Business Context and Reporting Period
NICE-Systems Ltd. is an Israel-based provider of software and related services for customer interactions, financial crime and compliance, and security, safety and operations. The company sells primarily on-premise solutions and is expanding Hosted and Software-as-a-Service offerings.
This Form 20-F reports the fiscal year ended December 31, 2012, prepared under U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The source does not provide a standalone fourth-quarter income statement; the requested 2012 Q4 period is therefore covered only through annual results and fourth-quarter events.
Key Financial Metrics
| U.S. dollars in millions, except per-share data | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $879.0 | $793.8 | +10.7% |
| Product revenue | $369.4 | $355.8 | +3.8% |
| Service revenue | $509.6 | $438.1 | +16.3% |
| Gross profit | $527.8 | $486.5 | +8.5% |
| Gross margin | 60.0% | 61.3% | -1.3 percentage points |
| Operating income | $45.6 | $59.0 | -22.7% |
| Operating margin | 5.2% | 7.4% | -2.2 percentage points |
| Net income | $67.9 | $57.3 | +18.6% |
| Diluted EPS | $1.09 | $0.89 | +22.5% |
| Cash flow from operations | $135.6 | $154.4 | -12.1% |
Revenue growth was led by Customer Interactions Solutions, which generated $566.0 million, up 18.5%. Financial Crime and Compliance Solutions generated $127.1 million, up 2.2%, while Security Solutions generated $185.9 million, down 3.1%.
- Research and development expense was $121.4 million, or 13.8% of revenue, compared with $109.1 million in 2011.
- Selling and marketing expense was $230.2 million, or 26.2% of revenue, compared with $199.0 million, or 25.1%.
- Amortization of acquired intangible assets increased to $32.6 million from $23.7 million.
- A $1.9 million restructuring charge was recorded for facility consolidation.
- Net financial income and other income was $8.3 million, compared with $10.6 million in 2011.
- Cash and cash equivalents were $98.6 million at year-end. Short-term and long-term investments totaled $346.1 million, producing combined cash and investments of approximately $444.7 million.
- Working capital was $137.6 million, compared with $173.5 million in 2011. Total assets were $1.661 billion and shareholders’ equity was $1.191 billion.
- The filing does not provide a clear value for interest-bearing debt; no debt balance is presented in the balance-sheet lines reproduced in the filing.
Material Changes Versus the Prior Comparable Period
- Service revenue grew substantially faster than product revenue, increasing services to 58.0% of total revenue from 55.2%.
- Gross margin declined primarily because of higher amortization associated with the Merced acquisition and the inclusion of a full year of Fizzback and CyberTech results.
- Operating income and operating margin declined despite revenue growth because selling and marketing, research and development, amortization, and restructuring costs increased.
- Net income increased despite lower operating income, primarily because of a $14.0 million tax benefit in 2012 versus $12.4 million of tax expense in 2011.
- Operating cash flow declined as trade receivables increased by $11.9 million and accrued expenses and other liabilities decreased by $17.9 million.
- Investing cash outflow was $164.4 million, including $164.5 million for acquisitions and $28.7 million for property and equipment.
- Financing cash outflow was $76.6 million, including $107.0 million used for share repurchases, partly offset by $30.4 million from employee option exercises and share purchases.
- Outstanding shares declined to 60.25 million from 61.81 million, while treasury shares increased to 6.10 million from 3.00 million.
Guidance, Outlook, Risks and Unusual Items
Management expected an effective tax rate of approximately 15% to 17% in coming years, subject to tax settlements, expiration of statutes of limitation, changes in law and future acquisitions. The company stated that existing working capital and expected operating cash flow should be sufficient to fund operations for the next twelve months.
In February 2013, the board approved an intended quarterly cash dividend policy, subject to future declaration. The initial expected annual dividend was $0.64 per share, or $0.16 per quarter, with the first payment expected in the second quarter of 2013. NICE historically had not paid cash dividends.
NICE completed the $185.9 million acquisition of Merced Systems in February 2012 and the $11.6 million acquisition of RedKite Financial Markets in October 2012. RedKite consideration included a potential earn-out of up to an additional $5.8 million.
The Financial Crime and Compliance reporting unit was subject to a quantitative goodwill impairment test in the fourth quarter. Its estimated fair value exceeded carrying value by approximately 13%, and no impairment was recorded; management indicated that the unit remained sensitive to unfavorable changes in projected cash flows, terminal value multiples or discount rates.
- Key operating risks include intense competition, pricing pressure, rapid technological change, migration toward cloud and SaaS models, and possible substitution of voice interactions by email, chat, social media and other channels.
- The company depends significantly on distribution and strategic partners, including Avaya, and on North America, which generated more than half of revenue.
- Large government and security projects may involve customer acceptance, fixed-price obligations, subcontractor dependence, penalties and delayed cash collection.
- Acquisition integration, goodwill and acquired-intangible amortization remain material risks following multiple acquisitions.
- Foreign-exchange exposure is significant because expenses are incurred in NIS, EUR, GBP and other currencies while much revenue is dollar-based. Outstanding currency hedges had a notional amount of approximately $195.5 million at year-end.
- Contractual cash obligations totaled $151.8 million, including $113.9 million of operating leases, $13.6 million of unconditional purchase obligations and $24.3 million of severance obligations. Uncertain income tax positions totaled $38.0 million.
- Material or potentially material legal matters included a Calyon appeal, a Tal-Yam contract dispute and an Actimize employment-discrimination lawsuit. Accrued legal liabilities were described as immaterial.
- Political and security conditions in Israel, Israeli tax incentives and Office of the Chief Scientist grants could affect operations, taxes and cash flows.
Most Important Facts to Verify
- Reconcile the requested quarterly period with the annual filing because the filing provides annual results rather than a standalone 2012 fourth-quarter income statement.
- Assess the sustainability of the 2012 net-income increase after removing the $14.0 million tax benefit and considering the lower operating margin.
- Evaluate whether service-revenue growth, SaaS and hosting expansion can offset higher delivery costs and acquired-intangible amortization.
- Review acquisition performance, integration costs, goodwill concentration and the limited 13% fair-value cushion in Financial Crime and Compliance.
- Confirm liquidity after acquisitions, capital expenditures, share repurchases and the proposed dividend policy, including the composition and credit quality of the $444.7 million cash-and-investment portfolio.
- Verify the amount and terms of any interest-bearing debt or credit facilities, as the reproduced filing text does not provide a clear debt balance.
- Monitor receivables, deferred revenue, customer concentration, partner dependence, North American exposure and currency-hedging effectiveness.