Nice Ltd (NICE) 2014 Q4 法說會逐字稿

Welcome to the NICE Systems conference call discussing fourth quarter and full year 2014 results, and thank you all for holding. (Operator instructions.) As a reminder, this conference is being recorded February 5, 2015. I would now like to turn this call over to Mr. Marty Cohen, VP, IR at NICE. Please go ahead.

Thank you, Operator. With me on the call today are Barak Eilam, CEO, Dafna Gruber, CFO, and Eran Liron, EVP, Marketing and 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 according 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 Three 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 fourth quarter and full year 2014 results and the Company's guidance for the first quarter and full year 2015. 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 differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release.

I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. I'm glad to be on the call with you today. As a result of all-around, excellent execution, I'm pleased to report a very strong finish to the year in which we reported record revenues of $294 million for the fourth quarter. This represented 9% organic growth. Moreover, our profitability improved significantly. Earning were very strong at $1.02 per share, which represented a substantial 36% increase compared to the fourth quarter of last year and demonstrates the much-improved operational efficiency at the Company.

Early in 2014, we discussed two main areas of focus, to look into our long-term growth strategy while at the same time thoroughly reviewing our operational model. We made a strong commitment to improve the business through flawless execution to drive growth in an efficient, effective, and profitable manner. I'm pleased to say that we achieved some great success in this area as seen by the significant milestone we reached. We achieved a 20% operating margin for the full year 2014. This was supported by record-breaking 25% operating margin for the fourth quarter of 2014.

The strong organic growth -- the strong organic top line growth, which helped us to cross the $1 billion revenue mark for the first time in our history, is a result of very strong demand for our analytic solutions, supported by excellent execution. Furthermore, the significant profitability improvement is the result of the ongoing successful implementation of our operational plan to streamline the business and increase profitability. Some of the measures we have taken so far including optimizing our go-to-market, eliminating nonproductive activities, and disciplined expense management. We are centered on product leadership and go-to-market expansion. We are moving products faster to the market, and profitability remains high on our agenda.

Q4 was the best quarter we ever had for analytics, demonstrating the increasing demand for these solutions. Analytics registered another strong quarter of double-digit revenue growth and has now become the major part of our business, representing 60% of our new business in Q4. We continue to see customers expanding their analytic solutions with NICE due to the high return of investment that they are getting from these solutions. Moreover, an increase in the number of large deals that we are receiving is being driven by analytics.

Deal size, as well as the number of competitive replacement, has been increasing over the past couple of quarters, demonstrating the strengthening of our leadership position in the market. This is because an increased number of our customers are further expanding their footprint with NICE by purchasing our full portfolio of solutions. In other words, they are standardizing their NICE. In doing so, we are becoming our customers' strategic partners, enabling them to lower costs and improve business results.

A unique competitive differentiation for NICE is that we are increasingly combining the technologies of our customer interactions in financial crime and compliance businesses. In Q4, we had multiple deals where these collective technologies were instrumental in winning the deals, and we are now taking these technologies to new verticals.

We are also gaining traction in cyber-security. Our investment in this area of security is bearing fruit, resulting in strategic deal in Q4 with one of our large-term European customers.

Let me now take a minute to talk about the broader view of NICE in the market. At NICE, we serve organizations - we understand their challenges, their needs, and their goals. However, at the end of the day, what we're really doing at NICE is helping people. We take care of three very important matters for people. We take care of their money, we take care of their safety, and we care for their experiences. Today, we are securing financial transactions and preventing fraud for people using the services of the world's largest financial institutions. We are securing cities and assets around the world where people live and work, and we are making people's experiences timely and seamless.

These areas - money, safety, and experiences - have something in common. They're all going through a major disruption because of technology. But, at the same time, technology is what can and will revolutionize these dimensions for people. And not just any technology, but rather a unique combination of four areas of expertise, expertise that we have practiced for the last three decades.

First, the ability to connect and capture hundreds of sources of data. Second, managing very large amounts of data. Third, delivering a lot of sophisticated analytics. And fourth, the ability to execute on these technologies in context within a specific domain.

Our vision and strategy for the next few years is to strengthen and solidify our position in these three important areas of money, safety, and experiences by further enhancing the technology domains that we master. We have a great starting point, bolstered by our leadership position in each of these technology domains, and we see large addressable markets and significant opportunity for years to come. All of our strategic and operational plans are well aligned to capture these opportunities in 2015 and beyond.

As we head into 2015, we'll continue to execute on our operational plan that we start to implement earlier in 2014. We believe it will lead to continued improvement in our profitability. We are pleased to close 2014 on a very strong note, and now look forward to achieving another year of success in 2015. I want to take this opportunity to thank our employees around the world for their contribution in making 2014 a successful year for NICE.

Before I turn the call over to Dafna, as most of you saw today, we announced that she will be leaving us in the coming months, but will remain with NICE until her successor is announced and fully on board so that she can help support a smooth transition. On behalf of myself and the entire Company, I want to thank Dafna for her dedication and support during her eight years at NICE. As CFO and a valid member of our management team, she has made a huge contribution to the success of our business. I wish her the best for the future. 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 fourth quarter and full year 2014, as well as our outlook for the first quarter and full year of 2015.

Revenue for the fourth quarter were a record $294 million, up 9% organically from $271 million in Q4 last year. Revenue for the full year 2014 increased 6.5% organically to $1.012 billion. Sequentially, growth in the fourth quarter was 18%, reflecting the continued second half weighted seasonality in our business, with even greater weight on Q4.

Customer interaction revenues were $178 million in the quarter, up 6% from Q4 2013. For the year, customer interaction revenues were $613 million.

Financial crime and compliance had a strong quarter, with revenue of $65 million, representing 18% growth over Q4 last year. Financial crime and compliance ended the year with revenues of $197 million.

Security revenues grew 8% year-over-year for the fourth quarter to $51 million, bringing full year revenues to $202 million.

Moving to the regional breakdown, the Americas region continued to be strong and was a major contribution to our overall growth. For the year, the Americas accounted for 66% of total revenue, EMEA 24%, and APAC 10%. Fourth quarter revenue in the Americas were $197 million, up 13% from Q4 2013. Full year Americas revenues were $666 million.

Revenues in EMEA increased 6% from last year to $68 million in Q4. Full year EMEA revenues were $239 million.

Revenues for Asia-Pacific region were $29 million in Q4 compared with $32 million in Q4 last year, and were $107 million for the full year 2014.

Looking at revenues by business line, product revenue accounted for 45% of total revenues in the fourth quarter and 38% in 2014. Product revenues were up 13% in Q4 and 3% for the full year.

Service revenues were up 5% in Q4 and 9% for the full year.

Maintenance revenues accounted for 34% in Q4 and 39% for the full year, and professional services, including cloud, accounted for the remaining 21% in revenues in Q4 and 23% for the full year.

Gross margin in Q4 was 70.3% compared with 66.5% in Q4 last year. The year-over-year increase in gross margin was mainly the result of the increase in product revenues and the continued increase in software-based analytic product, which is now the vast majority of our business. For the full year, gross margin was 66.7%, slightly higher than 2013.

Operating margin in the fourth quarter was 24.7% compared to 19.8% last year. The significant growth in operating profit and operating margin is the result of executing on our commitment to improve profitability. The incremental operating margin in Q4 was 82%, bringing 2014 leverage to 31%. For the year, the operating margin was 20%, marking a major milestone for the Company, and it was in line with our goal to continue to improve profitability. We continue to monitor our spending while working on optimizing our business to continue to improve our operating margin over time.

Tax rate for the year was 16%, and we expect a tax rate of 17% to 19%, going forward.

EPS increased 36% to a record of $1.02 in Q4 compared to $0.75 last year. For the full year, EPS was $2.85 compared to $2.58 last year.

Cash flow from operation for the fourth quarter was strong at $64 million and was $182 million for the full year.

Total cash and financial investments were approximately $500 million at the end of December 2014.

During the fourth quarter, we bought back 307,000 shares for a total consideration of approximately $13 million as part of our share repurchase plan. We still have $23 million in our current buyback plan available. During Q4, we paid a quarterly dividend of $9.4 million. In line with our dividend plan, NICE's Board of Directors approved a dividend for Q4 2014 of $0.16 per share. The record date is February 18, 2015, and the payment date is March 4, 2015.

Turning to guidance, we expect first quarter 2015 total revenues to be in the range of $240 million to $248 million, and fully diluted EPS to be in a range of $0.66 to $0.72.

We expect total revenue for the full year 2015 to be in the range of $1.065 billion to $1.085 billion, and fully diluted EPS to be in the range of $3.06 to $3.20.

Before I turn the call over to Q&A, I want to say that I'm proud to have been a part of the Company's achievement during the past eight years. After a very strong 2014, with healthy momentum going forward, I believe now is the right time for me to take some time off before moving to the next step in my career.

It is now an exciting time at NICE. Great new products and strong market and industry dynamics are creating many opportunities for growth, going forward. I would like to thank our investors and analysts for your support. It was a great opportunity to work with you during the time here at NICE. I look forward to seeing NICE to continue to succeed and deliver value to shareholder and customers alike.

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

(Operator instructions.) Shaul Eyal, Oppenheimer.

Thank you, Operator. Good afternoon, guys. Congrats on a strong finish to fiscal '14 and the fiscal '15 outlook. Dafna, also was a pleasure working with you over the past so many years, and hope we cross path in the future.

Dafna, any foreign exchange tailwinds, headwinds, or neutral impact this quarter?

It's basically neutral impact this quarter, and also next quarter. The way we work is that we are hedged a few months ahead, and therefore favorable exchange rate allows us to expand our investment, and this is what we are doing right now. So -- but there's no direct impact on profitability.

Thank you. Barak, great performance from an operating perspective. With analytics already 60% of total revenue, how should we think about the analytics contribution to an improved margin profile?

Well, thank you, Shaul, good question. First, the contribution of analytics obviously to the growth, but we also can see the impact on the profitability. These are software-only solution where the core competency and IP of those solution is all made home-grown at NICE. So, it's definitely contributing to our gross margins, as you can see this quarter. The more we increase our products' revenues, obviously we'll see an impact -- positive impact on the profitability.

Got it. And one final question, if I may, on cyber-security. Barak, you indicated a contract with an existing European customer. What is it exactly that NICE will be doing for the customer from a cyber-security perspective? Just trying to get a sense or some color about the product offering relating to cyber-security from NICE's perspective.

So, we operate in two domains of cyber. Cyber is a big space for us, and referring now to the intelligence part of our business, the security part of our business, over here there is the aspect of the cyber-defense and the active cyber. We are not here allowed to expose exactly what we are offering to this particular customer, given the nature of that business and the request of the customer, but this is an entry point to this customer. It's existing customer for us, using other solutions, and now expanding into cyber. So, it's the first solution of cyber more on the active side of it, with future expansion potentially into the cyber-defense part.

Got it. Thank you so much. Congrats again.

Thank you.

Saliq Khan, Imperial Capital.

Great. Thank you. And I'll be speaking on behalf of Jeff Kessler. Just a couple real quick questions that we have for you, first one being is you guys continue to go [at] -- improve your overall margins. One of the things that you've talked about on the call was finding ways to become more disciplined in expense management. Could you give us more color on what that essentially means for you guys when you're streamlining the overall business?

Yes. Let me refer to that. Thank you for the question. NICE has been growing on a rapid pace in the last many years, both organically and through acquisitions. As a result of that, we have a variety of structures in the Company that can be simplified, and this is what we've been doing in the last few quarters. And there is still a long way to go in the quarters to come.

In addition to that, as we mature the Company, is growing as a Company, there is a way to simplify the processes, and this is what we are doing, as well. With further discipline, given the size of the Company that we are, which allow us to control expenses better, and we actually see that demonstrating it very nicely in the fourth quarter. And I believe we'll be able to continue with this approach as we step forward to 2015 and beyond.

Great. And then, one of the things that you'd talked about previously was that, for the vast majority of customers that you guys are bringing on now, you're becoming more of a standard for them to institute your type of solutions rather than going with a competitor. Are you guys -- when you're able to do that and engage in that new contract, are you giving [them] some sort of price break, or are you sticking to your guns in regards to making sure that the margins remain pretty high?

It's a very good question, actually. I think that what we see happening to us in -- for the last two years, we've expanded our portfolio quite significantly. This is on the product side. Now, on the go-to-market side, what we have started to educate our sales team and now is working for us quite nicely, is to become much more of the trusted advisor of our customers. And the dialogue is changing quite dramatically, given the portfolio that we have, from a discussion of pricing and discount to much more of the value that we can provide.

So, in the end of the day, when the discussion about the value and the right solution, or set of solutions -- and this is the unique part, the fact that we can come with set of solutions to the customer, and it's a platform that we can add more and more to that -- as pricing or price point become less relevant in this discussion, we also find ourselves selling much higher in the chain where, again, price of course matters, but it's not the prime decision factor, or not the prime factor for the decision in the decision about the project.

Great, thank you. And then, the last question is, last quarter you guys saw a positive impact from the Telco market. How is the strengthening of the Telco market really benefited you guys during this current quarter? And also, what other vertical markets are you seeing out there that could be beneficial for you during the coming year?

So, we definitely continue to see a strong momentum in this market. It's a vertical that we started to grow into in the last two years. And so, quite a major breakthrough in the previous quarter, as you've mentioned. We saw the same dynamics this quarter, and also when we look, moving forward, on the pipeline and the attraction and level of activity we have in this vertical, it's very encouraging. The portfolio that we have today is very suitable for this market, and also the domain expertise we have developed in-house, as well as thanks to several past acquisitions that we have done, definitely helping us and got us to this point today.

Great. Thank you all.

Thank you.

Daniel Ives, FBR.

Thanks, congrats on another great quarter. And Dafna, it's a great way to go out on top, [just that it's great to see], and good luck. Barak, so let me ask you, what -- I mean, this is probably, my opinion, the best back-to-back quarters I've seen in NICE in probably almost a decade. So, what is it that you think was either the low-hanging fruit, or what's really been the change at NICE that you made or implemented, either from a go-to-market or from product perspective, that maybe you could kind of look back on the last six months?

Thanks, Daniel. So, it's a combination of several things. Obviously few low-hanging fruits, but the fundamentals of the Company are very, very strong. And what we've done in the last few quarters, I referred to that in the previous call, and it's -- we continue to see that even more pronounced in the fourth quarter, several things.

First of all, we started to push and deliver products to the markets faster than before. We had a lot of products waiting in the pipe, and we started to release them earlier than we originally expected. We put a lot of pressure on that, a lot of investment, and we're starting to see very good traction for those products in the market. So, that's the first part.

The second part is a certain alignment that we've done in the go-to-markets. Just to name one example, I referred to that earlier, and this is the fact that we removed some of the barriers between the sales team of our customer interactions business and our financial crime and compliance business, and we see great cooperation over there, and we had several very large deals, very strategic deals in the quarter, which are basically the combined solution between our customer interaction business and our financial crime and compliance, some came with the support of that sales team, and some with the support of the other sales team.

So, these are just few examples, but that is combination of several other activities. Energizing the troops, if you would like, I believe contributed to the success that we've seen this quarter, and Q3 as well.

Yes, it's a breath of fresh air. Just lastly, just can you talk about, like, your thoughts in M&A or tuck-in, or just holes in the product areas, or just broadly going into 2015, maybe comparing that to how we were a year ago in terms of the M&A strategy? Thanks.

So, our strategy and thoughts about M&A did not change. At the same time, obviously we see a very nice improvement with respect to our organic activities, and we are investing in releasing more capabilities to our customers and our capabilities to cross- and up-sell to our existing customers, as well as a significant momentum in competitive replacement that we see is very encouraging.

Having said that, we started to expand into certain adjacent markets, which definitely an acquisition can help us to accelerate on that front. We continue to remain active on the M&A front, and when the right opportunity will come, we'll sure be aggressive about it. Our thought about using our capital for acquisition did not change, and we have a healthy pipeline on that front.

Shyam Patil, Wedbush Security.

Hi, guys, congrats on the quarter, and Dafna, best of luck to you. I think maybe just following up on the previous question, Barak, what are you seeing out there in terms of valuations for M&A? Does it differ across geographies and segments? And what -- anything of particular interest in terms of segments you're focused on, or areas within analytics?

So, thanks, Shyam. So, I've mentioned before, the strategy with respect, and the philosophy respect to -- with respect to M&A did not change. Obviously valuation are -- you can refer to them as high. There is variety of valuations out there. And valuation is important, but first is the strategic fit, and this is what we are looking when opportunity present itself.

Given the direction I've mentioned before, with respect to the four domains we operate in in technology-wise, we are looking mainly into adjacent areas to what we do that are fully aligned with our strategic direction. And analytics, as you mention, is a key part of it. So, no doubt that, if we make an acquisition, it will have a solid contribution to our analytics direction.

Great. And then just some modeling questions. How should we think about [the] segments in terms of growth for this year? And in terms of the product service mix, maybe what's [actually] impacted that in the fourth quarter, and how should we think about that this year?

Yes. In terms of the growth, we are targeting growth of double-digit over the long-term, and a slight improvement over time in all our businesses. In terms of the breakdown between product, services, and maintenance, the outlook for 2015 in a year, and I'm not talking about the specific product, but I don't expect 2015 to be very different from the distribution in the previous years.

Okay. And this is my last one, and I apologize if you already mentioned it. But, in terms of the FX impact, did it have any kind of impact on the 2015 outlook versus what you may have originally been expecting?

There is a certain impact, but it's already embedded in the guidance that we gave, and the strengthening of the dollar across the world is definitely helping us ramping up our expenses -- our investments in certain areas that we had to cut back in the past because of non-favorable exchange rate. But, as I said, everything is already embedded in the guidance for the year. If there will be a change in trend and the dollar will become weaker, we'll have to adjust our expenses accordingly, over time.

Excellent. Thank you.

Greg McDowell, JMP Security.

Great. Thank you very much. And Dafna, I agree, you have a lot to be proud of in your run as a CFO. My first question, Barak, something you said caught my eye when you talked about competitive displacements, and I was just hoping you can expand a little bit on what's going on with competitive displacements, whether the displacements are accelerating, and maybe why that is happening now.

So, yes, I've mentioned that -- earlier that we see in the last two quarter an acceleration in the rate of competitive replacements. When I look on those and what's common to them, I believe it's a result of two things. First of all, it's the fact that we have did some changes in our go-to-market, improve our coverage by segmenting the go-to-market, and we find opportunities that are not covered by the competitors, hence allowing us to drive competitive replacement. That's one thing.

And the second part why I believe we see accelerated rates is that it's -- some of them are existing customer far as in one product that have on the other part of the business a competitive platform, and they decide to go and make NICE the standard across the board. And I give that to the fact that, with the recent products that we introduced to the market across the board in all the different divisions, they see a value in making a one-vendor choice, and instead of dealing with several vendors, dealing with one. And that's something that we see accelerating, and I believe and I hope that we will see it also in 2015, which definitely will contribute to our success.

Thank you. And one quick follow-up, Barak. When you started the year as CEO, certainly one of your themes was improving operational efficiency, and I think we've seen the positive results. But, one thing I wonder is, sort of in your first year, you were able to pick the low-hanging fruit, if you will, of improving operational efficiency. So, as we start year two of your leadership, I was just wondering, what else is left in streamlining the business, and is it getting harder to find the parts of the business that truly need to be streamlined down?

So, I think we're starting to see, and you started to see some of it in the third quarter, and much more in the fourth quarter, and also in our guidance for next year you see the improvement in profitability. And it's a combination of both the low-hanging fruit that we already took care of most of them coming in full force in the fourth quarter almost, and then for sure in 2015, but there's still a long way to go. I believe there are multiple opportunities for improvement.

We have a great company. It's a company that grew rapidly for many years, and done many acquisitions. So, some of the thing were very easy and fast to make. Some others require a bit more time, with very concrete plans behind them, which we're executing rapidly on them. And that's where I believe we can drive more improvement. I believe there is still plenty of opportunities, and long way to go. So, I believe the opportunity -- so the improvement was not just one or two quarters, but it's something that we see gradually growing in 2015 and beyond.

Great. Thank you very much.

Thank you.

Jonathan Ho, William Blair.

Hey, guys. Dafna, let me also echo my warmest congratulations for you in terms of this opportunity. Just moving on in terms of the results in the APAC region, I just want to understand sort of your expectations for 2015 and maybe whether you're going to be making any changes there to try and drive improved results, and just maybe what those changes would be.

Yes. So, what we saw in the quarter in Asia, in Asia-Pacific, and to a certain degree in the year, is the result of some lumpiness that we had in our security business. We had some very large deals in the previous year that did not happen this time, but the pipeline, moving forward, is healthy. So, I don't think we -- there is a major issue over there. Obviously since it's a small region, representing only a small part of our business, every large deal over there can create this lumpiness.

The other part is that these territories for us is less developed in terms of our analytics solutions, which actually I see as an opportunity. And one of the thing that [we'll] do, moving forward, is the fact that we will start to push those and apply go-to-market tactics and go-to-market coverage similar to what we've seen in other territories, and it will contribute to the growth, moving forward.

Got it. And then, just in terms of the target operating margin, I know you've answered a lot of questions in terms of the potential for this to continue improving, but is there sort of a goal out there that you see for the operating margins over the long-term, and maybe the trajectory that you would see us moving towards that goal, over time?

Yes. Thanks, Jonathan, also for your kind words at the beginning. So, my input on the operating margin is that we're targeting gradual improvement in operating margin over time, and that would be achieved to additional leverage that we see in the model. And I hope that the rate of improvement over time would be slightly faster than what we've seen in the past.

Great, thank you.

Thank you.

Dan Bergstrom, RBC Capital Markets.

Yes, congratulations, and congratulations, Dafna. Thanks for taking my questions. You mentioned cyber-security and a nice win there, and gave some color into that win in Q&A. Can you expand upon your investments that you made there and the opportunity? And then, how are you differentiated in cyber-security?

Thank you, Dan. So, cyber-security, as I've mentioned before, is a very wide space, very hot space, on one hand, but also very complex though, and multiple ways to approach it. We are now taking this in the governmental level. This is our play at the moment. Our investment was made mainly organically, but not also -- also for certain partnerships that we have formed using our existing go-to-market, taking the combination of the two.

What we believe our unique value proposition is the fact that, since we have a large install base of customers using our monitoring solutions, the ability to connect to multiple cyber sensors and connect all of this data, and provide basically a hub for those cyber sensors, and overall eventual to cyber-defense, will gain us something that point solutions do not have. So, this is where our unique value proposition is, and we saw it happening with the customer that I've mentioned before, which was a very important win for us. And we start to see good traction for this approach from other customers, as well.

Thanks. And then, guidance for fiscal year '15 looks odd but realistic. What are some things we should look for, or look for to happen, that could push the growth rate into the upper single digits, approaching that 10% mark?

So, it's the beginning of the year. We are finishing 2014 in a very strong note. We had very strong momentum in the fourth quarter. We are cautious about the top line numbers for the year. We want to see how the year progresses for us. At the same time, as you can see on the bottom line for our profitability, we are committed to achieve a much higher growth with the leverage, nice leverage on the model.

Obviously we continue to invest in our strategic direction, which I believe for the long run will allow us to accelerate on the growth rate. And as soon as we see the different strategic direction in full execution, I believe this is the point where the acceleration on the growth rate will occur.

Thanks. And then, you mentioned the strong fourth quarter. Dafna, that'll repeat next year, just thinking through the linear -- in the model, right?

Yes. Yes.

Thank you.

Thank you, Dan.

Tal Grant, UBS.

Hi there, guys, congratulations on a strong end of the year, and also, Dafna. It's been great working with you, and best of luck for the future. A couple of questions. First of all, just wondering what percentage of the cost base is paid in shekels. And I was a bit confused by your comments about the currencies. So, just wondering, for full year '15 guidance, what FX rate are you assuming there, and is that all hedged already? So, if there are any fluctuations, presumably that would affect out years, but not full year '15. Is that what you're saying?

Secondly, financial crime and compliance obviously made a comeback from the Q3 relative weakness. I'm just wondering, were there any products in particular that performed well within financial crime and compliance, and do you expect -- what are you expecting for 2015 in that division? That's about it, I think. Thank you.

Okay. Tal, thank you for the question. Let's go first to the financial crime and compliance, and then I'll let Dafna refer to the question about the foreign exchange.

So, actually, our financial crime and compliance business is doing extremely well for the last six quarters, actually two years almost. We see traction over there in all domains. We operate over there in three domains, just a reminder, in anti-money laundering, fraud solution, and the financial markets, or trading surveillance. And today they operate under a single platform, and we see actually customer buying all of them either at once or adopting one solution after the other. So, it is -- it continue to grow, and the strength is in all the three domains that I've mentioned almost equally.

In terms of market segment, we serve in that market obviously the high end of the markets. But, in 2014, we started to see growth in addition to the high end of the market, also to the mid-market, banks in the ranges of $5 billion to $20 billion in assets, and also to new markets like alternative payments, as we've mentioned in Q3, and also happened to us in the fourth quarter.

Moving forward, we expect to see a nice growth also in that business in 2015 and beyond as the traction and the momentum is very, very healthy. And Dafna, you'll refer to the FX question?

Yes. So, the way we work is that we have a hedging policy in place where, on average, we'll hedge for the next six months. So, the guidance I've given are based on the rate that are already hedged. And for the second half of the year, on average, we assume the guidance reflect the current rate. If there will be a change over time in the exchange rates, we would have to adjust our level of spending.

Okay. And what percentage of the cost base is in shekel, could you confirm?

Yes. The cost basis in shekel is less than 30% of the overall costs.

Okay, and mainly in R&D, is that--?

--It's mainly R&D, and also some corporate functions, some marketing, but mainly R&D.

Okay, thank you very much.

Thank you, Tal.

Tavy Rosner, Barclays.

Hi, yes, thank you for taking my question, and good luck to Dafna for your future career. I just had two quick-one questions. Are you seeing any move among your existing customer from onsite to cloud-based applications?

So, thank you for the question. We see a traction in cloud solution and continue to expand in that. This quarter, our cloud business grew, as in previous quarter, very nicely. We see less of the existing solutions moving and more about the more advanced new solutions adopting the cloud.

However, all our offering today is cloud-ready, and we make sure that all the solutions that we have, both the legacy and the new one, are fully both cloud-available as well as on premise, so customers do have the choice to decide whether they go that way or the other way. We see it less in the high end of the market, but as we go further down in the market, it is becoming more attractive, and we see some customers adopting it. But, as I've mentioned, it's more with the new advanced solution, like the analytical solutions.

Understood. And on the Telco side of the business, I was wondering if you could comment on the competitive environment, and if you're seeing any pressure on pricing on that front.

So, I think as I've mentioned before, over there expanding into the Telco vertical, where we have already a significant presence, and we are expanding our footprint over there, it's less about competition. It's more about the fact that we expanded our portfolio quite significantly in the last couple of years, and we are now very much focused on this vertical. And as such, and thanks to the fact that we offer a very wide value proposition, the dialogue is more about the value that we provide, and we have a dialogue with customer about real business problems, hence it's much less about specific pricing. It's not about -- it's not commoditized solutions or anything in that nature, so it's less about the price in here.

Thank you.

Thank you.

Thank you. There are no further questions. I would like to hand the conference back to Barak to conclude. Thank you.

Thank you very much for joining us today, and wish everyone a great day. Thank you.

Thank you. Ladies and gentlemen, this concludes your conference call for today. Thank you for joining us. You may now disconnect your lines. Enjoy the rest of your day.