NICE Ltd. FY2019 Form 20-F Summary
Business context and reporting period
NICE Ltd., an Israeli company reporting under U.S. GAAP, provides enterprise software in Customer Engagement and Financial Crime and Compliance. Its offerings include cloud, on-premises software, analytics, artificial intelligence, automation, contact-center services, public-safety solutions and compliance applications. This filing is the annual report for the fiscal year ended December 31, 2019; it does not provide separate fourth-quarter financial statements.
NICE served more than 25,000 organizations in over 150 countries and had 5,996 employees at year-end, up approximately 8.9% from 2018. The company continued its strategic transition toward cloud-based delivery, particularly through the NICE inContact CXone and X-Sight platforms.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,573.9 million | $1,444.5 million | 9.0% |
| Product revenue | $269.1 million | $263.8 million | 2.0% |
| Services revenue | $709.1 million | $719.5 million | (1.4%) |
| Cloud revenue | $595.7 million | $461.2 million | 29.2% |
| Gross profit | $1,042.1 million | $947.7 million | 10.0% |
| Gross margin | 66.2% | 65.6% | Up 0.6 points |
| Operating income | $238.7 million | $197.6 million | 20.8% |
| Operating margin | 15.2% | 13.7% | Up 1.5 points |
| Net income | $185.9 million | $159.3 million | 16.7% |
| Diluted EPS | $2.88 | $2.52 | 14.3% |
| Cash flow from operations | $374.2 million | $396.6 million | (5.7%) |
Cloud revenue represented 37.9% of total revenue in 2019 versus 31.9% in 2018. Cloud gross margin improved to 51.3% from 48.8%, while product gross margin increased to 91.5% from 88.2% and services gross margin increased to 69.0% from 68.1%.
- Customer Engagement revenue increased by approximately $109 million, primarily due to cloud demand, mid-market expansion and the full-year contribution from Mattersight.
- Financial Crime and Compliance revenue increased by approximately $20.4 million, supported by new offerings and cloud expansion in the mid-market.
- Americas revenue increased 9.8% to $1,234.5 million; EMEA revenue increased 4.5% to $216.2 million; and APAC revenue increased 8.4% to $123.2 million.
- Operating expenses increased 7.1% to $803.4 million, including higher research and development, sales and marketing, and general and administrative costs.
- Stock-based compensation expense increased to $82.0 million from $67.2 million.
Liquidity, capital allocation and debt
Cash, cash equivalents and short-term and long-term investments totaled $981.5 million at December 31, 2019, compared with $730.8 million at December 31, 2018. Cash and cash equivalents were $228.3 million, and working capital was $160.3 million.
Investing activities used $344.3 million, including $26.0 million for acquisitions, $27.3 million for property and equipment, $34.7 million for internal-use software and $256.3 million of net purchases of marketable securities and short-term deposits. Financing activities used $42.7 million, principally reflecting $47.3 million of share repurchases.
Debt principal totaled approximately $502.5 million at year-end: $215.0 million of variable-rate term debt due in 2021 and $287.5 million of 1.25% exchangeable senior notes due in 2024. Net debt carrying value was approximately $464.9 million after debt issuance costs and the exchangeable-note discount. The exchangeable notes became convertible because the share-price condition was triggered and were classified as current liabilities. NICE reported compliance with all Credit Agreement covenants, including the applicable 2.50-to-1.00 maximum consolidated total net leverage ratio.
Management stated that existing working capital and expected operating cash flows should be sufficient to fund ongoing operations for the next twelve months. The company has no current plans to pay dividends. A $150 million share-repurchase authorization remained substantially available at year-end, and a further $200 million authorization was approved in February 2020.
Material changes versus the prior comparable period
- Revenue growth accelerated through cloud adoption, while services revenue declined as customers shifted away from on-premises implementations.
- Gross and operating margins expanded despite higher investment in research and development, sales and marketing, and administrative infrastructure.
- Net income benefited from higher operating income and lower net financial expense, but the effective tax rate increased to 20.6% from 14.7%, partly due to the U.S. Tax Reform and a greater proportion of U.S. revenue.
- Operating cash flow declined despite higher net income, primarily reflecting working-capital movements, including higher trade receivables and prepaid expenses and lower deferred-revenue growth.
- NICE completed 2019 acquisitions with aggregate preliminary cash consideration of approximately $26.7 million, recording approximately $15.7 million of identifiable intangible assets and $14.5 million of residual goodwill. The acquired businesses were individually immaterial.
- The company adopted the new lease standard on January 1, 2019, recognizing $120.6 million of right-of-use assets and $139.2 million of lease liabilities without changing prior-period results.
Guidance, outlook, commentary and risks
The filing does not provide a specific 2020 revenue or earnings guidance range. Management’s stated strategy is to expand cloud platforms, digital and omnichannel capabilities, analytics, artificial intelligence and automation; cross-sell across the existing customer base; expand in selected international markets; and supplement organic growth with acquisitions.
The filing identifies COVID-19 as a significant emerging risk. The company took precautionary actions in early 2020, including changes to employee locations and travel and cancellation of marketing events, but stated that the duration, spread and financial impact were uncertain. Because of its subscription model, any effect might not be fully reflected in reported results until later periods.
- Competitive pricing pressure and rapid technological change could reduce revenue, pricing and margins.
- The transition to cloud and SaaS may delay revenue recognition, increase reliance on third-party cloud providers and create execution and service-availability risks.
- Cybersecurity incidents, privacy regulation, cross-border data restrictions and service outages could result in liability, penalties, customer attrition or credits.
- Acquisition integration, goodwill and acquired-intangible impairment, and the need for additional acquisition financing remain material risks.
- Variable-rate debt exposes the company to interest-rate risk, while exchangeable notes may require cash, ADSs or a combination upon conversion.
- Foreign-exchange volatility affects expenses incurred in NIS, INR, GBP, EUR, PHP and other currencies; the company hedged approximately $128.8 million of forecast exposures at year-end.
- Tax benefits under Israel’s Preferred Technology Enterprise regime and Israeli research grants depend on continued compliance; uncertain tax positions totaled $64.9 million at year-end.
- Contractual obligations totaled $777.3 million, including debt, leases, purchase obligations and severance. Uncertain income-tax positions were additional obligations of $64.9 million.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition was identified as a critical audit matter because of multi-element contracts, judgment in standalone selling prices and automated usage-based cloud billing.
Important facts for investors to verify
- Confirm the filing date and distinguish the FY2019 annual results from any separate 2019 fourth-quarter or 2020 guidance disclosures.
- Track cloud revenue growth and cloud gross-margin expansion against the pace of services-revenue decline and the economics of the SaaS transition.
- Assess liquidity and refinancing or conversion requirements for the $215 million term loan due in 2021 and the $287.5 million exchangeable notes due in 2024.
- Review the impact of COVID-19, customer retention, deferred revenue, remaining performance obligations of approximately $943.5 million, and subsequent-period bookings.
- Evaluate acquisition integration, goodwill of $1.38 billion, identifiable intangible assets of $411.0 million and the potential for future impairment or amortization.
- Monitor the effective tax rate, Israeli tax benefits, $64.9 million of uncertain tax positions and the company’s ongoing Israeli and foreign tax audits.
- Review cybersecurity, privacy, cloud-provider concentration, service-level commitments and any related claims, credits or regulatory actions.