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NICE Systems
delivered a set of first-quarter results that were anything but nice,
and the stock fell nearly 10% on the day of the results. The company
specializes in offering hardware and software that captures and analyzes
customer interactions across a number of platforms. For these reasons,
it's often seen as a big-data play. Fools may be asking what the
disappointing results mean for NICE, for rivals like Verint Systems , and for companies looking to expand its data analytics offerings, like IBM ?
NICE Systems soft first quarter A
quick roundup of the results reveals that revenue and EPS came in below
the bottom end of its guidance. In addition, its full-year guidance was
reduced.
First-quarter revenue of $228.6 million vs. guidance of $230 million-$240 million
First-quarter non-GAAP EPS of $0.57 vs. guidance of $0.58-$0.63
Full-year revenue guidance reduced to $995 million-$1.025 billion from $1.01 billion-$1.035 billion
Full-year non-GAAP EPS guidance reduced to $2.68-$2.80 from $2.73-$2.85
Second-quarter guidance of $230 million-$240 million in revenue, and non-GAAP EP of $0.55-$0.62
It was anything but a nice quarter, and the report
doesn't auger well for Verint or IBM. It matters to IBM because the
company is a partner of NICE in offering big-data analytics solutions,
and, as Fools already know,
IBM is depending on growth in areas like business analytics to counter
slow growth elsewhere in its product portfolio. In fact, earlier this
year, IBM announced a $1 billion investment in creating a business unit
for Watson, its supercomputer system that delivers data analytics via
the cloud.
More of a NICE Systems issue than an industry problem While
it's never good news to see a leading company in an industry reducing
full-year guidance, there are three key reasons that suggest this is
more of a company-specific issue.
Investors in Verint Systems and its rival NICE Systems
have gotten used to some pretty solid performances in 2013. The two
companies specialize in systems that capture and analyze customer and
employee interactions. With the growth in data analytics that companies
like NICE's partner IBM
is seeing, you can expect both Verint and NICE to find it a lot easier
to sell analytics as part of their packaged solutions (which is exactly
what is happening.) Moreover, the shift toward analytics looks likely
to favorably adjust their long term growth rates.
Verint Systems beats and raises The recent third quarter results from Verint saw the company beat estimates and raise guidance.
The full-year revenue growth forecast was increased to 6.5%-7.5%, up from 6%-7% previously.
Full-year EPS guidance was raised to $2.75-$2.80.
2015 revenue and diluted EPS guidance were projected at of 7%-9% growth.
Verint differs from NICE by focusing more on
security and government work, while NICE's strength lies in the
enterprise (particularly in the financial sector) and call center
markets. As such, the two Israeli companies will inevitably be discussed
as merger candidates. The differences also mean that they report some
contrasting results at times. Looking at Verint's quarter in detail, the
standout performer was Verint's communications intelligence segment
which recorded 30.6% revenue growth.
Source: Company presentations
If there was a disappointment, it was with the 3.3%
rise in enterprise intelligence revenue. Verint's management argued
that this was a consequence of weakness in Europe, because its Americas
enterprise business was up "mid to high single digits."
NICE and Verint grow data analytics Both
companies are seeing growing analytics sales. The two already have an
installed base of clients with their hardware solutions, so it's
relatively easier for them to sell larger deals with analytics
incorporated into the deal. Indeed, this is part of the reason why IBM
has a deal with NICE, that involves incorporating its big data analytics
within NICE's solutions.
The big advantages enjoyed by these companies is
that their customers get to buy analytics and customer interaction
capture systems (voice, video, online, and similar options) from one
vendor. However, Foolish investors should note that the shift is
changing some of the operating metrics.
Verint confirmed that it is seeing stronger average selling prices as its solutions are increasingly being sold with analytics.
Sales cycles appear to be getting longer as deal size and complexity increases.
Solutions that include analytics software are likely to see a
trade-off between short-term revenue generation and longer-term service
and support revenue.
Margins and cash flow should improve going forward as software tends to be higher margin.
Many of these factors are already playing out in Verint's
results. During its conference call, Verint's management outlined that
its operating cash flow would be around $160 million for the full year,
and "we expect that cash flow to grow kind of commensurate with the
earnings growth that we outlined in our guidance." Assuming capital
expenditures of around 1.8% of revenue (a conservative estimate)
suggests that free cash flow generation will be around $144 million and
$154 million for the next two years. These are impressive figures,
especially given that its enterprise value (market cap plus debt) is
only $2.28 billion.
Eagle-eyed readers will note that Verint's guidance implies no
increase in margins next year, despite it selling more software
analytics solutions. When pushed on the issue on the conference call,
CEO Dan Bodner replied:
Our guidance is 7% to 9%... ...we are aiming at double-digit growth.
So the trade-off here is between leverage that obviously exists in the
software business and investing more organically to accelerate growth.
And at this point, this is our initial guidance.
In other words, don't be surprised if Verint trades off its margin
expansion in the near-term to generate stronger growth in future.
The bottom line In conclusion,
this was a pretty strong report from Verint. Along with NICE Systems,
it represents a relatively cheap way to play the big data trend. These
companies aren't over-researched glamor stocks, and I think this makes
them even more interesting for Fools to look at. With a P/E ratio of
13.4 times 2014 estimates, Verint remains a good value.
A slightly disappointing set of results from customer interaction specialist NICE Systems (NASDAQ: NICE)
must have left its investors fearing that growth is starting to slow
for the company. The company's non-GAAP revenue growth slowed to just
4.2% in the quarter. Is it time to give up on the stock?
NICE Systems lowers guidance A brief summary of the third-quarter results and outlook:
Non-GAAP Revenue of $230.1 million vs. guidance of $225 million- $240 million
Non-GAAP EPS of $0.62 vs. guidance of $0.56-$0.66
Fourth-quarter revenue guidance of $260 million-$275 million
Fourth-quarter non-GAAP EPS guidance of $0.72-$0.77
The fourth-quarter guidance means that the
company's full-year guidance is now $940 million-$955 million, which
represents a lowering of the high end by $15 million. Similarly, the
high end of its full-year EPS guidance was lowered by $0.05 to reach
$2.55-$2.60.
Data analytics demand is slowing revenue growth
While it's never a good thing to see companies lowering guidance, NICE
has some plausible reasons for doing so. In addition, they mirror what
its competitor, Verint Systems (NASDAQ: VRNT)
, is delivering. Both companies specialize in selling systems that
monitor and analyze customer interactions. Moreover, increasing
awareness of the need for corporations and governments to use data
generated from user/customer interactions is creating more demand for
analytics solutions.
The good news is that increasing analytics sales
should drive stronger cash-flow generation in future because they tend
to be higher margin. The bad news is that it has a negative effect on
near-term revenue growth. Deals with analytics solutions tend to have
longer sales cycles, which means they generate revenue over a longer
time period due to having a larger services component.
A quick look at NICE's products and services demonstrates that its services growth is much stronger these days.
Source: company presentations
In addition, in its last set of results,
Verint disclosed that it was signing larger orders this year, with much
higher growth rates from its analytics solutions. Turning back to NICE,
here is what its management said on the recent conference call:
In the third quarter, new order of advanced
applications grew well above 20% compared to the last year's third
quarter and represented close to 50% of total new bookings.
Verint and NICE are both seeing sales moving toward value-added analytics solutions.
Reasons to be optimistic Looking forward to the next quarter, investors shouldn't be worried by the lowering of guidance for the full-year.
First, NICE's management confirmed that it was
targeting year-on-year growth in its product revenue. This would be a
welcome return to form because product revenue growth has been negative
for the last three quarters.
Second, management claimed to be on track for over
$1 billion in bookings this year. When you consider that the midpoint of
its full-year revenue growth is $948 million, it's clear that bookings
are growing faster than revenue. This is fine because the service
revenue from these bookings will drop into the top-line over time.
On a more negative note, there was some weakness in the enterprise sector in China and India. Given what NICE's partner, IBM (NYSE: IBM) recently reported in China,
this wasn't surprising. NICE incorporates IBM's analytics solutions
within its services offering. Unfortunately, IBM's management doesn't
expect to return to growth in China until the first quarter of 2014.
While this is disappointing, it should be noted that IBM's business
analytics solutions were the brightest spark in its recent results, and
are still up 8% year-to date.
Where next for NICE Systems? All
told, it was a solid, but slightly disappointing quarter from NICE.
Looking ahead, it needs to hit its targets in Q4, and then outline a
faster pace of growth in 2014. Analysts have NICE on 8.8% revenue growth
in 2014, but given the structural changes in its revenue stream
discussed above, it's reasonable to expect forecast be lowered.
The slowing of revenue growth is not a problem in
itself, provided that NICE continues to generate good bookings growth
and strong analytics sales. Companies will always find it difficult to
predict revenue growth when the structure of their sales is changing in
this manner.The bottom line is that the company's cash flow remains very
strong, and with a P/E ratio of just 13.7 times forecast for 2014, the
stock is a good value.
If there is such a thing as a defensive growth stock in the IT sector, then Verint Systems (NASDAQ: VRNT) might be it. Along with its rival NICE Systems (NASDAQ: NICE) , Verint has put in a very consistent performance this year. Both companies are leaders in customer-interaction and analysis solutions, and both look set for good earnings growth in the future. Verint recently followed NICE in reaffirming its 2013 guidance, and those of you looking for a relatively safe option within tech should consider the stock carefully.
End demand looks good...
The market reacted well to Verint's strong second-quarter results, even though it kept its full-year guidance unchanged. It was a similar story with NICE's second-quarter results delivered earlier in the reporting season. While the market may appear to be overly rewarding these companies for merely hitting guidance, there are deeper reasons why it is right. Essentially, there are a number of positive trends in the sector that help increase their longer-term earnings potential.
Customers are demanding more value-added data-analytics solutions.
Big data is starting to be used across all kinds of data channels, and companies will need to capture and integrate data from things like call centers, websites, social media, video etc.
Verint and NICE have strong, installed bases with their hardware-capture solutions, and they have an opportunity to sell data analytics into them because customers value buying solutions from one vendor.
Companies can still generate growth -- even in a weak economy -- by better analyzing their existing customers.
Solutions to prevent money laundering, fraud, and other crime are seeing secular growth prospects because criminals are also using technology to become more sophisticated.
Governments are increasingly pressured to use surveillance and intelligence gathering in order to monitor terrorist threats.
The points above relate to end-market demand, but the type of demand is also likely to positively change their earnings potential.
That demand is likely to help Verint's operating metrics
First, on its conference call, Verint predicted gross margins to be flat this year. You shouldn't read too much into this, because longer-term, the prospects for margin expansion are significant. Increasing demand for higher-margin analytics solutions implies that gross margins should increase in the future. Quoting from the recent conference call:
So overall, we still have about 50-50 mix between capture products and analytics. But clearly, we are growing our analytics portfolio. Analytics is growing at higher growth rates, which kind of shifts the overall growth rate of the company.
Verint is benefiting from analytics, and NICE has the bonus of a deal with IBM (NYSE: IBM) that integrates IBM's analytics solutions within NICE's solutions. This is a particular benefit to call centers and financials, sectors in which NICE is strong. IBM gets the benefit of tapping into NICE's installed base, and the latter gets to offer its customers the kind of analytical solutions that they require in the "big-data" world. It's a win-win scenario.
Second, even though it kept its full-year revenue-growth forecast at 6% to 7% and its EPS target at $2.75, the underlying picture did get better. Verint disclosed that it was seeing larger orders this year compared to last year.
What you need to understand is that these larger orders are likely to take longer to generate revenue, particularly if they contain a large services component. In other words, there won't be an immediate effect, but in the longer term, earnings and cash flow will be enhanced by booking larger orders now.
Where next?
Long-term prospects look good, and it's reasonable to expect margin expansion going forward. Moreover, if Verint and NICE can continue to grow revenues in the 6% to 7% range, then assuming an earnings growth rate in the double digits seems reasonable. Moreover, both companies are highly cash-generative. For example, Verint has converted more than 250% of its net income into operating cash flow over the last three years. This cash-flow conversion is likely to increase in future years as services and analytics grow as part of the revenue mix.
If NICE can hit free cash flow of around $125 million, and Verint hits its target of $100 million, then both stocks will trade on a free-cash-flow-to-EBITDA ratio of 5.9% and 4.3%. NICE looks cheaper on this basis, although both stocks look attractive for the long-term investor.
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.
One of the great IT bellwethers, IBM (NYSE: IBM),
issued mixed results in mid-July. It’s hard to be too critical of a
company that has just raised estimates despite increased currency
headwinds, but a deeper analysis of the company's results reveals some
underlying weakness. It’s been a difficult year for technology, and IBM’s earnings did little to raise investors' spirits.
IBM reports
The two key positives in the report came from the growth in
services backlog (7% at constant currency) and the strength in
higher-margin software sales. In order to demonstrate their impact, here
is a chart of IBM’s segmental growth. All data is sourced from company
accounts.
Growth in the second quarter was better than in the first. Moreover,
IBM’s reported revenue decline of 3% was made to look worse due to
currency headwinds of 2%. Based on its backlog, IBM forecasted that
third-quarter revenues in its global business services segment would be
up by mid-single digits, with global technology services increasing in
the low single digits.
The software segment's bounce back toward growth looked robust, and
management pointed out that its 4% reported revenue increase (5% in
constant currency) was the strongest recorded since the first quarter of
2012. IBM spoke of a very good software pipeline, and referenced good
growth in some important niches like branded middleware (up 10%) and
business analytics (11%).
To put this data into context, here is a graph (sourced from company
accounts) of the segmental revenue share and normalized pre-tax income
share.
Clearly, software is its highest-margin business, and its relative
strength in the quarter helped IBM raise gross margins to 49.7% from
48.3% last year.
With the services backlog up 7%, and higher-margin software returning
to growth in Q2, why aren’t these results as hot as they look?
Four reasons it's still tough out there
First, although software returned to growth in Q2, this was partly due to the weakness in the previous quarter. In fact, growth in the first half
was only 1.9%, which compares unfavorably to 2.6% and 11.5% in the two
previous years. Indeed, a glance at the first chart above demonstrates
that IBM is starting to lap some weaker quarters in 2012.
Second, going back to what IBM said last time around,
$400 million in software and mainframe deals were rolling in to Q2
anyway. When asked about these deals on the current conference call,
management stated that less than half closed in Q2, and, more
importantly, rollovers in higher-margin software are actually larger
going into the Q3. This all sounds good, but there is no guarantee that
rollover deals will get closed. In addition, its main rival Oracle(NYSE: ORCL) also reported some weakness in the quarter.
The third reason is that IBM’s forecast for services
revenue growth in Q3 needs to be put into context. Penciling in growth
of 5% and 2% for business services and technology services,
respectively, would give a total services revenue figure for Q3 of
around $14.9 billion. This compares favorably with the $14.4 billion
recorded last year, but rather less so against the $15.3 billion in
2011.
Finally, the macro commentary wasn’t great. America’s revenues
disappointingly declined 3%. However, the real surprise was within its
growth markets. Revenues in Brazil, India, Russia, and China, were flat
(up 1% in constant currency). In common with Oracle, IBM cited specific
weakness in Russia and China, and it expressed a cautious outlook for
its growth markets for the second half.
Key takeaways for the industry
While the tech market remains weak in 2013, there are pockets of
strength. IBM stated that its cloud revenues were up 70%; Oracle also
reported cloud-based strength. This shows a clear shift in corporate IT
spending towards the cloud and away from legacy on-license/on-premise
software.
Furthermore, the relative strength in IBM's middleware and business
analytics numbers suggests that middleware and data analytics company TIBCO Software(NASDAQ: TIBX) and interactions management provider NICE Systems(NASDAQ: NICE) could do well.
TIBCO finally seems to be sorting out its problems with its sales
force in North America. In addition, its increased focus on big data
analytics solutions, and offering its customers its service both
on-premise and via the cloud, is in line with trends in IT spending. Corporations
may be holding back on discretionary IT spending in general, but they
are still keen to invest in niche areas like social media and customer
engagement. Indeed, TIBCO cited specific strength in sectors such as
financial services and retail.
As for NICE, it has a deal with IBM to
integrate the latter’s analytics within its services. Unlike many areas
of tech spending this year, NICE has been reporting earnings that are
in line with expectations. Moreover, it is seeing strength within sales
of its advanced applications, which allow customers to analyze the data
that its systems capture. Again, this is a sign that in a slow global
economy, corporations are willing to spend on analyzing customer
interactions in order to better manage how they sell into their existing
customers.
The bottom line
In conclusion, IBM and Oracle have both reported earnings, and
neither had particularly good news for the IT spending environment.
Conditions appear to be stabilizing, but the broad-based bounceback in
demand hasn’t really happened yet.
With regards to IBM itself, the company’s story is about its ongoing
paring of lower-margin businesses, and how well it manages its shift
toward more software sales. For longer-term investors, I think the stock
will do fine. If it hits the raised adjusted diluted guidance of $16.90
in EPS for 2013, then it will trade on a forward earnings multiple of
11.4 times, as I write. This is attractive enough, but investors need to
be prepared for potential near-term volatility, because tech spending
remains weak.
You can either pay sky high evaluations for big data plays or buy a backdoor entry into the sector with a company like Verint Systems(NASDAQ: VRNT).
Companies that already use Verint's customer interaction capture
hardware will increasingly want to buy its data analytics software and
services in order to analyze the captured data. I’m sympathetic to the
argument, and hold its rival and potential partner NICE Systems(NASDAQ: NICE). With that said, recent results from Verint were a mixed bag, and the stock looks fairly valued for now.
Verint reports mixed data
Verint’s first quarter numbers were pretty much in line with expectations, but as I wrote about the last results,
investors would have been justified in expecting a bit more from the
company. Its management was upbeat last time but, like a lot of
technology companies, this quarter's results were mixed.
In short, Europe, the Middle East and Africa proved to be a headwind,
while the Asia-Pacific region’s growth was strong enough to counter it.
European growth is now expected to be near flat for the full year
versus previous expectations of small growth. This affected its core
Enterprise Intelligence business and meant that it only grew by 1.2% in
the quarter as opposed to the total revenue growth of 2.6%.
In order to see how Verint generates its revenues, I’ve broken out 2013 segmental revenues below.
In geographic terms, the first quarter saw 54.6% of its $205 million
in revenues coming from the Americas, with Europe, the Middle East and
Africa contributing 20%, as opposed to 25% for the first quarter last
year, and Asia-Pacific with 25.4%. While the Europe, Middle East and
Africa decline of $9 million was unwelcome it wasn’t enough to put a
dampener on the overall results.
Communications intelligence is an area where Verint is stronger than
NICE, and it demonstrated an impressive 7.2% revenue growth. The
government vertical is large for Verint -- traditionally around 25% of
revenues -- and there were some concerns that it would be affected by
the sequester. Clearly these worries turned out to be misguided, and
Verint’s international exposure certainly helped. In addition, this type
of intelligence gathering and surveillance activity is not going away
anytime soon.
However, the biggest positive surprise was probably that the video
intelligence segment revenues only fell by 1.7% after declining 13.4%
over the last year. There was some discussion in the conference call of
increased interest following the tragic events in Boston and such events
emphasize the need for expenditure on these types of solutions.
Elsewhere in the segment a $4 million order came in from a big box
retailer in order to help it reduce shrinkage.
Long term growth drivers
Putting these elements together demonstrates that the key drivers of
Verint’s future growth are still in place. As argued in the conference
call, customers likely want to buy solutions from a single vendor and as
Verint already has a substantial installed base with its data capture
solutions, it can expect future growth. In addition it has a number of
secular drivers in its favor. For example, even in a slow economic
environment, financial institutions generate growth by investing in
analyzing existing customer interactions. Similarly reducing fraud and
money laundering will always be a part of a financial firm or contact
center’s operations.
Indeed, a quick look at NICE Systems' recent results
revealed these positive underlying trends. Similar to Verint it kept
full year guidance intact. NICE is seeing an increased willingness among
its customers to sign bigger deals and integrate its analytics
solutions with its product sales. NICE is well positioned to do this,
particularly to its string verticals like financials and contact
centers, because of its partnership with IBM(NYSE: IBM).
Back in October, NICE announced that it would be integrating IBM’s big
data analytics software within its solutions. It’s a mutually beneficial
solution because IBM will get entry into NICE’s installed base while
also giving NICE added functionality with which it can add value to
customers.
The interesting thing about IBM’s results
is that they somewhat presaged weaker conditions for IT enterprise
spending and set the tone for a disappointing IT earnings season. The
fact that NICE and Verint reported results that were pretty much in line
and kept full year growth expectations is therefore somewhat of a net
positive.
Where next for Verint?
Full year guidance is for 6%-7% growth and earnings of around
$2.75 and free cash flow generation of around $100 million. At the
current price this makes for a forward PE of around 12.8 and a free cash
flow yield of around 5.3%. All of which is pretty fair value for a
company forecast to generate single digit earnings growth over the next
couple of years. I suspect the stock is also being
supported on the back of speculation over a possible acquisition by
NICE. It’s worth monitoring but hard to make a case that it is great
value right now despite the positive long term prospects.
Nice Systems $NICE is a stock that benefits from increasing security and regularity compliance within financial services. They make the kind of surveillance and monitoring systems that the likes of UBS would have needed to make sure that a rogue trader like Kewku Adoboli might have been picked up early on in his activities. As such, Nice Systems primary profit driver is increasing regulation and awareness of ever complex needs to gather information from multiple sources, both internally and externally.
Nice Systems Equity Research
There is a detailed write up on Nice Systems in a previous post on Earnings View. The post is intended to analyze Nice Systems as a possible stock to buy in the light of recent results and guidance.
Turning back to the original post-referred to above- it’s clear that Nice Systems has done quite well this year.
Feb Guidance
Current Guidance
Mid-PointChange
Full Year Revenue
$775-800m
$792-806m
+1.5%
Full Year EPS
196-202c
205-209c
+4%
The numbers are nothing stellar but it is solid performance and the stock price has moved in a highly correlated manner to the S & P 500. In other words, the stock is flat. The recent earnings were quite good and the company raised guidance but analysts were left enquiring over the book to bill ratio for the third quarter and why it was below one. A number of reasons were given for this on the conference call, which are summarized below
Slower customer bookings in the third quarter, some of which were closed in the ongoing fourth quarter
Book to bill forecast to be much higher in the fourth quarter
Weakness in Q3 not seen in any product line or geography
Management explained that the book to bill was also had a pattern of being weaker in the third quarter in previous years, and that this was partly due to the increase in maintenance revenues and the way that business was conducted
All of which, is perfectly feasible but cannot allay particular fears about the macro economic uncertainty creeping into their order book. Moreover, as the share price is tracking the S & P 500, it is perhaps prudent to wait until they confirm a return to a string book to bill ratio in Q4. That said, Nice Systems rival Verint $VRNT Inc raised full year revenue guidance growth to 9% from 8% in September.
Nice Systems and Verint Systems Recession Proof?
The odd thing about these two stocks, Nice Systems and Verint Systems is that they both increased net income and cash flow through the recession. This is to be understood, as their revenue drivers are relatively secular. However, with Nice Systems, there was a drop in revenues of 6.5% from 08-09 and gross profit fell by 10% However, Nice managed to only lose 7% in EBIT due to reduced SG & A expenses.
This suggests that Nice Systems is relatively recession proof but the problem is that a large amount of the company’s revenue comes from the financial services vertical. Unfortunately, if there is a Sovereign Debt Crisis induced slowdown then it is this sector and its suppliers that will get hit the hardest and, Nice Systems will not be immune from negative sentiment.
Nice Systems Stock Evaluation
No matter, even though the outlook does look uncertain and, investors will want to see the book to bill ratio improve in the next quarter, this stock is an intriguing one to follow for the potential to outperform when/if the Sovereign Debt fears subside. It is certainly not cheap on a PE basis but Nice Systems do generate consistently good free cash flow and as of September had nearly $600m in cash and equivalents on the balance sheet. Its an attractive stock to buy but, for now, its on monitor.
Nice Systems $NICE is a, err, NICE way to play the growing trends towards regulation and security management within financial services. Nice gave results recently and announced an acquisition which was well received by the market. With the implementation of Dodd-Frank and the increasing needs for firms to manage security and work flow optimisation, Nice looks set to grow strongly.
Nice Systems helps companies to extract insight from interactions, transactions and surveillance. The information is gathered from a wide range of different sources, from emails and phone calls to video surveillance. Nice should see good growth as financial firms start to spend again to support expansion and deal with mounting compliance and regulatory issues. For example, the Dodd-Frank legislation is expected to lead to many more firms being regulated.
Furthermore, financial firms and Governments are under increasing pressure to protect themselves and the company from internal and external security threats as well as ensure that work flow is being properly managed. These words sound abstract, but consider Nick Leeson and Jerome Kerviel, both of whom benefitted from lax monitoring and compliance controls.
Nice Systems Results
Turning to the recent results
Q4 Revenues of $187m vs. $180m estimates
EPS of 51c vs. 49c estimates
Guidance
Q1 Revenues of $179-$183m vs. $179.3m
Q1 EPS of 43-27c vs. 45c estimates
Full year Revenues of $775-800m vs. $768.5m
Full Year EPS of $1.96-2.06 vs. $2.02 estimates
It should be added that the guidance includes the impact of the CyberTech acquisition ($25m to full year revenues) which is expected to complete at the end of March. Nevertheless, the guidance for Q1 is an upgrade and Nice beat Q4 estimates handsomely.
CyberTech Acquisition and Nice Systems Position
Essentially, Nice Systems is positioned at the high end of the Work Flow Optimisation market. As such, Nice tends to offer relatively expensive large scale solutions to the enterprise market. Whilst this leaves them exposed to cheaper competitors chasing Nice's installed base when they come to upgrade or renew, it also ensures that Nice offers a comprehensive best in class solution.
The CyberTech acquisition is intended to give Nice some complimentary solutions and also allow Nice to offer sales with a lower Total Cost of Ownership (TCO). In particular, CyberTech offers compliance recording solutions and has a good position within European financial services firms. CyberTech is not only a good technology fit but also a good geographic one too, as Nice's current strength is in the US and Asia. Buying CyberTech will also allow Nice to make inroads into the previously uncharted SMB territory.
One area of possible concern is public sector end demand, but it is probable that this is an area whereby Governments will be highly reticent to cut. Work Flow Optimisation gives a tangible return on investment and much of Nice end demand is regulatory and compliance led. Another cause of worry could be an increase in the demand from organisations for their WFO solutions to be sold by their contact center infrastructure provider. Although, Nice is focused on the high end so this trend is unlikely to have a great affect.
Nice on a Nice Stock Evaluation?
With a stock price of $35.36 Nice has a market cap of $2.22bn and an Enterprise Value of $1.92bn with a highly cash generative business model. The current PE ratio is 35.36/1.85=20.2x and Nice trades on 17.5x forward earnings. Turning to free cash flow Nice just generated $133.3m which puts the company on a FCF/EV= 6.9% which is very good. With some back of envelope calculations it is not unreasonable to expect Nice to translate the forecast $129.5m in net income into around $145m in free cash flow which would put the company on a forward FCF/EV of 145/1920=7.5% but it should be noted that the forecast tax rate for 2011 is only 17-18%
If you-very conservatively-adjust the numbers for a 30% tax rate the reduction could come to around $19m which would give an adjusted FCF/EV of 126/1920=6.6% approximately. If investors want to buy a stock on a forward ratio of 5.5% then this would give a of around $42.2
