NICE Ltd. Form 20-F Summary
Business context and reporting period
NICE Ltd., an Israeli company listed on NASDAQ and the Tel Aviv Stock Exchange, provides enterprise software for Customer Engagement and Financial Crime and Compliance. Its offerings include cloud and on-premise platforms, analytics, automation, artificial intelligence, contact-center solutions, fraud prevention, anti-money laundering and compliance tools.
The filing is an audited annual report for the fiscal year ended December 31, 2017, prepared under U.S. GAAP. It is not a standalone fourth-quarter filing, although the filing discusses fourth-quarter seasonality and annual impairment testing.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1,332.2 million | $1,015.5 million | 31.2% increase |
| Product revenue | $318.9 million | $306.3 million | 4.1% increase |
| Service revenue | $652.0 million | $623.8 million | 4.5% increase |
| Cloud revenue | $361.2 million | $85.5 million | 322.4% increase |
| Gross profit | $863.5 million | $677.8 million | 27.4% increase |
| Gross margin | 64.8% | 66.7% | Down 1.9 percentage points |
| Operating income | $150.1 million | $134.2 million | 11.9% increase |
| Operating margin | 11.3% | 13.2% | Down 1.9 percentage points |
| Net income | $143.3 million | $116.9 million | 22.5% increase |
| Diluted EPS | $2.31 | $1.92 | 20.3% increase |
| Cash flow from operations | $394.7 million | $228.2 million | 72.9% increase |
Customer Engagement revenue was $1,051.4 million, up 39.4%, while Financial Crime and Compliance revenue was $280.8 million, up 7.5%. The Americas generated $1,035.9 million of revenue, or approximately 77.8% of total revenue; EMEA revenue declined 1.8% and APAC revenue increased 4.7%.
Cloud revenue represented approximately 27.1% of total revenue versus 8.4% in 2016. Cloud gross margin declined to 46.7% from 59.4%, primarily because inContact cloud historically carried lower margins. Product gross margin increased to 84.0% from 82.7%, and service gross margin increased to 65.5% from 59.9%.
Operating expenses increased to $713.4 million from $543.6 million. Research and development increased 28.0% to $181.1 million, selling and marketing increased 34.7% to $361.3 million, general and administrative expense increased 10.7% to $129.1 million, and amortization of acquired intangible assets increased 143.6% to $41.9 million.
Financial income and other expense shifted from net income of $10.3 million in 2016 to net expense of $20.4 million in 2017, primarily because of interest and debt-related costs associated with the inContact acquisition financing, including non-cash amortization of debt discounts.
The 2017 tax benefit was $13.6 million compared with tax expense of $21.4 million in 2016. The effective tax rate was negative 10.5%, largely reflecting a one-time $31.0 million deferred-tax benefit from the U.S. Tax Cuts and Jobs Act. The 2017 result should therefore not be viewed as a normalized tax rate.
Liquidity, cash flow and debt
Cash and cash equivalents were $328.3 million at December 31, 2017, compared with $157.0 million at December 31, 2016. Short-term and long-term investments totaled $196.8 million, producing cash, cash equivalents and investments of approximately $525.1 million. Working capital was $132.2 million, compared with $13.7 million in 2016.
Operating cash flow of $394.7 million benefited from net income, $156.3 million of depreciation and amortization, $57.0 million of stock-based compensation, a $41.6 million increase in deferred revenue, and working-capital improvements. Investing cash outflow was $213.0 million, including $76.0 million for acquisitions, $39.9 million for property and equipment, $27.9 million for capitalized internal-use software and net investment purchases.
In January 2017, NICE prepaid $260.0 million of its term loan. At year-end, the remaining term-loan principal was $215.0 million, due in 2021, and the company had issued $287.5 million of 1.25% exchangeable senior notes due January 2024. The notes had a net liability carrying amount of $236.1 million after debt issuance costs and discount. The $75.0 million revolving facility was undrawn.
The credit agreement includes leverage and other restrictive covenants. NICE reported compliance with all covenants at December 31, 2017. Management stated that existing working capital and expected operating cash flows should fund operations for the next twelve months.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially because 2017 included a full year of inContact and Nexidia results and reflected continued migration toward cloud offerings.
- Cloud revenue increased by $275.7 million, while its gross margin declined because of the lower-margin inContact cloud business.
- Gross profit increased, but gross and operating margins contracted as the business mix shifted toward cloud and expenses rose following acquisitions and investments in growth.
- Net income increased despite higher operating costs and debt expense, aided materially by the U.S. tax reform deferred-tax benefit.
- Operating cash flow increased sharply, while investing outflows declined from $800.0 million in 2016, when NICE acquired inContact, Nexidia and other businesses.
- NICE completed two additional acquisitions in 2017 for approximately $76.9 million in cash; the acquisitions were individually and collectively described as not significant.
- The company ended its quarterly dividend policy in January 2017 and adopted a capital-return strategy. It paid $9.6 million of dividends in 2017, or $0.16 per share, and stated that it had no current plans for future dividends.
- NICE repurchased 341,777 shares in 2017 for approximately $24.4 million and authorized a new repurchase program of up to $150 million.
Guidance, outlook, commentary, risks and unusual items
Management’s strategy is centered on expanding cloud adoption, increasing penetration of the mid-market, growing Customer Engagement and Financial Crime and Compliance offerings, and applying analytics, machine learning, artificial intelligence and automation. The filing does not provide a specific 2018 revenue or earnings guidance figure.
Management expects a greater proportion of recurring revenue from maintenance and cloud subscriptions to improve revenue predictability over time. However, cloud subscriptions generally recognize revenue ratably over the contract term, which can delay revenue recognition compared with upfront software licenses.
The company adopted the new revenue standard, ASC 606, on January 1, 2018 using the modified retrospective method. It expected cumulative adjustments of approximately $39 million to deferred revenues and $45 million to costs of obtaining customer contracts, with corresponding retained-earnings effects. These estimates were subject to change as implementation continued.
- Principal business risks include intense competition, pricing pressure, rapid technological change, dependence on the success and profitability of cloud SaaS, and execution and integration risks from acquisitions.
- NICE depends on third-party cloud platforms, hosting facilities, network providers and channel partners. Service outages, cyberattacks or security breaches could cause customer losses, credits, penalties, litigation and reputational damage.
- Data privacy and regulatory requirements, including GDPR effective May 25, 2018, may increase compliance costs or restrict the use of cloud services.
- Financial services is a major industry vertical, creating exposure to spending reductions, regulatory changes and financial-sector instability.
- The company is exposed to variable interest rates on the term loan and foreign-exchange risk related principally to the NIS, INR, GBP and EUR. It used currency forwards and options with approximately $54.0 million of aggregate notional exposure at year-end.
- Contractual cash obligations totaled $673.4 million, including $526.6 million of long-term debt obligations, $97.4 million of operating leases and $31.8 million of unconditional purchase obligations. Uncertain tax positions totaled $44.0 million.
- A California College litigation matter involving inContact had a claimed amount reduced to approximately $9.2 million; the filing states that the company could not evaluate the probability of a favorable or unfavorable outcome.
- No goodwill impairment was recorded for 2017. Goodwill was $1.318 billion, and other intangible assets were $551.3 million, creating meaningful exposure to future impairment or amortization.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2017.
Important facts for investors to verify
- Whether cloud growth remains strong while cloud gross margins improve from the 2017 level of 46.7%.
- The sustainability of operating margins after the full-year impact of acquisitions, higher sales and marketing spending, amortization and stock-based compensation.
- The normalized effective tax rate excluding the $31.0 million one-time U.S. tax reform benefit and the continued availability of Israeli tax incentives.
- Progress on deleveraging, the $215.0 million term-loan maturity in 2021, the $287.5 million exchangeable notes due in 2024 and compliance with credit-agreement covenants.
- The actual effects of ASC 606 adoption on revenue timing, deferred revenue, contract-cost capitalization, retained earnings and comparability with 2017.
- Acquisition performance, including the integration and economics of inContact, Nexidia and the 2017 acquisitions.
- Customer retention, renewal rates, channel-partner stability and concentration, including the customer representing approximately 5% of 2017 revenue.
- Developments in the California College litigation, tax audits, uncertain tax positions and other contingencies.