NICE Systems Ltd. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2010; filed March 31, 2011. The filing is an annual Form 20-F rather than a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP in U.S. dollars.
Business context
NICE provides software, hardware and services that capture and analyze customer interactions, financial transactions and security data. Its principal reporting sectors from 2010 were Enterprise Interaction Solutions, Public Safety and Security, and Risk and Financial Crime Solutions. Approximately 98% of sales were generated outside Israel, primarily in the Americas, EMEA and APAC.
Key financial metrics
| U.S. dollars in millions, except per-share data | 2009 | 2010 | Change |
|---|---|---|---|
| Total revenue | 583.1 | 689.5 | 18.2% |
| Product revenue | 281.8 | 325.4 | 15.5% |
| Service revenue | 301.3 | 364.0 | 20.8% |
| Gross profit | 345.9 | 420.4 | 21.5% |
| Gross margin | 59.3% | 61.0% | +1.7 percentage points |
| Operating income | 38.2 | 49.1 | 28.4% |
| Operating margin | 6.5% | 7.1% | +0.6 percentage points |
| Net income | 42.8 | 48.7 | 13.9% |
| Diluted EPS | $0.68 | $0.76 | 11.8% |
| Cash flow from operations | 119.7 | 145.0 | 21.2% |
- Segment revenue was $403.9 million for Enterprise Interaction Solutions, $166.0 million for Public Safety and Security, and $119.5 million for Risk and Financial Crime Solutions.
- Risk and Financial Crime Solutions revenue increased 66.7%, partly from a full year of Fortent results and partly from organic growth. Enterprise Interaction Solutions increased 11.1%, and Public Safety and Security increased 12.3%.
- Service revenue rose to 52.8% of total revenue from 51.7%, supported by maintenance and professional services growth.
- Research and development expense increased to $97.1 million from $77.4 million; selling and marketing increased to $178.4 million from $141.5 million.
- Product gross margin declined to 67.1% from 68.8%, primarily because of higher amortization of acquired intangible assets. Service gross margin improved to 55.5% from 50.5%.
- The effective tax rate increased to 16.1% from 6.6%. The 2009 rate benefited from releases of prior-period tax provisions and a prior tax settlement.
- At December 31, 2010, cash and cash equivalents were $109.5 million, marketable securities were $553.7 million, and total cash, cash equivalents and investments were approximately $663.2 million.
- Working capital was $173.9 million, compared with $184.5 million in 2009. Total assets were $1.534 billion and shareholders’ equity was $1.161 billion.
- The filing does not report outstanding interest-bearing debt; the balance sheet primarily shows operating liabilities, severance obligations, deferred taxes and other liabilities.
Material changes versus the prior comparable period
- Revenue growth resumed strongly after the 6.6% revenue decline in 2009, which had been attributed primarily to the macroeconomic environment.
- Gross profit and operating income grew faster than revenue, reflecting improved service utilization and mix, although higher acquisition-related amortization pressured product margins.
- Operating cash flow increased by $25.3 million, but investing cash outflow increased substantially to $276.7 million from $71.3 million, primarily because of marketable-security purchases and acquisitions.
- Cash and cash equivalents declined by $105.3 million during 2010, despite positive operating cash flow, largely because of investment purchases and acquisition payments.
- 2010 acquisitions included Orsus for approximately $21.5 million, Lamda for approximately $5.0 million in cash plus contingent consideration, and e-Glue for approximately $25.8 million in cash plus earn-out consideration. Goodwill increased to $527.6 million from $494.5 million.
- The company changed its operating segment structure beginning January 1, 2010, moving from geographic segments plus Actimize to three operating-based sectors.
Liquidity, commitments and unusual items
- Management stated that existing working capital and expected operating cash flows were sufficient to fund operations for at least the next twelve months.
- Contractual cash obligations totaled approximately $145.3 million, including $117.9 million of operating leases, $2.6 million of unconditional purchase obligations and $24.8 million of severance obligations. Uncertain tax positions totaled $36.0 million and were payable upon settlement, with timing not reasonably estimable.
- Guarantees related to continuing operations totaled approximately $37.6 million.
- The investment portfolio consisted mainly of investment-grade corporate debentures, U.S. Treasuries, U.S. government agency securities and Israeli Treasury bills. Derivative contracts with approximately $208.9 million of notional value were used primarily to hedge foreign-exchange exposures.
- The company had no off-balance-sheet transactions as defined in the filing and paid no cash dividends. Management expected to retain earnings for growth.
- Subsequent to year-end, NICE authorized a share repurchase program of up to $100 million and completed the approximately $60 million acquisition of CyberTech International on March 4, 2011.
Outlook, management commentary and risks
Management’s strategy was to expand cross-channel analytics, broaden the integrated contact-center and back-office suite, grow NICE Actimize’s financial-crime platform, deploy end-to-end security solutions, increase value-added services, leverage strategic partners and pursue selective acquisitions. The filing states that management expected an effective tax rate of approximately 18% in coming years, subject to tax settlements, changes in law and other factors.
- Competitive pressure, pricing reductions, commoditization and entry by large enterprise software, telecommunications and systems-integration companies could reduce revenue and margins.
- Rapid technology changes, cloud and SaaS adoption, VoIP migration and changing communication channels could require substantial product investment and could make existing offerings obsolete.
- Avaya accounted for less than 10% of revenue in 2009 and 2010, but NICE reported declining Avaya business during 2011 and identified the relationship and Avaya’s competing offerings as a material channel risk.
- Large government and security projects may involve fixed-price exposure, delays, penalties, complex third-party integration and volatile collections.
- The company relies on contract manufacturers, particularly Flextronics, and on selected suppliers and distribution partners.
- International operations expose NICE to foreign-exchange, economic, political, regulatory, tax and security risks. The company also depends on Israeli tax benefits and research grants that carry compliance, manufacturing and intellectual-property restrictions.
- Pending or disclosed legal matters included the Fair Isaac patent litigation involving Actimize, the Nuvation dispute seeking $8 million, the Calyon dispute of approximately $0.7 million plus interest, Tal-Yam litigation of approximately NIS 1.0 million, and employment-related claims. The filing states that the company could not evaluate the likely outcome of several matters.
Important facts for investors to verify
- Reconcile the annual figures with the separate 2010 fourth-quarter results if a Q4-specific analysis is required; this filing does not provide a standalone Q4 income statement.
- Assess how much of 2010 growth was organic versus acquired, particularly in Risk and Financial Crime Solutions and Public Safety and Security.
- Review the composition, credit quality, maturities and currency hedges of the approximately $663.2 million cash and investment portfolio.
- Monitor acquisition integration, goodwill of $527.6 million, intangible-asset amortization and future impairment sensitivity.
- Evaluate the sustainability of the 61.0% consolidated gross margin as product mix, competition and amortization change.
- Track Avaya channel exposure, customer concentration, distribution-partner dependence and the shift toward direct sales.
- Review pending litigation, uncertain tax positions of $36.0 million, Israeli tax-benefit conditions and the effect of the CyberTech acquisition and $100 million repurchase authorization after year-end.