NICE Ltd. 2015 Form 20-F Summary
Business context and reporting period
NICE-Systems Ltd., an Israeli company reporting under U.S. GAAP, filed its annual report for the fiscal year ended December 31, 2015. The company provides enterprise software and services in two core areas: Customer Interactions and Financial Crime and Compliance. Its ADSs trade on NASDAQ under “NICE” and each ADS represents one ordinary share.
During 2015, NICE divested its Physical Security and Cyber and Intelligence businesses and classified them as discontinued operations, allowing management to focus on its core enterprise software markets. Approximately 99% of sales were generated outside Israel, with the Americas representing the largest region.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $926.9 million | $872.0 million | 6.3% |
| Product revenue | $317.9 million | $289.6 million | 9.8% |
| Service revenue | $609.0 million | $582.4 million | 4.6% |
| Gross profit | $623.3 million | $568.5 million | 9.6% |
| Gross margin | 67.2% | 65.2% | +2.0 percentage points |
| Operating income | $166.1 million | $106.3 million | 56.2% |
| Operating margin | 17.9% | 12.2% | +5.7 percentage points |
| Net income from continuing operations | $140.6 million | $100.2 million | 40.4% |
| Net income | $258.8 million | $103.1 million | 151.1% |
| Diluted EPS | $4.22 | $1.69 | 149.7% |
| Cash flow from operations | $244.7 million | $182.3 million | 34.3% |
Financial Crime and Compliance revenue increased 21.1% to $238.8 million, while Customer Interactions revenue increased 2.0% to $688.1 million. Revenue increased in the Americas by 6.6%, EMEA by 4.1% and APAC by 8.9%.
Operating expense leverage was significant. Research and development expense increased 4.4% to $128.5 million, while selling and marketing expense declined 2.3% to $225.8 million. Amortization of acquired intangibles declined 34.9% to $12.5 million, and no restructuring expense was recorded versus $5.4 million in 2014.
The 2015 net income increase was substantially affected by discontinued operations. NICE recorded $147.3 million of pretax gain on the divestitures and $118.3 million of after-tax income from discontinued operations. Continuing-operations results therefore provide a more representative measure of ongoing profitability.
Cash flow, liquidity, capital structure and balance sheet
- Cash and cash equivalents were $325.9 million at December 31, 2015, compared with $187.5 million at December 31, 2014.
- Short-term and long-term investments totaled approximately $502.4 million, producing total cash, cash equivalents and investments of approximately $828.4 million.
- Working capital was $256.1 million, compared with $107.1 million in 2014.
- Total assets were $1.850 billion and shareholders’ equity was $1.415 billion.
- Operating cash flow of $244.7 million benefited from increased deferred revenue and accrued liabilities, partly offset by a $56.4 million increase in trade receivables.
- Investing activities used $28.4 million, including $16.6 million of capital expenditures and net investment purchases, partly offset by $186.1 million of proceeds from the divestitures.
- Financing activities used $71.8 million, including $68.4 million of share repurchases and $38.2 million of dividends, partly offset by $27.5 million from employee option exercises and share purchases.
- The filing does not identify material conventional borrowings or interest-bearing debt. Liquidity is primarily supported by cash, investments and internally generated operating cash flow.
- Management stated that existing working capital and expected operating cash flows should fund operations for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue growth accelerated modestly, with total revenue rising 6.3% versus 6.1% in 2014.
- Gross margin improved from 65.2% to 67.2%, driven by a greater mix of software-based solutions, lower intangible amortization and improved service utilization.
- Operating margin expanded from 12.2% to 17.9% as revenue growth combined with lower selling and marketing costs, lower amortization and the absence of restructuring charges.
- Financial Crime and Compliance became a stronger growth contributor, with revenue up 21.1% year over year.
- Cash flow from operations increased by $62.5 million, while the cash balance increased by $138.4 million.
- NICE repurchased 1.13 million shares for $68.4 million during 2015. The company also paid $0.64 per share in dividends.
- Employee headcount declined 5.6% to 3,316, principally because of the divestitures.
- Goodwill declined to $651.1 million from $659.7 million, primarily due to foreign currency translation. No goodwill or long-lived asset impairment was recorded.
Guidance, outlook, commentary, risks and unusual items
Management’s strategy is to strengthen leadership in Customer Interactions and Financial Crime and Compliance, increase recurring revenue, expand cloud and SaaS offerings, cross-sell to the installed customer base, and pursue acquisitions. Management expected an effective tax rate of approximately 17% to 19% for 2016 and future years, subject to tax settlements, law changes and transaction-related effects.
Subsequent to year-end, NICE completed the $135.0 million cash acquisition of Nexidia on March 22, 2016 and the acquisition of Voiceprint International on March 11, 2016. The filing also disclosed a $0.16 per share fourth-quarter 2015 dividend paid on March 9, 2016.
- Key operating risks include intense competition, pricing pressure, rapid technological change, migration from on-premise software to cloud and SaaS, and the possibility that SaaS revenue recognition may be spread over multiple periods.
- The company depends substantially on financial-services customers, recording solutions, maintenance revenue, distribution partners and major infrastructure vendors.
- More than half of sales were generated in North America, increasing exposure to U.S. economic conditions and financial-services spending.
- Foreign exchange exposure arises from expenses denominated in NIS, EUR, GBP and other currencies. NICE had approximately $115.0 million of NIS-related currency option contracts outstanding at year-end.
- The company had $18.2 million of uncertain tax positions and disclosed continuing tax audits in Israel, the United States and other jurisdictions.
- Contractual cash obligations totaled $106.2 million, including operating leases, purchase obligations and severance obligations. The filing also disclosed substantial guarantees, including $24.3 billion related to discontinued operations, for which NICE had back-to-back contractual commitments and indemnification rights.
- NICE disclosed an intellectual-property lawsuit against ClickFox and a disputed indemnification claim by a buyer of a divested business. The filing did not provide a reliable estimate of either outcome.
- The company benefits from Israeli Preferred Enterprise tax incentives and research grants; loss or reduction of these benefits could increase taxes and reduce profitability.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2015. The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Separate recurring operating performance from the $118.3 million after-tax gain and income from discontinued operations.
- Review whether Financial Crime and Compliance growth can offset the comparatively slower growth in Customer Interactions.
- Assess the sustainability of the 67.2% gross margin and 17.9% operating margin after divestitures and lower amortization.
- Reconcile the reported $828.4 million liquidity figure with the detailed cash, investment and discontinued-operation balances.
- Evaluate the financial impact, integration risk and purchase-price allocation of the Nexidia and Voiceprint acquisitions completed after year-end.
- Review the large disclosed guarantee amounts, indemnification rights and potential exposure from divested businesses.
- Monitor foreign exchange sensitivity, tax audits, $18.2 million of uncertain tax positions and continued reliance on Israeli tax benefits.
- Verify the company’s transition from perpetual-license sales toward cloud and SaaS models, including effects on revenue timing, margins and cash generation.