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NICE Systems' record year

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midastouch017   Monday, 04/17/06 10:38:15 AM
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Post # of 45 
NICE Systems' record year
CEO Haim Shani on restoring market confidence and possible future acquisitions.

Gitit Pincas 17 Apr 06 13:18

Let us go back a few years to January 2001, when Applied Materials Israel general manager Haim Shani was appointed CEO of NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE), which was in deep crisis. NICE had a glorious past, a dark present and a clouded future.
“Whether by chance or not, this was the third time in my career that I took up a post with problems,” said Shani at the time. “I was given a clear picture of the problems at the company, and I believe that NICE must, and can, recover from its problems. The company has great potential, and its market position will help it grow.”

On a different occasion, Shani said that NICE had the means to stand on its feet and recover lost market share.

“Globes”: Did you really believe those things at the time? The situation was discouraging, and there were few optimists.

Shani: “Of course I believed them. We’re not an ad agency. I meant what I said. My optimism at the time was based on my knowledge of NICE’s markets, its standing and the need for its products. We had thousands of customers then, and our entire management team, myself included, met them to try to figure out where the market was headed. That was a Sisyphean task. All of NICE’s success was due to the wisdom, know-how and experience of the company’s people. For example, our NICE Perform product, launched in 2004, was initiated three years earlier at those rounds of talks with customers. NICE Perform underwent lengthy development that cost tens of millions of dollars and a long time to reach market, but look at the results. That’s why you need a lot of vision in this business.

“It’s hard for me to say precisely what we did to succeed, but it was definitely connected to the fact that the entire management team was focused on the company’s business. We built a fairly new management with experience in different fields, and we focused on operational matters and processes. In this matter, we were helped by a consultancy firm with which we formulated a long-term multi-year plan that brought us to this point. The plan was fulfilled successfully and completely. We recently prepared a new multi-year plan using the same format, and we hope that it, too, will be implemented.”

So, now you can sit back and relax?

“You never relax for a moment in high tech. We keep a constant finger on the pulse, especially as a company that wants to continue to grow. There’s not a moment of rest.”

“No miracles here”

NICE specializes in multimedia recording and quality management. The company’s solutions are used to record conversations, monitor and secure trading rooms, casinos and airports, and for other security purposes. The company’s market cap is $1.1 billion.

Before Shani was appointed CEO, NICE underwent a number of embarrassing incidents. They began with a severe profit warning in late 2000, a few weeks after then-chairman and CEO Benny Levin told shareholders that the company would see growth, belying rumors to the contrary. This was the company’s second profit warning in two years, and came in the wake of a restatement of its results for 2000 caused by incorrect reporting of revenue. The warning also followed Levin’s resignation as chairman. Above all, the profit warning created a crisis of confidence by the capital market. The rumors that preceded the profit warning slashed the company’s share price within a few days, and it continued to slide thereafter.

How do you restore capital market confidence? “There are no miracles here,” says Shani. “NICE CFO Ran Oz simply did a lot of legwork. I sometimes joined him to speak with investors and analysts, explaining our strategy, and providing guidance, which we eventually met. It was nothing glamorous. Ran would get on a plane, get off, make another connection, meet investment institutions and analysts, and return. It was a lot of hard work.”

Oz says, “After a while, we had more serious talks with American and other investment institutions. Some of them could name every company in our sectors, but didn’t know NICE, even though we were number one in some of these sectors. We had no such problems on our last road show. I think that investors now know that we’re a transparent company; we’re in contact with them, and we’re building trust. We can report the results we predicted, quarter after quarter. We draw them a picture, and while not everyone will ultimately invest in the company, that’s OK; we’re satisfied with less than everyone.”

It’s impossible to talk about NICE’s recovery period without mentioning the takeover attempts. Then, as now, NICE has a lot of cash, and its shares a held by a great many investment institutions, very few of whom are parties at interest. Only six months after Shani’s appointment, Polar Investments Ltd. (TASE: PLR) (then Poalim Investments) and Koor Industries Ltd. (NYSE: KOR; TASE: KOR) tried to take over the company, and Koor became a party at interest in it. There was a lot of criticism, the takeover difficult, and was ultimately dropped. Even now, Shani doesn’t want to talk about takeovers. “It’s not a subject we deal with. Naturally, it’s more relevant during hard times, and so long as we’re successful, we’re not bothered by the matter. In any case, let’s move on.”

NICE’s growth, rising profitability, and jump in market cap are all noteworthy, especially when one remembers that the company was once up to its neck in the mire. The company predicts $367-375 million revenue for 2006, and pro-forma earning per share of $1.90-2 ($41.1-43.3 million). Revenue has grown by an average of 48% a year in 2001-05, and the share price has climbed 260% since the profit warning of February 2001. In other words, anyone who believed in NICE in 2001 has done very well.

Future growth engines

Shani’s carrier includes stints at Orbotech Ltd. (Nasdaq: ORBK) and Applied Materials Inc. (Nasdaq:AMAT). He says he sees parallels with NICE. “Both Applied Materials and Orbotech are global companies, although Orbotech is a fraction of the size of Applied Materials. They both focus on combining technology with marketing, they both try to be number one, and lead in investment in technology. There’s a reason why they’ve been industry leaders for years. I learned from Applied Materials president emeritus Dan Maydan and Orbotech CEO Yochai Richter how to focus on markets, products and auditing, and apply the lessons at NICE.”

2005 was a record year for NICE, and 2006 promises to be better. As noted above, the company predicts $41.1-43.3 million on $367-375 million revenue for the year. What’s next? What will drive the company’s subsequent growth?

“We have a number of growth engines,” says Shani. “The first is enterprises’ need to meet new regulations. The cost of an error in this area is high.”

Shani is referring to the 2003 US national Do Not Call Registry, under which consumers can register to avoid telemarketers and pollsters. A company that calls a person in the registry will be fined. Companies use recordings of these calls to protect themselves from lawsuits, and companies have complete records of all outgoing calls.

“Our second growth engine is the VoIP revolution,” says Shani. “Anyone who lives on a budget who has Skype, for example, knows how important it is for making calls. This opens a new direction for us for recording calls not only at central branches, but also by agents and smaller branches.”

Shani says insurance companies and banks will record calls made from headquarters, but not those made by agents or from various branches, because of the high cost. The cost of recording and storing VoIP calls, even calls between branches, while managing them centrally, is not high.

Shani says a third growth engine is the trend towards outsourcing, especially to India and the Philippines. “Regardless of politics, and whether this is a good thing or not, it’s an additional business. Many companies set up English-speaking customer support teams in these countries. It is vital that these calls are monitored and supervised and that the call centers meet the standards the companies apply in the West. We help them do this.”

A fourth growth engine in security. Municipalities and national governments want to better protect citizens against terrorism and crime in general in city centers.

Without sounding cold, you expected more from the security market in the wake of 9/11.

“True, but with reservations. We didn’t expect that all security systems would utterly change. If someone thought so, it was a pipe dream. On the other hand, there’s the challenge of civil defense. The process is happening, we weren’t wrong about that, but the pace is slower; there’s no quick fix. We didn’t think there’d be a magic solution.

“I remember that after 9/11, at a security conference in Las Vegas, I met executives of a then-popular company that was developing facial identification software. There were stories on CNN at the time that if Bin Laden were to ride the subway, these products would identify him. I watched the company’s demo, and later worked on image processing for quite a few years at Orbotech and Applied Materials, and thought to myself that it had no chance of becoming significant. I thought toys [using the technology] might be sold here and there, but nothing on a large scale. Nevertheless, the company’s share soared at the time, and the hype was huge.

“In 2001, when were about a third of what we are now, we decided to focus on security, among other things, and on video. That’s starting now. A contract like the one we signed with the Baltimore municipality didn’t happen the day after 9/11, but last year. This might be bad news, but the good news is that it happened.”

NICE’s main competitors in the civilian market are Verint Systems Inc. (Nasdaq: VRNT), Witness Systems Inc. (Nasdaq:WITS) and General Electric Company (NYSE:GE) following the latter’s acquisition of Dallmeier Electronics GmbH. In the security and emergency services sector, NICE”s main competitors are Verint, Mercom Systems and ASC Telecom.

When asked about Verint, Shani replies, “It’s an important player, and I don’t want to insult them, but there are others.”

Israel’s Verint, with a market cap of $1.1 billion, is an old-time competitor of NICE, and there have been plenty of rumors about a merger between the two.

How much overlap is there between NICE and Verint?

“We divide the market differently, so I can’t be sure where we overlap today, but it’s certainly not 100% as is sometimes thought.”

Would it be correct to estimate the overlap at 30%?

“I really don’t know, and I don’t think about it.”

”Acquisitions as strategy”

One of the truly astonishing things about NICE”s balance sheet is its $411.6 million in cash, an immense amount that allows the company to make more acquisitions. In late 2005, NICE raise $200.1 million, and it was believed at the time that the money would be used to acquire a specific company, but that the matter was subsequently dropped.

“I don’t know who thought that,” says Shani, “but part of our growth to date has been through acquisitions, and we’ll make more. Future acquisitions will be in the same format as our acquisitions of Thales Contact Solutions (TCS), Fast Video Security, and Dictaphone’s Communications Recording Systems (CRS) business. In other words, acquisitions in both the civilian and security sectors will be on the basis of customers, technology, or distributors. We’re constantly accumulating experience, and the more we do, the more we learn and the better we get.”

Shani says acquisitions, including specific inputs, are part of the company’s plan. “This isn’t something opportunistic because I met someone during a flight. It’s part of our strategy. TCS, for example, was a company whose name appeared in our business plan as a possible acquisition target. The same is true for most of the companies we’ve acquired in recent years. It just didn’t suddenly pop up.”

What’s your vision?

“To be a market leader through solutions for the capture, management and analysis of raw multimedia data in every medium: radio, telephone and VoIP, and to improve enterprises and governments’ business performance to better protect people. We have substantial growth potential in all our areas of business. The fact that neither you nor I have an immediate interaction when we call a customer service center, and dissatisfaction is often measured in time, shows that our vision is rich enough and will fill our activities with content for a long time to come. It will enable the company to achieve growth, profitability, and a higher market cap.”

NICE will publish its financial report for the first quarter of 2006 on May 10.

Published by Globes [online], Israel business news - www.globes.co.il - on April 17, 2006


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