healthcare industry are compelling healthcare insurers to change their business model from B2B to B2C. Now that the consumer can choose their healthcare provider, the brand has become more important, and therefore, customer satisfaction and experience is now high priority for them.

In another deal, one of the UK's leading retail operations and a prominent brand was looking for a solution with rich functionality, scalability, and the capability to help them improve customer satisfaction. In what was a competitive deal, they decided that NICE had the right solution that met their needs. The NICE solution will gather customer feedback from across all retail stores and contact centers. Acting as the backbone about this customer experience program, the solution will provide comprehensive Voice-of-the-Customer insights to better understand and improve the overall shopping experience. It will give this retailer the ability to react quickly to changing consumer needs.

Our financial crime and compliance business delivered another very strong quarter with 40% revenue growth as we continue to extend our market leadership in these segments. The second quarter saw strength across all lines of business within this segment, including our anti-money laundering, fraud, and compliance solutions. Anti-money laundering continued to drive the business as regulators continue to clamp down on financial institutions. Being the leader in anti-money laundering solutions, in addition to having a large customer base, gives us a distinct advantage in capitalizing on these increasing regulatory environment.

In a seven-digit AML deal which was driven by regulation, cost reduction, and operational efficiency, a major bank purchased one of our AML solutions to track currency transactions. It was a competitive win for us and will replace an existing incumbent solution. We won the deal because of the holistic solution we can provide and the vast experience we have with big banks.

The expanding regulatory environment also continues to drive our compliance business, supported by some large compliance deals. In one area of compliance foreign-exchange trade surveillance has received a lot of attention from regulators. One of our existing customers, which is a major European bank and one of the biggest foreign-exchange traders in the world, selected NICE based on our proven platforms and product capabilities. In this highly competitive seven-digit deal the bank purchased our foreign exchange swaps compliance modules.

We continue to expand our presence in the mid-market as a result of increasing regulations. In one example we acquired a new customer with strong presence on the West Coast. Similar to the needs of large financial institutions, these banks needed more sophisticated tools to help prevent money laundering and fraud. In a competitive win for us, we signed a seven-digit deal with the bank as they replaced their incumbent and home grown solutions with our suites of anti-money laundering and fraud solutions along with our Enterprise Risk Case Manager.

Our security business continues to be driven by worldwide awareness around safety and security. In surveillance the investment climate for Situation Management solutions remains strong with more organizations looking at the value that the solution provides beyond just pure cost. As a result, we are seeing an increase in interest and demand for Situator, our situation management solution.

In the second quarter we won our largest Situator deal to date, which we already announced. It was a deal in which our Security solution is helping to protect a large city in Brazil and played a significant role in the security and safety of the World Cup that took place there.

In our intelligence part of our security business, we signed several large deals in the quarter. In one of those deals, Nokia Networks bought our advanced geolocation solution to enhance the planning and optimization of mobile networks.

In summary, we continue to execute on the main initiatives I defined when I stepped into the role, which include: further defining NICE's long-term growth strategy, reviewing our operational model, and committing to flawless execution that will drive growth in efficient, effective, and profitable manner. We are focused on driving innovation with clear value to our customers in order to facilitate organic growth while looking for opportunities for inorganic expansion.

As we step into the second half of the year, our strong pipeline, solid execution in the second quarter, the demand we see for our new products, and the many market opportunities, give me confidence that we can finish the year strongly in both revenue and profitability.

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 second quarter of 2014 and our outlook for the third quarter and full year. Revenues for the second quarter were $239 million, up 6% from $225 million in Q2 last year.

Customer interactions revenues were $145 million in the quarter, down 1% from Q2 2013. Financial crime and compliance had a very strong quarter, growing 40% year-over-year to $48 million. Security revenue grew 3% year-over-year to $46 million.

Moving to the regional breakdown, second-quarter revenues in the Americas were $156 million, up 16% from Q2 2013. Revenue in EMEM increased 6% from last year to $59 million. Revenue from Asia-Pacific region were $24 million. For the quarter that Americas accounted for 65% of total revenue, EMEA 25%, and APAC 10%.

Looking at revenues by business line, product revenue accounted for 36% of total revenue in Q2. Maintenance revenues accounted for 41%, and professional services, including cloud, accounted for the remaining 23% of revenues.

Gross margin in Q2 was 65.2% as a result of product mix. This had an impact on operating margin that came in at 17.2%. The increase in revenue expected in the second half of the year will drive improvement in both gross margin and operating margin. We expect full-year 2014 operating margins to be higher compared to 2013.

Earnings per share were $0.57 in Q2 compared to $0.61 in Q2 last year.

Headcount at the end of June totaled 3611 people compared to 3584 people at the end of December 2013.

Cash flow from operations in the second quarter was $26 million. Total cash and financial investments were approximately $462 million at the end of June 2014.

During the second quarter we bought back 632,000 shares for total consideration of approximately $25 million as part of our share repurchase plan. During the second quarter we paid a quarterly dividend of $9.6 million. In line with our dividend plan NICE Board of Director approved the dividend for Q2 2014 of $0.16 per share. The record date is August 12 and the payment date is August 26, 2014.

Turning to guidance, we expect third quarter 2014 total revenues to be in the range of $240 million to $248 million and fully diluted earnings per share to be in the range of $0.59 to $0.67. We expect total revenues for the full-year 2013 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?

(Operator Instructions) Shyam Patil from Wedbush Securities.

The first question is, when you look at the ramp that you are expecting in the fourth quarter, can you maybe talk just a little bit about what gives you confidence and how we should just think about the segments contributing to that ramp?

It's a combination of several things. First of all, as I've mentioned, the booking in the quarter was very strong and gives us confidence that we will be able to convert that into revenue in the second half. And the other part is obviously the pipeline that also looks very strong, robust, and promising for the second half.

If you look on our business historically you will see that the business becoming more and more back-end loaded, given the fact that we are leaning much more towards advanced application analytics. You saw it last year, the year before. And we believe it will be even more pronounced this year.

With respect to the segments we see this strength coming from all the different line of businesses.

Great. And, Barak, it seems like M&A is going to be maybe a bigger area of focus that it has been previously. Just wondering if maybe you could talk about where you are with your thoughts there and any expectations we should have externally on that front.

We are very active in that field. We continue to develop, I would like to call it, a healthy pipeline with respect to potential acquisitions. Obviously, it takes two for tango and we will do the right acquisition when applicable. But I believe that's something that we push heavily in that area, and as soon as something will happen obviously you will know about it. But definitely we are very active in that field.

Great, thank you very much.

Daniel Ives from FBR Capital Markets.

Two questions -- one, in terms of margins this quarter on the expense side, were there some unusual expenses that came through that you are not expecting to come through in 3Q and 4Q, just from a margin perspective?

Yes. The major impact on profitability this quarter was actually the gross margin and, more specifically, product mix that affected mainly the gross margin on products. And when we look at the composition of deals for the second half of the year we believe that the gross margin will improve significantly.

In terms of the expenses we do see increase in expenses over time. That's part of our plan to continue to invest in R&D and other areas. And we believe we would see the benefit and the profit coming from out of this investment in the second half of the year.

And then just maybe at a higher level, Barak, obviously, taking over, when you are looking second half of the year into 2015 what are the one or two (inaudible) strategic objectives that you think you need to change or just your view going into the next six to nine months for NICE? Thanks.

So definitely it was a busy quarter, as I have mentioned. I stepped into the role, completed the management transition. We continue to move forward with a variety of operational transformation initiatives that will -- started in Q2 but also will take us through the second half and next year. We are very much focused on executing on our roadmap and you saw it with the launch today of NICE Engage, which is a very significant milestone for us in terms of our product release, which we believe and expect many customers of ours to upgrade to that platform, given its benefits.

And we are working on a variety of strategic initiatives in the different line of businesses of the Company. Taking all that together, we are very busy and very optimistic for the second half of the year and obviously moving forward.

Thanks.

Hugh Cunningham from Oppenheimer.

Piggybacking on what Daniel just asked, I know you were working on the -- I guess it's called the NICE 2020 Strategic Analysis. And out of that analysis, are there any sort of big picture takeaways that you are coming out with? And specifically I think the general consensus is that under your leadership, Barak, it's reasonable to expect more activity on the M&A side. But are there any other things -- I hate to say change because maybe there is no change needed; maybe NICE is on the right strategic direction. But is there any takeaway from NICE 2020 that is big picture directional, maybe market-driven? And aligned to that, if you are more active in M&A, are there any areas that you are particularly interested in?

So indeed we embarked, as I said, into the role with the strategic planning process for the year, which is -- you named it correctly, NICE 2020. And we are in the middle of this process, which we are on schedule and plan to finish towards the end of the year. Obviously, there are many insights, some tactical and even operational initiatives that we already started internally. And there are also, as you called it, big picture insight.

The good news about it is that the market opportunities that we have in the different domains that we operate are very rich both in our existing markets and also in adjacent markets. So it's more a decision of which different directions to take. Some of those that we can also take in the short term we execute on already. And some, as I mentioned, will -- should start the end of the plan or when the plan is ready, which will be towards the end of the year.

Okay, thank you. One quick question regarding the -- when you talked about analytics you mentioned the cloud. Can you remind me where your mix stands for cloud revenue?

So yes. First of all, it was another strong quarter for our cloud business. It grew in double digits. With respect to the mix, Dafna will know first with the exact mix of the cloud out of the business. I don't know if I remember the number by heart.

We are not giving a specific number, but I can say that overall we are between 5% to 10% in cloud.

Okay, and then one last thing -- what sort of impact is NICE seeing from the ongoing military action in Israel?

I will say that on a personal level I am wishful for peaceful days. On a business level we see no impact, no internal impact or external impact to the business. And in general as a common practice for the company we have business continuity plan in place which was developed actually several years back, which guarantee our continuance of the business in any kind of situation, whether in Israel or in other places.

Thank you very much for taking my questions.

Tal Grant from UBS.

Just three questions from me -- firstly, on M&A I see that you spent $220,000 on M&A fees, it looks like. Could you comment on that? Did a deal fall through or is that just sort of standard going through deals with bankers?

Secondly, I see there was $3 million in restructuring expenses and $4 million in reorganization expenses. Could you comment on that and whether -- what you see for that for the second half?

And finally, just looking at your earnings projections for Q4, I calculate it to be sort of 17% growth at the bottom end, which seems quite high. You increased it 6% last year in Q4. Just wondering how likely or how confident you are in achieving that bottom end.

Okay. So I'll start with the restructuring cost. We had quite a significant expense this quarter. It has to do mainly with the change in leadership and change -- certain changes in management. Mostly all of the changes have been made already and accrued already. So it's definitely a one-time phenomenon of Q2.

In terms of certain specific costs, we did do a very small acquisition of a partner at the beginning of Q2 -- very, very small. And these expenses are related to that.

And your third question was regarding our ability to generate profitability towards the end of the year. This is supported mainly by or totally by our assumption that we would see significant ramp up in revenues, actually in product revenues. And while doing so we believe that with the current expense structure of the Company we can generate much more profit. But that would happen -- probably most of it would happen the fourth quarter, as you've indicated. We are basing this assumption on our operational plans and how we look at the second half of the year that, but as I mentioned earlier, it is expected to be very strong.

Thank you.

Greg McDowell from JMP Securities.

I wanted to first ask about the security business, which seems to have recovered a little bit with 8% year-over-year growth. I think it was down 11% in Q1. And you had talked at the analyst day a few months ago about splitting the security group into two different areas, surveillance and intelligence. I was just wondering if you guys are starting to feel the positive impact of the split of the security group. And is that one of the reasons we saw an acceleration in security growth?

Thank you for the question and the good memory from the analyst day. So yes, indeed we did that management split in terms of managing the portfolio to the surveillance and the intelligence. And I referred to them as I reported on the results. And we indeed see better results this quarter in this business. And as I've mentioned also, the booking and the pipeline was very positive. As we know, in this business it takes us longer in this business to convert booking into revenue. But we believe that it will look even better in the second half of the year. And I have a great belief in the new leaders that came to lead this business. And all the market dynamics in this particular business are also very, very healthy.

Great, thank you. And one quick follow-up on financial crime and compliance -- obviously, that has been a real bright spot for you guys with the business growing 40% last quarter. But going back to the analyst day one more time, I remember Joe talking about the total market growth rate being in the range of 8% to 14%. So I would just love to hear your updated views on whether you feel like market share gains in the financial crime and compliance sector are accelerating. And do you feel like they could continue to accelerate?

Thank you for the question, once again, and thank you for the very good memory of Joe presenting. And indeed, it was a very strong quarter for the financial crime and compliance business in all the different segment of this market, both the anti-money-laundering solution, the compliance, and fraud.

The good dynamics that we see in this business is a result of a few things. First, the regulations that continue to be even stronger not just in the US, also internationally outside of the US. So that's one driver. And we continue to see more and more on those. And the type of solutions that we have in this market help us very much.

The second part is a very large customer base we have in this market, being the leading player at the high-end of this market. And the second thing is the opportunities that we have in the midmarket. And I referred to one of the deals that we won in the quarter, which is a great example of the customer that is actually almost number 100, give or take, and the relatively small, if you would like, bank in the list of the financial institution in the US. However, when you look at the deal and the needs of the customer, we sold over there the entire portfolio in a seven-digit deal. And it gives us great confidence in our ability to take our solution, not just expanding it in the high end of the market but also the applicability of the solution to take it down market. And as a result, the total addressable market for our solution is growing significantly.

That's helpful. Thank you very much.

Saliq Khan from Imperial Capital.

Speaking on behalf of Jeff Kessler, the first question that we had was, it looks like the pipeline of the M&A activity looks fairly healthy. But as you look out into the out quarters, and you are engaging your customers to essentially help you drive the sales of more advanced analytic platforms, what exactly is the bottleneck that could prevent you from driving your EPS number, say, at or above $3 as we look out into 2015?

We are not referring specifically for 2015 in terms of the EPS. We haven't discussed 2015. Obviously, the focus of the Company is on analytic-based applications in all three businesses that we operate in. And we believe that would be the driver for further growth and margin expansion.

Okay, that's fair. The other one being, is -- it appears that a lot of the multinational firms, particularly those in the United States that have branches globally, they need a similar level of compliance that their counterparts in the United States have. How is the conversation evolving with that parent company based out of the United States since the last time you and I spoke?

I'm sorry; can you repeat the question? The line is a bit unclear. Yes, can you repeat the question please?

Is this any better? Sorry about that. So the multinational firms, particularly those in the United States that have branches globally, they tend to need a similar level of compliance that their counterparts in the United States have. How is that conversation evolving with that particular parent company?

We are moving them more and more -- we have, obviously, a lot of multinational global organizations that we sell to. And there are more and more of them that are approaching us in one region, usually the America region, but negotiating global deals because they are looking at a solution that will have to be deployed globally. This is definitely a plan that we are seeing in our business and a continuous plan that we see in this industry.

Yes, and that definitely the fact that we operate globally as a company and we do business with a lot of fortune 100 companies that are either already global or globalizing their operation, having the solution deployed or our solution deployed in their US operation helps us very much when they go overseas and either expand or open their operation.

Great. And the last question that we had for you was, if we look at about a year ago, what happened with the acquisition of Causata, the idea there was twofold. One is that you can certainly increase the customer interaction analytics platform and solutions that you price for the end-user. But at the same time, from an investor standpoint we are envisioning that it would help you drive margins above 65%, 66%. How is that process coming along and how do you think we need to be thinking about this for the next two or three quarters?

The acquisition of Causata that took place last year brought to NICE a lot of technological assets that's helping us in shaping and further evolving the customer engagement analytics solution that we announced on last year in the effort and theme of providing a solution for organization to oversee and manage the entire customer journey. They brought assets in the area of web analytics and personalization that we have already integrated into the platform, and we are making good progress on that front. I don't believe it has any impacts to any size with respect to gross margin. The impact obviously is more with respect to evolving our product portfolio in the analytics arena.

Great, thank you.

Jonathan Ho from William Blair.

I just wanted to start out with the contact center business. Clearly, you guys are looking for improved results in the second half of the year and with release of Engage. How should we be thinking about the longer-term growth rate of the business, just given the first half performance and your longer-term expectations?

So yes, we are very optimistic about this business. It represents a big chunk of the Company business and we have a very wide set of assets in this business, both the portfolio as well as the customer base. And we are expanding in this market in variety of directions. For the long run we still believe and optimistic that this business can and should grow in double digits. It did have somewhat of a slower start for the year, but the booking of Q2, the pipeline that we have for the second half of the year, gives us confidence that we will see in the short term much better growth in the second half. And we are building upon many opportunities including the release of the NICE Engage platform to solidify our position and get this business to a double-digit growth in the long run.

Got it. And just in terms of the Engage platform, clearly this is going to be a significant driver. Can you maybe talk about the go-to-market strategy, penetration rates for the existing analytics solutions and how maybe this changes either of those two?

Yes. So definitely we announce the Engage platform today. And we already just from this morning are starting to get positive interest from customers. The platform itself is actually -- the targeted market, obviously the first target is all our customers. And we have many of them.

And there are many benefits in this platform. It's the market's first scalable, highly cost-efficient platform, really unprecedented capabilities of full, 100% real-time analytics. If you combine all of those capabilities with the very attractive reduction of total cost of ownership for customers, we believe that many of our existing customers will upgrade to this platform. Our sales teams are already engaged and will have to educate our customers and will elaborate on the existing go-to-market capabilities that we have in order to get as many of our customers to upgrade. As they will upgrade to this platform, obviously additional capabilities are open to them to acquire and purchase from NICE.

Great. And any sense of timing in terms of when Engage will become more meaningful to the numbers?

I believe also from historical experience we will see a certain ramp up. And as we come into next year it will have a much more meaningful impact.

Great, thank you.

Ladies and gentlemen, we have no further questions. I would now like to turn the call back over to Barak Eilam for closing remarks.

Thank you very much for joining us today and have a great day. Thank you.