NICE Ltd. 2016 Form 20-F Summary
Business context and reporting period
NICE Ltd. is an Israeli global software provider serving Customer Engagement and Financial Crime & Compliance markets through on-premises, subscription, cloud and professional-services offerings. This Form 20-F covers the fiscal year ended December 31, 2016, audited under U.S. GAAP; the filing does not provide a standalone fourth-quarter income statement.
Key 2016 strategic developments included the acquisitions of Nexidia, Voiceprint International and inContact. The approximately $1.05 billion inContact acquisition closed on November 14, 2016 and materially increased NICE's cloud contact-center presence.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $1,015.5 million | $926.9 million | 9.6% increase |
| Product revenue | $306.3 million | $317.9 million | 3.7% decrease |
| Service revenue | $709.3 million | $609.0 million | 16.5% increase |
| Gross profit | $677.8 million | $623.3 million | 8.7% increase |
| Gross margin | 66.7% | 67.2% | Down 0.5 percentage points |
| Operating income | $134.2 million | $166.1 million | 19.2% decrease |
| Operating margin | 13.2% | 17.9% | Down 4.7 percentage points |
| Net income from continuing operations | $123.1 million | $140.6 million | 12.5% decrease |
| Consolidated net income | $116.9 million | $258.8 million | 55% decrease |
| Diluted EPS from continuing operations | $2.02 | $2.29 | Decrease |
| Diluted EPS | $1.92 | $4.22 | Decrease |
Customer Engagement revenue was $754.4 million, up 9.6%, while Financial Crime & Compliance revenue was $261.1 million, up 9.4%. Americas revenue rose 14.4% to $720.5 million; EMEA declined 1.7% to $193.5 million, mainly because of currency effects; and APAC increased 1.6% to $101.5 million.
Operating expense growth outpaced revenue growth. Research and development increased 10.2% to $141.5 million, selling and marketing increased 18.8% to $268.3 million, general and administrative expense increased 29.0% to $116.6 million, and acquired-intangible amortization increased 37.5% to $17.2 million. Management attributed the pressure primarily to acquisitions, integration costs, additional personnel, higher sales incentives and increased facilities costs.
- Cash provided by operating activities was $220.3 million, compared with $244.7 million in 2015.
- Cash used in investing activities was $800.0 million, including $1.156 billion for acquisitions, partially offset by $449.9 million of investment proceeds.
- Cash provided by financing activities was $413.3 million, primarily reflecting $464.8 million of debt proceeds, partially offset by dividends and share repurchases.
- Cash and cash equivalents were $157.0 million at year-end; short- and long-term investments totaled $129.0 million.
- Working capital was $13.7 million, including deferred revenues and advances classified as long-term liabilities in the filing's selected data.
- Total assets increased to $2.632 billion from $1.850 billion, driven largely by acquired goodwill and intangible assets. Goodwill rose to $1.285 billion from $651.1 million.
- Year-end debt consisted principally of a $475 million variable-rate term loan, with $465.2 million net carrying value after debt issuance costs; the $75 million revolving facility was undrawn.
- The company reported $1.511 billion of shareholders' equity and $1.512 billion of total liabilities and equity less total assets reconciliation differences due to presentation rounding.
Material changes versus the prior comparable period
- Revenue growth shifted toward services and cloud: product revenue declined while service revenue increased, reflecting subscription revenue recognition and greater cloud demand.
- Profitability weakened despite higher revenue. Operating margin fell to 13.2% from 17.9%, and continuing-operations net income declined 12.5%.
- 2015 consolidated net income benefited from approximately $147.3 million of pre-tax gains from divestitures of the Cyber and Intelligence and Physical Security businesses. In 2016, discontinued operations produced a $6.1 million net loss, including settlement-related expenses.
- The inContact, Nexidia and VPI acquisitions added significant goodwill, intangible assets, personnel and integration costs. InContact contributed only a partial period of operating results in 2016.
- Net cash declined by $168.9 million, primarily because acquisition spending exceeded operating cash flow and financing proceeds.
- NICE paid $0.64 per share in 2016 dividends, but the board terminated the dividend plan in January 2017 and stated that it had no current plans for future dividends.
Guidance, outlook, commentary and risks
Management stated that existing working capital and expected operating cash flows were sufficient to fund ongoing operations for the next twelve months. The company expects continued investment in cloud delivery, analytics, machine learning, customer engagement and financial-crime solutions, together with additional potential acquisitions. The filing does not provide a clear numerical 2017 revenue or earnings outlook.
Management identified cloud adoption, recurring maintenance and subscription revenue, cross-selling to the installed base, analytics and machine learning as key growth drivers. However, SaaS revenue is generally recognized ratably over the subscription term, which can delay revenue recognition and make near-term trends less visible.
- Acquisition and integration risk is elevated, particularly for inContact, including execution, retention, technology integration, expected synergies and potential impairment of acquired goodwill and intangible assets.
- Debt increased materially following the inContact acquisition. The credit agreement includes restrictions on additional debt, acquisitions, investments, dividends, repurchases and asset transactions, as well as leverage covenants.
- Competitive pricing pressure, rapid technological change, new entrants and possible commoditization could reduce revenue and gross margins.
- More than half of sales were generated in North America, and the financial-services sector is a major vertical; weakness in either area could materially affect results.
- Cloud operations depend on third-party hosting, network, hardware and software providers. Outages, cybersecurity incidents, data breaches, service-level credits and privacy regulation could affect revenue, liability and customer retention.
- Currency exposure is concentrated in the NIS, INR, GBP and EUR. NICE had approximately $110 million of currency options and forward contracts outstanding at year-end to hedge payroll and facilities expenses.
- Contractual obligations included approximately $140.6 million of operating leases, $22.7 million of unconditional purchase obligations and $26.7 million of uncertain tax positions. The filing also reported significant guarantees related to continuing and discontinued operations, with discontinued-operation guarantees backed by contractual indemnification.
- The company was involved in inherited litigation related to inContact, including a California College claim with approximately $9.2 million of asserted damages; management stated that the outcome could not yet be evaluated.
- Goodwill impairment testing in the fourth quarter resulted in no impairment charge, but the large increase in goodwill raises future impairment sensitivity.
- Management and the auditor concluded that internal control over financial reporting was effective; however, inContact's controls were excluded from management's assessment because the acquisition closed shortly before year-end.
Most important facts for an investor to verify
- Confirm that the requested 2016 Q4 analysis is not being confused with the annual FY2016 results; this filing primarily reports the full year.
- Reconcile reported cash, investments, debt, working capital and acquisition funding, including the subsequent January 2017 repayment of $260 million of term debt.
- Assess whether cloud and service-revenue growth can offset lower product revenue and the lower service gross margin.
- Evaluate inContact integration, recurring-revenue trends, customer retention, cloud margins and the effect of acquisition-related amortization and stock compensation.
- Review debt covenants, variable-rate exposure, refinancing requirements and the effect of the 2017 exchangeable senior notes.
- Determine the sustainability of operating cash flow after acquisitions, capitalized software development costs, dividends and repurchases.
- Verify the termination of the dividend plan, the enlarged $150 million repurchase authorization and any resulting capital-allocation trade-offs.
- Monitor goodwill and acquired-intangible balances, tax benefits, uncertain tax positions and potential impairment or tax-benefit changes.
- Review legal contingencies, guarantees connected with divested businesses and the inherited inContact litigation.