NICE Ltd. (NICE) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the NICE Systems Conference Call discussing Fourth Quarter and Full Year 2015 Results. [Operator Instructions] As a reminder, this conference is being recorded, February 11, 2016. I would now like to turn this call over to Mr. Marty Cohen, VP of Investor Relations at NICE. Please go ahead.

Thank you, Operator. With me on the call today are Barak Eilam, Chief Executive Officer; Sarit Sagiv, Chief Financial Officer; and Eran Liron, Executive Vice President, 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 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 2014 annual report on Form 20-F as filed with the Securities and Exchange Commission on April 2, 2015. During today's call we will present a more detailed discussion of fourth quarter 2015 results and the company's guidance for the first quarter and full year 2016. 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 difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. I will now turn over the call to Barak.

Thank you, Marty, and welcome, everyone. I am glad to be on the call with you today. We're pleased to report another strong quarter on both the top and bottom lines. For the fourth quarter we reported revenue of $274 million which represented 5.4% growth compared to the fourth quarter of last year. Revenue growth was 8.3% excluding the impact of currency exchange rates. Our earnings per share came in above our guidance range at $1.09. This represents a 12% increase year-over-year. Our drive to improve profitability is also reflected in the 29.7% operating margin that was reported in Q4, which represented solid growth over the 26.8% operating margin reported in Q4 of last year. Ending 2015 as we did with strong finish encapsulate what I believe can be characterized as a truly transformative year for NICE. It was a year in which we managed significant and valuable changes to the business while delivering solid results. We lined internal processes from R&D to sales putting to place a more effective go-to market strategy, strengthened innovation, grew our portfolio of solutions, brought products faster to the markets, divested two business, and streamlined our overall operations, the result a more simplified enterprise software company in which our business is aligned to close all dimensions including technologies, customers and markets and one that is clearly focused on analytics. The fundamental changes that we made to the business in 2015 we continue to benefit NICE for the long term. What we accomplished in 2015 is part of a broader journey for the new NICE that I talked about last quarter. There is more of the plan to come that will continue to have a long lasting positive impact on the company both operationally and financially. Today I'd like to share with you our vision that we have for the new NICE going forward. There are four elements to our plans that I'd like to talk about, one to complete our transformation to a true enterprise software company. Two to further evolve the enterprise software company with a large and growing portfolio of solutions. Three, to further evolve within an enterprise software company with a large portfolio that is tied together for analytics platforms. And four, to add further Cloudification layers to our portfolio and extend the go-to market accordingly. With regard to the first element of the plan, while we have already made significant headway in the process in terms of our portfolio, business model and our financial results, there are still a few more steps to complete our transformation to a true enterprise software company. Regarding the second element of the plan which is to further evolve as an enterprise software company with a large and growing portfolio of solutions, this has been our approach for the last several years. However, we’ve accelerated it with many new products that we released in the last 18 months and we've plans for many more as innovation remains essential component of our strategic plans. Recent innovation includes IVR optimization, total voice of the customer and full back office suite, real-time authentication, NICE Investigate, holistic surveillance, NICE Engage, NICE Actimize notifications and attestations and others. Many of the deals we signed in Q4 demonstrate that this portfolio approach is gaining momentum. For example, our holistic surveillance solution which uniquely combines our technologies around communications and trading surveillance were selected by major financial institutions which resulted in a large 7 digit deal. Using our advanced analytics, this institution will now monitor and analyze all of its communication trading channels. In another portfolio deal which was an eight digit one, and also a competitive replacement in major financial institution purchased or anti money laundering suite in our enterprise with case manager. We also closed an 8 digit deal with a large telecom company that purchased the portfolio of our solution to enhance compliance and improve operational efficiency. We also saw further adoption of our back office suites that combines many solutions within our portfolio. The suite was purchased by multiple customers including the large global bank and an insurance company both resulting in 7 digit deals. The recent acquisition of Nexidia serve as a major accelerator to the third element of our plan which is to further evolve as an enterprise software company with a large portfolio that is tied together for analytics platforms. We're on a constant journey to bring analytics to all the different domains of our business. Until now all customers analytic solutions in the market had one or more meaningful limitations. Among these limitations are accuracy, scalability, speed, cost, use cases and ease of deployment. These limitations were an obstacle to board adoption and faster expansion in the markets for these solutions. However, the combination of NICE and Nexidia in the cutting edge grid and speech processing technologies creates a customer analytics power house that can offer analytics with no limits. We can now provide our customers and the entire markets an unparallel offering the facility to facilitate a much broader enterprise deployment while expending our addressable markets. We are very excited about this acquisition which is expected to close by the end of Q1. We believe it will further strengthen our leading position in the highly demanded and fast growing area of customer experience analytics. Even before the addition of Nexidia, analytics continue to be a driving force of our business and once again analytics represented a majority of our booking in Q4. For example, we closed a 7 digit deal which allows healthcare company for analytics and another 7 digit deal which allows cable company for one of our real-time analytics solutions. As for the fourth element f our plan which is to further Cloudify our portfolio and extend the go-to-market accordingly, we continue to see cloud as great opportunity for us to expand our addressable markets. In closing, we're very pleased with the overall performance and execution in 2015. We did a lot in little time and managed to grow revenues and significantly increase profitability and needed changes. As I said, this was not an easy task but operational excellence and good execution allowed us to succeed. We're now looking forward to 2016 and beyond. The market in which we operate continue to provide great opportunities with continued innovations, strong execution and an emphasis on creating efficiencies in our business model, we believe we will see further gross and profitability as we move forward with our strategic planning place. I said at last quarter but it is worth repeating. We're very excited about the new NICE. Our employees around the globe are highly committed to our strategy and I would like to thank them for the success we achieved in 2015. I will now turn the call over to Sarit, who will review our financial results.

Thank you Barak, and good day everyone. I'm pleased to provide you with an analysis of our financial results in business performance for the fourth quarter and full year of 2015, as well as an outlook for the first quarter and full year of 2016. Firstly we would like to point out that the financial results represent continued operations and exclude divested intelligence and physical security businesses for Q4 and full year 2015 and a comparative number for 2014. These two businesses are presented as discontinued operations. However, the cash flow statements include the results for both divestitures. Revenues for the fourth quarter were $274 million which represent an increase of 5.4% from $259 million in the same period of last year. Excluding the impact of foreign currency exchange rates, revenue growth was 8.3% in the fourth quarter. Revenues for the full year 2015 increased 6% to $927 million. As in previous year, 2015 was a backend loaded year. We expect similar seasonality for 2016. Customer interaction revenues for Q4 2015 were $199 million, a 2% increase compared to Q4 2014. Customer interactions revenue for the full year 2015 was $688 million, compared to $675 million in 2014. Financial crime and compliance revenues increased 16% to $75 million for Q4 2015. For the full year 2015, financial crime and compliance revenues grew 21% to $239 million. On a regional breakdown, revenues in the Americas region were $179 million for Q4 2015 and $630 million for the full year 2015. Americas accounted for 68% of total revenues for the full year. Revenues in EMEA were strong with 30% growth to $65 million for Q4 2015 and increased 4% for the full year 2015 to $197 million. Revenues for the Asia-Pacific region grew 19% to $30 million for Q4 2015. For the full year 2015, APAC revenue grew 9% to $100 million. Looking at revenue s by business line, product revenues accounted for 40% of total revenue in the fourth quarter of 2015 and 34% for the full year 2015. Maintenance revenues accounted for 37% of total revenues in the fourth quarter and 41% for the full year 2015. Professional services, including Cloud, accounted for the remaining 23% of total revenues in the fourth quarter and 25% in the full year 2015. Gross margin in Q4 was a record of 72.9%, compared to 72.4% in Q4 last year. The gross margin improvement was mainly attributed to higher revenue, product mix, and a more efficient utilization of the services organization. For the full year, gross margin was 70.6% compared to 69.4% in 2014. Operating profit in the fourth quarter increased 17% to $81 million and operating margin improved to a record of 29.7% compared to 26.8% last year. The improvement in the operating profit and operating margin is the result of a higher gross margin combined with continued cost structure improvement. For the year, the operating margin reached 25.4% compared to 22.1% last year. The effective tax rate for the quarter was 19% which was in line with our expectations. We expect the tax rate to remain at this level in 2016. Earnings per share increased 12% to a record of $1.09 in Q4 2015, compared to $0.97 in the same period last year. For the full year earnings per share increased 17% to a record of $3.18 compared to $2.72 last year. Fourth quarter cash flow from operation was $54 million. Cash flow from operation for 2015 was strong at $245 million, a 34% increase from 2014. Excluding a one-time tax payment on the capital gain related to the divestitures of our security businesses, operating cash flow would have been $270 million. Total cash and financial investments were $828 million at the end of December 2015. As part of our share repurchase plan, we bought back a total of $20 million during the fourth quarter. In line with our dividend plan, our Board of Directors approved a dividend of $0.16 per share for Q4 2015. Turning to guidance, we expect first quarter 2016 total revenues to be in the range of $220 million to $230 million and fully diluted earnings per share to be in the range of $0.71 to $0.77. For the full year 2016, we expect revenues to be in the range of $995 million to 1.015 billion in fully diluted earnings per share to be in the range of $3.38 to $3.52. Full year guidance include the acquisition of Nexidia which is expected to close by the end of Q1. That concludes my comments. I will now turn the call over to the operator for questions. Operator?

[Operator Instructions] Your first question comes from the line of Shaul Eyal from Oppenheimer. Please proceed.

Thank you. Good afternoon, guys. Congrats on really ongoing consistent execution and guide. Barak, so, exactly a month ago, you've announced the Nexidia acquisition. I know you provided us with some color during your opening remarks, but I believe the street was mostly dealing about a month ago - still is, by the way with declining markets. So, could be that this transaction might have slipped the street attention. Can you talk to us regarding the benefits, the synergies, the complementing technologies that Nexidia brings to the table?

Absolutely, and thank you Shaul. So, as I said on my comments, we’re very excited with this acquisition. We knew and have known Nexidia for many years. And it's a small startup but the technology over there is pretty amazing. As I described, we've been spearheading the customer analytics domain for quite some time performing very well in that domain. But when you look on the different solution out there in the market including our legacy solution, you add them all up together and there is always a limitation that comes with the solution either of the scalability, or the accuracy or the certain use cases or the ease of deployments attending the platform that is out there or other limitation. So customer do go and adopt it, and they expand but at certain points they hit a certain limitation or a barrier. The combination of NICE and Nexidia together, actually opens up all of those limitation and this is why we define it as analytics with no limit. The combined solution allows customers to basically deploy it where accuracy is by far in order of magnitude much better than any solution out there, scalability in terms of the costs, the performance and the speed of the technology from Nexidia is 10x to anything that we have and it's in out there and obviously with the go-to-market capabilities of NICE, the customer or base of NICE, from the variety of the solutions that we have, the retail to the general market allows the two companies together to create a real powerhouse around analytics and we are very excited to take this to the markets.

Got it. This is extremely helpful. Thank you for that. And maybe a follow on for - I don't know Barak, maybe even Sarit. Great performance on both gross and operating margins. Actually, I want to try and focus specifically on the gross margins. Record gross margin this quarter. Is it the ongoing transition to the software model you've been talking about in recent years? Is it the analytics kicking in strongly as we have seen it in recent quarters, or is it some of the divestment that historically might've had a more of a hardware sense? So, how can we think about it?

Hi, Shaul this is Sarit. We see indeed very nice growth in the profitability and we add very good and strong gross margin for Q4 and for the year. This has to do with the increase and revenue volume. Obviously it includes also increase in the analytic solution products, it also includes as we said all the time the mix of the products can also impact the margin and as you can see in the last couple of quarters, we also show an improved growth margin from services. As I mentioned earlier, this is due to a more efficient utilization of our service organization.

Got it. Thank you so much. Good luck, and congrats again.

Your next question comes from Paul Coster from JPMorgan. Please proceed.

Thank you for taking my questions. Sarit, I wonder if you could just let us know what Nexidia is contributing to the 2016 outlook.

Nexidia is included in our guidance for 2016. We look at the company that together there is an overlay of each of the companies both on the products and on the sale and therefore we're not looking at it separately as by itself. And we guided based on the forecast therefore combined company.

Okay. So, you're not prepared either to, obviously, articulate an organic growth outlook for 2016.

Again our guidance includes the combined companies.

Okay. Got it. Perhaps, Barak, you can talk a little bit about what you're seeing in the financial services sector at the moment. Obviously, there's a lot of distress. And I guess that many of us would expect there to be budgetary constraints notwithstanding the regulatory mandates out there. Can you tell us what your customers are saying and doing at the moment?

Sure, so obviously we are tracking similar terms to all of you about distress in the last month also in the market but we don’t see any change in dialogue or pipeline or traction to what we do. First obviously we operate in the multiple segments, financial services is one of them but we feel financial services, the type of solution that we offer are highly mission critical solution, many of them with respect to compliance and we really don’t expect compliance pressure to ease. So it is still mandatory to have those solutions that keep the lights on. We’ve been through those cycles in the past where we’ve seen stress in the financial services market and our business actually did very well although the strength again - given the fact that we are mainly providing compliance in mission critical solutions that are required both in good times and in a more distressed times.

Okay. And then one of your nearest competitors has talked about difficulty in closing large deals. Are you experiencing such a problem, or are you simply not having to close large deals because you've somehow or another configured your product in a different way? Can you just comment on that?

So I think that’s my comment before. I’ve described numerous number of both 7 digit and 8 digit deals which is very typical I think for us in any given quarter and especially in the fourth quarter. And we've seen a large volume of those deals and although all we don't see a change in dynamics in terms of the ability to close large deal of 7 figures and 8 figures.

All right. Very good. Thank you very much.

Your next question comes from Dan Bergstrom with RBC Capital Markets. Please proceed.

Yes, thanks for taking my questions. Say, really strong results out of Europe. Just wondering if there was anything there you'd point us to.

Yes, Europe was very strong quarter for us. Every quarter we have different phenomena’s in different regions but we had very good results in Europe. Actually if you add the FX impact, they should be actually dealt even further stronger than what was presented and shared, in just a mix of traction and good execution of our team in EMEA.

And then a really great job, guys, for the past year or so in coming in at or above the upper ends of guidance range. Could you talk to your confidence in the business now, say, versus two years ago? What do you see or what do you track that gives you confidence in the guidance ranges you're providing us with?

So we’ve provided the guidance now for the full year. When we provide guidance both for the full year and for the quarter we look on a variety of parameters, obviously the backlog that we have. The guidance, the forecast we get from the different sales team across the different regions and the pipeline, the growth in the pipeline and obviously all of that translates into revenue. At the same time, looking on the other side of it which is EPS, we are managing our expenses in a very responsible way and the balance of the two allows us to provide guidance. The range that we gave is the range we believe is the right one for the year and I will remind all of us similarly to last year actually in all the past two years we’re very much back ended. So you’ll see in our guidance, we have the annual, we have the quarterly and we expect bigger chunk of the business to happen in the second half of the year which was exactly the same trend in the last three, four years.

Thank you.

Your next question comes from Tal Grant of UBS. Please proceed.

Hi, guys. Congratulations on a very strong quarter, particularly in financial crime and compliance. Just wondering for customer interactions, any reason that wasn't quite as strong, up 2%? Was that disappointing for you? What do you think is going on there? And then just a question on cash usage. So, even after the acquisition, you'll still have a huge amount of cash. So, what is the plan for that?

Hi Tal, thank you for the question. I will answer the first one and I will allow Barak to take the second one. The overall growth for product in 2015 was 10%. So overall we’re happy with the growth. We expect to see additional growth, we see good market, as far as we’re looking it it’s only a timing issue and we do see the market continue to be positive for us.

And Tal with respect to the question on the cash utilization, so I think that you’ve seen that we have a stronger cash position, we’re generating healthier cash flow from operation and I think we’ve demonstrated in 2015 and I believe it will be also the case moving forward a good balance of our capital allocation. So on one hand we continue to provide as Sarit said on her comments, we have a buyback program that is in place and continue to operate as planned. We’ve a quarterly dividend, between the two give or take it’s about $140 million altogether on an annual basis and we’re also obviously using cash to execute on our strategic plans through acquisitions and I think Nexidia is a great example of that extremely aligned with our plans and will contribute to our ability to execute our strategy. And I expect it to be moving forward, we’re not rushing to do acquisition, I’ve been asked about it a few times and obviously we are very active on that front these days and before and we see the right opportunity and it’s the right fit and the financial makes sense, we will execute. So that’s how we see it moving forward. Obviously if things change and we see less opportunity for acquisition, we might decide to change our capital allocation. But right now we’re happy with what we've seen in 2015 and we believe we will continue in that path in 2016.

Okay. Good. And if I could have a follow up about the OpEx, so R&D has come down about 1% of sales, something like that. Is that from the trend to offshoring, or has that not started yet?

No, I don’t think it is the trend for from off-shoring, actually we’re expanding the amount of people we have in R&D. I wouldn't look at it necessarily from percentage of revenue. I think that's the model or the leverage we have in the model. We have been continuously prioritizing about where to put R&D resources. And I think we are doing a better usage of our great talents and engineer these days. And the evidence for that, I believe, is what I’ve talked about, is the acceleration in the innovation. In the last 18 months, the number of products as we have, we have a list, is far from what we’ve done in the past and while no significant expansion - R&D expenses, I think it goes to the R&D leadership that we have today in place. That move to a more advanced methodologies, obviously, agile and other which allows us to be way more active on releasing products and innovation as a whole.

Got it. Thanks.

Your next question comes from Jonathan Ho from William Blair. Please proceed.

Hi, guys, good morning. Just wanted to start out with maybe some of the Cloud opportunities that you guys discussed. Clearly, there's more sort of transition to SaaS that's taking place. I just want to understand from your perspective what you see as those opportunities in the Cloud and how you sort of intend to pursue those opportunities.

Thank you, Jonathan. We see Cloud in our respective market as a good opportunity and I’ll give couple of examples. Obviously, we’ve been working in the last two to three years to Cloudify different products that we have in our portfolio, that's available ones to the cloud. Needless to say, that all the new products that we have developed, are developed either purely as a Cloud, or a combination of both Cloud and on premise. For us the opportunity since we play - we don’t play just behind of the market but in certain areas, you'll definitely in the high end of the market and this is our bread and butter. Cloud allows us actually to go further down in the market, which is a very sizable opportunity for us because, obviously, it allows customers in a smaller size to consume it faster in a much better TCO. And these are not necessarily very, very small customers. I’m talking about the medium market which is very broad for us. I’ll give you an example, one from the financial crime and compliance. At least historically, we’ve been mainly at what we define as tier zero and tier one of the market, you go to tier two of the market, we are talking about a very significant number of financial institutions, and that allows us to expand faster in that regard. And in the customer interaction business, obviously that’s similar. It also allow us to further expand the ecosystem that we have around us. So this is not kind of something that we see a dramatic change in the short term. But definitely it’s part of our strategy, as I referred to the full element of our strategy, the fourth one. For the longer run, is to further expand our addressable markets. We’re seeing the existing domain with the Cloud solutions.

Got it. And then just a further clarification around Nexidia, can you talk a little bit about how many customers they have and whether there's any significant cross-sell synergies here between Nexidia and your existing product portfolio?

So I’ll start with saying that Nexidia, as I said, have really an amazing technology. When we started, I personally know Nexidia for many years, running analytics for NICE for many years. And when we started the dialog with them, we thought that we knew what they have, but when we looked under the hood, the technology was really, really amazing. It was developed in Atlanta with very strong team over there. Throughout the years, Nexidia has been focused mainly in the United States. They don't obviously, they are a small company, they didn’t have the means or the focus to go outside of core markets in the United States and obviously NICE has that. Plus, the integration to other products, Nexidia focused mainly on taking this technology and use it in specific used cases. When you take it to the broader NICE aspect, obviously, it allows us to use the technology in much further aspects. So when you combine the two together, I believe that's what the long run it provide us the great opportunity with great technological leadership both for cross-selling to the installment of two companies, and upselling.

Great. Thank you.

Your next question comes from Tavy Rosner from Barclays. Please proceed.

Thanks for taking my question. First one on guidance, if my math is right, when I look at net margin at the midpoint of your 2016 guidance, it's broadly in line where the numbers you reported today for the full year. So, are you being conservative on the overall margin side?

Hi Tavy, this is Sarit. Actually the guidance that we gave for the EPS represent growth of 8.5% over 2015. So it does include a nice growth expected for 2016.

I just look on the net side. Let's say, net margin, I have 21% at the midpoint if I take midpoint of revenues and midpoint of EPS. Is that - does that compare to where you're currently today?

Tavy, regarding profitability, I don’t know what calculation exactly you are doing, but we do expect 2016 to continue and show gradual improvement in profitability, in the gross margin and the operation margin.

Okay. Thank you. And maybe just a broad one on the go-to-market strategy, something you talked about last few quarters. I was wondering, how is it going in terms of dialogue with your customer and perhaps in terms of pricing when you approach them with the more integrated solutions?

I think it’s going according to our plan. I think it’s evident in the results, and I gave few examples, the approach of selling a portfolio of solutions, aiming to specific used cases of the customer, and tying to analytics. I believe it’s very appealing to our customers. It allow us also to win new customers and dialogue is going very well, actually, as we come at this approach, the dialogue itself takes us to higher level in the organization and truly from the different examples that I gave of 7 and 8 figure deals that happened in Q4, when I try to think on each and every one of them, what best represent those portfolio deals, is that instead of just going and doing a simple small transaction, the sales team that we are constantly coaching, went up the chain, finding relatively senior, if not very senior executive sponsor, building such a deal with great value to the customer and then obviously the discussion is way more in value and price is less of the focus of the discussion.

Thank you.

I would now like to hand the call back over to Barak Eilam for closing remarks.

Thank you very much all for joining us and have a very good day. Thank you.