NICE Ltd. 2013 Form 20-F Summary
Business context and reporting period
NICE-Systems Ltd., an Israeli company whose ADSs trade on NASDAQ, provides software and services for Customer Interactions, Financial Crime and Compliance, and Security Solutions. Its offerings include on-premise, hosted and SaaS deployments and are used in more than 150 countries. The filing is an annual Form 20-F for the fiscal year ended December 31, 2013; the supplied filing text does not provide standalone fourth-quarter 2013 financial statements.
The financial statements were prepared under U.S. GAAP and received an unqualified audit opinion. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2013.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $949.3 million | $879.0 million | 8.0% increase |
| Product revenue | $377.6 million | $369.4 million | 2.2% increase |
| Service revenue | $571.7 million | $509.6 million | 12.2% increase |
| Gross profit | $584.3 million | $527.8 million | 10.7% increase |
| Gross margin | 61.6% | 60.0% | 160 basis-point expansion |
| Operating income | $79.8 million | $45.6 million | 74.8% increase |
| Operating margin | 8.4% | 5.2% | 320 basis-point expansion |
| Net income | $55.3 million | $67.9 million | 18.6% decrease |
| Diluted EPS | $0.89 | $1.09 | 18.3% decrease |
| Operating cash flow | $124.3 million | $135.6 million | 8.4% decrease |
Segment revenue was $592.3 million for Customer Interactions, $193.9 million for Security, and $163.0 million for Financial Crime and Compliance. Financial Crime and Compliance was the fastest-growing segment, increasing 28.3% year over year. The Americas generated $596.7 million, or approximately 62.9% of revenue, followed by EMEA at $215.6 million and APAC at $128.7 million.
Research and development expense increased to $136.6 million, or 14.4% of revenue, while selling and marketing expense increased to $248.6 million, or 26.2% of revenue. General and administrative expense declined to $88.3 million from $96.1 million, primarily because of lower acquisition-related costs.
Liquidity, capital structure and cash flow
- Cash and cash equivalents were $119.5 million at year-end, compared with $98.6 million in 2012.
- Short-term and long-term investments totaled approximately $323.6 million, resulting in cash and investments of approximately $443.2 million.
- Working capital was $76.4 million, based on current assets of $460.6 million and current liabilities of $384.2 million.
- The balance sheet reports no separate borrowings or debt balance; liabilities primarily consisted of deferred revenue, accrued expenses, payables, severance and deferred taxes.
- Operating cash flow was $124.3 million. Investing cash outflow was $33.4 million, including $24.2 million for acquisitions and $20.3 million for property and equipment. Financing cash outflow was $68.9 million, including $79.4 million of share repurchases and $29.0 million of dividends.
- Management stated that existing working capital and expected operating cash flow should fund operations for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue growth accelerated in Financial Crime and Compliance, supported by increased fraud activity, regulatory requirements and demand for centralized risk monitoring.
- Service revenue grew faster than product revenue, reflecting higher maintenance, professional services, SaaS and hosting revenue. Services represented 60.2% of total revenue versus 58.0% in 2012.
- Gross margin improved because of lower product-related intangible amortization, lower royalties and better service headcount utilization.
- Operating income increased substantially despite higher research and development and selling and marketing investment.
- Net income declined because 2012 benefited from a $14.0 million tax benefit, whereas 2013 included $28.4 million of income tax expense.
- The 2013 tax expense included a $19.2 million charge related to settlement of a multi-year Israeli tax audit and an election to release previously tax-exempt earnings under a temporary Israeli tax program.
- NICE acquired Causata, a real-time Big Data analytics provider, on August 12, 2013 for approximately $22.7 million, including a potential earn-out of up to $2.0 million.
- NICE repurchased 2.1 million shares for approximately $79.4 million during 2013 and initiated a quarterly dividend program, paying $0.48 per share during the year.
Guidance, outlook, commentary and risks
Management expects the effective tax rate to increase to approximately 18%–19% in 2014 and future years, subject to tax settlements, legal changes, acquisitions and other uncertainties. The company intends to continue investing in advanced analytics, cloud and SaaS delivery, cross-channel solutions, internal research and development, and acquisitions.
Zeev Bregman was scheduled to retire as President and Chief Executive Officer, with Barak Eilam expected to complete the transition to CEO by the end of April 2014. NICE identified this succession as a potential operational risk.
Key risks include intense competition and pricing pressure; rapid technological change and possible product obsolescence; dependence on North America, which generated more than half of sales; reliance on recording solutions, Avaya-related installations and distribution partners; extended sales cycles and quarterly seasonality; foreign-exchange exposure; acquisition integration and goodwill risk; privacy, cybersecurity and regulatory compliance; government spending and large-project execution; Israeli political and security conditions; and possible changes to Israeli tax benefits and research grants.
Contractual obligations included approximately $109.2 million of operating leases, $15.3 million of unconditional purchase obligations, $26.7 million of accrued severance obligations and $36.3 million of guarantees. Uncertain income tax positions totaled $33.2 million, with additional accrued interest of $3.9 million. Pending legal matters included Tal-Yam, Jamshy and a former Actimize employee discrimination claim; the filing states that the company could not assess the likely outcomes of these matters.
Most important facts for investors to verify
- Reconcile the annual results with the separate fourth-quarter 2013 Form 6-K or earnings release, because the 20-F text does not provide clear standalone Q4 figures.
- Assess the sustainability of the improved gross and operating margins after excluding lower acquisition-related amortization and restructuring effects.
- Evaluate the recurring-revenue mix, including maintenance, SaaS and hosting growth, and its effect on deferred revenue and cash conversion.
- Review the $19.2 million tax charge, the Israeli tax settlement, the expected 18%–19% future effective tax rate and the $33.2 million uncertain tax position.
- Monitor the CEO transition and execution of the Causata integration and broader acquisition strategy.
- Confirm cash, investment maturities, foreign-exchange hedges, contractual commitments and the absence of reported borrowings.
- Track exposure to North America, major channel partners, Avaya infrastructure, competitive pricing and regulatory or cybersecurity changes.
- Review the status and potential exposure of the pending legal proceedings and the company’s $100 million share-repurchase authorization announced in February 2014.