Nice Systems' CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 4.11 | About: NICE-Systems Limited (NICE)

Nice Systems Ltd. (NASDAQ:NICE)

Q1 2011 Earnings Call

May 4, 2011 8:30 AM ET

Executives

Anat Earon-Heilborn – IR

Zeevi Bregman – President and CEO

Dafna Gruber – Corporate VP and CFO

Analysts

Daniel Meron – RBC Capital Markets

Paul Coster – JP Morgan

Shyam Patil – Raymond James & Associates

Daniel Ives – FBR

David Kaplan – Barclays Capital

Brian Ruttenber – Morgan Keegan

Deev Tall [ph] – UBS

Craig Nankervis – First Analysis

Michael Kim – Imperial Capital

Ari Bensinger – Standard & Poor’s

Jonathan Ho – William Blair & Company

Operator

Welcome to the NICE Systems conference call discussing Q1 2011 results and thank you all for holding. (Operator Instructions). As a reminder, this conference is being recorded May 4th, 2011. I would now like to turn the call over to Anat Earon-Heilborn, Investor Relations at NICE. Please go ahead, ma’am.

Anat Earon-Heilborn

Thank you, Operator, and good day everyone. With me on the call are Zeevi Bregman, President and Chief Executive Officer; and Dafna Gruber, Corporate Vice President and Chief Financial Officer.

Before we start I would like to point out that some of the statements made on this call are considered forward-looking statements. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, please be advised that the company’s actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained under the subheading “Forward-Looking Statements” in the company’s 2010 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 31st, 2011.

Such factors and forward-looking statements are based on the current expectations of the management of NICE Systems Ltd only and are subject to a number of risks and uncertainties that could cause the actual results and performance of the company to differ materially from those described herein, including but not limited to the impact of the global economic environment on the company’s customer base, particularly financial services regulations and the resulting uncertainties; changes in technology and market requirements; declining demand for the company’s products; and ability to timely develop and produce new technologies, products and applications; difficulties or delays in absorbing and integrating acquired operations, products, technologies, and personnel; loss of market share; pressure on pricing resulting from competition; and inability to maintain certain marketing and distribution agreements. The company undertakes no obligation to update or revise these forward-looking statements except as required by law.

During today’s call we will present a more detailed discussion of Q1 2011 developments and the company’s updated guidance for 2011. Following the comments there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call we will be commenting on our adjusted results of operations which differ in certain respects from generally accepted accounting principles as reflected mainly in our accounting for acquisition-related revenues and expenses, amortization of intangible assets and accounting for stock-based compensation. The differences between the non-GAAP adjusted results and their equivalent GAAP figures are detailed in today’s press release. With that I’ll turn the call over to Zeevi Bregman.

Zeevi Bregman

Welcome everyone to our Q1 2011 earnings call. Q1 was a strong quarter for NICE. We continued to execute on our strategy to provide our organization with a unique analytics-based customer and billing applications to improve its performance, enhance compliance, and ensure safety and security. Our solutions enable an organization to gather insights and other data as well as provide them with an ability to impact specific events in real time.

Our Q1 revenues were stronger than originally expected and reached $187 million, increasing 15% from the Q1 of last year. Q1 was a strong quarter for our Enterprise business. We enjoyed strong demand for our analytics-based advanced application in the customer interaction segment, and we continued to enjoy growth in our financial crime and compliance segment.

Non-GAAP EPS reached $0.47 in the quarter, up $0.09 from Q1 last year. We continue to see strong demand for our products and we enjoy a healthy pipeline across the board. Following the very strong Q4 bookings we are pleased with our Q1 booking performance as well. Book-to-bill for the quarter was close to 1, and we forecast book-to-bill to be higher than 1 for the full year. Our backlog represents over two quarters of revenue. Based on both backlog and pipeline we are raising our revenues and EPS expectations for the full year. We continue to demonstrate robust cash generation with cash flow from operations in Q1 reaching a record $55 million. Our top line cash balance at the end of March was $657 million.

A few words about the status of the CyberTech acquisition. The acquisition closed as planned in early March. We began the integration process immediately and it is focusing well and in line with our expectations. We are moving ahead with respect to all organizational, operational and customer-facing aspects. Given the satisfactory performance of CyberTech so far, the positive feedback we received from business partners and customers, and most importantly two months’ of experience in working closely with the CyberTech team we are very positive prospects of this acquisition.

We are reinforced in our belief that CyberTech’s complimentary solutions will enhance our offering and that the deal will serve to strengthen our presence in (inaudible). We continue to reap the fruits of our labor in the fast evolving, highly-specialized markets in which we operate. There are several fundamental needs that keep driving the demand for our products. These are the needs for evolving business performance, enhancing compliance, and safeguarding people and assets. We are confident about the core growth engines across our business line and expect to continue to deliver consistent, solid performance.

Our Enterprise business, which is comprised of the customer interaction business and the financial crime and compliance business, had a very good Q1. Looking at our customer interaction business, we continue to execute on our strategy to provide our customers with solutions that enable them to impact every customer interaction.

There are two trends that we would like to highlight to you today. The first is the increasing demand for our advanced applications in developed markets; the second is a strong demand for our solutions in emerging markets. Starting with the developed market, we are seeing a substantial shift from our traditional products to analytics-based advanced applications which include our established insight solution as well as our new real time impact and back office offerings.

In the previous earning call, we talked about an enterprise build for a major North American financial institution that outgrew its infrastructure. The new infrastructure enabled this customer to enjoy our advanced applications, and in Q1 it made a large follow-on order. This infrastructure order is solely for our insight and real time impact solutions.

While financial institutions are our largest vertical, the demand for value-added applications is clearly visible in other verticals as well. For example, during the quarter we booked a multi-million dollar build with one of our largest telcos in Australia. This customer operates in a highly competitive market and views our solutions as strategic for process optimization and customer experience improvement. It expects to formulate best practices across its call center, which will help decrease churn, improve quality and increase output.

Moving on to emerging markets, we are pleased to see an improvement in demand in markets such as Southeast Asia, Latin America and Eastern Europe. Here we are now seeing a transition from the purchase of products to the purchase of business solutions, assimilating our plan to the one we have already been witnessing in the developed markets. This naturally leads to an increase in the number of large deals in these areas.

Turning to our financial crime and compliance business, which continued to demonstrate strong holds, due to regulatory changes and increasing sophistication of product types, many firms realized that their systems, which are often ongoing, cannot effectively support today’s builds. Therefore they choose to replace their outdated technology with enterprise-wide solutions. Such solutions provide them with a holistic view of activity across the (inaudible), their divisions and geographies, enabling them to detect potential connections between activities. These trends continued to drive our financial crime and compliance business in Q1. For example, we signed a high seven-digit deal with a large North American financial institution for both our security surveillance [ph] to trading software technology and AML solutions. This bank chose to implement multiple products that operate on a single platform in order to improve its effectiveness in preventing (inaudible) activities.

Eight months ago we published a press release about our win with the Bank of Ireland, which sold several of our solutions last year which it is now implementing. This deal reflects several business trends that we have been discussing during the past few quarters: one, the extension of our business across Europe; two, it demonstrates the fundamental need for our financial crime and compliance solutions regardless of microeconomic conditions; finally, it is another instance where the desire to obtain a more realistic view of financial crime risk cost impact was the key driver for the deal.

Today we announced that we were recognized as a leader in (inaudible). We believe that our position is supported by the very strong analytics technology that drives our solution and our ability to integrate our web offerings with a real time cost impact and enterprise-forward management platform, and the effectiveness of our feature-rich platform.

Moving to our security business, we continued to enjoy a strong pipeline for our distinctive portfolio of security solutions. In this portfolio, the fastest growing area is Situator, our situation management solution. These follow from our global rapid market growth as well as from our clear leadership and product differentiation. We are seeing growing adoption of the situation management solution mostly in the US but also in other regions, including emerging markets. The leading verticals in adopting our solutions are transportation, utilities, and financial services.

In March we introduced a new version of the Situator. Enhancements include (inaudible), precise real time tracking of valuable assets, and preconfigured user-specific packages for addressing growing compliance requirements. The new capabilities enable organizations to leverage a wealth of external information sources for efficient support when responding to situational threats.

In our business surveillance business we continue to see migration from video to IP-based video. This trend leads to additional revenue from existing customers as they modernize their security systems to keep up with their growing security needs. A little over eight months ago we discussed that Dallas-Fort Worth International Airport has placed a multi-million dollar order with us. The deal includes the deployment of our IP video surveillance solution as well as our incident information management solution. These deployments will provide a foundation for the airport to migrate to our IP video surveillance in the future. The overall pipeline for the security businesses is healthy and we believe that the opportunities we are working on will materialize in the latter part of the year.

To conclude, we are satisfied with our performance in Q1 which demonstrates (inaudible) execution. We delivered revenue goals, profitability improvement and robust cash generation. We are seeing a continuous shift from our traditional products to advanced applications and we are also very pleased with the growth in demand we are experiencing in emerging markets. We believe that the demand for our unique solutions as well as our ability to sell and deliver these solutions will continue to drive our business forward during the remainder of 2011 and beyond. Many thanks to all our teams for their execution during the quarter. I will now turn the call over to Dafna Gruber, our CFO. Dafna?

Dafna Gruber

Thank you, Zeevi. I am pleased to provide you with the analysis of our financial results and business performance for the Q1 of 2011, out outlook for Q2, and then give guidance for full-year 2011.

Revenues for Q1 reached $187 million, exceeding our expectations and up 16% from $163 million in Q1 of 2010. The CyberTech acquisition, which closed on March 4th, contributed about $2 million to the quarterly revenues. Our backlog at the end of the quarter was very strong and represents more than two quarters of revenues. We are pleased with the strong pipeline across our business. Our book-to-bill ratio in Q1 was close to 1 and we expect it to be greater than 1 for the full year.

Our revenues by businesses were as follows: Enterprise revenues reached $147 million in Q1 and accounted for 78% of total revenues; Security revenues reached $40 million in Q1 and accounted for 22% of total revenues in the quarter. By geography, the Americas region continued to perform well. Revenues reached $114 million in Q1, increasing 22% over Q1 of 2010. Our business in Europe, the Middle East and Africa had revenues of $48 million in Q1, increasing 5% over Q1 last year. Revenues from the Asia-Pacific Region were $25 million in Q1, up 5% from last year. In summary, the Americas region accounted for 61% of total Q1 revenues, EMA for 26% and A-Pac for 13%.

Product revenues accounted for 44% of Q1, revenues from maintenance was up at 37% of total revenues, and revenues for professional services accounted for 19% of revenues. Q1 gross margin increased to 65.9% from 64.1% last year. This improvement is the result of the continuous shifting of our business towards software-based applications, a favorable product mix as well as continued increase in the recurring maintenance business. Operating income in Q1 was $34 million and represents 18.2% of revenues, compared with 16.6% operating margin in Q1 of 2010. We are on track with our plans to continuously improve profitability and operating margin.

Net income increased by 25% from $24 million in Q1 last year to $30 million in Q1 2011. Earnings per fully diluted share came in at $0.47 for the quarter, up from $0.38 in Q1 last year. Cash flow from operations continues to be very strong and we generated a record $55 million in Q1. As a result, our cash and equivalents reached $657 million at the end of March as noted. During the quarter our cash outflow for acquisitions was approximately $65 million: $59 million was paid for the CyberTech acquisition and $6 million was payment for prior acquisitions (inaudible). We started executing the share buyback plan in March and so far purchased shares are at a total amount of $10.5 million. During Q1 $2.2 million was spent on the repurchase of 62,500 shares.

We had a significant increase in our core expenses and interoperabilities [ph] visible on our balance sheet and cash flow statement. Most of the increase is the result of an increase in deferred revenues and advanced payments from customers. This is further evidence of the strength of our business.

Turning to guidance, we are introducing today our guidance for Q2 and raising our guidance for the full year 2011. Our expectations do not include the impact of any share repurchase plan. We expect revenues in Q2 to be in the range of $190 million to $196 million. As for earnings per fully diluted share, we expect a range of $0.47 to $0.51 for Q2. Based on our performance in Q1, our stronger backlog and pipeline, we currently expect revenues in 2011 to be in the range of $780 million to $803 million, and earnings per fully diluted share to be in the range of $1.98 to $2.07 this year.

This concludes my comments. I will now turn the call over to questions. Operator?

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator Instructions.) The first question is from Daniel Meron of RBC Capital Markets. Please go ahead, sir.

Daniel Meron – RBC Capital Markets

Hello Zeevi and Dafna, congratulations on a solid execution. Zeevi, can you provide us a little bit more detail on the growth rate that you see in developed markets versus emerging markets? Can you quantify that? Is one market growing faster than the other? And how is the profitability profile in the different segments between the developed and emerging? Thank you.

Zeevi Bregman

Well, we are not breaking the forecast into emerging and developed countries. Most of our growth in the developed market is coming from selling more and more applications to our installed base and selling more equipment to our installed base, while in emerging markets it’s more in penetration of new customers. Obviously when we are penetrating new customers there might be sometimes we are investing more for it, but generally in terms of trends it’s more or less similar.

Daniel Meron – RBC Capital Markets

Okay, and then if I was to look into the developed and emerging markets, do you see Enterprise or Security mix different in the different markets? Or is Security more going into developed markets versus emerging or vice versa? And same goes for Enterprise. And what do you see your activity within that optimized solution when we look at it from this geographic breakdown?

Zeevi Bregman

When we are looking at our Enterprise solutions and most of our Security solutions, most of the businesses are in the Americas and then in EMA and then in A-Pac, pretty much following our overall model of regional distribution. When we are looking at part of our Security solutions, the intelligence part, this is more leaning to emerging markets.

Daniel Meron – RBC Capital Markets

Okay, and last question on my end for you, Dafna. It’s great that you guys started to buyback (inaudible) on that. Given the strong cash flow in the quarter, maybe it’s a bit too early in the game but it does seem that the buyback is not keeping up with the cash generation. Any thoughts there on what you’re going to do with the buyback?

Dafna Gruber

First of all I’m glad that the cash generation is better than the ability to spend and buy debt, but more seriously, we have an initial plan to buy back shares at a total amount of $100 million, and as you see we’ve executed more than $10 million already and intend to continue to this plan going forward as well. And once this amount will be purchased we will evaluate the best way to continue. We need to remember that the major use of the cash in our company is to grow the business through acquisitions; that’s the main purpose and we’re very focused on that as well.

Daniel Meron – RBC Capital Markets

Okay, thank you. Good luck.

Operator

The next question is from Paul Coster of JP Morgan. Please go ahead, sir.

Paul Coster – JP Morgan

Thank you, good morning. Zeevi, you started off by talking about how in the developed markets you’re moving from sales of your traditional products to analytics, and I’m particularly interested in the smart center customer experience kind of suite and the multi-channel capability. Can you give us a little bit of color around where we stand in terms of the adoption of this multi-channel capability? Is it very early stage still? What is the size of the market? What’s your anticipated growth rate for that segment of your business relative to the overall business? Any sense or so on how long the sales cycle is for the smart center customer experience solutions?

Zeevi Bregman

When we are looking at our analytics solutions the introduction of a cost channel is something that we introduced I believe last year. And we have customers that are using it but we are in the early stages of the internal market penetration. We are in the early stages of the activity there and our opportunities, and as we are proving our solutions with customers they are buying and investing more with us. When we look at where we are focused today we are focused more on the introduction of solutions that are completing the cycle, that are a combination of our insight solution that is providing trends and then our real time solutions that they look at the trends and make the actions, and enable actions in real time by our customers.

So these complete the cycle and then these solutions can be measured again by the insight solution to show, to look at the progress and to look at how we have advanced and how we have supported the business goals of the customers when they implemented the analytics solution. And this is the main area of supporting this cycle and supporting the complete business process by providing those trends, and as for the impact this is our main focus area and this is our unique advantage in this field.

Paul Coster – JP Morgan

And are you cross-training your salespeople to sell the customer experience in addition to the insight or do you have specialists in this area?

Zeevi Bregman

The way that we work is that we have a sales team that is knowledgeable about the market and they are also knowledgeable about the products and we are investing a lot in a program called NICE University, in educating them and making them constantly up to speed. And their learning capability is a fundamental requirement to become a sales person in our space, but when we are getting to a more developed sales situation the team of consultants and experts is supporting the sales person in creating and ensuring the value we expected for the customer.

Paul Coster – JP Morgan

Okay. My last question is as you add resources to address this growth opportunity that you’re exploiting, can you give us some sense of where you’re investing? Is it in sales versus R&D? Is it in specific geographies and specific product categories? Just so we get a sense of where your attention is.

Zeevi Bregman

We are obviously spending money where our growth engines are, but overall our spending is across the board, across all the functions of the company. We are using our leverage to invest less in G&A compared to other areas, but besides G&A we are, and also in G&A as we are going within the scalability we are investing. We are investing across the board.

Paul Coster – JP Morgan

Okay, thank you very much.

Operator

The next question is from Shyam Patil of Raymond James & Associates. Please go ahead, sir.

Shyam Patil – Raymond James & Associates

Hi, thanks. Great quarter guys. My first question is around the back office solutions you’ve talked about in the past. Can you maybe talk more about that in terms of the pipeline, how many deals you guys have closed there, potential revenue contributions this year and what that can mean for the business kind of looking out maybe two to three years?

Zeevi Bregman

The back office, we believe that the back office provides a significant opportunity for us. We believe, we know and the analysts are saying that two to five more people operating in back office that are in the front of in the contact center, and it’s a significant opportunity for us. The first opportunity that we see and the strongest demand that we see at the moment is the healthcare and insurance demand, and this is where we are focusing our activities. We are already, during the quarter and even before we already signed several deals and we are gaining good traction in this market, and we believe that both the number of deals and the size of deal will increase throughout the year. So now in terms of revenues in booking, we expect there to be growth there but we are not expecting significant revenues this year. They will be meaningful but not significant.

Shyam Patil – Raymond James & Associates

Okay. And I think based on the comments you guys made during the call you’re expecting the Security business to show better revenue trends or to ramp in the back half of this year. In addition to the strong backlog you guys have built up there, what kind of gives you confidence that you’re going to see that play out this year?

Zeevi Bregman

When we are looking at our metrics and looking at the business of (inaudible) activity, we have seen relatively strong activity in our Security business during the quarter, and from the quarter till today. So we are confident that the business will grow year-over-year.

Shyam Patil – Raymond James & Associates

Got it. And then it looks like the services revenue was particularly strong this quarter. I mean should we assume that that primarily came from the Enterprise business? And then when you look at the Enterprise product revenue, if you back out the contribution from Actimize to the year-over-year growth, what are the other applications or products within Enterprise that are showing strong year-over-year growth?

Zeevi Bregman

When we are looking at the, first of all we are in Q1 so it’s difficult to think about trends. But generally the areas that are going on the Enterprise side are, not in any particular order, are the systems that are going to emerging markets as we spoke about before; and in the applications space, the areas and applications that are based on interaction analytics, and applications that are real time impact solutions; back office we spoke about before. These are the main going areas within our customer interaction business.

Shyam Patil – Raymond James & Associates

Okay, and then just my last question. The buyback, how should we think about kind of the execution of that? I mean do you guys expect to be price sensitive so right now, with the stock having a nice move we should expect you know, maybe more limited repurchases and kind of more opportunistic on pull backs? Or do you guys plan to deploy the cash kind of consistently throughout the year?

Dafna Gruber

Our first plan is to continue with the execution of the buyback. We do it as a divided [ph] plan so it’s not opportunistic. It has some guidance regarding prices but it’s more guidance for daily activity, and overall I can say we continue to buy back stocks at these prices as well.

Shyam Patil – Raymond James & Associates

Great, thank you and congrats again.

Operator

The next question is from Daniel Ives of FBR. Please go ahead, sir.

Daniel Ives – FBR

Hey, how’s it going? Could you just talk in regards to seven-figure deals? You talked about the big deals – can you maybe compare that sequentially and year-over-year?

Zeevi Bregman

We are not ready with the specific Q1 to Q1 comparison, but when we are looking at and analyzing our numbers and our data we are clearly seeing a trend of growth of the number of the seven-digit deals that we have.

Daniel Ives – FBR

So were seven-figure deals up sequentially?

Zeevi Bregman

We didn’t make this analysis; I cannot answer.

Daniel Ives – FBR

Okay, okay. Could you talk just anecdotally about what’s going on in the Security business? I mean are you seeing… You talked about the second half growth but are deals getting bigger? Is there any particular geographic strength, any change in competition? Just talk about what you’re seeing in the field in that business.

Zeevi Bregman

Well, we are, one of our growth engines in the Security side is our situation management platform where we are the market leader. We are enjoying a good pipeline, solid build growth and we are continuing with the momentum in this business. And this is definitely a growth area and we expect to see accelerated growth during the year. We have seen there was some improvement in our traditional video business this quarter and also when we are looking at our public safety and the (inaudible) we have seen some nice builds that we did which appears right now in the booking and in the areas which are outside of the US.

Daniel Ives – FBR

Okay, thanks.

Operator

The next question is from David Kaplan of Barclays Capital. Please go ahead, sir.

David Kaplan – Barclays Capital

Hi, good afternoon. First question is on operating profit. The margins looked pretty strong, particularly for Q1 – 18.2%. I know the long-term target is 20%. Are the recent acquisitions in any way helping or going to help over the rest of this year increase the operating profit in the short-term or does this really still continue to be a long-term goal?

Dafna Gruber

The target for us is to reach, especially a mid-term target of two years is to reach 20% and then what we intend to do is to gradually improve our profitability. So we do expect certain improvements in profitability during 2011 and especially in the second half when the full impact of the acquisition of CyberTech could be added to the profits. It’s going to be more evident in the second part of the year.

David Kaplan – Barclays Capital

Okay, and then just a second quick question on the updated guidance. If we look at the top end of the guidance for Q1 and you had given in the results $180 million, it was beat by about $4 million, the updated guidance for 2011 has the top end of the guidance raised $3 million if I’m not mistaken. So actually is the view of your 2011 numbers just a reflection of the beat in Q1 or is it actually an analysis of your expectations for the rest of the year?

Dafna Gruber

I think it’s based on expectations for the year. Let’s remember that we are giving a range, and if you notice we’ve increased the lower part of the range much higher than the higher part and still it’s a range. And we need to remember it’s still the beginning of the year and hopefully we will continue to perform well and increase our numbers.

David Kaplan – Barclays Capital

Great, thanks very much.

Operator

Your next question is from Brian Ruttenber of Morgan Keegan. Please go ahead, sir.

Brian Ruttenber – Morgan Keegan

Thank you very much. Can you talk about the Security growth on the year, what you’re anticipating? Do you see a pickup in Security? And I have some follow-up questions.

Zeevi Bregman

We are, what we expect is to have at least 10%, two-digit growth for the year in Security.

Brian Ruttenber – Morgan Keegan

Great. And then maybe you can talk about G&A. In the quarter it was up dramatically from last quarter; I assume that was due to the acquisition. How much was due to the acquisition?

Dafna Gruber

There was a certain part, not a significant part due to acquisitions. The acquisition, I believe that we had some favorable impact on G&A last year in Q4 so the level of Q1 is probably a better indication for G&A levels going forward and it’s actually much more similar to the levels we’ve experienced during 2010.

Brian Ruttenber – Morgan Keegan

Okay. And then the last question on the tax rate – you’re at 27% in Q1, what’s your rate looking like for the whole year?

Dafna Gruber

The tax rate was about 18% and the target for us is to range between 17% to 18%. That has not changed, and there are some changes from quarter to quarter but the overall target has not changed.

Brian Ruttenber – Morgan Keegan

Great, thank you very much.

Operator

The next question is from Deev Tall [ph] of UBS. Please go ahead, sir.

Deev Tall [ph] – UBS

Hi, and congrats on a good quarter. Dafna, can you give us a little color on the impact of FX going forward and to give us a little bit of detail on your hedging?

Dafna Gruber

We have a hedging policy to actually hedge mainly our (inaudible) costs in Israeli shekel compared to the US dollar, and as you know there was a certain change, a continuous change in the exchange rate. The way we work and we’ve always worked is that we have a certain hedging system in place that allows us to predict quite accurately the coming quarter or the coming quarters, or actually the coming six months. So I don’t expect major impact in the coming few months. Going forward, though, over a longer period of time, if the Israeli shekel will remain very strong we will have to take some measures and change the way we invest our money between Israel and other areas, but this is something that’s yet to be seen. We have some flexibility in terms of our spending to overcome the fluctuations between the currencies.

Deev Tall [ph] – UBS

Thank you very much.

Operator

The next question is from Craig Nankervis of First Analysis. Please go ahead, sir.

Craig Nankervis – First Analysis

Thank you very much. Really most of my questions have been asked. I guess on the Security story, would NICE be satisfied with 10% or 10% to 12% Security growth this year? Would you consider that to be–

Zeevi Bregman

We said that it will be at least two-digit growth, right. It will be two-digit growth, which means at least 10% but more, if you look at the numbers and you look at the way that Security was trending last year, because between quarter to quarter Security was more or less flat, if we will grow by 10% it’ll present a higher rate on a quarter-by-quarter. If you compare Q4 to Q4 it will be a higher growth rate than what, because of the nature and the distribution of the revenues.

Craig Nankervis – First Analysis

You’re saying the quarters are lumpy and you could have some pretty strong quarters.

Zeevi Bregman

That’s also correct. What I’m saying is that if you look at the trend of the Security last year it was more or less flat, and therefore in order to increase the annual business by two digits it means that the effective growth of the rate is going to grow faster than the low two digits.

Craig Nankervis – First Analysis

I just find it puzzling because- Can you say, is sort of the regular base Security business, has that changed? Has that softened in some way? I mean you’ve added new product capability, you have a greater offering set in situation management, and you have large, very large wins from 2009 that are at some point to contribute. And it seems like neither of those is happening.

Zeevi Bregman

So the large deal from 2009, we continue to execute on this deal and on this project and it goes according to plan. And what we have said also in the previous call, we didn’t get- The nature of the large deal on the Security side is lumpy and we have in the pipeline some large deals and we believe that they will materialize; some of them will materialize during this year. And we will see some revenue growth from these deals coming in. On the surveillance basis, also as we mentioned we are seeing growth.

Craig Nankervis – First Analysis

Thank you very much.

Operator

The next question is from Michael Kim of Imperial Capital. Please go ahead, sir.

Michael Kim – Imperial Capital

Hi guys, just to clarify then, the Security pipeline, the order pipeline is growing faster than the Enterprise pipeline as well as backlog, or can you just clarify how you’re seeing the pipeline growth?

Zeevi Bregman

We didn’t look at the pipeline growth. It would be difficult to measure the growth of the pipeline. What we have said is that we have a very strong pipeline in our Security business. We believe that some of the deals will materialize. We believe that the business is going to grow this year by at least two digits.

Michael Kim – Imperial Capital

To get to the double digit growth, it does seem to imply almost 20% growth in the back half of the year with quarterly revenues approaching $50 million in the Security business. So are some of these–

Zeevi Bregman

There can be a lumpiness quarter-over-quarter in terms of the volume, but this is where basically you explain better what I tried to explain previously, that this is quite aggressive growth.

Michael Kim – Imperial Capital

And are you seeing that growth in North America or is it in international opportunities?

Zeevi Bregman

It’s across the board.

Michael Kim – Imperial Capital

Okay. And you know, this year there’s been a degree of consolidation in the defense space. Any commentary on how that might change the competitive landscape and the position for Situator?

Zeevi Bregman

Yeah, we are the first- We believe that when you are looking at the space we are at the top where there is concern with an ROI in terms of the spending. So the systems like Situator are helping people to save money, and instead of investing in areas like (inaudible) which are very costly, providing some intelligence that is much more cost-effective and therefore we believe there is going to be a demand. Now, some of the demand is not coming from defense. We are not sending the Situator to the defense world. We are sending it to the security and mostly to the enterprise security and some public organizations, and when we are looking at the issues like compliance and the existing threats that exist in this market are creating good demand for this type of data services.

Michael Kim – Imperial Capital

And then switching back to Enterprise, can you comment on the penetration of new customers relative to expansion of existing customers? Are you starting to see stronger new client additions or new logos into Actimize?

Zeevi Bregman

We are increasing our market share. We are seeing a constant flow of new customers and this is across the board.

Michael Kim – Imperial Capital

And just one last question on the Security portfolio. Considering your balance sheet, can you talk strategically in terms of if you fill out that portfolio on a technology basis or vertical expansion, or is it geographic? What are your kind of priorities to build the security portfolio?

Zeevi Bregman

When we are looking at our Security- And by the way, it’s not different than any factor that we are looking at. We are looking first at whether we can- We’re looking always at opportunities to expand market reach and our go-to market, opportunities to consolidate come of the field where we are at, opportunities to expand our product offering in a complementary way. And when we are doing it we’re always looking at the financials behind such interactions and whether it makes sense. And whether we are very conservative in our M&A approach and we are going to continue to be in terms of the financial models and making sure that we are making the right returns to our shareholders from our investments.

Michael Kim – Imperial Capital

Great, thank you very much.

Operator

The next question is from Ari Bensinger of Standard & Poor’s. Please go ahead, sir.

Ari Bensinger – Standard & Poor’s

Yes, thanks. I just want to try to tackle the Security question maybe a little differently. If you had to aggregate your total addressable market, what do you feel the market growth rate is for 2011? Because it just seems with the strong fundamentals and the headline news in terrorism that growth over the last four quarters should be a little bit stronger than what the company has shown. So is it a function of the market, just the long shelf cycles, or is it a market share component?

Zeevi Bregman

I don’t think it’s the size of the market that we are averaging in the Security are huge, so the market share is not an issue and there is a very significant market opportunity. There is a certain lumpiness in terms of the purchasing cycles that exist in this market, and as I said before, we’ve seen a quite good traction and we are optimistic about the traction that we have seen in the security business within Q1, and we believe that this will materialize throughout the year. And we are going to see growth this year in the Security, like at least at the same rate as the growth between 2009 to 2010.

Ari Bensinger – Standard & Poor’s

Okay, thanks.

Operator

Your next question is from Jonathan Ho of William Blair. Please go ahead, sir.

Jonathan Ho – William Blair & Company

Hi, good morning. Just a quick question on the advanced applications in your call center. Do you see this opportunity primarily as an upgrade cycle in your installed base or is there an opportunity here to drive a broader refresh in the industry which could allow you to take some incremental share?

Zeevi Bregman

Could you repeat your question please?

Jonathan Ho – William Blair & Company

The question is basically is this primarily going to be – on the advanced application side – an upgrade cycle within your installed base, or do you think this is going to cause a broader refresh in the industry so that maybe folks that are not using NICE as a platform could potentially switch over?

Zeevi Bregman

We are seeing both trends. We are seeing units sold to our customers, and it’s being sold to new customers as the reason and the motivation for them to refresh their technology. So we are seeing both trends on an ongoing basis.

Jonathan Ho – William Blair & Company

Great. And can you give us maybe an update on what’s happening with the large FAA contract that you guys signed back in 2007 and maybe where we stand there?

Zeevi Bregman

We are continuing to deliver platforms quarter by quarter and this is continuing, and I don’t remember now how much of the project is already behind us but we are progressing as usual.

Jonathan Ho – William Blair & Company

Great, thank you.

Operator

There are no further questions at this time. Before I ask Mr. Bregman to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call 1-888-782-4291. In the UK, please call 0800-917-4256. In Israel please call 03-92-55-921 and internationally, please call 972-3-92-55-921. Mr. Bregman, would you like to make your concluding statements?

Zeevi Bregman

Thank you, everyone, for joining us today and have a nice day.

Operator

Thank you, sir. This concludes the NICE Systems Q1 2011 results conference call. Thank you for your participation, you may go ahead and disconnect.

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