Wednesday, December 12, 2012

Introducing Nice Systems, The Big Data Play You Haven't Heard Of

Sometimes all a stock has to do is confirm its own guidance and it will go higher because the market didn’t really believe in the numbers in the first place. I think this was the case with Nice Systems (NASDAQ: NICE) recent set of results.  Yes the company beat on EPS and raised guidance accordingly, but this was partly due to lower taxes. Margins improved too, but it’s worth noting that the Q3 revenue number was only slightly ahead of the midpoint of guidance and Nice kept the full year revenue forecast unchanged. In addition this implies a wider than usual variance in its Q4 revenue guidance due to uncertainty. In summary, it is a good set of results, but the market’s optimism is arguably due to the point I made initially.

Nice Systems Q3 Results

Before I develop this point I want to summarize the Q3 results.

  • Q3 Revenues of $220.9 million vs. guidance of $217-225 million
  • Q3 Non-GAAP EPS of 64c vs. guidance of 56-60c
  • Full Year Revenue Guidance of $890-910 million unchanged
  • Full Year EPS Guidance of $2.41-2.46 vs. previous guidance of $2.28-2.38

So EPS numbers beat and guidance was raised for the full year but revenue numbers were kept the same. Obviously the higher margins recorded was good news, but I think the key to the market reception can be seen if you look back at an article I wrote at the previous results.

My point is that –at that time- the guidance for H2 implied some pretty historically strong numbers for Q4 but now that we are three months closer to it and management has affirmed the revenue guidance, there is a more solid sense of belief in them. To understand why some (including me) were skeptical lets go back to the implied guidance. First, purely from a revenue perspective.....

And now from the perspective of sequential revenue growth.

From either view the Q4 numbers looked like being a bit of an ‘ask’ for the company. No matter the recent affirmation has restored a lot of confidence to the stock price. This is a commodity which was in deficit after Nice’s last set of numbers and when its rival Verint Systems (NASDAQ: VRNT) also disappointed the market. My take on Verint’s numbers was that its management was too optimistic over prospects in the previous quarter and the stock got punished when results didn’t live up to expectations.

This sort of thing is part and parcel of technology investing this year, but I think this sector is relatively resistant to a slowdown.  Many of the drivers of the business are secular in nature and the drive towards social media, online interactions and increased regulatory compliance requirements is creating strong underlying demand for Nice’s solutions.  Accordingly, management was quick to highlight the growth in data analytics sales. Corporations and Governments are struggling to deal with the mass of unstructured data being created by increased interactions and the next step is to translate this information into structured data with which everyone can benefit.  

IBM (NYSE: IBM) is one of leading players in data analytics and Nice Systems has made a great move by signing a deal to incorporate its analytics solutions within Nice’s customer service applications. It’s also a good deal for IBM as it battles it out with Oracle (NASDAQ: ORCL) and SAP (NYSE: SAP) to establish itself as the key player in the industry. While Oracle and SAP have been forced into making acquisitions that strengthen their positioning in the cloud with Software as a service (SaaS) based solutions, IBM is looking to tap into Nice’s installed base of hardware customers.

It’s a smart move because Nice already has a pre-eminent position with key verticals like financial institutions and contact call, both of which currently use its hardware to monitor transactions. The deal is part of a move by Nice to leverage its installed base and to transform itself as a big data play. Indeed the financial vertical was strong for Nice in the quarter and regulatory requirements will only strengthen its end demand.

Moreover, its security solutions look set for increased demand (albeit in a lumpy manner quarter by quarter) as cyber crime morphs into using the same channels of interaction as consumers.

Where Next for Nice Systems?

Frankly I think the company remains conservative in its guidance and is openly stating that its forecasts include assumptions for ongoing closure rates. Therefore any pick-up in activity will likely see them beat estimates. Furthermore increasing data analytics sales are likely to increase margins and its underlying drivers remain. I’m happy to hold the stock for its upside potential, but anyone interested in buying should understand that the company’s visibility is relatively limited. So look out for volatility. 

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