- NICE Systems reported rising sales, up 6.3% Y/Y on rising gross profit but falling margins. The full year outlook was maintained.
- The long thesis was based on recurring sales, strong Fortune 100 customer base, and cross-selling of new services to these but also new customers. The thesis has worked well.
- I reiterate my long thesis and raise my target price to $44 per share within 12 months, offering a ~13% upside within a year, with additional ~10% per year afterwards.
NICE Systems, Ltd. (NASDAQ:NICE) reported solid Q2 2014 earnings (SEC filing, conference call). Revenues increased 6.3% Y/Y to $239M. GAAP EPS was $0.17 per diluted share, compared to $0.27 for the second quarter of 2013. Gross profit of $144.9M was up 4% Y/Y, but gross margin fell to 60.6% from 61.8% Y/Y. Operating income was down to $12.2M from $19.3M and operating margin was 5.1%, down from 8.6% a year ago. Net income of $10.4M was down from $17M Y/Y. Net margin was 4.3%, down from 7.5% Y/Y. Non-GAAP EPS reached $0.57, compared to $0.61 a year ago, missing estimates by two cents. Operating cash flow was $25.9M. $22.7M was used for share repurchases and $9.6M for dividends. The quarterly dividend remains unchanged at $0.16 per share. Third quarter non-GAAP total revenues are expected to be in a range of $240M to $248M and non-GAAP EPS in the range of $0.59 to $0.67 per share. The full year outlook was maintained with 2014 revenue of $995M to $1.025B and non-GAAP EPS of $2.68 to $2.80. For the full year, the company expects improving margins which should surpass 2013 margins on growing sales.
Strong demand continued for the analytics applications which represented around 50% of the new business for Q2 and again grew double digits, with growth coming from both new and existing customers. The Americas strongly contributed to the overall 6.3% sales growth, with 16% Y/Y revenue increase. EMEA grew a solid 6% Y/Y while APAC struggled but represented just a 10% share. The financial crime and compliance business delivered another very strong quarter, with 40% revenue growth to $48M, and NICE continued to solidify its market leadership here. Customer interaction revenues were $145 million in the quarter, down 1%. Security revenue grew 3% year-over-year to $46 million.
Despite temporarily lower margins, I reiterate my long thesis on NICE Systems. The top line is growing and there are several strong growth segments and regions, such as the financial crime and compliance, and the key North American region shows robust growth. The competitive position remains strong, with ~80% of Fortune 100 companies being NICE's customers. I am also raising my target price from $39 a year ago to $44 now based on higher fair value on continued solid performance.
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