Aug 7, 2013
Executives
Marty Cohen - VP, IR Zeevi Bregman - President and CEO Dafna Gruber - CFO
Analysts
Shaul Eyal - Oppenheimer James Moore - FBR Capital Markets Jonathan Ho - William Blair Greg McDowell - JMP Securities Matthew Hedberg - RBC Capital Markets David Kaplan - Barclays
Operator
Welcome to the NICE-Systems Conference Call discussing Second Quarter 2013 results, and thank you for holding. All participants are present in a listen-only mode.
Following management's formal presentation instructions, will be given for question-and-answer session. As a reminder, this conference is being recorded, August 7, 2013.
I would now like to turn this call over to Mr. Marty Cohen, VP, Investor Relations at NICE.
Please go ahead.
Marty Cohen
Thank you, operator. With me on the call today are Zeevi Bregman, President and Chief Executive Officer; Dafna Gruber, Chief Financial Officer.
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 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 Risks Factors in Item 3 of company's 2012 Annual Report on Form 20-F as filed with the Securities and Exchange Commission on March 25th, 2013. During today's call, we will present a more detailed discussion of second quarter 2013 results and the company's guidance for the third quarter and 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-related revenues and expenses, amortization of intangible assets, and accounting for stock-based compensation.
The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. I'll now turn the call over to Zeevi.
Zeevi Bregman
Thank you, Marty, and welcome everyone to our second quarter 2013 earnings call. We delivered solid results for the second quarter.
We continue to execute on our strategy, and we are well positioned for a strong second half of 2013. Non-GAAP total revenue for the second quarter was $225 million, up 4% compared to the second quarter of 2012.
Non-GAAP EPS for Q2 was $0.61, representing an increase of 7% compared to the second quarter of last year. The highlight of the quarter was the strong growth in new booking of our advanced applications, including some very important deal that we will discuss later in more detail.
In the second quarter, new orders of advanced applications grew more than 20% compared with the last year's second quarter, and represented nearly 50% of total new bookings. The strong growth of our advanced applications, is the result of our continued successful efforts to extend our offering to our existing customer base, with our growing portfolio of advanced applications.
One of our key assets is our more than 25,000 customers, including some of the largest and leading organizations in each vertical that we serve. We continue to partner with them, as they take on additional NICE solutions to help them ensure compliance, enhance operational efficiency, increase revenues, improve the customer experience, and safeguard [people] and assets.
The increase in new bookings of advanced applications was also reflected in the strong growth of our cloud solutions. We will continue to expand and enhance our cloud offering, which reflects our commitment to our customers by offering them additional value and flexibility.
The consistent and rapid growth that we have seen in our advanced applications, is the result in the growing demand from our customers to unlock the value of the Big Data being generated by the consumer of these same organizations. This growing demand has led us to focus on innovation and acquisitions, that help us continue to expand and enhance our portfolio of advanced applications, and our Big Data platform and technology, specifically our Customer Engagement Analytics platforms, which we spoke about last quarter.
Our Customer Engagement Analytics platforms provide our customer, the ability to improve customer experience and business results, by better understanding the customer's behavior and preferences with our cross-channel analytic solution, that sits on top of the platform. This platform takes full advantage of Big Data, by leveraging the (inaudible) infrastructure, as well as [serving] predictive capabilities We are enhancing the capabilities and accelerating the path of the development of our Customer Engagement Analytics platforms, with the acquisition of Causata, which we announced earlier today.
Causata is a provider of Big Data, real time and predictive analytics technology, focused on the web channel. From our own survey as well as from our customer feedback, we know that more and more consumers are accessing the company website before or even during their call with the contact center.
Still, many organizations are managing the customer touch points in silos. The integrated solution for NICE and Causata, will provide greater visibility into the consumer's activity on the web, and will enable our customers to provide the simplest customer experience across the web and the contact center.
In addition, Causata's (inaudible) based predictive analytics and machine learning capabilities would allow us to further enhance our real-time decisioning and guidance capabilities. In our customer interaction business, the second quarter was characterized by strong booking in advanced applications, and more specifically by an increasing shift to our (inaudible), where multiple applications were sold, rather than just individual products.
This shift is a result of increasing number of customers, especially in the Americas, looking for solutions to transform their organization around [field-led] initiatives like ensuring compliance, improving customer experience and improving operational efficiency. Our solutions, which are tied to our customer's operations, enable the organization to align the company around common goals and measurements.
(Inaudible) structural change, and of critical components in providing the analytics and decisioning required for the transformation. An example of one such transformational deal that we rolled in the second quarter was with a North American telecommunication company.
The deal was around an initiative to improve customer experience. The deal, with a total contract value of eight digits, impacted our customer feedback, performance management, and [impacted] office optimization and incentive compensation management solutions.
While each product was selected based on its specific capabilities, we responsibly demonstrated the specific module of the combined suite, in aligning the entire organization to help improve customer experience. This was a key differentiator for us, in this competitive win, and the reason that we will replace the number of incumbent solutions.
In addition, that deal win demonstrates that improving customer experience is garnering rapidly increasing attention among our customers, and further validating this, was due to booking [roles] in our Voice of the Customer solution, and the growing interest in our Customer Engagement Analytics and real-time authentication solutions. Another initiative that continued to gather momentum, is around compliance and regulations.
There are increasing regulations around frauds, risk limits, fee disclosures and major interest rate benchmarks, to name just a few. In addition, there are continuing enforcement actions by the CFPB, a regulatory formed under the Dodd-Frank act.
Moreover, with the senate's confirmation of the CFPB agency director, CFPB enforcement activity is expected to substantially (inaudible) in the immediate future. Our Proactive Compliance solutions are meeting the needs of the growing regulatory environment in helping our customers transform the trade inflow and contact center operations around compliance.
The solution, (inaudible) the suite, embrace our capture, analytics and (inaudible) technology, addressing all parts of the compliance operation. This improves data collection, historical record-keeping data retrieval, current transaction analysis, customer profiling and reports of (inaudible).
We are seeing good traction for this solution, and we secured our first bid for retail banking Proactive Compliance from a major U.S. bank.
Then there is the transformation we continue to see around operational efficiency. This has led to multiple application sales within our Workforce Optimization portfolio of solutions like the deal win I spoke about earlier; and to further strengthen the capabilities around employee engagement, which is critical for this transformation, during the quarter, we added collaboration (inaudible) features into our product portfolio.
Our leading industry position is reflected in the new 2012 market share report by DMG Consulting, where NICE was recognized as the leader in contact center WFO for the third consecutive time. Maintaining our leading position growing our market share, are only possible things to our ability to deliver to our customer solution, that targets their actual business needs.
In our financial crime and compliance business, we posted a strong quarter of double digit growth in bookings. The strong performance continues to be driven by significant regulatory activity, investigation and continued fines on banks and other financial institutions.
One example of a new regulation is FATCA. While the effective date for FATCA was pushed back by six months to mid-2014, during the quarter, we added two more deals related to this new regulation.
One deal was with the U.S. financial institution, and the other with an international one.
As the regulatory climate continues to intensify, institutions continue to look for new and more efficient ways, in which (inaudible) can help them prevent financial crime and comply with regulations. (Inaudible) remain a key focus area for our customers, and we continue to see increase in the growth of our (inaudible) solutions.
In fact, we are well positioned as the capital leader in 2013 (inaudible), to emphasize fraud management solution for financial services. Also stimulating demand in more financial institutions is the need to consolidate global risk management.
Customers are thriving for consistency in approach, which is often required by the regulator, as well as cost reduction. This has led to increasing sales for our enterprise risk case management solution, which provides a holistic and coordinated approach to case management and investigation throughout the global organization.
Last, in our security business, we saw strength in the banking and in the critical facilities verticals. We continue to expand our banking business solutions internationally, as we won a deal to deliver our branch banking video module to an international bank.
This is a module we introduced about a year and half ago, which is new capturing devices developed for ATMs and branches, and multi-site management [desktop] and a smart ATM integration. In the critical facilities vertical, we were chosen to implement NICE Situator in a large (inaudible) project for the new military training center.
An alternative was considered, which called for the system integrator to develop a [PC] solution from scratch. And we were able to convince the integrator, that our solution provides the higher return on the investment, while meeting the high security need.
Once again, these sales is a proof of the validity of our solution approach and its advantages over the customer deployment. In our intelligence business, technological challenges continue to drive governments to be more open to external solutions.
As a result, we continue to see demand for Target 360, our intelligence flagship VoIP solution. Target 360 is a unified platform for communication interception, voice and data (inaudible) analysis, and investigation.
It helps our customers fight organized crime, drug trafficking, terrorism and other national security threats. In summary, we reported solid results for the second quarter, which was marked by strong new booking growth in our analytics based advanced applications.
As a result, we believe we are well positioned for a strong second half of the year. The booking growth of our advanced application is the result of the increasing demand from our customers to operationalize Big Data.
We continue to focus on innovation to further extend and enhance our Big Data platform and analytics, and our portfolio of advanced applications, so that we can continue to deliver direct value to our customers. I would like to thank the NICE team for their work in this quarter.
I will now turn the call over to Dafna Gruber, our CFO. Dafna?
Dafna Gruber
Thank you, Zeevi. I am pleased to provide you with an analysis of our financial results and business performance for the second quarter of 2013, and our outlook for the third quarter and full year.
Revenue for the second quarter was $225 million, up 4% from $217 million in the second quarter of last year. Customer interactions revenues were $146 million, up 4% compared to $140 million in Q2 last year.
Financial crime and compliance revenues were $34 million, up 7% from $32 million in the second quarter of last year. Security revenues were $45 million, up1% from the second quarter of last year.
For the second quarter, customer interactions accounted of 65% of total revenue; financial crime and compliance 15%; and security 20%. Looking at the regional breakdown, revenues in the Americas increased 2% to $135 million, compared to the second quarter of last year.
Revenues in the EMEA increased 2% to $56 million, and revenues in Asia-Pacific region increased 14% to $34 million compared to the second quarter of last year. For the second quarter, the Americas accounted for 60% of total revenues; EMEA 25%, and APAC 15%.
In the second quarter, product revenues accounted for 37% of total revenues, and maintenance represented 39% of total revenues. Professional services, including SaaS and hosting, accounted for the remaining 24%.
Gross margin reached 66.9%, compared to 66.1% in Q2 last year. Operating margin reached 19.4%, up 60 basis points from 18.8% in Q2 last year.
Earnings per share were $0.61 in Q2, representing an increase of 7%, compared to $0.57 in Q2 2012. Second quarter cash flow from operations was $35 million compared to $12 million in the second quarter of 2012.
In the first half of the year, we generated $93 million cash from operations, which is a 14% increase compared to the first half of 2012. Our total cash and financial investments were approximately $503 million at the end of June 2013.
Headcount at the end of June totaled 3,450 people, compared to 3,360 at the end of June last year, and 3,399 people at the end of December 2012. During the second quarter, we paid about $15.3 million to repurchase approximately 425,000 shares as part of our share repurchase plan.
In line with our dividend plan announced in February, NICE's Board of Directors approved a dividend payment of $0.16 per share. The record date is August 22, 2013, and the payment date is set for December 9, 2013.
As you know, we just announced today, the technology acquisition of Causata. As a young startup company, operating in the SaaS model, the acquisition will have a very negligible impact on 2013 revenues.
We expect the acquisition to be slightly dilutive to the third quarter of 2013 earnings per share, and have no impact on first quarter profitability, and we are not changing the range of our full year 2013 earnings per share guidance. We expect the third quarter 2013 total revenues to be in the range of $225 million to $240 million, and fully diluted earnings per share to be in the range of $0.56 to $0.66.
We have not changed our annual guidance. We continue to expect total revenues for the full year 2013 to be in the range of $940 million to $970 million, and fully diluted earnings per share to be in the range of $2.55 to $2.65.
That concludes my comments, I will now turn the call over for questions. Operator?
Operator
Ladies and gentlemen, your question-and-answer session will now begin. (Operator Instructions).
We do have our first question and it comes from the line of Shaul Eyal from Oppenheimer. Please go ahead Shaul.
Shaul Eyal - Oppenheimer
Thank you, operator. Good afternoon everybody.
Zeevi, with all the good news about contract wins and kind of booking levels, I believe that's kind of the company last quarter, I think we talked about booking levels -- of exiting fiscal 2013 with booking levels of around $1 billion or even kind of above that. Are you still kind of holding to that view?
Zeevi Bregman
Yeah, we focus to end the year with the more than $1 billion in bookings.
Shaul Eyal - Oppenheimer
Got it. Thank you for that.
Dafna, the product this quarter kind of a little soft, I am kind of looking at my model. What's kind of -- what's behind it?
Is that kind of just a product mix, is it just going to be one-off or is it kind of more of a trend that we should be expecting for the second half of this year?
Dafna Gruber
Yeah, it's basically a combination of the two. There is an impact of the business mix on that, specifically on this quarter.
But we also need to remember, that because of the complexity of the advanced applications we are selling, via more professional services. And so we see a gradual change in the ratio for the professional services.
That's one thing. And also, we have mentioned in the past, the [net] line between booking and revenues is lengthening, due to the growth we are seeing in advanced application, and these deals, because of the complexity, takes longer to recognize, and this is the main reason we are seeing more seasonally weighted second half, and especially Q4; and the impact is mainly and greater on the product revenue element.
Shaul Eyal - Oppenheimer
Got it. So as we think about the second half, was expected of product lines.
Are we still expecting kind of growth for products, let's say second half over first half?
Zeevi Bregman
We expect growth in products, second half over first half. But there is at least one additional component which is very positive, and Dafna even mentioned, and this is the uptick in our cloud business.
The cloud business is categorized as services and not with products, and there is a certain categorization here.
Shaul Eyal - Oppenheimer
Got it. Maybe one final question if I can squeeze in Zeevi, with the technology acquisition that you did this morning, can you kind of maybe explain kind of the audience kind of how that kind of goes and sits with your respect to kind of the remains of your -- kind of Big Data strategy so to speak?
Thank you.
Zeevi Bregman
This is enhancing and expediting some of the implementation deliveries within our Big Data strategy. As we understand from our customers, there are more and more cases, where people are [counting] the contact center, after visiting or browsing the website of an organization.
And actually, we are hearing from our customer even that they are doing it while they are browsing the website while calling the contact center. And what the technology of Causata is enabling us, is to really integrate the two worlds and provide a seamless customer experience from the web to the human channel.
Whether it's the contact center or a store. And we can look at the customer journey, understand what are the recent activities that the customer has done or is still doing on the web, and [they know] the service, their article to the right agent and improve the overall customer experience and the business results of our customer.
Shaul Eyal - Oppenheimer
Thank you. That's helpful.
Operator
Thank you for your question. The next question comes from the line of Daniel Ives from FBR Capital Markets.
Please go ahead.
James Moore - FBR Capital Markets
Hey guys, this is actually Jim for Dan. I guess, could you just talk a little bit about the Actimize business and general trend just in there, in the regulatory environment?
Zeevi Bregman
Sure. Actimize is enjoying the wave of the regulations that is coming on.
When we are looking at the business, you can see that went back to growth in the this quarter in the first half. We are also seeing the booking is solid, and the growth is coming mainly from around regulations and around understanding that there is a need of (inaudible) activities and make them really an enterprise-wide offering, and enterprise-wide technology.
So if we are looking at regulation, Dodd-Frank and operations of Dodd-Frank has a positive impact on our activity, specifically the other regulations like FATCA and these being implemented, AML -- we usually characterize it, but it's basically the regulated event. We are seeing a strong demand there as well, and when we look at the international market, and the regulations in the growth like EFMA in Europe are also impacting areas like [intra-day], where we have a very unique technology.
So we are still looking for very strong demand, on these areas. The other area that we are seeing demand is to the enterprise risk case manager.
The Enterprise Risk Case Manager is a tool that is deployed enterprise-wide, and enabled to do investigations across the organization, to collect data across organizations. We are seeing more and more enterprise-wide deployment of this too.
We have also seen in other areas of Actimize, from a growth in activity, and this is around (inaudible). Managing for the enterprise-wide solution.
James Moore - FBR Capital Markets
Okay. Thanks for that.
And just getting back to your acquisition. With respect to M&A, are you guys still interested in looking at other things at this point, and what would be the focus?
Zeevi Bregman
We believe that we can complement our innovation and our growth with the growth that is coming inorganically from acquisitions, also innovation that can come from acquisitions. As a result, we continue to look at the companies and businesses that will complement our business.
We continue -- there are no major changes in this strategy. We continue to be looking carefully about valuations, looking carefully about strategic fit, a chance of integration, and the overall long term return to the shareholders of this acquisition.
James Moore - FBR Capital Markets
Thanks very much. Good luck going forward.
Operator
Thank you for your question Daniel. The next question comes from the line of Jonathan Ho from William Blair.
Please go ahead.
Jonathan Ho - William Blair
Good morning guys. Just wanted to get a sense of the macro environment, and whether you could talk a little bit about deal closure rates, as far as the pipeline of opportunities?
Zeevi Bregman
If you look at the global macro environment, to the extent that we can measure it. Again, we are a small company in a large world.
But the way that we can measure it, we are seeing signs of improvement in the U.S., and maybe we are seeing -- Europe is stable, but we have a good business in Europe, and we believe that we will go this year, and APAC is okay. When it comes to specifically, early in the quarter, we saw some softness in the public sector in the U.S., and I think that it has [recurred] in the second half of the quarter.
Jonathan Ho - William Blair
Got it. Just in terms of the deal closure rates, have you seen sort of customers start to normalize in terms of that, or is still a relatively challenging environment there?
Zeevi Bregman
The environment is still challenging. However, there is no deterioration.
So it's really already within our model and the focus of our salespeople.
Jonathan Ho - William Blair
Got it. Just in terms of the analytic side.
Are you seeing sort of an uptick there now, in terms of an increase of the percentage of your revenue that's coming directly from these events at [analytics visions], or is there any sort of metric that you can give us, in terms of what that might be looking today in terms of contribution?
Zeevi Bregman
We are not measuring contribution, what we are highlighting is percentage of new business that is coming from advanced, from the [critical space] solution. We said that it grew 20% compared to the second quarter of 2012, and it's now representing around 50% of our overall new business.
Jonathan Ho - William Blair
Great. Thank you.
Operator
Thank you for your question, Jonathan. The next question comes from the line of Greg McDowell from JMP Securities.
Please go ahead sir.
Greg McDowell - JMP Securities
Great. Thank you very much.
I was hoping to drill a little bit into the Causata acquisition that you made, and I was wondering first, do you share any customers with Causata, and could you may be talk a bit about their customer base, and what sort of goals they focus on? Thanks.
Zeevi Bregman
They have several customers. I believe that we do not -- we are not sharing customers at the moment.
We do share some customers that are in their pipeline. So some of the pipeline customers are existing customer of ours, and this is the -- if you can repeat your second part of your question?
Greg McDowell - JMP Securities
It was the vertical component of Causata. Were they focused or strong in any particular verticals?
Zeevi Bregman
I don't think that there is particular sector that's strong. It's more that the strength is there in the web.
It's more of -- its (inaudible) offering within the web domain. So it's in the website, and this is something that for us -- we are integrating and this is how we are generating the value.
Greg McDowell - JMP Securities
Great, thank you. One more quick question, and I know you don't like to give the book to bill metric on a quarterly basis anymore, but are you still pretty confident that for the full year, your book-to-bill ratio will be greater than one?
Zeevi Bregman
Absolutely.
Greg McDowell - JMP Securities
Great. That's all I have.
Thanks.
Operator
Thank you for your question Greg. The next question comes from the line of Matt Hedberg from RBC Capital Markets.
Please go ahead.
Matthew Hedberg - RBC Capital Markets
Thanks for taking my questions guys. Just looking at sort of the full year and Q3 guidance, I think if the midpoint of my math is right, it looks like we would assume up 17% sequential growth in 4Q.
And it's a little bit above, call it your three year average, maybe closer to 7%, and you have mentioned, whether it's strong bookings and advanced applications cloud solutions, maybe the U.S. government or the U.S.
vertical improving. But I guess I am wondering, are there any large deals in your pipeline, maybe 4Q specifically, because you increased confidence in that kind of growth?
Zeevi Bregman
Correct. We have a very healthy pipeline for Q4, including the federal large deals.
Matthew Hedberg - RBC Capital Markets
That's helpful. And I think Zeevi, you mentioned, customers are buying multiple apps today, versus maybe individual products.
Is there any way you can help us understand, maybe how many applications the average customer is buying today, versus maybe a year or two ago?
Zeevi Bregman
It's really -- if you look at the large deals that we closed this quarters, and we are analyzing them one by one, we can say that each of this deal was, based on a solution of a platform, that is the combination of a federal solutions that are tied together. So -- and the solutions are more holistic in terms of the used case (inaudible).
It's difficult to measure it on a percentage, as we see that a lot of small business, that our single product, single solution and within each quarter.
Matthew Hedberg - RBC Capital Markets
Great. Thank you.
Operator
Thank you for your question Matt. We have another question, and it comes from the line of David Kaplan from Barclays.
Please go ahead, sir.
David Kaplan - Barclays
Hi everyone. Zeevi, you just touched on, what I guess we would call a bundling of product.
Can you talk a little bit about cross verticals there, particular verticals where you see more applications purchased per customer, or are there -- I guess, talk about verticals a little bit. Let me start with that part.
Zeevi Bregman
We are -- especially, it's interesting because it's -- the vertical pretty much in line to the different business cases that we are delivering, and we are seeing strength in the telco market, and this is mostly around customer experience, and so the telco is -- solutions in telco for customer experience are -- we are seeing strength. When it goes to the financial sector, we are seeing increased interaction in business, around compliance solution, and also some customer experience initiative.
So these are two areas, and key payment is again around customer experience, and sometimes operational efficiency, and I guess, these are the main verticals.
David Kaplan - Barclays
So just to clarify, are you seeing more applications purchased per customer, or is it just the vertical seems to be widening?
Zeevi Bregman
No. When we are providing a customer experience -- the way that the -- what we are seeing is we are addressing more and more transformations in the customer, that are led by executives, sometimes CEO, sometimes it’s the COO who leads the initiative.
For example, around customer experience. Then what we look for (inaudible) into our business consulting, how can we help them to improve the customer experience in transformational way.
So it goes to how we should look at the employee engagement, and making sure that the employee are engaged and working in [measured], and working in this area. We are looking at the employees who are concentrated in this area.
We are looking that the entire organization is measured around the KPIs that are required from this transformation, and we are providing the analytics and the decisioning that is required to this transformation to take place. All this together is a combination of people and products that are integrated, and these are creating the transformation within the customer environment.
So we are moving more to such transformation, in terms of the value proposition is basically increasing the volume of the size of the (inaudible) environment, and also increasing the number of products that we are tying together, in order to provide a solution to the customer.
David Kaplan - Barclays
Okay. And this is probably going to be for Dafna a little bit, but how does that business change -- first of all, how does it impact renewal rates of contracts, one year, two years if the original contract runs out, so how are those renewal rates, one?
And two, how is that going to impact, or will that impact the balance sheet or deferred revenues going forward?
Zeevi Bregman
First, in terms of -- some of these solutions are cloud based and some of them on-premise. When we are looking overall in the renewal rate of our -- both on the recurring maintenance and on the (inaudible), it's very high, it's in its 90s.
So we have a high renewal rate and the fact that we have -- we are tied more and more into the operations of our customers, means that our solutions are more sticky and we expect -- we are generating also more value, and we don't expect to see any change in the renewal rates.
David Kaplan - Barclays
Okay. And on the balance sheet impact, Dafna, anything?
Dafna Gruber
The balance sheet, the SaaS business has a certain impact on the balance sheet, it depends on the structure of the deal. I don't expect any major impact on the balance sheet.
David Kaplan - Barclays
Okay, great. Thanks.
Operator
Thank you for your question David. There are no further questions on the audio platform.
Zeevi Bregman
Thank you everyone for joining us today, and have a nice day.
Operator
Thank you. Ladies and gentlemen, that concludes your conference call for today.
You may now disconnect. Thank you for joining, and have a great afternoon.