Wednesday, February 20, 2013

Nice Systems Results Were Better Than the Market Thinks

It’s worth taking the time to look closely at Nice Systems' (NASDAQ: NICE) latest results because I think the market made an erroneous knee jerk reaction in marking the stock down. The results were pretty good, and the business is doing well with compliance regulation driving sales growth. Meanwhile, its data analytics of customer interactions and cloud based solutions offers good long term growth prospects. In summary, I think the growth story is intact, but the shift in the structure of its sales is making revenue growth look weaker than the underlying bookings and creating less visibility over earnings. No need to worry though, things look like they are on track.

Nice Systems Stock Research

A brief summary of the results and guidance:

  • Q4 Revenues of $240 million vs. consensus of $246 million
  • Q4 Non-GAAP EPS of 70c vs. consensus of 66c
  • Q1 Revenue Guidance of $220-230 million vs. consensus of $234 million
  • Q1 EPS Guidance of 57-62c vs. consensus of 62c
  • Full Year Revenue Guidance of $940-970 million and EPS of $2.55-2.65

I’ve previously discussed Nice in an article linked here, and readers can see from that link just how unusually strong the Q4 was on a sequential basis. Indeed, I had some doubts that the internal guidance would be hit. No matter, the numbers were good (albeit EPS was boosted by a tax gain), and bookings were strong with double digit growth recorded. The current book to bill ratio is greater than 1 and Nice announced ‘strong booking’ in advanced applications for 2012. Advanced applications made up more than 50% of new bookings in the quarter; this is a sign that it’s able to expand into the analytics space easily.

So if it has all these good things going on, then why is the guidance only for full year revenue growth of 7% at the midpoint?

The answer lies in the changing structure of its sales.

Nice Systems Equity Analysis

The first reason given to explain this conundrum is that its sales are becoming more back-end loaded. In other words, we can expect stronger second halves to the year going forward. This is what happened in 2012, and it’s understandable if Nice finds it difficult to confidently predict what will happen in the second half of 2013.

The second explanation relates to how its advanced applications are rising as a share of the sales mix. Its cloud based solutions are growing along with is analytics sales. This means that while bookings are growing double digits, it is likely to take longer for bookings to be added to recognized revenues. Again, this is consistent with companies that are increasing services revenues over product sales.

Of course this won’t go on forever. At some point the bookings will drop into revenues, and they should increase at a similar run rate going forward (when bookings growth naturally slows). The trend of increasing analytics sales will carry on not least because Nice signed a deal with IBM (NYSE: IBM) in order to incorporate its analytics solutions within its service applications. This is a great way for IBM to get a channel into Nice’s strong presence within the Financial vertical. Indeed, Nice booked a major customer interaction deal in Q4 and signed a follow up deal with a large US bank with a compliance based solution.

Nice Systems Earnings Drivers

If, as I do, you think that financials are being increasingly regulated and fined over compliance and customer interaction issues then Nice is set for a strong period of growth. As customer interactions increase across multi-platforms and the threat of fraud (external and internal) rises, there is an increasing need for solutions that log and monitor these interactions.

Moreover, the structuring of this mass of data is what the industry calls ‘big data’ analytics. I think that as corporations increase spending and awareness of the ROI of structuring this data then they will increasingly see the need to capture it--which is where Nice comes in.

Another positive would come if Nice underwent the merger/takeover that some parts of the press think it will do with its rival Israeli firm Verint Systems (NASDAQ: VRNT). I think this deal would make good sense for both companies and discussed the subject here. Verint is stronger in fraud prevention and security while Nice is strong in compliance and analytics. In a timely reminder of this Nice saw its notoriously lumpy security revenues come in a bit lower than expected thanks to a couple of deals slipping into the next quarter. In addition, the key verticals that they sell to are complimentary. A deal makes sense.

Is Nice Systems a Stock to Buy?

I think the stock is attractive, and the announced intent to pay a 64c dividend is a good way to start returning some of its strong cash flows to investors. I think a forward PE of around 15x is decent value, and that gives a target price of around $40 with some upside because I think the management is being conservative with guidance.

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