It was a significant business decision for NICE-Systems Ltd. (NICE, Financial) to drop two major lines and focus instead on the remaining two: customer interaction (such as call center software) and financial fraud prevention.
Yet it has worked out well for this Israel-based information technology company, which has consistently grown its top and bottom lines.
In fact, it scores a 10 for financial strength at GuruFocus; it’s also a 5-Star Predictability stock. By design and execution, NICE-Systems is a growth stock. With 25,000 customers in more than 150 countries, it has reach and more opportunities for growth.
Whether it’s time to buy is a tougher question; the share price is about 1% below its 52-week (and all-time) high, but at the same time, the price hasn’t gone far since June 2015, a year and a half ago.
To complicate assessments, a recent press release announced the company’s American arm, Nice Systems Inc., is taking on $225 million in debt to help cover the costs of acquiring inContact, which it bought last year for $940 million.
History
Seven former Israeli army colleagues got together in 1986 and founded Neptune Intelligence Computer Engineering (N-I-C-E). They started with technology for defense and security but soon transitioned to civilian applications for markets such as call centers, financial services and business intelligence.
In 1991, the company officially shortened the name to NICE-Systems Ltd. and in that same year was listed on the Tel Aviv Stock Exchange. Along the way, NICE-Systems Ltd. also became a wholly owned subsidiary of Nice Ltd. Since 1996, NICE-Systems’ American Depositary Receipts (ADRs) have traded under the symbol "NICE" on NASDAQ.
In the last three years, the company has shifted its focus to customer interactions (such as call centers) and fraud prevention, thus narrowing its field of operations. To make this happen, it sold two company divisions, which took it out of the defense industry. It also bought Nexidia, which aids in management of customer call centers and inContact, which will allow it to move its call center software into the cloud.
History based on information at Wikipedia.org, Haaretz.com and PR Newswire.
The business of NICE Systems
At its website, the company says, “At NICE, we protect people’s money, ensure their safety and improve their experiences.” It also says, “When it comes to turning information overload into practical business value, no one else comes close to NICE.”
(Unless otherwise noted, information in this article comes from the company’s 20-F, which is the equivalent of a 10-K for an American company.)
Based on the 20-F, the company operates in two segments: Customer Interactions and Financial Crime and Compliance.
- Customer Interactions: solutions for contact centers, back office operations and retail branches, spanning multiple industries including communications, banking, insurance, health care, business processes outsourcing (BPO), government, utilities, travel and entertainment.
- Financial Crime and Compliance: solutions for fraud prevention, anti-money laundering and compliance adherence. In this area, much of the company’s attention is focused on financial institutions.
Image above from the November 2016 Investor Presentation
Within that context, NICE says it helps companies:
- Understand their customers.
- Predict their needs.
- Optimize their workforce to drive greater efficiency.
- Identify suspicious behavior to prevent financial crime.
It says it does this by capturing interactions and transactions in multiple channels and sources. This captured data is then reviewed by analytics software. The analysis allows it to identify the intentions of customers in real time. Further, the analysis is provided in a way that allows NICE clients to operationalize the insights.
On its website, NICE reports having 25,000-plus customers including more than 85 of the Fortune 100.
It spent $132 million on research and development in fiscal 2015. Within its intellectual property portfolio, it holds 135 U.S. patents and another 72 pending.
Revenue
The company generated $965.2 million in revenue for the 12 months ending Sept. 30, 2016. That compares with $311.1 million 10 years ago:
This chart, from the company’s November 2016 Investor Presentation, shows the sources of revenue in fiscal 2015:
This chart shows the Israel-based company brings in most of that revenue from the Americas:
In its third-quarter 2016 guidance, the company expected fiscal 2016 revenue to grow past the $1 billion mark between $1.022 billion and $1.036 billion.
Competition
The company divides its competition by its segments.
Customer Interactions: NICE says, “We are seeing more CRM and Business Intelligence companies offer solutions that compete with our Customer Interactions analytics offerings. Also, with the shift to cloud, CCaaS providers are offering complete solutions that include several of our WFO capabilities. In this market, we compete against WFO vendors as well as contact center infrastructure vendors that expand their offering to include some WFO or analytics capabilities.” Named competitors are Aspect Technology, Genesys (NSE:GENESYS, Financial) and Verint Systems (VRNT, Financial).
Financial Crime and Compliance: Competition with both niche vendors (which specialize in one subset) and larger companies that provide anything up to end-to-end solutions. Name competitors include BAE Systems (LSE:BA, Financial), FICO (FICO, Financial), Oracle (ORCL, Financial) and SAS Institute.
It also says it has several competitive advantages including patents and trademarks, a loyal customer base and market leadership in its area of operations.
Moat
Vuru gives NICE-Systems the equivalent of a wide-moat rating, noting the company has maintained substantial gross margins as shown in this chart:
GuruFocus reports, “NICE Ltd.'s five-year average operating margin growth rate was 21.00% per year,” and “NAS:NICE's operating margin is ranked higher than 81% of the 1,857 companies in the Global Software - Application industry. (Industry Median: 4.74 vs. NAS:NICE: 16.66).”
Also, given the complexity of software and firmware, switching costs can be high for customers of IT companies. System integration, for example, gives incumbent companies an advantage over competitors.
Growth
NICE-Systems has had the following average annual revenue growth rates:
- Three years: 2.3%.
- Five years: 6.2%.
- 10 years: 7.4%.
As this slide from the Investor Presentation shows, about half of the company’s revenues are recurring:
Looking ahead, the company says in its 20-F that it plans to:
- Keep investing in innovation and development.
- Continue augmenting organic growth with more acquisitions.
- Expand in selected vertical markets and geographic area.
- Broaden its customer base and increase its distribution channels.
On acquisitions, it says it sees them broadening its product and technology portfolio.
Other
NICE-Systems Ltd. is headquartered in Ra’anana, Israel; it has five offices in the U.S.
It trades American Depositary Shares/American Depository Receipts (ADS/ADR) with each ADS share representing one ordinary share. It trades on the NASDAQ Global Select Market.
Year-end is Dec. 31.
At its website, it reports it has more than 3,500 employees and a presence in more than 150 countries.
Chairman of the board: David Kostman, age 52, has been in this position since 2013. He has been a director since 2001.
CEO: Barak Eilam, age 40, has held this position since 2014. Eilam has served in various management roles at NICE since 1999.
Chief Financial Officer: Beth Gaspich has been CFO since last year. She held two other CFO positions before moving to NICE-Systems. Officer information is from Reuters.com.
Ownership
Two investing gurus followed by GuruFocus have positions in NICE-Systems Ltd., Ken Fisher (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Fisher owns 83,837 shares while Simons owns 75,644 shares.
Because this is an ADR, other ownership information is not available here.
By the numbers
Financial strength
NICE garners good scores for both financial strength and profitability/growth:
The company has had no long-term debt over the past decade, but the acquisition of inContact may change that.
As noted, both its revenue and operating margins have been expanding.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) charts like this:
EPS (earnings per share) over the past 10 years:
This chart shows free cash flow:
Its weighted average cost of capital is 9.5% while its return on invested capital is 14.2%.
Valuations
NICE-Systems is a 5-Star (out of five) company, reflecting its ability to consistently increase its earnings over five years (or longer). A company with a predictable earnings history is more likely to generate capital gains over the longer term (five years or more) and less likely to produce capital losses.
However, all valuations generated by the GuruFocus system show NICE as currently overvalued:
The earnings-based DCF fair value calculator values NICE at $40.54, 72% below its current value of $69.63.
Among the analysts followed by NASDAQ.com, the 12-month consensus target price is $75.00; that’s 7.7% higher than the Jan. 30 close of $69.63. The analysts lean to the buy side:
With the price-earnings (P/E) ratio at 28.28, it’s tempting to think this stock might be overpriced. However, it is currently cheap in the context of its P/E over the past decade:
Compared with its publicly traded peers (and keeping in mind Oracle is massive compared to the other two companies), NICE is in the middle on P/E:
The PEG (Price/Earnings divided by five-year earnings growth rate) comes in at 1.64, near the middle of fair-value range (anything between 1.0 and 1.99 is considered fair-valued).
From a basic technical perspective, the price is getting slightly ahead of its 200-day Simple Moving Average (in red):
Conclusion
There’s no doubt NICE-Systems Ltd. is a powerful growth company, with even more to come if it can execute its plans for integrating inContact with its existing systems. It seems likely the company will succeed at this; it has a history of successful acquisitions and integrations.
However, this is not an easy company to understand. American investors interested in the company will need extra time for due diligence, given the web of entities that comprise this firm.
It is not a value stock; its share price is nudging the 52-week high, yet given its price history since June 2015, there’s uncertainty about capital gains in the next few years. It seems the market is waiting to see that the changes made over the past few years will produce the promised results.
Despite the recent successes, prudent investors will want to wait as well.
Disclosure: I do not own shares in any of the companies listed in this article, and I do not plan to buy any in the next 72 hours.
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