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It’s been a volatile year for the tech sector, but one company's
consistency has helped it stand out. Customer interaction company NICE Systems(NASDAQ: NICE)
has managed to keep its guidance on an even keel throughout the year.
Meanwhile, the company is gradually transforming itself from a hardware
specialist into a big data play.
NICE Systems' latest results
Here's a brief summary of the company's latest-second quarter (Q2) results:
Q2 revenue of $225 million, vs. internal guidance of $220 million to $230 million
Q2 non-GAAP diluted EPS of $0.61, vs. internal guidance of $0.58 to $0.64
Q3 revenue guidance of $225 million to $240 million
Q3 non-GAAP diluted EPS guidance of $0.56 to $0.66
Full-year guidance maintained, with revenues forecast at $940 million to $970 million, and EPS of $2.55 to $2.65
The Q2 numbers were bang in the middle of internal estimates, while
full-year guidance held steady. In a year where so many other tech
companies have warned or reduced guidance, this must be seen as a net
positive. So why is NICE doing so well?
Reasons to be NICE
There are three key reasons why the company has been outperforming.
First, its solutions do not necessarily need a strongly growing
economy. Essentially, NICE enables governments and enterprises to
monitor and analyze interactions through call centers, websites, email,
or even internal company interactions (for compliance, fraud or
regulatory reasons).
Fortunately, these sorts of activities are equally relevant in a
slow- or a fast-growing economy. In fact, in today’s cautious spending
environment, corporations might be more inclined to maximize the
potential within their existing customers, rather than chasing new ones.
Second, big data is only getting bigger. The explosion of data being created by social networking sites such as Facebook is
creating a huge amount of awareness of the need for corporations to
monitor and analyze customer behavior. This benefits NICE, because it
may drive demand for its data-capturing hardware systems, and
also because NICE has the capability to sell data analytics solutions
into its installed customer base. NICE calls these solutions “advanced
applications,” and they made up a 50% of its new bookings in Q2.
Moreover, the company has been proactive in developing its offerings, thanks to a deal to incorporate IBM's (NYSE: IBM) world-leading
analytics solutions within its services. In exchange, IBM gets to tap
into NICE’s installed customer base (particularly its key financial
customers).
You can see the gradual shift in NICE’s revenues by looking at product sales vs. services sales.
Source: Company accounts.
The third reason is that a lot of NICE’s solutions are not really
economically aligned. For example, its financial crime & compliance
solutions increased an impressive 7% in Q2, and contributed 15% of
revenues. In addition, its security based revenues made up 20% of
revenues in Q2. In other words, 35% of NICE’s revenues are coming from sectors whose end demand is not really cyclical.
In addition, on its conference call, NICE outlined that
the Dodd-Frank act will likely increase financial companies' enforcement
and regulatory activity. This is good news for NICE, because financials
are likely to buy more compliance and monitoring solutions as a
consequence.
What the industry is saying
In general, the rest of the data capture and analytics industry has been reporting good market conditions. For example, despite reporting a mixed set of results in July,
IBM generated 11% growth from its business analytics solutions.
Meanwhile, NICE’s perennial rival and potential merger partner, Verint Systems(NASDAQ: VRNT), maintained its full-year revenue guidance of 6%-7% at its results in June.
Verint is a good potential partner, because its strength is in
security and government-based work, while NICE is stronger with
enterprises (particularly financial companies) and call-centers. Despite
reducing its guidance for its European operations, Verint’s overall
view on the first quarter was one of “particularly strong business
activity relative to the first quarter in the year.” In addition, Verint
reported similar business trends to NICE, with its analytics solutions
generating faster growth than its legacy capture systems.
Where next for NICE?
For the reasons outlined above, NICE has good chances to hit its
full-year guidance of around $2.60, putting the stock on a forward P/E
ratio of around 14.4 times earnings. That looks cheap for a business
with good long-term prospects, and relatively defensive growth
properties.
NICE has a tradition of good cash flow generation, having generated
an average of around $125 million in free cash flow over the last three
years. This figure represents around 6.2% of its current enterprise
value. In other words, there is plenty of scope to increase its dividend
yield of around 1.4%. Furthermore, the shift towards more services
revenues is likely to increase cash flow generation in future.
In conclusion, the stock represents a good way to get exposure to big
data spending, and is a good value proposition for more cautiously
minded tech investors. It could also see some upside if the market reevaluates it as a big data play.
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