UBS >> Nice Systems Limited Q2 14: A reassuring top-line beat

Q2 revenues beat consensus by 2%, but margin fades
Q2 revenues of $239m were up +6.3% y/y, beating consensus by 2% (cons.: $235m /
+4%), and at the top end of guidance ($230-240m). Product revenue of $86m was up
+2.4% y/y, a welcome rebound from the sharp decline in the previous quarter (Q1: -
13%). Services (includes cloud, maintenance, and professional services) decelerated
slightly from the previous quarter to $153m, +8.6% y/y (Q1: +12%). Unusually low
product gross margin (75.3% vs 78.9% in Q213) suggests a possible proliferation of
hardware sales in the products mix, and along with an increase in R&D spend (+17%
y/y), caused the operating margin to fall to 17.2% (cons.: 17.6%) from 19.4% in
Q213. This resulted in profits coming in at the lower end of mgt's 55-62c guidance
(cons.: 59c), with EPS of 57c.

Cash generation and balance sheet remain strong
After generating $25.9m of operating cash flow, NICE concluded the quarter with
$462m of net cash on the balance sheet (including no debt), $7m less than the $469m
it finished March with. A total of $25.1m was returned to investors via buybacks in Q2
and a quarterly dividend of $9.6m (16c) was also paid. The company has $66m left of
its current buyback programme to deploy.

Q3 guidance in-line to slightly below Street and FY14 guidance left unchanged
Mgt announced guidance for Q3 with a mid-point that is slightly below analyst
estimations. The company expects to generate revenues of $240-248m or +4-8%
(cons.: $246m / +6.8%) and EPS of 59-67c (cons.: 65c). For the full year, revenue
expectations were left unchanged at $995-1,025m (cons. $1,004m). EPS guidance was
similarly unchanged at $2.68-2.80 (cons. $2.72).

Valuation: Buy; $46 PT based on blended DCF and multiples approach
Mgt will host a conference call for analysts and investors today at 1:30pm UKT. Call
details: +44 800 783 0906 / +1 866 804 8688; passcode: 249 317 29.
 

Roni Biron
Analyst
 

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