Jul 31, 2016
Executives
Marty Cohen - VP, IR Barak Eilam - CEO Eran Liron - EVP Marketing and Corporate Development
Analysts
Greg McDowell - JMP Securities Hugh Cunningham - Oppenheimer & Co. Paul Coster - JPMorgan Jonathan Ho - William Blair and Company Tal Grant - UBS Chris Reimer - Barclays Capital Lena Rogovin - Chardan Capital Markets
Operator
Welcome to the NICE conference call discussing Second Quarter 2016 Result and thank you all for holding. All participants are at present in a listen-only.
Following management’s formal presentation instruction will be given for the question-and-answer session. As a reminder, this conference is being recorded July 28, 2016.
I would now like to turn the call over to Mr. Marty Cohen, VP Investor Relations at NICE.
Marty Cohen
Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer, and Eran Liron, Executive Vice President Marketing and Corporate Development.
Before we start, I’d 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 2015 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 23, 2016. During today’s call, we will present a more detailed discussion of second quarter 2016 results and the company’s guidance for the third 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 differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today’s press release. I will now turn the call over to Barak.
Barak Eilam
Thank you, Marty, and welcome, everyone. I’m glad to be on the call with you today.
We are pleased to report a strong performance for the second quarter of 2016. We reported revenue of $235 million, representing 9% growth over Q2 2015.
Excluding the impact of currency exchange rates, revenue growth was double-digit at 10%. Along with the growth in revenues, our continued emphasis on operational excellence led to operating income of $57 million or 18% growth compared to the second quarter of 2015.
The operating margin was 24%, up from 22.3%, and earnings per share was $0.79, which was an increase of 23% compared to the earnings per share reported in the second quarter of 2015. Beyond the strong financial results, the second quarter was a defining quarter for two of our four transformations.
We witnessed a significant acceleration in both analytics and the cloud and announced the acquisition of inContact. The acceleration of analytics in Q2 helped deliver another quarter of double-digit growth for these solutions and helped drive a significant increase in seven-digit deals.
Analytics are accelerating for several reasons. First, analytics are being added to more parts of our portfolio, and as a result, we see acceleration in adoption of the full portfolio.
Second, we are seeing expanding amounts and types of use cases in which our analytics are being applied. And lastly, we are seeing strength in new verticals and market segments for our analytics solutions.
Let me give you some examples of the various ways in which our analytics are being adopted among different verticals. In one instance, a major retailer in a seven-digit deal is applying our analytics to their credit card operation to ensure collections compliance, sales effectiveness, and process improvements.
In another seven-digit deal with one of the largest global retailer, the customer's emphasis is on discovery and quantification of problems related to order fulfillment and shipping to help uncover opportunities to drive process improvement. Another strong vertical for analytics is telecom.
One of our existing customers, a Tier 1 service provider, is significantly expanding their application of our analytics, taking these solutions to another level by adding multiple sophisticated use cases. This transaction was just shy of eight figures.
In a similar example, a large, well-known cable and media company that has already deployed several NICE solutions expanded to additional lines of businesses in a very significant seven-digit deal. Also, one of the largest global software companies was looking to reduce handle time through the identification of troubleshooting improvement opportunities.
This resulted in yet another seven-digit deal. Analytics are also driving our strong results in financial crime and compliance as well as leading us into new verticals in this segment of our business.
Gaming and entertainment is one example of vertical expansion. And in a seven-digit deal, a major gaming and entertainment company purchased several solutions from our anti-money-laundering suite.
This is a new customer for our financial crime and compliance business and demonstrates our ability to bring our financial crime and compliance solutions into verticals beyond financial services that are faced with similar regulatory compliance and fraud-related issues. In addition, one of the largest global banks with whom we have long-standing relationship has expanded with NICE in a seven-digit deal for our fraud solutions.
With regulators enforcing more actions to prevent fraud in outgoing payments, this bank wants to be the forefront of preventative measures. In doing so, our solution will be the front and center, monitoring in real-time every single outgoing payment.
This puts our solution at the center of the inter-banking payment system. I believe that this deal further demonstrate the value of our solutions and exemplify the trust that an institute of this size has in our capabilities.
With our strength in analytics, we are also witnessing more competitive replacement. For example, an existing analytics customer decided to standardize on one platform, resulting in a seven-digit replacement deal.
While analytics were a key driver for our performance this quarter, we are starting to witness an acceleration in cloud adoption in the customer service market. And as you know, two months ago, we announced the acquisition of inContact, the cloud contact center market leader.
The feedback that we received has been very positive from customers, partners, market analysts, and employees. This positive feedback was reinforced at Interactions 2016, our annual user conference.
With 1,500 participants representing many customers and partners, it was a great opportunity to hear feedback on the significant value created by the combined companies. We are encouraged by the positive response as it supports the trend of increasing cloud adoption in our respective markets.
Customer service organizations are progressively exploring the cloud for its agility, pace of implementation, elasticity, scalability, and overall lower total cost of ownership. At the same time, they don’t want to give up full functionality.
With NICE and inContact, organizations will get the best of everything: best-in-class analytics, applications and infrastructure in the cloud, fully integrated from a single vendor at a lower total cost of ownership, and with full elasticity. It is a platform that is unmatched in our business.
As the customer service cloud market is rapidly growing, NICE and inContact have all the ingredients to become the clear leader in this market. In closing, we look forward to the second half of the year and we remain centered on further capitalizing on the many growth opportunities in our expanding addressable market.
I will now turn the call over to Eran, who will review our financial result.
Eran Liron
Thank you, Barak, and good day, everyone. I’m pleased to provide you with an analysis of our financial results and business performance for the second quarter of 2016, as well as our outlook for the third quarter and full year 2016.
Please note that the financial results represent continued operations and exclude divested businesses for Q2 2016 and the comparative numbers for 2015. These two businesses are presented as discontinued operations.
However, the cash flow statements include the results of both divestitures. And now I will review the results.
Revenues for the second quarter were $235 million, which represents an increase of 9% from $216 million in the same period of last year. Excluding the impact of currency exchange rates, revenue growth was 10%.
Customer interaction revenues for the second quarter of 2016 increased 8% to $172 million, and financial crime and compliance revenues increased 10% to $63 million. On a regional breakdown, we had good growth in all regions.
Revenues in the Americas were $162 million for the quarter, an increase of 7% compared to last year. Revenues in EMEA increased 13% to $48 million, and revenues for Asia-Pacific grew 18% to $25 million for the second quarter.
Looking at revenues by business line, product revenues accounted for 27% of total revenues in the second quarter, maintenance revenues accounted for 44% of revenues in the quarter, and professional services and cloud accounted for the remaining 29% of total revenues in the second quarter 2016. Gross margin in Q2 reached 70.4% compared to 69.2% in Q2 last year.
The gross margin improvement is a result of revenue growth, a favorable product mix, and continued efficient utilization of the service organization. Operating profit in the second quarter increased 18% to $57 million.
The operating margin improved to 24% compared to 22.3% last year. The improvement in the operating margin is a result of a higher gross margin and continued disciplined expense management.
The effective tax rate for the quarter was 19.5%, which was in line with our expectations. Earnings per share increased 23% to $0.79 in Q2 2016 compared to $0.64 in the same period last year.
Second quarter cash flow from operations was $30 million and total cash and financial investments were $776 million at the end of June 2016. As part of our share repurchase plan, we bought back a total of $9 million during the second quarter.
In line with our dividend plan, our Board of Directors approved a dividend of $0.16 per share for Q2 2016. And I will now turn to guidance.
For the third quarter 2016, we expect total revenues to be in the range of $234 million to $244 million and fully diluted earnings per share to be in the range of $0.78 to $0.84. For the full year 2016, we reiterate revenues to be in the range of $995 million to $1,015 million.
For earnings per share, we increased the full year 2016 diluted earnings per share to be in the range of $3.48 to $3.58. That concludes my comments.
I will now turn the call over to the operator for questions. Operator?
Operator
Thank you. Ladies and gentlemen your question-and-answer session will now begin.
[Operator Instructions] Your first question comes from the line of Greg McDowell with JPM Securities. Please proceed.
Greg McDowell
Great. Thank you very much and good day.
My first question - and it’s great to see all the million-dollar-plus deals and just the continued execution of the business. My first question has to do with seasonality of Q3 versus Q4, because it seems to be with the Q3 guidance you provided, it seems to be a little bit more backend loaded.
So I was just wondering if you could first comment on maybe seasonality in the back half of the year compared to previous years. Thanks.
Barak Eilam
Thank you for the question. It’s very similar to previous years.
We have - usually our business is very much backend loaded. It’s not very different from previous year.
We usually see our bigger chunk of the business come and recognize as revenue in Q4. We also have very small FX impact due to the deterioration of the UK pound that shifted a couple of millions of dollars into Q4.
So that’s very typical and we feel confident with the guidance.
Greg McDowell
Thank you. And one quick follow-up question.
It looks like you had strong performance out of EMEA with EMEA revenue up 13%. But I was just wondering if you could comment on any impact you’ve felt so far from Brexit and whether or not you’ve made some adjustments to how you’re thinking about your European business and especially your UK business.
Thanks.
Barak Eilam
Good question. We haven’t seen anything - any change - any change of dynamics.
The event itself happened, if I’m not mistaken, a week and a half or two before the end of the quarter. Beside the issue of the FX itself, the foreign exchange rate itself from business dynamic, we haven’t seen anything.
Actually, if you look on our performances in EMEA, if you add to that the FX impact, actually we grew even faster in EMEA. So all-in-all, it’s same as before.
We don’t see any change in dynamics right now.
Greg McDowell
Thank you.
Operator
Thank you. Our next question comes from the line of Hugh Cunningham from Oppenheimer.
Hugh Cunningham
Thank you for taking my question. Congrats on a strong quarter.
Can you talk a bit about the evolution of the conversation you are having with your customers about the cloud? Are there any remaining decelerators impacting that transition?
I think we used to view security as an inhibitor. Is there anything that’s inhibiting the move to the cloud now?
And on the analytics front, can you discern a pattern that customers are following as they adopt new use cases for analytics deployment?
Barak Eilam
Thanks for the question. So the first one is exactly the thought process and the analysis we have done in the last couple of years before reaching to the conclusion and acquiring inContact, as we have done two months ago.
We’ve been monitoring this market very closely, speaking with a lot of customers, analysts, and other, trying to understand at what point customer in all segments of the market will get enough confidence to start moving to the cloud. And I’ll tell you from my dialogue and my colleagues’ dialogue with customer that we see, and you’ve heard it in my previous comments, a significant change in the approach of customer service organizations as companies overall, including their IT organizations, with respect to the cloud.
I would say it’s actually coming in twofold. First one is on the defensive side, whether it is secured enough, whether it offer everything that you can offer on an on-premise.
And many of the past concerns that we have heard are no longer part of the dialogue. I think the cloud, obviously depending on the exact solution and whether the company offer that, gets to the maturity level of the technology itself.
The services that can be offered in cloud, the overall environment is such that more and more organizations and a very security aware organizations in terms of the information security feel more and more comfortable moving more parts of their operation into the cloud. So we do see a dramatic shift with respect to that.
The second part, which was you called it a decelerator or hurdle, which we still see and we believe that we are addressing with the acquisition of inContact. While the cloud has a lot of benefit, it is to beyond the total cost of ownership and the benefit of moving to the cloud really to get the full functionality and more than just the full functionality when you move to the cloud.
And the feedback that we have received as a result of the acquisition of inContact, putting together cloud routing, full contact center functionality with WFO, with analytics, all in the cloud together enabling different used cases that are not feasible to do in an on-premise way are really triggering a very interesting dialogues with customers. And as I’ve mentioned, we start to see an acceleration in dialogue.
A lot of customers are asking us to come and educate them. Some are asking to start.
Smalls are asking to move much faster, and we are engaged in those types of dialogues. With respect to the analytics and the different use cases, so I’ll say it’s from many different directions.
If in the past we had to take our analytics solutions and educate our customers on what analytics can do for further business, many of our customers already experienced our analytics for one or two very basic use cases in the last couple of years. And the acceleration, if I can characterize it that we’ve seen in the quarter and also in the pipeline moving forward, is taking some basic use cases and on one hand adding it to more advanced use cases.
And on the second hand, taking it to a much broader enterprise deployment. And the different project and deals that I referred to have the flavor of both.
Some of them is just adding use cases to the existing capacity and some of them is adding use cases, but also increase the deployment itself to a much broader audience within the enterprise.
Hugh Cunningham
Thanks very much. That’s very helpful.
If you could indulge me for just a quick sec, just referring back to the prior question. You talked about Brexit.
I don’t know if this work has been completed yet, but can you differentiate between the impact of the Brexit decision and what you think might be two years from now the actual impact, if and when Brexit actually takes place. Have you gone through that exercise yet?
Do you have any sort of preliminary conclusions?
Barak Eilam
The only thing I can give you is personal speculations. We talk to many customers, I think all of them are in almost in not holding patterns in terms of investment, but they are waiting to see.
But they are acting business as usual at the moment. I don’t know what to say what’s two years from now.
I think that we like to see some of the opportunities in this situation. There might be some opportunities as we - a lot of our business depends on or enjoy very much our customers building new centers or shifting to other centers.
We might have an opportunity over here, but I think it’s really, really too soon for anyone and for us to say.
Hugh Cunningham
Thanks very much for taking my question.
Barak Eilam
Thank you.
Operator
Thank you. Your next question comes from the line of Paul Coster, JPMorgan.
Please proceed.
Paul Coster
Thanks very much. First of all could you just give us an update on the sort of the timeline of the acquisition and how you are prepping for it from an integration perspective?
Barak Eilam
Thank you, Paul. So yes, the planning or the closing of the acquisition is as we stated before, we are expecting it before the end of the year.
We are going right now through all the regulatory approvals as well as the shareholder vote on the inContact side that is expected, if I’m not mistaken, a couple of weeks from now. So right now, everything is going as planned.
Obviously, internally we are preparing ourselves for the integration itself. And we have teams working on that, working diligently on a very detailed planning, both for the short-term and for the long-term.
And I think so far going as we planned and as we expected.
Paul Coster
You’ve had a positive response from your incumbent customers, but can you talk just a little bit about those parties that are sort of on the outside of the deal looking in, particularly people that you’ve previously - or entities you’ve previously partnered with. How have they responded and has it led to sort of any changes across the industry?
Barak Eilam
So as I mentioned, we have and we had a dialogue with a variety of stakeholders. I’ve mentioned obviously customers and partners and market analysts and also our employees and inContact employees.
And overall, the feedback is very positive. Many of our customers and partners very much like the vision as well as the different ingredients that are coming together.
And also our existing partners and inContact's partners, those that partner also with others, they see great opportunity over here. So all-in-all, I would say it’s positive.
Paul Coster
Okay. My last question is on the operating margins.
The last two quarters, you’ve been at record levels for these seasons, 24%. Are we kind of peaking at the moment?
Or is there further margin expansion?
Barak Eilam
We are right now at a place where we feel comfortable with respect to the margin level, but we do see an opportunity for an improvement and continuous improvement. As we have provided this improvement in the past, we believe there is opportunity to improve also in the future.
The improvements come in several areas where we continue to deliver on our plan. Different changes in the way that we operate, as well as improvement.
And Eran referred to that improvement in the gross margin that we continue to see, which is coming both from improvement on the product, the mix itself, but also in our ability to better utilize our professional services organization. So I would say that right now we feel comfortable with where we are, but we see gradual improvement and we do plan to take it higher.
Paul Coster
All right. Thank you.
Barak Eilam
Thank you.
Operator
Your next question comes from the line of Jonathan Ho, William Blair and Co.
Jonathan Ho
Hey, guys. Just wanted to start out with the analytics opportunity that you described.
Is there any way that you can quantify for us how much upsell opportunity you’re adding through these new analytics used cases? And maybe relative to your standard WFO opportunity, does this double your addressable market?
You know, just any way you could quantify this would definitely be helpful.
Barak Eilam
I’m not sure I’ll be able to actually give an exact quantification. I’ll try to give you a bit more color.
It might be helpful for your effort to quantify it. It goes to where do we see the expansion opportunity of analytics.
While we have introduced analytics, starting from basic analytics almost a decade ago, we believe that we are experiencing a pretty good inflection at the moment that is derived from several reasons. The first one, as I said, we have a very large customer base.
Not all of this customer base already experience analytics. So by definition, there is still opportunity to take it to more and more customers.
And one of the great opportunities that we’ve seen it, as I referred to the user conference we had, Interactions 2016, we saw a great mix of customers. Those that are using analytics for quite some time and those that are brand-new to the concept and you saw great collaboration to these customers.
So the first opportunity is to take analytics, different type of analytics, to the very large customer bases we have. So that’s the first opportunity.
The second one I referred to, even with an existing customer that are using our analytics, there are only a few that kind of deployed it across the entire enterprise to all use cases. So we see more and more opportunity of expanding both capacity and use cases.
And the third one is - and I gave a few examples of that, which are not typical for us in the past, but analytics get us into these verticals. We see different verticals, as I’ve mentioned before that allow us to penetrate and to become more pronounced as part of our customer base that used to be a very small vertical of ours.
I’ve mentioned for example the retail as a vertical, gaming and entertainment, and some others. So that’s yet another opportunity.
And the last opportunity that I will mention is that so far, most of our analytics was adopted by the higher end of the market. I would say mid end and higher end of the market.
As we go including with analytics more and more into the cloud, it allows much smaller customers, midsize customers and even smaller than that to enjoy the power of analytics because it can be offered in a much more efficient, effective, and attractive way over the cloud.
Jonathan Ho
Great, thank you.
Operator
Thank you. Your next question comes from the line of Tal Grant, UBS.
Please proceed.
Tal Grant
Hi, guys. Congrats on another very strong quarter.
That’s eight beat and raise in a row. So well done.
Just had a few questions. Firstly Barak, I think you just said something about the weakness in the sterling shifting revenues to Q4.
I didn’t quite follow what you meant there. If you could maybe explain?
And sticking with the theme of sterling, could you please tell us what percentage of your costs in revenue are in sterling? Secondly, just wondering about the - how the business works.
So your services revenue was up 12%. Products were down 6%.
Just wondering aren’t the services there to sort of implement the products that you sell? How can there be such a big divergence?
And then finally, I think just following up on what Paul was asking about how partners have responded. So obviously, your big competitor here has said that one of its competitive advantages over you once this deal with inContact completes is that they will be agnostic as to who they partner with for cloud infrastructure deals, whereas you guys will be more closely tied to one partner.
So how have other cloud infrastructure vendors that you’ve maybe worked with in the past responded? Are they bothered or are they okay with it all?
Thanks.
Barak Eilam
Sure. I’ll take the three questions.
So the first one was with respect to the impact of the foreign exchange with respect to the revenue. The only thing I said with respect to the guidance that we gave is this is what we see with the split between Q3 and Q4.
And with respect to Q3, we see an impact to the number that we see right now. This is already taking into account a certain hit of couple of millions of dollars due to the devaluation in the British pound.
That’s my comment. We still see the year according to the guidance that we have provided.
With respect to the mix of the services and product, so first of all, I think we need to look at it for more than a quarterly part, more than just one quarter. We should look on the trend, and there are fluctuations in services and product between quarters.
But as I’ve mentioned in my previous comments, we see a very nice traction to our cloud solutions that they sit under our service line in our P&L, in our reporting. And the increase that you see on the service is not just, but a lot of it attributed to the increase in the cloud revenue.
But moving forward, we also do expect a pretty balanced picture between the ability to grow the product, service maintenance, cloud, all the different components. So that’s with respect to the second question.
And with respect to the third question, I think now I understand it more clearly. So thank you.
So as you know, we are working with a variety of partners. We have been a vendor agnostic since ever basically.
That’s the nature of our business. And now we are also tying the integration to the market leader in the cloud space of contact center.
So when it comes to the on-premise environment, obviously we are vendor-agnostic. It’s also true to the cloud.
We also have cloud players. But we believe that the market is going through a shift and will go further through a dramatic shift.
WFO and routing, when it comes to the cloud, we’ll go together. And here we joined forces with the largest one of those players.
And we believe we can gain a lot from that while continue to work with all different partners, and the partners we are working with right now continue to work with us as before.
Tal Grant
Okay, great. Thank you.
Barak Eilam
Thank you, Ta.
Operator
Thank you. Your next question is from Chris Reimer from Barclays.
Please proceed.
Chris Reimer
Hi, thanks for taking my call. I was wondering if you could give some color on the kind of customers you are seeing for your cloud, whether they are large or smaller.
And if there is any regional particular activity you see in certain regions that might be picking up.
Barak Eilam
Thank you for the question. So I referred before to the - I think there was a question with respect to how customers see and discuss cloud these days.
And as I’ve mentioned, we see this dialogue with respect to cloud and the acceptability and the desire to start looking into the cloud is in all segments of the market. Obviously the higher adoption at the moment - and not just at the moment, also in the last couple of years is at the lower end of the market.
But the shift that we see is that more and more larger customers and larger enterprises are either looking to largely adopt a cloud or looking to take a subset of the operation and have that on the cloud. Basically more of a land-and-expand opportunity for us.
So we see it across the board, I would say. Very, very strong at the lower end of the market, but we see the trend of it climbing up.
The last thing I will say to the comment I made before about analytics, when it comes to specific stand-alone applications like analytics that we do see very, very strong in all segments of the market, including the higher end of the market.
Chris Reimer
Okay, thanks. And just any regional specific things that you might be seeing.
Barak Eilam
It’s across the board. Needless to say that the Americas or the US is a stronger or faster adopter, but in terms of the dialogue, we see it in many different places.
I would say that the Americas is a bit more advanced also from an infrastructure perspective, but we do have very interesting dialogue also in very - other territories as well as some very nice successes.
Chris Reimer
Okay, thank you very much.
Barak Eilam
Thank you.
Operator
Thank you. Your next question comes from Lena Rogovin, Chardan Capital Markets.
Please proceed.
Lena Rogovin
Hello, congratulations for great results. My question for updated full year EPS guidance.
So the question is if this is an indication of better than you expected profitability for the full year? Or it is related to some one-offs which happened earlier this year or expected in the second half?
Thank you.
Barak Eilam
Thank you for question. It's better-than-expected profitability that we are expecting for the full year.
Lena Rogovin
Thank you.
Barak Eilam
Thank you.
Operator
Thank you. We have no further questions.
Barak Eilam
Thank you very much, everyone. Thank you for joining us and have a great day.
Operator
Thank you, ladies and gentlemen. That now concludes your conference call.
You may now disconnect. Thank you for joining.
Have a very good day.