Aug 1, 2012
Executives
Marty Cohen – VP, Investor Relations Zeevi Bregman – President and CEO Dafna Gruber – Chief Financial Officer Eran Liron – EVP, Corporate Development
Analysts
Daniel Ives – FBR Shyam Patil – Raymond James Daniel Meron – RBC Capital Markets David Kaplan – Barclays Capital Mark Strouse – JPMorgan Jonathan Ho – William Blair Michael Kim – Imperial Capital
Operator
Good day, ladies and gentlemen. And welcome to the NICE Systems Q2 2012 Earnings Call.
My name is Stephanie, and I’m your event manager. During the presentation, your lines will remain on listen-only.
(Operator Instructions) I would like to advise all parties, this conference is being recorded. And now I’d like to hand the call over to Marty Cohen, VP, Investor Relations at NICE.
Thank you.
Marty Cohen
Thank you, Operator. With me on the call today are Zeevi Bregman, President and Chief Executive Officer; Dafna Gruber, Chief Financial Officer; and Eran Liron, Executive Vice President, 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 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 2010 annual report on Form 20-F, is filed with the Securities and Exchange Commission on March 29, 2012. During today’s call, we will present a more detailed discussion of second quarter 2012 results and the company’s guidance for the third quarter and the full year.
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 -- acquisition-related revenues and expenses, amortization of intangible assets and accounting for stock-based compensation.
The difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today’s press release. And I’ll now turn it over to Zeevi.
Zeevi Bregman
Thank you, Marty. And welcome everyone to our second quarter 2012 earnings call.
Today we reported full results for the second quarter. Non-GAAP total revenues were $213 million, up 10% compared to the second quarter of 2011.
Non-GAAP EPS for Q2 were $0.57, representing an increase of 14% compared to the second quarter of last year. Our book-to-bill ration was 1 and our backlog is strong at more than two quarters of revenue.
At the same time, the macro environment is causing longer sale cycle. This is resulting in slower than expected growth in both our [core] and our analytics based advanced application businesses.
Therefore, we are lowering the range of our 2012 total revenue guidance. However, we are committed to profitability and for effective cost control we expect a minimal impact at operating margin.
We believe that the second half of 2012 which will be weighted more to our Q4. We will continue to deliver growth in booking, backlog, revenues and profitability.
We continue to see strong demand for our solutions, driven by the need for organization to improve operational efficiency, enhance the customer experience, increase customer satisfaction, drive revenues and show compliance, and safeguard people and assets. We saw strong growth in our analytics based advanced applications business in the first half of 2012 and we believe that it will be continue to be a major catalyst for our future growth.
A key driver of the growth in our analytics based advanced application is that organization increasingly understand that they are now sufficiently prepared to meet the challenges of the opportunity presented to them the big data. For several years, NICE has provided best-in-class analytic solutions to help our customers extract value from structured and non-structured data.
Our solutions capture and analyze data for multiple channel, such as voice, text, chat, email, social media, video and financial transaction. More recently, we have extended our solution portfolio with additional internal analytics capabilities enabling our customer to own the decisive moment of each interactional event.
Analytics based advanced applications now represent over 40% of our overall non-recurring revenue. Let me move on to our customer interaction business where we continue to see strong growth in our analytics based solution.
We believe that the best way to help our customer achieve their business goal into real-time cross channel analytics which deliver not only insight but also recommendation for the next best action to be taken. Our development efforts are focused on deeper integration between all parts of our portfolio to provide a streamline user experience and the consolidated view of the customers across different parts of the organization.
We would like to share with you few use cases of our solutions, which demonstrate the way our solution help our customers achieve their business goals. One example is our interactional analytics are being deployed to ensure compliance with the requirement of the Dodd-Frank Act for transaction investigation.
During the second quarter we received orders from two of the top U.S. banks for operating [call] recording and analytics.
These banks are getting ahead of the expected requirement to monitor all interactions, search the basic transaction and be able to better reconstruct the channel using for investigation. We have been with other major banks in the pipeline as the Dodd-Frank Act has elevated the level of global interest to our solutions.
We are also using interaction analytics to safeguard assets in a new product called Contact Centre Fraud Prevention, which combined our interaction analytics and financial crime and compliance solution. This solution is based on voice biometrics and enables financial institutions to prevent from damaging a fraud voice screen with an existing data base of the bank.
In Q2, we won our first deal for this new solution with the top U.S. bank after a very successful dialogue in which we exceeded the customer’s requirement.
The pipeline for this product is growing, demonstrating the value we are providing to customers by combining the technology of our business unit. The integration of (inaudible) is going according to plan.
One of the key wins in Q2 was a performance management deal with the major APAC-based bank that was looking to transform customer experience while improving efficiency. Before the such deal and in fact, a growing percentage of our performance management deal as such.
We are pleased with the performance of our financial crime and compliance business where we are seeing strong product booking. Regulatory pressure continued to drive demand, particularly Dodd-Frank and Anti-Money Laundering enforcement.
For example, let’s say, most recent investigation into useful mobilities to money laundering was one of the catalysts for the stronger quarter we had in our AML solutions. This solution and other topics that are high on the agenda of governments and financial institutions, namely ordinary crime money laundering, terrorist financing, functions and tax evasion.
We are winning large deal for both government agencies and global banks for this solution. In the second quarter, the two faster growing significant market were Latin America and the U.S.
Regional Bank. We are seeing strong sales and large demand from U.S.
Reg market, including from new customers. Even the good health and the recent growth of regional banks, they have no money to invest and therefore they are investing in more sophisticated risk management and financial crime prevention strategies.
As we announced a few weeks ago, Operational Risk & Regulation Magazine ranked us as a number solution provider in both, the anti-money laundering and the anti-fraud software categories, a fixed compliant software ranking for 2012. The magazine in software results article conceives two plans that we have been witnessing as well.
The sales despite the fixed budget standing on compliance is still healthy thanks to the growing regulatory requirement for transparency, reporting and consistency. The second base a long-term trend powered from the authorization across business lines which improves oversight and financial crime prevention and reduces operational costs.
Let me move on to our security business which has a strong booking in this quarter. Also here, the strength in bookings is coming from our analytics stage solution in both our communication intelligence and surveillance businesses.
We had strong bookings in our communication intelligence businesses. Government agencies worldwide are investing in technology by banks sophisticated analytic solutions to prevent crime and adapt to the cyber era.
Demand is coming from both developed countries and emerging markets. In our surveillance business, we are expanding operational use cases for Situator and had several exciting wins in this area.
The first is an expansion at Los Angeles International Airport, an existing Situator customer who has been using it to manage its security and safety events. After a success of our solutions for managing safety and security, the airport decided to expand the use to manage its daily operations as well.
The second is a large deal with a larger North American mass transit agency. This deployment will be won over the largest and most complex is imported we are aware of.
We believe that one of the factors behind our success is that we are a product-based solution provider as opposed to being purely professional services based. A few years ago, the agency -- this agency contracted for a nine digit deal with a system integrator to build the business solution.
Nevertheless, the agency chose to replace this [fast lead] deliverer system without solutions. As we were able to prove, that our deployment will be faster while meeting all the necessary requirements.
Given the [massive tool] and complexity of this project and others like it, we believe our solutions strike the right balance between sophistications and agility. In closing, while growth in 2012 will be lower than originally expected, we’re very confident about our growth profitability going forward.
We expect a stronger second half of the year and continue to target other digit growth over the long term. Our growth is driven by a unique and broad portfolio of solutions towards the Big Data opportunities available to organizations worldwide.
Our capabilities around Big Data encompass an industry-leading portfolio for analytics based advanced applications. This application enables our customers to analyze the complete lifecycle of interactional event and a powerful driver of demand.
I would like to thank the NICE team for their work during the quarter. I will now turn the call over to Dafna Gruber, our CFO.
Dafna?
Dafna Gruber
Thank you, Zeevi. I’m pleased to provide you with an analysis of our financial results and business performance for the second quarter of 2012 and our outlook for the third quarter and full year.
Revenues for the second quarter reached a record of $217 million, up 10% from $197 million in Q2 last year. Our enterprise business revenues totaled $172 million, up 16% from Q2 2011.
Of that total, customer interaction revenues were $140 million and financial crime and compliance revenues were $32 million. Security revenues were $45 million compared to $48 million in the second quarter of last year.
As in the past, security revenue continues to be uneven on a quarterly basis because of the nature of large projects enrolled and therefore should be measured overtime. Q2 was a very strong booking quarter in security and we believe this business will grow in line with the rest of the business in 2012.
Moving to the regional breakdown, revenues in the America in the second quarter of 2012 increased 6% to $132 million, compared to the second quarter of last year. Revenues in Europe, Middle East and Africa increased 10% to $55 million compared to Q2 of last year and revenue from Asia Pacific region were $30 million, up 32% from Q2 2011.
For the second quarter, America region accounted for 61% of total revenues, EMEA at 25% and Asia Pacific at 14%. Product revenues in second quarter accounted for 41% of total revenues while maintenance represented 36% of total revenues.
And professional services accounted for the remaining 23%. The 2012 second quarter gross margin reached 66.1% compared to 64.9% in Q2 last year.
Our operating margins for the second quarter of 2012 was 18.8% compared to 18.3% in the second quarter of last year. We continue to focus on operating margin expansion and expect that our operating margin in the second half of 2012 to be higher than in the first half.
Second quarter 2012 net income increased 10% to $35.7 million, compared to $32.3 million in Q2 last year. Second quarter 2012 fully diluted earnings per share was $0.57 which was an increase of 14% compared to $0.50 in Q2 2011.
Cash flow from operations was $12 million in the second quarter, bringing first half cash flow from operation to $82 million and similar to cash generated in the same period last year. Our total cash and financial investments were approximately $439 million at the end of June with no debt.
Headcount at the end of the second quarter totaled 3,360 people, compared to 3,010 at the end of June 2011 and 3,125 people at the end of December, 2011. During the second quarter, we paid $20 million, the remaining conditional payment in the acquisition of Merced.
In the second quarter, we also paid about $30 million to repurchase approximately 800,000 shares as part of our share repurchase plan. For the first half of 2012, we repurchased a total of 1.8 million shares for $66 million and since we began repurchasing shares in 2011 and up until the end of Q2, we have bought back a total of approximately 4.8 million shares for $162 million.
Turning to guidance. Please note that both the third quarter and full-year guidance take into consideration the share buyback executed so far but excludes future buybacks that maybe executed going forward.
We expect third quarter 2012 total revenues to be in the range of $217 million to $225 million and fully diluted earnings per share to be in the range of $0.56 to $0.60. We now expect total revenues for the full year 2012 to be in the range of $890 million to $910 million, and fully diluted earnings per share to be in the range of $2.28 to $2.38.
That concludes my comments. I will now turn the call over to questions.
Operator?
Operator
(Operator Instructions) And we do have a question which comes from the line of Mr. Daniel Ives.
Mr. Ives, please go ahead.
Your line is open.
Daniel Ives – FBR
Yeah. I mean, my question is you just given some of the headwinds you’re seeing, just compare this to what you guys have seen in past downturns maybe comparing contrast?
Zeevi Bregman
Dafna, maybe, you will comment because you were here on the previous downturn.
Dafna Gruber
Yeah. I think that what we’ve seen there, in general is certain slowdown in our ability to conclude deals.
We have a strong pipeline. We had a good booking quarter in Q2.
But it is not as we wanted it to be. And also going forward, we see a strong pipeline, but we had to adjust our expectation regarding deal closure.
I think that in the previous downturn, we’ve seen a certain rebound at the end of the year, because our systems are very critical for our customer. I think that now again, the systems are very critical.
But at this point of time, we need -- we feel that we need to take more conservative approach regarding the rest of the year. We do see a strong pipeline and because of that, we believe H2 will be stronger than H1.
Zeevi Bregman
Maybe on that, there is a fundamental difference between these macroeconomy in the 2009, and in this, now, we are expecting and our expectation is to continue to grow this year, which start on a slower pace, and so we believe that we are going to grow in 2012 and we are seeing pipeline, an evident for that.
Daniel Ives – FBR
Okay. Thanks.
Operator
Thank you. The next question we have comes from -- one moment.
Mr. Shyam Patil.
Please go ahead. Your line is open.
Shyam Patil – Raymond James
Hi, thank you. In terms of the expectations for the second half, were there any -- among those two areas that you guys breakout customer interaction management, Actimize in security, any one of those areas is particular where you cut your expectations more than the others?
Zeevi Bregman
No. I think that this is across the different line, maybe with the exception of Actimize, where we expect a double-digit growth this year.
Shyam Patil – Raymond James
Have your expectations for Actimize changed from what you stated last quarter, in terms of sequential growth throughout the year, and if you already give your…
Zeevi Bregman
Not -- no. They didn’t change.
Shyam Patil – Raymond James
Got it. What the stock off in a pre-market, can you maybe talk about whether or not, you’d consider raising the buyback authorization?
Zeevi Bregman
We currently have plan for -- that we are -- we announced $100 million additional plan we executed till the end of the year quarter about $60 million of the -- we have $40 million of the growth. We’ll complete this $40 million.
We will now announce our plans going forward.
Shyam Patil – Raymond James
Okay. It is my last question.
Zeevi, in your prepared remarks, you talked about analytics being, I think you said 40% of non-recurring revenue. Just wondering how big that is on an absolute basis and what exactly you guys include in your definition of analytics?
Thank you.
Zeevi Bregman
You can -- I don’t want to make the math, but you can make it because we expected what is our maintenance business. And so I think that the math can be done.
I don’t want to do it without checking the first. Regarding what it includes, it include our analytic solutions across the business line and enterprise space in the Actimize and in the security.
Dafna Gruber
In order to be, maybe a little bit more concrete here, on the customer interaction business, we are talking about all analytic-based application starting with interaction analytic, performance management, written guidance and feedback and all analytic driven applications. And we look at the whole of Actimize business is analytic based, because it’s all based on the analytic tools.
And certain within our security, which relates to video analytic, situation management capabilities, also power to solve the measurement of the analytic based applications.
Shyam Patil – Raymond James
Got it. Thank you.
Operator
Thank you. The next question comes from the line of Mr.
Daniel Meron. Please go ahead.
Your line is open.
Daniel Meron – RBC Capital Markets
Thank you. Hi, Dafna and Zeevi.
Furthermore, can you discuss during -- early in the quarter, when you start noticing the macro impact, when was that? Was it, I may have missed it in the prepared remark, was it related to any specific segment, region or any type of customer?
Thank you.
Zeevi Bregman
I think that the most of the -- when we notice -- if you notice, it’s by booking. And what we’ve seen and this is something that we have finally saw at the end of the quarter is slippage of deal from the second quarter down from third quarter that got us in, that we plan to have this booking coming in the quarter and they were fleet, which is pumping that you can see when the environment -- spending environment is a deteriorating.
So, we saw an extraordinary number of deals that are being slipped from Q2 forward.
Daniel Meron – RBC Capital Markets
Since the quarter ended, did you see it come back or what has happened since then, do you see that your competition is fairing in the same way? Or that some deals close after more pricing concessions or going to competition, how is the insurance execution compared to your expectations?
Zeevi Bregman
No. I don’t think that there is -- I don’t think that we lost any and this has not – deals closed, our business slipped.
While we lost a competition that were not on the slippage and some of them we closed early in the quarter, but not all of them. And but some of them were closed early in the quarter.
And in terms of the business, we have a very strong pipeline. This year, it’s more than before and this is because the move to the applications basic, it moves more to Q4 and it’s really back ended in terms of Q4.
And overall there is a strong pipeline and we believe that the lot of these pipeline we materialize, because there is a demand, the strong demand, also on executive level for these type of solutions.
Daniel Meron – RBC Capital Markets
Okay. And then how did the insurance changes in the sales team and they move in to U.S.
the top 60 account management impact execution during the quarter or towards your targets, and how did Actimize fare to this?
Zeevi Bregman
So, if you look at the changes that we spoke about last quarter on the sales force. Now, we are progressing according to plan.
A pipeline is being built. If the part of this pipeline in this -- we will complete the booking in Q3, part in Q4 and part next year.
But we are continuing the plan on building the relationship and the account management practice within the largest accounts globally.
Daniel Meron – RBC Capital Markets
Okay. And then other due to math -- acquisition that I think that’s combined, they add up to about $70 million between Fizzback and Merced, variably.
I think that the underlying organic growth is closest to low single-digits unless my math is wrong. But can you explain, how you think that the long-term targets are impacted.
Do you think that there is a change to your long-term plans as far as topline growth and operating margin expansion? Thank you.
Zeevi Bregman
Obviously, first thing, in terms of the acquisition, the impact on the acquisition is very similar to the rest of the business. So the calculation for organic growth we’ll take it into account and therefore, we believe that the organic growth is a mid single digits, the way that we calculate it.
And when it comes to the question about the long-term, we believe that we will grow and each business will grow in double-digit. Obviously, the slower growth this year will have impact on also on the coming year and some impact on the coming year.
In terms of expansion on our model legal change and with each -- and we have a leverage the model and with each of the $1 on -- for organic growth, we expect to have at least $0.25 of leverage.
Daniel Meron – RBC Capital Markets
Okay. Thank you.
Good luck.
Operator
Thank you. The next question comes from the line of Mr.
David Kaplan. Please go ahead.
Your line is open.
David Kaplan – Barclays Capital
Hi, everyone. Zeevi, you talked a little bit about the sales cycle and it’s little, I guess longer than it has in the past.
Can you talk a little about what that change has been? How much visibility it gives you?
And then in terms of thinking about that, were you talking about a back ended sales in Q4, given that new visibility, what is the risk of some of that’s going slip into Q1?
Zeevi Bregman
First, yeah, when we are looking at our models, we already -- we have a more cautious model and we have -- we are expecting, we adjusted our conversion rates to the conversion rates that we are seeing. So this is part of the result.
It is reflected on our guidance for the year. So it’s not the -- we are giving what we believe is more cautious but also more realistic outlook, taking into account the conversion rate and the micro -- and the spending environment.
In terms of the pipeline, the pipeline is very big and very strong. We believe that part of it will materialize.
We expect that part of it will be materializing in the third quarter and in the fourth quarter. However, again, we factored in a lower conversion rate before.
David Kaplan – Barclays Capital
Okay. And I think you’ve kind of made it clear that your macro slowdown or impact that you are seeing is across the board, but if you just think about in terms of geographies or in terms of verticals.
Are there any differences that are important that we would be able to figure out because, I mean, given the granularity around the type, the reporting you guys give at least in the press release. Is there anything deeper that we can get to get a better sense of really what’s going on there?
Zeevi Bregman
First, as you can see from the report, we had a very strong quarter in APAC and the -- we don’t see slowdown in APAC. So you can and this is also reflected in the breakdown -- the geographical breakdown.
Above that is, I mean, we -- it’s very difficult for us, when we are looking at the numbers and numbers will slow and looking at the quarter is to go to global trends based on the business that we are making. So, overall, it seems like, across the board all different -- across the board in terms of business line and geographies.
Behind that, we are still and we said, we are still seeing major goals, maybe smaller than we originally expected in our advanced application business.
David Kaplan – Barclays Capital
Okay. Thanks very much.
Operator
Thank you. And the next question comes from the line of Mr.
Paul Coster. Please go ahead.
Your line is open.
Mark Strouse – JPMorgan
Good morning. It’s Mark Strouse on for Paul.
Most of my questions have been asked, but just wanted to talk about how are you guys are prioritizing use of the cash, I mean, should we expect continued buybacks or I mean, how do you prioritize that versus M&A and particularly if the macro kind of raise from the evaluations that are out there?
Zeevi Bregman
We are constantly looking at the acquisition opportunity. We are looking at the value and the quality of the business and the seasonality to our business and the strategic fit.
And when there will be -- once we can reach an agreement, we’re acquiring companies and we are going to continue to do that. In terms of the buyback, we have -- we think at the end of the quarter we spend $60 million, slightly more than $60 million of the $100 million announced plan.
And once this plan will be completed, we will announce our plans for the future.
Mark Strouse – JPMorgan
Okay. Thank you.
Operator
Thank you. And the next question comes from Mr.
Jonathan Ho. Please go ahead.
Your line is open.
Jonathan Ho – William Blair
Good morning, guys. Can you talk a little bit about the competitive environment and whether you’re seeing any changes out there or any pricing pressures, anything, just given a tougher macro environment?
Zeevi Bregman
We are operating in a competitive market and we -- and this has been in the past and it’s continued now. There are no extra, we always have some pricing pressures but I don’t think that there is anything extraordinary.
Jonathan Ho – William Blair
Okay. And then just in terms of some of the deal pressures that you guys are seeing in terms of the push ups.
Can you maybe talk about, what that specifically is coming from? Is it more sort of delays in approvals or is it more budgetary pressure.
Trying to get a sense of across, some of the push ups that you are seeing, what the drivers are there?
Zeevi Bregman
It’s a combination of some budgetary pressure and some approvals and internal processes. It’s a combination of some -- when you go case by case, you see that the stories are similar that there is additional process that have to be feel and any additional proof point that has to be given and additional internal process that we have to follow.
Jonathan Ho – William Blair
Got it. And I know you guys don’t give guidance for bookings, but just from a perspective of the second half?
I mean would you expect the book-to-bill to stay above 1, just broadly speaking?
Zeevi Bregman
That’s -- it’s -- the book-to-bill will -- we believe that the book-to-bill will stay above 1 for the year, also for the second half but also for the year.
Jonathan Ho – William Blair
Great. Thank you.
Operator
Thank you. And the next question comes from Michael Kim.
Please go ahead. Your line is open.
Michael Kim – Imperial Capital
Hi, guys. Could you talk a little about your level basically in security, Dafna, you mentioned some larger projects coming in the pipeline and the impact on the timing of the revenues?
Is it your sense that Q3 looks a little bit more like Q2 and then we’ve seen most of that…
Zeevi Bregman
Yeah. What we’ve…
Michael Kim – Imperial Capital
… in Q4?
Zeevi Bregman
In terms of security, what we have said is that we have growth from large projects in Q2, some large deals, it was a strong bookings in the second quarter and this are the revenue recognition of this deals will be over time, inclusive of impact but not major impact on the Q3. But down the road it’s a very positive trend.
When we look at the pipeline, we also see a very strong pipeline for support, security product, but this will -- I’m not sure that we mentioned it on the script in particular, we said more in general.
Michael Kim – Imperial Capital
Okay. And then specific to Situator, you talked about some more diverse used cases, are you seeing that with other customers inquiring about additional used cases beyond [53]?
Zeevi Bregman
What we’ve seen and this is what we try to gave two examples on the call, is that people are looking at the Situator first for security and moving it to be more operation, and specifically operational with platform.
Michael Kim – Imperial Capital
Okay. Great.
Thank you very much.
Operator
Thank you. There are no more questions at the moment.
Zeevi Bregman
So, thank you everyone and have a nice day. We would like to thank you for participating in our call.
Operator
Thank you. Ladies and gentlemen, that concludes your conference call for today.
You may now disconnect. Thank you for joining and enjoy the rest of your day.