NICE Systems Still Growing Strong

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.