NICE Ltd. 20-F 2014
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2013
Commission file number 0-27466
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
22 Zarchin Street, P.O. Box 690, Ra’anana 43107, Israel
(Address of principal executive offices)
Dafna Gruber, +972-9-7753151, firstname.lastname@example.org,
22 Zarchin Street, P.O. Box 690, Ra’anana 43107, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:60,096,547 Ordinary Shares, par value NIS 1.00 per share (which excludes 8,181,586 treasury shares)>
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such reports).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question indicate by check mark which financial statements the registrant has elected to follow:
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
This annual report contains historical information and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to NICE’s business, financial condition and results of operations. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “strategy,” “continue,” “goal” and “target” and similar expressions, as they relate to NICE or its management, are intended to identify forward-looking statements. Such statements reflect the current views and assumptions of NICE with respect to future events and are subject to risks and uncertainties. The forward-looking statements relate to, among other things: operating results; anticipated cash flows; gross margins; adequacy of resources to fund operations; our ability to maintain our average selling prices despite the aggressive marketing and pricing strategies of our competitors; our ability to maintain and develop profitable relationships with our key distribution channels; the financial strength of our key distribution channels; and the market’s acceptance of our technologies, products and solutions.
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. Many factors could cause the actual results, performance or achievements of NICE to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, competition with existing or new competitors, changes in executive management, changes in general economic and business conditions, disruption in credit markets, rapidly changing technology, changes in currency exchange rates and interest rates, difficulties or delays in absorbing and integrating acquired operations, products, technologies and personnel, changes in business strategy and various other factors, both referenced and not referenced in this annual report. These risks are more fully described under Item 3, “Key Information – Risk Factors” of this annual report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. NICE does not intend or assume any obligation to update these forward-looking statements. Investors should bear this in mind as they consider forward-looking statements and whether to invest or remain invested in NICE-Systems Ltd.’s securities.
In this annual report, all references to “NICE,” “we,” “us” or “our” are to NICE-Systems Ltd., a company organized under the laws of the State of Israel, and its wholly owned subsidiaries. For a list of our significant subsidiaries, please refer to page 55 of this annual report.
In this annual report, unless otherwise specified or unless the context otherwise requires, all references to “$” or “dollars” are to U.S. Dollars, all references to “EUR” are to Euros, all references to “GBP” are to British Pounds, all references to “CHF” are to Swiss Francs and all references to “NIS” are to New Israeli Shekels. Except as otherwise indicated, the financial statements of and information regarding NICE are presented in U.S. dollars.
TABLE OF CONTENTS
Item 2. Offer Statistics and Expected Timetable.
Item 3. Key Information.
Selected Financial Data
The following selected consolidated balance sheet data as of December 31, 2012 and 2013 and the selected consolidated statements of income data for the years ended December 31, 2011, 2012 and 2013 have been derived from our audited Consolidated Financial Statements. These financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated statements of income data as of December 31, 2009 and 2010 and the selected consolidated balance sheet data for the years ended December 31, 2009, 2010 and 2011 have been derived from other Consolidated Financial Statements not included in this annual report and have also been prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5, “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and notes thereto and other financial information included elsewhere in this annual report.
Risks Relating to Markets, Global Operations and Competition
Conditions and changes in the local and global economic environments may adversely affect our business and financial results.
Adverse economic conditions in markets in which we operate can harm our business. Global financial conditions during recent years have been characterized by increased volatility and several financial institutions either went into bankruptcy or had to be rescued by governmental authorities. Among these uncertainties are the financial conditions of certain governments in Europe, which may have an impact on the entire Euro zone.
To the extent that our business suffers as a result of such unfavorable economic and market conditions, our operating results may be materially adversely affected. In particular, enterprises may reduce spending in connection with their contact centers. Financial institutions may also reduce spending in relation to trading floors and operational risk management, as IT-related capital expenditures are typically lower in times of economic slowdowns. In addition, enterprises’ ordering and payment patterns are influenced by market conditions and could cause fluctuations in our quarterly results. Moreover, our clients may, due to imminent regulatory or operational deadlines or objectives or for other reasons, prioritize other expenditures over the solutions that we offer.
Disruption to the global economy could, therefore, have a number of follow-on effects on our business, including a possible (i) slow-down in our business, resulting from lower customer expenditure, inability of customers to pay for products and services, insolvency of customers or insolvency of key partners, (ii) negative impact on our liquidity, financial condition and share price, which may impact our ability to raise capital in the market, obtain financing and secure other sources of funding in the future on terms favorable to us, and (iii) decreases in the values of our assets that are deemed to be other than temporary, which may result in impairment losses.
We depend on the stability of the North American market.
Over half of our sales are generated from North America. In the event that there is deterioration or a future crisis in the economic and financial stability in the United States, specifically but not limited to the financial services sector (which is our main industry vertical), it could result in reduced spending by our top tier customers or the delay or postponement of orders, all of which may have a negative impact on our sales to this region. This may materially adversely affect our results of operations and may increase the difficulty for us to accurately forecast and plan our future business.
The markets in which we operate are highly competitive and we may be unable to compete successfully.
The markets for our products, solutions and related services are, in general, highly competitive. Some of our principal competitors or potential competitors may have advantages over us, including greater resources, a broader portfolio of products, applications and services, larger patent and intellectual property portfolios and access to larger customer bases, all of which would enable them to adapt better to new or emerging technologies or customer requirements or devote more resources to the marketing and sale of their products and services. Additionally, continued price reductions by some of our competitors, particularly at times of economic difficulty, may result in our loss of sales or require that we reduce our prices in order to compete, which would adversely affect our revenues, gross margins and results of operations.
New potential entrants to our markets may lead to the widespread availability and standardization of some of the products and services, which could result in the commoditization of our products and services, reduce the demand for our products and services and drive us to lower our prices. System integrators, as well as infrastructure vendors, that have decided and/or may decide in the future to enter our market space and compete with us by offering comprehensive solutions, could result in a substantial decline in our sales. Moreover, major enterprise software vendors, such as those from the traditional enterprise business intelligence and business analytics sector, Customer Relationship Management (or CRM), or infrastructure players (mostly telephony or switch vendors), may decide to enter our market space and compete with us in this emerging opportunity, either by internal development of comprehensive solutions or through acquisition of any of our existing competitors. Such competition could have a material adverse effect on our business, financial condition or results of operations.
While the market for our software applications is constantly growing, successful positioning and sales execution of our products is a critical factor in our ability to successfully compete and maintain growth. As a result, we expect to continue making significant expenditures on research and development and marketing. In addition, our software solutions may compete with software developed internally by potential clients, as well as software and other solutions offered by competitors. We cannot ensure that the market awareness or demand for our new products or applications will grow as rapidly as we expect, or that the introduction of new products or technological developments by others will not adversely impact the demand for our products.
Successful marketing of our products and services to our customers and partners will be critical to our ability to maintain growth. We cannot assure you that our products or existing partnerships will permit us to compete successfully. The market for some of our solutions is highly fragmented and includes products offering a broad range of features and capabilities. Consolidation through mergers and acquisitions, or alliances formed, among our competitors in this market, who may have greater resources than we have, could substantially influence our competitive position.
Our competitors include a number of large, established manufacturers and distributors of similar products, as well as newly emerging competitors. Prices of most of our solutions have decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that the prices will not continue to decrease or that our gross profit will not decrease as a result. In addition, the success of some of our solutions depends on our ability to develop an effective network of distributors, while facing pricing pressures and low barriers to entry. We cannot assure you that our products and services or alliances will permit us to compete successfully.
If we fail to successfully compete with infrastructure vendors, such failure may materially adversely affect our financial results.
The economic climate has forced many organizations to reassess their contact center solutions’ infrastructure. For the contact center, the enterprise and the remote and mobile workforce, an all-in-one contact center platform may be a preferred alternative to a multi-point system, as it may result in a reduction in the Total Cost of Ownership (TCO) and the enablement of new cross systems business processes. Although we may benefit from this trend, at the same time, we are observing that there are infrastructure players that are potentially looking to introduce a “contact center as a service” cloud-based solution that will include features and functionality currently supplied by us, in addition to the infrastructures supplied by such vendors. With the strengthening of this trend, we may be faced with a new type of competition, and in the event that we are not able to create an integrated experience for our customers in the form of an integrated suite, there could be a material adverse effect on our business, financial condition or results of operations.
Risks associated with direct competition from our global distribution or strategic partnership channels may materially adversely affect our financial results.
Our current distribution channel partners or our strategic partners may decide to enter into our markets in competition with us, which would likely result in the termination of our relationship and may lead to a significant reduction in sales through related channels.
A portion of our strategic partners are suppliers of telecommunication infrastructure equipment. If our strategic partners decide to end the relationship and expand their product offering to compete with us, this may result in a significant reduction of sales made by such strategic partners, as well as to customers who use such partners’ infrastructure or work in their environment.
Some of our channels have made changes in their business models over the last couple of years, including the sale of branded products, which are currently based on their relationships with our competitors, as well as other sources. Such channels’ offerings of telephony solutions, including by way of bundling the products of our largest competitor, is in direct competition with our offering, and is directed at the market also served by them and NICE together. While these channels continue to also sell and support NICE products, their focus on selling their own branded suites may continue to change the scope and nature of our relationship with them or result in the termination of such relationship, and therefore result in the displacement of NICE’s offering. In addition, these channels may further their direct competition with us by offering recording as a standard functionality in the telephony infrastructure systems (recording at the switch). All of the above factors may have a substantial negative impact on our business and our relationship with these channels, and may result in a significant reduction of our sales.
As a result of all of these factors, including any difficulties we may experience in maintaining our relationship with these channel (for example, entering into subsequent commercial agreements), on the one hand, and their direct competition with us on the other hand, we may lose sales opportunities, customers and market share, which may have a material adverse effect on our business, financial condition or results of operations.
The markets in which we operate are characterized by rapid technological changes and frequent new products and service introductions.
We operate in several markets, each characterized by rapidly changing technology, new product introductions and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards might exert price pressures on our existing products or render them obsolete. Our markets are also characterized by consistent demand for state of the art technology and products. Existing and potential competitors might introduce new and enhanced products that could adversely affect the competitive position of our products. Our most significant market is the market for Customer Interaction applications. Customer Interaction applications are utilized by entities in various sectors to capture, store, retrieve and analyze recorded data. The market for our Customer Interaction applications is, in particular, dominated by a group of highly competitive vendors that are introducing dynamic competitive offerings around evolving industry standards.
We believe that our ability to anticipate changes in technology and industry standards and to successfully develop and introduce new, enhanced and differentiated products, on a timely basis, in each of the markets in which we operate, is a critical factor in our ability to grow our business. As a result, we expect to continue to make significant expenditures on research and development, particularly with respect to new software applications, which are continuously required in all our business areas. The convergence of voice and data networks and wired and wireless communications could require substantial modification and customization of our current cross-channel products, as well as the introduction of new multi-channel products. Further, customer adoption of these new technologies may be slower than we anticipate. We cannot assure you that the market or demand for our products and solutions will be sustained or grow as rapidly as we expect, if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance, or that the introduction of new products or technological developments by others will not render our products obsolete. In addition, our products must readily integrate with major third party security, telephone, front-office and back-office systems. Any changes to these third party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance. Our inability to develop products that are competitive in technology and price and responsive to customer needs could have a material adverse effect on our business, financial condition and results of operations.
Therefore, some of the factors that could have a material adverse effect on our business, financial condition and results of operations include industry-specific factors; our ability to continuously develop, introduce and deliver commercially viable products, solutions and technologies; the market’s rate of acceptance of the product solutions and technologies we offer; and our ability to keep pace with market and technology changes and to compete successfully.
Operating globally exposes us to additional and unpredictable risks.
We sell our products and solutions throughout the world and intend to continue to increase our penetration of international markets. In 2011, 2012 and 2013 approximately 99% of our total sales were derived from sales to customers outside of Israel. Our future results could be materially adversely affected by a variety of factors relating to international transactions, including:
Changes in the political or economic environments in the countries in which we operate, particularly in emerging markets, as well as the impact of economic conditions on underlying demand for our products and services could have a material adverse effect on our financial condition, results of operations and cash flows.
As we continue to explore the expansion of our global reach, an increasing focus of our business may be in emerging markets, including South America and in Asia and the Pacific (or, APAC). In many of these emerging markets, we may be faced with risks that are more significant than if we were to do business in developed countries, including undeveloped legal systems, unstable governments and economies, and potential governmental actions affecting the flow of goods and currency. We cannot assure you that one or more of these factors will not have a material adverse effect on our international operations, business, financial condition and results of operations.
Unpredictable events, including extreme weather events, earthquakes and tsunamis, may adversely affect our business.
The occurrence of catastrophic events, such as hurricanes, storms, earthquakes, tsunamis, floods and other catastrophes that adversely affect the business climate in any of our markets could have a material adverse effect on our business, financial condition and results of operations. Some of our operations are located in areas that have been in the past, and may be in the future, susceptible to such occurrences.
General Risks Relating to Our Business, Offerings and Operations
We depend on the success of our recording solutions.
Our recording solutions are based on a computer telephony integrated multi-channel voice recording and retrieval system. We are dependent on the success of our recording solutions to maintain profitability and sustain growth. Our recording solutions currently generate, and in recent years have generated, a large portion of our revenues, and we will continue to be dependent on the sales of our recording solutions in the next several years. However, there can be no assurance that the recording market will continue to grow. Also, switch manufacturers, such as Avaya Inc. (Avaya) and Cisco Systems Inc. (Cisco), offer various types of recording solutions, which could result in a significant decline in sales of our recording solutions, which could also result in a decline in sales of related applications, or a significant decrease in the profit margin on such solutions, that could have a material adverse effect on our business, financial condition or results of operations.
In addition, the trend of enterprise customers moving from voice to other means of communication with the enterprise (such as e-mail, instant messaging, social media and chat), may result in a reduction in the demand for our voice recording platform and applications. Furthermore, if such trend continues, our customers may cease to record voice and switch to recording other means of communication. This may have a material adverse effect on our business, financial condition or results of operations.
If we fail to develop or maintain relationships with existing and new distribution and strategic partnership channels, such failure may materially adversely affect our financial results.
We have agreements in place with many distributors, dealers and resellers to market and sell our products and services in addition to our direct sales force. Moreover, in certain regions, such as Asia and Eastern Europe, we predominantly work through such partners. Our financial results could be materially adversely affected if our contracts with distribution channel partners or our other partners were terminated, if our relationship with our distribution channel partners or our other partners were to deteriorate, or if the financial condition of our distribution channel partners or our other partners were to weaken.
We believe that developing partnerships and strategic alliances is an important factor in our success in marketing our products. In some markets we have only recently started to develop a number of partnerships and strategic alliances. We cannot assure you that we will be able to develop such partnerships or strategic alliances on terms that are favorable to us, if at all. Failure to develop such arrangements that are satisfactory to us may limit our ability to successfully market and sell products and may have a material adverse effect on our business and results of operations.
As our market opportunities change, our reliance on particular distribution channels and strategic partners may increase or we may need to create new strategic partnerships and alliances to address changing market needs, all of which may negatively impact our growth and gross margins. There can be no assurance that we will be successful in maintaining, creating or expanding these channels and partnerships. If we are not successful, we may lose sales opportunities, customers and market share, which may have a material adverse effect on our business and results of operations.
We depend on Avaya’s installation base for a significant portion of our recurring sales.
We sell our products, either directly or through our other distribution channels, to customers who use Avaya’s infrastructure or operate in Avaya’s environment. To the extent that Avaya does not allow or support the integration of our products with its infrastructure or products or uses other means to prevent us from selling our products to such customers (some of our largest customers currently use Avaya for their contact center infrastructure), we may experience a reduction in sales to these customers, which is broader than Avaya’s direct business with us. This could, of course, influence our ability to continue rendering maintenance services and other services and generate recurring sales to these customers. As a result, we may sustain loss of customers and market share, which may have a material adverse effect on our business, financial condition, or results of operation.
We depend on a small number of significant customers.
While no single customer of ours accounted for more than five percent of our aggregate revenues in 2013, we do have a small number of significant customers in each sector of our business, each of which could be material to a particular area of our business. In addition, in our Security business, there may be certain transactions that could account for at least five percent of our revenues in a particular year. Such transactions are subject to certain risks (as discussed in the immediately following risk factor "We face risks related to large projects."), which could have a material adverse effect on our revenues and operating results.
We expect that sales of our products and services to relatively few significant customers could continue to account for a substantial percentage of our sales in the foreseeable future. There can be no assurance that we will be able to retain these key customers or that such customers will not cancel purchase orders, reschedule, or decrease their level of purchases. Loss, cancellation or deferral of business to such customers could have a material adverse effect on our business and operating results.
We face risks relating to large projects.
Some of the customer projects for which we offer our Security Solutions and related products and services are growing in size. The larger and more complex such projects are, the greater the risks associated with such projects. These risks may include our exposure to penalties and liabilities resulting from a breach of contract, our ability to fully integrate our products with third party products, and a risk of failure due to a combination of various technologies and complex environments. In some of these projects we are highly dependent upon prime-contractors and subcontractors for various planning aspects, solution development, integration, delivery and the successful and timely completion of such projects. Also, we may be held liable for the failure of our subcontractors, from whom we may have no recourse. In addition, there may be more fluctuations in cash collection and revenue recognition with respect to such projects.
In order to successfully compete in all sectors of our business, including security projects awarded through a competitive bid, we may be required to commit to provide certain technologies and solutions which are under development or which we may have to develop, license from a third party, or acquire, specifically for that customer. This may result in technological difficulties that may prevent us from complying with our contractual obligations, exposing us to possible penalties and legal claims, and may affect the profitability of a project, which may have a negative impact on our business, financial condition and results of operations.
We face risks relating to government spending and contracts with governments and governmental entities.
We sell our products and solutions to, among other customers, governments and governmental entities. Due to financial conditions, governments may significantly reduce or terminate projects, even if already budgeted, or decide to change priorities and reallocate budgets. In addition, sales to governments and governmental entities are subject to special risks, such as delays in funding, termination of contracts or sub-contracts at the convenience of the government, reduction or modification of contracts or sub-contracts in the event of changes in the government’s policies or priorities, as a result of budgetary constraints or for other reasons, collection difficulties and increased or unexpected costs resulting in losses or reduced profits under fixed price contracts. Furthermore, some of these engagements require delivery in phases, and while each phase requires particular customer acceptance, a customer may require acceptance of the complete system with a right of return of the system, regardless of any previous partial acceptance. Failure to obtain customer acceptance for the complete system, the customer’s exercise of a right of return, or, generally, an early termination for convenience, would not entitle us to reimbursement for all of our incurred contract costs or profit for work performed. Such occurrences have happened in the past and we cannot assure you that we will not experience problems in the future in our performance of such government contracts.
In addition, the market for our Security Solutions is highly dependent on the spending cycle and scope of federal, state, local and municipal governments, as well as those of security organizations in international markets. We cannot assure you that these spending cycles will materialize as we expect and that we will be positioned to benefit from these potential opportunities.
We may not be able to sustain growth.
We cannot assure you that we will be able to sustain our growth in future years. The increasing proportion of advanced software applications in our overall sales mix might not compensate for the slowing growth rates of our recording solutions and other more mature products. In addition, our new solutions might not achieve wide market acceptance, and therefore might fail to support revenues growth. The failure to successfully implement our growth strategy could affect our ability to sustain growth and could materially adversely affect our results of operations.
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments. In particular, we may not succeed in making additional acquisitions or be effective in integrating such acquisitions.
As part of our growth strategy, we have made a significant number of acquisitions over the past few years, including a total of seven acquisitions during the years 2011 through 2013 (see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions” in this annual report), and expect to continue to make acquisitions. We frequently evaluate the tactical or strategic opportunity available related to complementary businesses, products or technologies. The process of integrating an acquired company’s business into our operations and/or of investing in new technologies, may result in unforeseen operating difficulties and large expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business, and which may result in the loss of key customers and/or personnel and expose us to unanticipated liabilities.
Other risks commonly encountered with acquisitions include the effect of the acquisition on our financial and strategic position, the inability to successfully integrate or commercialize acquired technologies and achieve expected synergies or economies of scale on a timely basis and the potential impairment of acquired assets. Further, we may not be able to retain the key employees that may be necessary to operate the business we acquire, and, we may not be able to timely attract new skilled employees and management to replace them. From time to time, we may also need to acquire complementary technologies, whether to execute our strategies or in order to comply with customer needs. There are no assurances that we will be able to acquire or successfully integrate an acquired company, business or technology, or successfully leverage such complementary technology in the market.
Moreover, there can be no assurance that the anticipated benefits of any acquisition or investment will be realized. Future acquisitions or investments could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses related to intangible assets and impairment of goodwill, any of which could have a material adverse effect on our operating results and financial condition. In addition, we may knowingly enter into an acquisition that will have a dilutive impact on our earnings per share.
There can be no assurance that we will be successful in making additional acquisitions or effective in integrating such acquisitions into our existing business. We may also compete with others to acquire companies, and such competition may result in decreased availability of, or increased prices for, suitable acquisition candidates. In addition, for possible commercial and economic considerations, we may not be able to consummate acquisitions that we have identified as crucial to the implementation of our strategy. We may not be able to obtain the necessary regulatory approvals, including those of competition authorities and foreign investment authorities, in countries where we seek to consummate acquisitions. For those and other reasons, we may ultimately fail to consummate an acquisition, even if we announce that we plan to acquire a company.
In addition, if we consummate one or more significant acquisitions in which the consideration consists, in whole or in part, of ordinary shares or American Depositary Shares (ADSs), representing our ordinary shares, shareholders would suffer dilution of their interests in us. We have also invested in companies which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire initial investment in these companies. Due to changes in the industry and market conditions, we could also be required to realign our resources and consider restructuring or other action, which could result in an impairment of goodwill.
Our shift towards advanced software applications could adversely affect our business.
Historically we have supplied the hardware and some software for implementing multimedia recording solutions. Our shift towards providing advanced software applications and a multi-product offering has required and will continue to require substantial investment and change in our business model, including the move to a more direct sales and service model, including customer installations. This requires, among other things, the continuous evolution of our sales force, maintenance and support offerings, manpower, research and development, and customer installation methods, as well as our route to market. Our customers’ end-users are changing and therefore we need to expand our relationships and brand recognition within our customer base. While this new business model has so far affected our business positively in terms of growth and profitability, it leads to longer sales cycles and higher customization requirements. In addition, the sale of a multi-product offering is usually subject to a prolonged process of product testing and acceptance only once all components of the product offering are proven to be working together as a complete system. The sale of advanced software applications is also subject to prolonged processes of customization, implementation and testing. Therefore, the increasing proportion of advanced software applications in our overall sales mix leads to a longer period between the time we "book" an order and the time we recognize the revenue from such orders. All of the above factors could result in a delay in revenue recognition and materially adversely affect our results of operations.
Our failure to adequately adapt to IT industry trends and customers' consolidation could negatively impact our future operating results.
Technological trends, such as the adoption of virtualization technologies, the need for IT efficiency (converting IT costs from capital expenses to operating expenses) and the increased demand for business agility are all contributing to the move of cloud computing into the mainstream.
As enterprise customers embrace cloud computing, the way they source business solutions likely will change, giving preference to hosted and cloud-based Software-as-a-Service (or SaaS). Although we are adapting and evolving our delivery options to include on-premise, hosted, cloud-based SaaS, or blended-hybrid deployment offerings, we may not be able to timely and adequately meet customer needs, which could have an adverse effect on our business, financial condition and results of operations. Furthermore, the business model of SaaS differs from the business model for the sale of products and services, and could, as a result, impact our booking and revenues, as the period for recognizing the revenue from such orders may spread over a greater number of fiscal quarters, which could result in a delay in revenue recognition and materially adversely affect our results of operations and our rate of growth and profitability. In addition, cloud computing could make it easier for new competitors (such as telecom carriers) to enter our markets due to the lower up-front technology costs. Such increased competition is likely to heighten the pressure to decrease pricing. Such increased competition and the above-mentioned change in business model may negatively impact our revenues.
Furthermore, some of our enterprise customers have increased in size, partly due to consolidation in the financial market. If our technology is not scalable enough to support these changes, it may have a material adverse effect on our business, financial condition and results of operation.
If we lose our key suppliers, our business may suffer.
Certain components and subassemblies that are used in the manufacture of our existing products are purchased from a single or a limited number of suppliers. In the event that any of these suppliers are unable to meet our requirements in a timely manner or that our relationship with any such supplier is terminated, we may experience an interruption in production until an alternative source of supply can be obtained. Any disruption, or any other interruption of a supplier’s ability to provide components to us, could result in delays in making product shipments, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some of our major suppliers use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, as suppliers discontinue their products, or modify them in manners incompatible with our current use, or use manufacturing processes and tools that could not be easily migrated to other vendors, we could have significant delays in product availability, which would have a significant adverse impact on our results of operations and financial condition. Although we generally maintain an inventory for some of our components and subassemblies to limit the potential for an interruption and we believe that we can obtain alternative sources of supply in the event our suppliers are unable to meet our requirements in a timely manner, we cannot assure you that our inventory and alternative sources of supply would be sufficient to avoid a material interruption or delay in production and in availability of spare parts.
If we lose our key personnel or cannot recruit and retain key personnel, our business may suffer.
In order to compete, we must recruit, retain, executives and other key employees. Hiring and retaining qualified executives and other key employees is critical to our business, and competition for highly qualified and experienced managers in our industry is intense. Mr. Zeev Bregman, our current President and CEO will be retiring and Mr. Barak Eilam will assume the position of CEO of NICE. The transition is expected to be completed by the end of April 2014, and it is likely that such changes will result in further changes in our management. The succession and transition process may have an effect on our business and operations. Additionally, in connection with the appointment of the new CEO, we will seek to retain our executive management team, hire new managers, and keep employees focused on achieving our strategic goals and objectives. In the event that we are not able to retain such executive management team and hire managers to fill in vacated positions and/or we are not able to keep our key employees focused on achieving our strategic goals, it could have a material adverse effect on our business and results of operation.
In addition, due to our growth, or as a result of regular recruitment, we will be required to hire and integrate new employees. Recruiting and retaining qualified engineers and computer programmers to perform research and development and to commercialize our products, as well as qualified personnel to market and sell those products, are critical to our success. As of December 31, 2013, approximately 24% of our employees were devoted to research and product development and approximately 23% were devoted to marketing and sales. There can be no assurance that we will be able to successfully recruit and integrate new employees.
There is often intense competition to recruit highly skilled employees in the technology industry. We have suffered from attrition in our workforce in previous years and we believe that such attrition will continue in the future. We may not be able to offer current and potential employees a compensation package that is satisfactory in order to keep them within our employ.
An inability to attract and retain highly qualified employees may have an adverse effect on our ability to develop new products and enhancements for existing products and to successfully market such products, all of which would likely have a material adverse effect on our results of operations and financial position. Our success also depends, to a significant extent, upon the continued service of a number of key management, sales, marketing and development employees, the loss of any of whom could materially adversely affect our business, financial condition and results of operations.
Our uneven sales patterns could significantly impact our revenues and earnings.
The sales cycle for our products and services is variable, typically ranging between a few weeks to several months from initial contact with the potential client to the signing of a contract. Frequently, sales orders accumulate towards the latter part of a given quarter. In addition, our revenues are typically highest in the fourth quarter and lowest in the first quarter. We believe this seasonality is typical for many software companies and that it may become more pronounced as the proportion of advanced software applications in our overall sales mix continues to increase. Additionally, as a high percentage of our expenses, particularly employee compensation, are relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have a material adverse impact on our quarterly operating results.
In addition, our quarterly operating results may be subject to significant fluctuations due to other factors, including the timing and size of orders and shipments to customers (including delays in execution of customer orders), variations in distribution channels, mix of products and services, new product introductions, competitive pressures and general economic conditions. It is difficult to predict the exact mix of products for any period between hardware, software and services as well as within the product category between interaction related platforms and related applications, transactional related platforms and applications, digital video, physical security information management and communications intelligence. Because a significant portion of our overhead consists of fixed costs, our quarterly results may be adversely impacted if sales fall below management’s expectations. Further, the period of time from order to delivery of our platforms and applications is short, and therefore our backlog for such products is currently, and is expected to continue to be, small and substantially unrelated to the level of sales in subsequent periods. As a result, our results of operations for any quarter may not necessarily be indicative of results for any future period, and may be below our forecasts.
Our quarterly results may be volatile at times, which could cause us to miss our forecasts.
Historically, our revenues have reflected seasonal fluctuations related to slower spending activities in the first quarter, and the increased activity related to the year-end purchasing cycles of many users of our products. We believe that we will continue to encounter quarter-to-quarter seasonality, especially given the increasing proportion of advanced software applications in our overall sales mix. Moreover, we typically enter into a significant number of transactions in the last week of a given quarter. As a result, transactions that do not meet all the recognition criteria of that quarter may only be recognized in the following quarter, which may have an adverse impact on the booking and revenues in the quarter in which such transactions were entered into. In addition, the timing in which transactions are entered into may shift from one quarter to another. Customers often shift their buying decision towards the end of their budgetary year, which could result in the shifting of booking and revenues from one quarter to another and in many cases to the last quarter of a calendar year, which may also have an adverse impact on the booking and revenues in the quarter during which such transactions were to be entered into.
We operate with certain backlog and we face factors such as timing and volume of orders within a given period that affect our ability to fulfill these orders and to determine the amount of our revenues within the period.
We derive a substantial portion of our sales through indirect channels, making it more difficult for us to predict revenues because we depend partially on estimates of future sales provided by third parties. In addition, changes in our arrangements with our network of channel partners or in the products they offer, such as the introduction of new support programs for our customers, which combines support from our channel partners with back-end support from us, could affect the timing and volume of orders. Furthermore, our expense levels are based, in part, on our expectations as to future revenues. If our revenue levels are below expectations, our operating results are likely to be adversely affected, since most of our expenses are not variable in the short term.
We generally provide our expectations as to future revenues in the coming quarters and year. These expectations are based on management estimation and expectation, the existing backlog and an analysis of assumptions and assessments that may not materialize or end up being inaccurate. We might not meet our expectations or those of industry analysts in a particular future quarter, including as a result of the factors described above as well as other factors mentioned in Item 3, "Key Information" in this annual report.
Risks Relating to Our Finances
We face foreign exchange currency risks.
We are impacted by exchange rate fluctuations. We are likely to face risks from fluctuations in the value of the NIS, EUR, GBP and other currencies compared to the dollar, the functional currency in our financial statements. A significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, are incurred in NIS, whereas most of our business and revenues are generated in dollars, and to a lesser extent, in GBP, EUR and other currencies. If the value of the dollar decreases against the NIS, our earnings may be negatively impacted. In addition, a significant portion of the expenses associated with our European operations are incurred in GBP and EUR. As a result, we may experience increase in the costs of our operations, as expressed in dollars, which could adversely impact our earnings.
We monitor foreign currency exposure and may use various instruments to preserve the value of sales transactions, expenses and commitments; however, this cannot assure our full protection against risks of currency fluctuations that could affect our financial results. For information on the market risks relating to foreign exchange, please see Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in this annual report.
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
As a global corporation, we are subject to income and other taxes both in Israel and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid or accrued is subject to our interpretation of applicable laws in the jurisdictions in which we do business. From time to time, we are subject to income and other tax audits in various jurisdictions, the timings of which are unpredictable. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. If we are assessed additional taxes, it could have a material adverse effect on our results of operations and financial condition.
In recent years we have seen changes in tax laws resulting in an increase in applicable tax rates, in part stemming from public pressure to increase tax liabilities of corporations. Such legislative changes in one or more jurisdictions in which we operate may have implications on our tax liability and have a material adverse effect on our results of operations and financial condition.
We might recognize a loss with respect to our financial investments.
We invest most of our cash through a variety of financial investments. If the obligor of any of these investments defaults or undergoes reorganization in bankruptcy, we may lose a portion of such investment and our financial income may decrease. In addition, a downturn in the credit markets could adversely affect our financial income, the liquidity of our investments, or the downgrading of the credit rating of our investments could cause us to recognize some loss. For information on the types of our investments, see Item 11, “Quantitative and Qualitative Disclosures About Market Risk” in this annual report.
Risks Relating to Our Products and Solutions, Intellectual Property and Privacy
Incorrect or improper use of our products and solutions or failure to properly provide professional services and maintenance services could result in negative publicity and legal liability.
Our products and solutions are complex and are deployed in a wide variety of network environments. The proper use of our software requires training and, if our software products are not used correctly or as intended, inaccurate results may be produced. Our products may also be intentionally misused or abused by clients who use our products. The incorrect or improper use of our products and solutions or our failure to properly provide professional services and maintenance services, including installation, training, project management, product customizations and consulting to our clients may result in losses suffered by our clients, which could result in negative publicity and product liability or other legal claims against us.
We rely on software from third parties. If we lose the right to use that software, we would have to spend additional capital to redesign our existing software to adhere to new third party providers or develop new software.
We integrate and utilize various third party software products as components of our products and solutions to enhance their functionality. Our business could be disrupted if functional versions of these software products were either no longer available to us or no longer made available to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third party software or develop these components ourselves. As a result, we might be forced to limit the features available in our current or future products and solutions offerings and the commercial release of our products and solutions could be delayed.
Undetected problems in our products or solutions could directly impair our financial results and we could face potential product liability claims against us.
If flaws in the design, production, assembly or testing of our products and solutions (by us or our suppliers) were to occur, we could experience a rate of failure in our products or solutions that would result in substantial repair, replacement or return of products and solutions (and possible refund of payments) and/or service costs, and potential liability and damage to our reputation. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate testing and manufacturing processes for our products or solutions will be sufficient to prevent a rate of failure in our products or solutions that results in substantial delays in shipment, significant repair or replacement costs or return of products, or potential damage to our reputation, or damage and penalties as a result of demands and claims, any of which could have a material adverse effect on our business, results of operations and financial condition.
We may be subject to claims that our products are defective or that some function or malfunction of our products caused or contributed to property, bodily or consequential damages. We attempt to minimize this risk by incorporating provisions into our distribution and standard sales agreements that are designed to limit our exposure to potential claims of liability. No assurance can be given that all claims will be barred by the contractual provisions limiting liability or that the provisions will be enforceable. We carry product liability insurance in the amount of $25,000,000 per occurrence and $25,000,000 overall per annum. No assurance can be given that the amount of any individual claim or all claims will be covered by the insurance or that the amount of any individual claim or all claims in the aggregate will not exceed insurance policy coverage limits. A significant liability claim against us could have a material adverse effect on our results of operations and financial position.
Any undetected errors or malfunctions in our products could adversely affect our reputation, result in significant costs to us, impair our ability to market our products and expose us to legal liability.
Our software products are highly complex. Despite extensive testing by us and by our clients, we have in the past discovered errors, failures, bugs or other weaknesses in our software applications and will likely continue to do so in the future. Such errors, failures, bugs or other weaknesses in products released by us could result in product returns, loss of or delay in market acceptance of our products, loss of competitive position, or claims by clients or others, which would seriously harm our revenues, financial condition and results of operations. Correcting and repairing such errors, failures or bugs could also require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our product licensing.
In addition, the identification of errors in our software applications or the detection of bugs by our clients may damage our reputation in the market as well as our relationships with existing clients, which may result in our inability to attract or retain clients.
Further, since our products are used for, among other things, compliance recording and operational risk management functions that are often critical to our clients, we are potentially subject to product liability claims. In particular, some of our customers, including financial institutions, may suffer significant damages as a result of a failure of our solutions to perform their functions. Although we attempt to limit any potential exposure through quality assurance programs, insurance and contractual terms, we cannot assure you that we will be able to eliminate or successfully limit our liability for any failure of our solutions. Any product liability insurance we carry may not be sufficient to cover our losses resulting from any such product liability claims. The successful assertion of one or more large product liability claims against us could have a material adverse effect on our results of operations and financial condition.
Inadequate intellectual property protections could prevent us from enforcing or defending our intellectual property and we may be subject to liability in the event our products or solutions infringe on the proprietary rights of third parties and we are not successful in defending such claims.
Our success is dependent, to a significant extent, upon our proprietary technology. We currently hold 127 U.S. patents and 68 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 120 patent applications pending in the United States and other countries. We rely on a combination of patent, trade secret, copyright and trademark law, together with non-disclosure and non-competition agreements, as well as third party licenses to establish and protect the technology used in our systems. However, we cannot assure you that such measures will be adequate to protect our proprietary technology, that competitors will not develop products with features based upon, or otherwise similar to our systems, or that third party licenses will be available to us or that we will prevail in any proceeding instituted by us in order to enjoin competitors from selling similar products. In most of the areas in which we operate, third parties also have patents which could be found applicable to our technology and products. Such third parties may include competitors, as well as large companies, which invest millions of dollars in their patent portfolios, regardless of their actual field of business. Although we believe that our products and solutions do not infringe upon the proprietary rights of third parties, we cannot assure you that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
We generally distribute our software products under software license agreements that restrict the use of our products by terms and conditions prohibiting unauthorized reproduction or transfer of the software products. However, effective copyrights and other intellectual property rights protection may be inadequate or unavailable to us in every country in which our software products are available, and the laws of some foreign countries may not be as protective of intellectual property rights as those in Israel and the United States.
From time to time, we receive “cease and desist” letters alleging patent infringements. However, no formal claims or other actions have been filed with respect to such alleged infringement, except for past claims which have since been settled or dismissed. Defending infringement claims or other claims could involve substantial costs and diversion of management resources.
In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms, any of which may have a material adverse impact on our business or financial condition.
We use certain “open source” software tools that may be subject to intellectual property infringement claims or that may subject our derivative products to unintended consequences, possibly impairing our product development plans, interfering with our ability to support our clients or requiring us to allow access to our products or necessitating that we pay licensing fees.
Certain of our software products contain a limited amount of open source code and we may use more open source code in the future. In addition, certain third party software that we embed in our products contains open source code. Open source code is code that is covered by a license agreement that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code.
As a result of our use of open source software, we could be subject to suits by parties claiming ownership of what we believe to be open source code and we may incur expenses in defending claims that we did not abide by the open source code license. In addition, third party licensors do not provide intellectual property protection with respect to the open source components of their products, and therefore we may not be indemnified by such third party licensors in the event that we or our customers are held liable in respect of the open source software contained in such third party software. If we are not successful in defending against any such claims that may arise, we may be subject to injunctions and/or monetary damages or be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our revenues and cash flow.
Moreover, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative products or to license our derivative products that use an open source license, our previously proprietary software products may be available to others without charge. If this happens, our customers and our competitors may have access to our products without cost to them, which could harm our business.
We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. The use of such open source code, however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts.
Risks Relating to the Regulatory Environment
Our business, results of operations and financial condition could be materially adversely affected by changes in the legal and regulatory environment.
Our business, results of operations and financial condition could be materially adversely affected if laws, regulations or standards relating to our products, us or our employees (including labor laws and regulations) are newly implemented or changed. In addition, our revenues would be harmed if we fail to adapt our products to changes in regulations applicable to the business of certain of our clients, such as securities trading, broker sales compliance and anti-money laundering laws and regulations, which could have an impact on their need for our products and services.
There are growing compliance and regulatory initiatives and changes for corporations and public organizations around the world that include both internal and external regulations and are driven by events and concerns such as accounting scandals, security threats and economic conditions. While we attempt to prepare in advance for these new initiatives and standards, we cannot assure you that we will be successful in our efforts, that such changes will not negatively affect the demand for our products and services, or that our competitors will not be more successful or prepared than us. Alternatively, a reduction in the implementation of compliance and regulatory requirements in the industries in which we operate could materially adversely affect our business and results of operations.
We are seeing a global trend for adoption and enforcement of privacy and information security legislation and procedures, and regulations or interpretive positions may be enforced specifically with respect to the use of SaaS and hosting services and other outsourced services. Adoption of such legislation and regulations may require that we invest in the modification of our solutions to comply with such legislation and regulations, cause a reduction in the use of our solutions and services or subject us or our customers to liability resulting from a breach of such regulations.
The occurrence of privacy or information security breaches (or the belief that any such breach has occurred) in the operation of our business or by third parties using our products and solutions could harm our business, financial condition and operating results. Some of our customers use our products to compile and analyze highly sensitive or confidential information. We may come into contact with such information or data when we perform service or maintenance functions for our customers. While we have internal policies and procedures for employees in connection with performing these functions, the perception or fact that any of our employees has improperly handled sensitive information of a customer or a customer’s customer could negatively impact our business. If, in handling this information, we fail to comply with privacy legislation or procedures, we could incur civil liability to government agencies, customers and individuals whose privacy was compromised. In addition, third parties may attempt to breach our security or inappropriately use our products through computer viruses, electronic break-ins and other disruptions. If successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and we may be subject to lawsuits and other liability. Any internal or external security breaches could harm our reputation and even the perception of security risks, whether or not valid, could inhibit market acceptance of our products.
In certain industries in which we operate, there may be regulations or guidelines for use of SaaS and hosting services that mandate specific controls or require enterprises to obtain certain approvals prior to outsourcing certain functions. If we are unable to comply with these specific requirements or guidelines, or privacy and information security legislation in general, it could materially adversely affect our business and results of operations.
In recent years, the European Union issued directives on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or “RoHS,” and Waste Electrical and Electronic Equipment, or “WEEE.” We are making every effort in order to maintain compliance with these directives, without otherwise adversely affecting the quality and functionalities of our products. The countries of the European Union, as a single market for our products, accounted in 2012 and 2013 for approximately 17% and 18%, respectively, of our revenues. If our products fail to comply with WEEE or RoHS directives or any other directive issued from time to time by the European Union, we could be subject to penalties and other sanctions that could have a material adverse effect on our results of operations and financial condition. In addition, similar regulations are being formulated in other parts of the world. We may incur substantial costs in complying with other similar programs that might be enacted outside Europe in the future.
Moreover, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals (tantalum, tin, tungsten and gold) that are known as “conflict minerals”, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for public companies that utilize in their products “conflict minerals” mined from the DRC and adjoining countries that necessary to the functionality or production of the product manufactured or contracted to be manufactured by such company, as well as guidelines regarding efforts to identify the sourcing of such “conflict minerals”. These new requirements require due diligence efforts, with initial disclosure requirements beginning in May 2014. There are costs associated with complying with these disclosure requirements, including for due diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. These requirements may have the effect of reducing the pool of suppliers who can supply DRC “conflict-free” components and parts, and we may not be able to obtain DRC conflict-free products or supplies in sufficient quantities for our operations or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be “conflict-free” or if we are unable to sufficiently verify the origins for all “conflict minerals” used in our products.
If we fail to meet current and new performance criteria prescribed by compliance regulators, we may suffer a loss to our business.
Our business, results of operations and financial condition could be materially adversely affected if we fail to meet current and new performance criteria prescribed by compliance regulators on our customers, such as the recording of all of the calls at our contact centers.
If we fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, it could have a material adverse effect on our business, operating results and share price.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the requirements of Section 404, which first applied to our financial statements for 2006, have resulted in increased general and administrative expenses and a devotion of management time and attention to compliance activities, and we expect these efforts to require the continued commitment of significant resources. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. In addition, we may identify material weaknesses or significant deficiencies in our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation and/or sanctions by regulatory authorities, and could have a material adverse effect on our business and operating results, investor confidence in our reported financial information, and the market price of our ordinary shares and ADSs.
Risks Relating to Israel
We are subject to the political, economic and security conditions in Israel.
Our headquarters and primary research and development facilities, as well as the facilities of Flextronics Israel Ltd., our key manufacturer, are located in the State of Israel, and we are directly affected by the political, economic and security conditions to which Israel is subject. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. In past years there was a high level of violence between Israel and the Palestinians, including continuous rocket and missile attacks on certain areas of the country over the last couple of years, and negotiations between Israel and representatives of the Palestinian Authority in an effort to resolve the state of conflict have been sporadic and have failed to result in peace. The establishment in 2006 of a government in the Gaza territory by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. During the last several years, Israel has engaged in armed conflicts with Hamas, which involved additional missile strikes from the Gaza Strip into Israel and disrupted most day-to-day civilian activity in the proximity of the border with the Gaza Strip. There can be no assurance that such attacks will not hit our premises or major infrastructure and transport facilities in the country, which may have a material adverse effect on our ability to conduct business. Recent political events and continuous unrest in various countries in the Middle East, including Israel’s neighboring countries (including the ongoing civil war in Syria), have shaken and continue to impact the stability of those countries. In addition, Iran has threatened to attack Israel, is known to have long range missiles, which could hit every location in Israel, and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon, which could result in rocket and missile shooting towards Israel. Any of these situations could escalate in the future and turn violent, which could affect the Israeli economy generally and us in particular, and have a severe impact on our ability to operate. In addition, acts of terrorism, armed conflicts or political instability in the region could negatively affect global and local economic conditions and harm our results of operations. We cannot predict the effect on the region of any diplomatic initiatives or political developments involving Israel or the Palestinians or other countries in the Middle East or North Africa. Furthermore, several countries restrict doing business with Israel and Israeli companies, and additional companies may restrict doing business with Israel and Israeli companies or boycott Israel as a result of an increase in hostilities or due to disagreement with Israel’s policies and agenda. This may also seriously harm our operating results, financial condition and the ability to expand our business. Our products are heavily dependent upon components imported from, and most of our sales are made to, countries outside of Israel. Accordingly, our business, financial condition and results of operations could be materially adversely affected if trade between Israel and its present trading partners were interrupted or curtailed.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Some of our officers and employees are obligated to perform up to 36 days of annual military reserve duty, and in the event of a military conflict, including the ongoing conflict with the Palestinians, these persons could be called to active duty at any time, for extended periods of time and on very short notice. The absence of a number of our officers and employees for significant periods could disrupt our operations and harm our business. We cannot assess the full impact of these obligations on our workforce or business if conditions should change.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon us, our Israeli subsidiaries, our directors and officers, and the Israeli experts, if any, named in this annual report, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and substantially all of our directors, officers, and such Israeli experts are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may be difficult to collect within the United States. Additionally, it may be difficult to enforce civil liabilities under U.S. federal securities law in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.
Subject to specific time limitations and legal procedures, Israeli courts may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetary or compensatory judgment in a non-civil matter, provided that the following conditions are met:
We currently benefit from local government programs as well as international programs and local tax benefits that may be discontinued or reduced.
We derive and expect to continue to derive significant benefits from various programs including Israeli tax benefits relating to our “Preferred Enterprise” programs and certain grants from the Office of the Chief Scientist of the Ministry of Economy (“OCS”), for research and development.
To be eligible for tax benefits as a Preferred Enterprise, we must continue to meet certain conditions. While we believe that we meet the statutory conditions to entitle us to previously obtained Israeli tax benefits, there can be no assurance that the tax authorities in Israel will concur. Should it be determined that our Preferred Enterprise programs have not, or do not meet the statutory conditions, our provision for income taxes will increase materially.
To be eligible for OCS-related grants and benefits, we must continue to meet certain conditions, including conducting the research, development, manufacturing of products developed with such OCS grants in Israel (unless a special approval has been granted for performing manufacturing activities outside Israel) and, as of 2012, providing the OCS with an undertaking that the know-how to be funded and any derivatives thereof is wholly owned by us, upon its creation. Under Israeli law, products incorporating know-how developed with grants from the OCS are required to be manufactured in Israel, unless prior approval of a governmental committee is obtained. As a condition to obtaining this approval, we may be required to pay to the OCS up to 300% of the grants we received and to repay these grants on an accelerated basis, depending on the portion of manufacturing performed outside Israel. In addition, we are prohibited from transferring to third parties the know-how developed with these grants without the prior approval of a governmental committee and, possibly, the payment of a fee. See Item 4, “Information on the Company—Research and Development” in this annual report, for additional information about OCS programs.
From time to time, the Israeli Government has discussed reducing or eliminating the availability of these grants, programs and benefits and there can be no assurance that the Israeli Government’s support of these grants, programs and benefits will continue. If grants, programs and benefits available to us or the laws, rules and regulations under which they were granted are eliminated or their scope is further reduced, or if we fail to meet the conditions of existing grants, programs or benefits and are required to refund grants or tax benefits already received (together with interest and certain inflation adjustments) or fail to meet the criteria for future Preferred Enterprises, our business, financial condition and results of operations could be materially adversely affected including an increase in our provision for income taxes.
Moreover, we participate in the European Community Framework Programme for Research, Technological Development and Demonstration, which funds and promotes research. There are no royalty obligations associated with receiving such funding. From time to time we may apply for new grants under the Framework Programme. Under these programs we need to comply with certain conditions. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. If the European Union, or any other applicable jurisdiction, discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be adversely affected.
Provisions of Israeli law may delay, prevent or impede an acquisition of us, which could prevent a change of control.
Israeli corporate law regulates mergers and tender offers, requires tender offers for acquisitions of shares above specified thresholds and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These provisions could delay, prevent or impede an acquisition of us. See Item 10, “Additional Information—Mergers and Acquisitions” in this annual report, for additional discussion about some anti-takeover effects of Israeli law.
Risks related to our Ordinary Shares and ADSs
Our share price is volatile and may decline.
Numerous factors, some of which are beyond our control, may cause the market price of our ordinary shares or our ADSs, each of which represents one ordinary share, to fluctuate significantly. These factors include, among other things, announcements of technological innovations, development of or disputes concerning our intellectual property rights, customer orders or new products by us or our competitors, acquisitions or investments by us or by our competitors and partners, currency exchange rate fluctuations, earnings releases by us, our partners or our competitors, general economic and market conditions, political changes and unrest in regions, natural catastrophes, market conditions in the industry and the general state of the securities markets, with particular emphasis on the technology and Israeli sectors of the securities markets.
Future sales of our ADSs may impact the market price of our ADSs.
If we or our shareholders sell substantial amounts of our ADSs in the public market, the market price of our ADSs could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Following an acquisition, our ADSs held by new holders may become freely tradable.
Item 4. Information on the Company.
History and Development of the Company
Our legal and commercial name is NICE-Systems Ltd. We are a company limited by shares organized under the laws of the State of Israel. We were originally incorporated as NICE Neptun Intelligent Computer Engineering Ltd. on September 28, 1986 and were renamed NICE-Systems Ltd. on October 14, 1991. Our principal executive offices are located at 22 Zarchin Street, P.O. Box 690, Ra’anana 43107, Israel and the telephone number at that location is +972-9-775-3030. Our agent for service in the United States is our subsidiary, Nice Systems Inc., located at 461 From Road, Paramus, New Jersey 07652.
For a summary of our recent acquisitions, please see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions” in this annual report.
We are a global leader in software solutions that enable organizations to better operationalize Big Data.
We enable organizations to take the next-best-action by understanding people through analytics of structured and unstructured data. Our solutions help our customers to become more operationally efficient, customer-focused, performance and revenue driven, security aware, and compliant.
Our solutions are used by thousands of organizations in more than 150 countries, including 75 of the Fortune 100 companies.
We have established leadership positions across many of our domains of activities based on comprehensive and innovative enterprise-grade solutions, a unique combination of structured and unstructured data analytics and decisioning technologies, continuous development of our product portfolio, deep domain expertise, global reach and our ability to understand our industry.
We operate in three business areas. Our Customer Interactions business serves customer-facing organizations within Business-to-Consumer enterprises across many verticals, including financial services, telecommunications, travel and healthcare. Our Financial Crime & Compliance business serves financial institutions and regulatory agencies. Our Security business addresses the needs of security sensitive organizations, such as banks, airports, mass transit, utilities, and public safety, law enforcement and intelligence agencies.
We offer our solutions both in an on-premise and cloud-based model. To address growing market demand and our customers’ need for greater operational flexibility and faster implementations, we are continuously expanding our hosted and SaaS offerings.
For a breakdown of total revenues by products and services and by geographic markets, for each of the last three years, please see Item 5, “Operating and Financial Review and Prospects – Results of Operation” in this annual report.
Demand for our solutions is enhanced by four major trends within our customers: increasingly demanding compliance requirements, organizations turning to advanced software to help improve revenues and efficiency, increased focus on improving customer experience, and a growing need to safeguard people and assets.
I. An Increasingly Demanding Compliance Environment
Organizations today deal with more regulations than ever before, more stringent enforcement in place, and the need to ensure compliance with requirements for advanced technological solutions. This can be seen across our different markets: in customer interactions, financial transactions, and security operations.
II. Growing Need to Drive Revenues and Efficiency with Advanced Software
This trend can be observed across our different business areas.
III. Increased Focus on Improving Customer Experience
This is another trend we see across our diverse business areas, as follows:
IV. Growing Need to Safeguard People and Assets
We also address the following technology trends: growing masses of structured and unstructured data that are being captured by organizations, broader adoption of advanced analytics technologies, increased penetration of cloud technology and Everything as a Service (XaaS) models (business models offering technology as a service such as SaaS, Infrastructure as a Service, Platform as a Service, Contact Center as a Service, etc.), growing challenges for financial firms and governments as a result of the proliferation of IP-based communications including VoIP, as well as mobile devices and the use of social networks.
Additionally, we also believe that there are several market needs that are driving companies to adopt cloud based solutions such as the continued pressures for improved operational efficiency and reduced total cost of ownership (TCO), the ease of implementation and the higher accessibility to innovation.
Our strategy is to be a global leader in enabling large organizations to operationalize Big Data and take the next-best-action by understanding people and leveraging our unique technologies for real-time and offline analytics of structured and unstructured data.
The key elements of our corporate strategy include: continuing to provide solutions that are leaders in their respective markets; maximizing the synergies across our businesses; offering our solutions in an enterprise software model; expanding our business offering with SaaS and hosting; continuing to provide innovative cross-channel analytics solutions; continuing to invest in bringing more comprehensive solutions to our existing customers; and continuing to invest in internal innovation and development while pursuing acquisitions.
Maintaining leadership in the markets in which we operate.
We intend to maintain our market-leading position by continuing to offer a comprehensive portfolio of solutions that is differentiated by its ability to drive decisions and actions in addressing multiple business needs. Our extensive domain expertise and ability to deliver solutions that address the needs of large organizations will also continue to drive our leading position.
We also intend to continue developing our direct contact with customers, nurturing our partner ecosystem, and targeting growth in each of the business areas in which we operate. Additionally, we intend to lead the new product categories we enter as we introduce new solutions and enter new market segments.
Enterprise Software Business Model
Our strategy is to offer our solutions in alignment with an enterprise software business model that accounts for both on-premise and cloud-based models. Currently, the largest portion of our license sales comes from a perpetual license model, under which customers purchase a license to use our software indefinitely, alongside a purchase of related professional services and annual software maintenance. We also offer some of our solutions under a term license model, under which customers purchase a license to use our software for a fixed period of time. In addition, as an alternative to on-premise deployments, we also offer many of our solutions in cloud-based models - either as a hosted license or in a SaaS model, enabling our customers with a lower TCO. We intend to continue offering our solutions in a variety of models, which enables us to be flexible in effectively addressing our customers’ needs. This in turn will enable us to focus on growth and improving profitability.
In addition, in our on-premise business, maintenance revenues growth (which is primarily a result of very high renewal rates of maintenance contracts and the growth of our installation base) is also driving an increase in our recurring revenues. An increase in the proportion of recurring revenues out of our overall revenues mix is expected to provide more predictable revenue streams.
Expand our business offering with SaaS and hosting.
We have expanded the delivery model of our products to provide SaaS and hosting offerings. Some customers prefer these models as they lower the costs of deployment and allow them to scale the solutions faster while reducing capital investments. We see a growing demand for these models and they could enhance our penetration into smaller sized customers as well as enable our existing customers to broaden their use of our products. We intend to continue to broaden our offerings delivered through these models.
Commitment to providing innovative, real-time analytics, and cross-channel solutions, that have significant impact on our customers’ businesses.
Companies are faced with masses of data that they need to make sense of in order to make a real-time impact on customer interactions.
With our solutions, we intend to continue to address the growing, unmet need to more accurately analyze and extract meaningful information from structured and unstructured data in real time, and to do so from multiple channels in a wide variety of businesses and operational environments. We aim to enable our customers to embed both real-time and offline analytics into their business processes in order to positively impact processes as they occur, which in turn has a positive impact on our customers’ businesses.
We will continue to enhance our abilities around operationalizing Big Data with analytics, behavior prediction, decisioning and guidance. We also intend to continue enabling companies to address the full lifecycle of interactions, transactions and events – i.e. before, during, and after they occur.
Continue to bring more comprehensive solutions to our existing customers.
We believe there are abundant opportunities to up-sell and cross-sell within our existing customer base by increasing our customers’ use of the full breadth of our solutions, migrating them to our next-generation portfolio and having them benefit from our new and broadening offering.
Continue to develop our solution offering through internal innovation and development while pursuing acquisitions.
We are committed to internal development and have a history of successful organic growth in all our business areas. We have also complemented this growth with successful acquisitions. We intend to continue augmenting our organic growth with additional acquisitions that broaden our product and technology portfolio, expand our presence in selected vertical markets and geographic areas, broaden our customer base, and increase our distribution channels and vertical market access.
Maximize the synergetic potential across our businesses.
In various business areas in which we operate, we offer leading solutions to the relevant markets. While serving a diverse set of industries, to each of which we bring deep domain expertise, most of our solutions are based on the same methodology of capturing and analyzing massive amounts of structured and unstructured data, and driving automatic decisioning and guidance in real time. An important pillar of our strategy is to maximize the synergies and cooperation between our business areas.
Introducing joint offerings, combining go-to-market efforts and leveraging extensive domain expertise, technological know-how, capabilities and developments may enable us to grow our business through additional cross-sell and up-sell opportunities. The synergetic approach reflects a core NICE value for nurturing a culture that is focused on delivering high-quality customer service.
Our Business Strategies and Solutions
I. Customer Interactions Business
Introduction to the Customer Interactions Solutions
NICE is a global leader in Customer Interactions Solutions. Our portfolio of solutions helps thousands of organizations, across the world, to transform the way they interact with their customers.
Our customers span multiple industries, such as banking, communications, health care, outsourcing, insurance, travel and utilities. As leaders in their respective industries, 75 of the Fortune 100 companies are NICE Customer Interaction Solution customers and 20 of the top global banks and leading telecom companies also utilize NICE solutions.
Today’s customers are better informed and expect more from their service providers, thus increasing the importance and difficulty for organizations to deliver superior customer experience. We help businesses understand and anticipate customer needs, and act in real time and consistently across customer touch points. By doing that, businesses can deliver an exceptional customer experience, improve operational efficiency, enhance regulatory compliance and increase revenues.
This is accomplished through:
We believe that our leadership in this market is sustained through the following key differentiators:
Customer Interactions Business Strategy
Our strategy is to extend our leadership in the customer service space while expanding beyond the contact center to the many different customer experience channels and across touchpoints. Our broad portfolio of solutions supports this strategy on three levels, providing benefits beyond the agent, beyond the contact center, and beyond customer service, namely:
We support our large existing customer base as their deployments grow, and help address their new business challenges as their business environment becomes more complex, through up-sale and cross-sale of advanced solutions. We constantly seek to expand and contract with new customers who are advancing their customer experience, operational efficiency, or compliance programs.
We continuously seek to develop our broad portfolio of Enterprise Class solutions, focusing on five themes:
Our Solutions’ Core Capabilities
Cross-Channel Interaction Management:> Enables organizations to capture unstructured and structured interaction and transaction data from multiple customer interaction channels, including phone calls, chat, emails, customer feedback, web sessions, and social media postings.
Customer Engagement Analytics >is a platform that enables organizations to capture and analyze customer transactions and lifecycle events to get a complete view of the customer journey. Powered by advanced Big Data technology, interaction analytics and predictive models, it identifies individual customers and sequences their interactions across time and touchpoints to understand the context of the contact, uncover patterns, predict needs and personalize interactions in real time.
Real-time Decisioning and Guidance> is a real-time decisioning engine, which draws on business rules and predictive models to process insights derived from analytics during the interaction in real time. This combination enables organizations to make the right decision for individual interactions and across mass amounts of interactions, then drive the best action in real time through employee guidance and process automation.
Cross-Channel Interaction Analytics:> Enables companies to uncover the valuable data and insights that are hidden in customer interactions. It uses advanced technology for analyzing speech, text, call flow and sentiment to understand the root-cause of issues and drive business results.
The combination of the above capabilities enables organizations to operationalize customer insights across service, sales, and marketing processes.
Addressing Business & Operational Needs
The NICE Customer Interactions portfolio addresses the following needs: ensuring compliance and mitigating risk, improving operational efficiency, enhancing customer experience, and increasing sales.
The solution suites include:
Compliance Recording proactively captures and retains all customer interactions across multiple touch points to help ensure compliance with government regulations, such as Dodd-Frank, SEC 17a-4, HIPAA, SOX, PCI-DSS, FSA and MIPPA, and internal policies, as well as resolve disputes, perform investigations, and verify sales. Redundancy and disaster recover capabilities are available to meet availability and business continuity requirements.
Proactive Compliance for Consumer Protection is an end-to-end solution to help organizations adhere to stringent regulations. The solution combines interaction analytics and real-time capabilities, delivering context-driven agent guidance, easy-to-use workflows, intuitive call search and retrieval capabilities, and advanced analytics to validate compliance and alert on exceptions.
Contact Center Fraud Prevention leverages voice biometrics and real-time decisioning and guidance engines, along with Interaction Analytics and the NICE Actimize Risk Case Manager, to identify fraudsters by their voice patterns, uncover social engineering tactics, assess call risk, guide agents to appropriately handle high-risk interactions, and effectively open and manage an investigation ticket.
Real-time Authentication, leverages a NICE patent-pending innovation that utilizes voice biometrics for authenticating customers in real time with no customer effort. It also helps agents expedite time to service and significantly reduces fraud risk for all customers.
Trading Floor Compliance Solutions enable organizations to capture, monitor, and analyze interactions and transactions in real time to proactively minimize risks, detect potential regulatory breaches, counter fraudulent activities, and improve investigative capabilities. These solutions deliver comprehensive, integrated capabilities to effectively manage the complex, ongoing, high-risk exchange of interactions and transactions between traders, firms, and their counterparties.
Essential Compliance is a set of solutions that enable trading floors to record and store transactions and interactions in any media, and flexibly and securely manage and access archived material on demand. Essential Compliance helps financial and energy trading firms ensure compliance with the strict recordkeeping requirements of today’s regulatory environment. The solutions include: NICE Trading Recording, NICE Distributed Recording, NICE Trader Replay, and NICE Trading Replay Authorization.
Proactive Compliance for Trading Floors leverages Compliance Recording and Interaction Analytics to monitor trading activity across trading turrets, fixed and mobile phones, email, text and instant messaging, chat and social media. It automatically detects potential risks and enables compliance officers to see emerging trends so that future compliance breaches and fraud can be averted. It offers tools to support investigation on mass structured and unstructured media, and to accurately reconstruct the chain of events related to a trade. This helps decrease penalties by implementing an automated risk management and analysis system. It also enables firms to meet the requirements of the regulatory environment established with the introduction of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules and regulations.
Workforce Optimization (WFO) is a suite of solutions that enables every individual in the organization to understand their impact on customers, own their schedule development, and use best practices and coaching to constantly increase their effectiveness, providing customers greater flexibility, lower upfront costs, and faster implementations. It includes:
Performance Management maps enterprise business objectives to group and individual goals and tracks and reports performance against these goals. It also automates critical managerial activities, including employee coaching, recognition, and performance improvement to allow front-line managers to become more effective and efficient in developing their teams. As a result, customer-facing operations are able to substantially improve productivity, boost revenue and increase customer satisfaction. Performance Management can be delivered as on-premise, hosted or SaaS.
Workforce Management forecasts customer interactions, schedules agents across multiple sites with appropriate skills to manage and optimize the level of customer service resources in multi-skilled environments. It measures agent and team performance and provides real-time change management to proactively respond to changing conditions. Workforce Management can be delivered as on-premise, hosted, or SaaS.
Quality Management automates quality processes and selection of calls for evaluation based on performance data. The solution facilitates root-cause evaluation with easy drill down to interactions that are missing Key Performance Indicator (KPI) targets to improve quality across voice, email, chat, and social media interactions channels.
Back Office Workforce Optimization automates manual processes, integrates data from employees’ desktops, improves forecast accuracy, enables managers to view and manage resource capacity, and empowers employees to improve their performance. It also provides tools to ensure regulatory compliance and fulfillment accuracy, and ultimately, elevates the level of service customers receive across the entire enterprise.
Call Volume Reduction leverages Big Data infrastructure and advanced analytics to help organizations resolve customer needs in one contact, predict and prevent follow-up calls and enable customers to effectively solve their issues using self-service tools.
Real-time Service Optimization automatically monitors agent activity in real time, enabling organizations to identify process bottlenecks and implement best practices; navigates agents through complex processes with on-screen guidance; and automates routine tasks to shorten handle time and eliminate manual processes.
Voice of the Customer (VoC) collects and analyzes comprehensive data from multiple interaction touchpoints and channels; analyzes interactions in real time and provides guidance on the next-best-action; proactively engages customers for feedback immediately following an interaction; and leverages social media analytics to monitor social networks and address customers’ issues. This enables companies to drive operations by customer perspective and deliver insights across departments.
Real-time Customer Feedback (NICE Fizzback) is part of the VoC family of solutions, but is also available separately. It uses a unique automated engagement mechanism to create a conversation with customers through their feedback channel of choice. Immediately following a retail, call center, or online experience, the solution reaches out for customer feedback from any touch point, including text message, email, IVR, mobile app, and forms. It uses Natural Language Processing to accurately categorize verbatim comments and quickly locate the key drivers of customer satisfaction.
Mobile Engage enables organizations to offer a smart customer experience to its mobile consumers and bridges mobile-apps on smart devices with live agents by identifying when consumers need assistance; recommending the next-best-channel for completing a transaction; seamlessly and effectively transitioning the interaction to other channels when necessary; transferring the interaction context to the agent’s desktop; and facilitating multimedia communication between customers and agents during the interaction.
Service-to-Sales identifies sales opportunities during inbound calls by leveraging NICE’s Cross Channel Analytics, correlated with transactional and feedback analytics. This combination delivers a real-time understanding of who the customer is (demographics, past transactions and interactions, past responses to sales offers, etc.), who the customer service rep is (profile, skills, past sales performance, etc.), and what are the customer’s needs and intent. With real-time decisioning and guidance, the solution provides service reps on-screen call-outs with scripts for making the best offer, and increasing sales conversion rates.
Incentive Compensation Management provides the end-to-end ability to create, manage and distribute all aspects of a commissions program. It automates the process of commission, bonus, and incentive administration in support of any type of variable pay strategy to deliver a pay-for-performance system that rewards employees for achieving targets that align with business strategy.
Customer Retention leverages NICE’s cross channel analytics and transaction-driven contact analytics to identify customers at risk before they churn. It analyzes the cross-channel customer experience and provides retention agents with real-time guidance, helping them tailor retention offers to each customer during the interaction.
Real-Time Web Engagement uses customer intelligence, predictive models and machine learning to make insightful, real-time decisions during customer interactions that are conducted over the Web. The solution helps organizations improve customer retention, improve online conversion rates and deliver better service by taking the next-best-action.
NICE Customer Interactions solutions are implemented by contact centers of all sizes, retail branches, and back office operations, across multiple verticals, including: Communication Service Providers, Banks, Insurance, Healthcare, Outsourcing, Utilities, and Travel and Entertainment.
II. Financial Crime & Compliance
Introduction to the Solutions
We seek to maintain market leadership in Financial Crime & Compliance and we believe our product offering constitutes one of the largest and broadest offering of financial crime, risk and compliance solutions on a single platform, for regional and global financial institutions, as well as government regulators.
We serve hundreds of customers, including some of the world’s top financial institutions and regulatory authorities, which turn to our solutions for their mission-critical needs. Our Financial Crime and Compliance solutions monitor millions of financial transactions daily, enabling clients to mitigate financial crime risk, improve compliance, and reduce operational costs.
The solutions are based on a scalable, proprietary software platform and flexible applications that address hundreds of compliance, fraud, and money-laundering scenarios in real-time. Solutions are delivered on-premise, as well as in the cloud, to enable customers to respond faster to challenging regulatory timelines and deploy solutions in a more cost-efficient manner.
Financial Crime & Compliance Business Strategy
We will continue to build an extensive risk and financial crime solutions enterprise-wide platform.
We are focused on providing solutions to many aspects of the global financial services industry and are constantly attempting to engage new customers. We continue to seek to cross-sell and up-sell into our existing customer base around the world. Many of our customers, for instance, buy our solutions as part of their Financial Intelligence Unit (FIU) strategy.
We will also continue to be focused on tier-1 clients, providing them with solutions to meet their needs via both cloud and on-premises models. In addition, we are now selling some of our high-end solutions to tier-2 customers, which provides us an opportunity to expand our presence in this segment, also leveraging our SaaS offerings.
Our Solutions’ Core Capabilities
NICE Actimize solutions share a single, flexible, and scalable core risk platform that provides financial institutions with the ability to expand the use of the company’s solutions over time, which eases implementation and lowers total cost of ownership.
Flexible Analytics and Tools:> The core platform provides dozens of out-of-the-box analytical models with each specific solution, as well as flexible modeling tools that can be used to develop and customize analytical models, data sources, and business processes at both the business and IT levels.
Multi-channel transaction management:> The solutions are proven to capture and analyze thousands of financial transactions a second from a variety of sources and channels.
Domain specific analytics: >Comprehensive, domain-specific solutions detect anomalous customer or employee behavior in real-time, leveraging industry-proven analytics.
Real-time decisioning and enforcement:> A real-time decisioning engine draws on analyzed data to trigger alerts that enable optimal enforcement and resolution. Built-in capabilities for comprehensive workflow and investigation management allow effective alert management.
Addressing Business Needs
The NICE Financial Crime & Compliance portfolio is comprised of four solution families that address the following needs.
Enterprise Risk Case Manager enables firms to better manage and mitigate organizational risk by providing a single view of risk across the business. The solution centralizes and correlates information from existing detection systems, turning multiple flows of information into actionable insights. It serves as a central platform for managing alerts, cases, investigations, link analysis, regulatory reporting, financial losses, oversight and more across multiple lines of business, channels, products, and regions.
Suspicious Activity Monitoring leverages transaction analytics to identify and report suspicious transactions related to known and unknown money laundering and terrorist financing.
Watch List Filtering provides enterprise-wide customer and transaction screening against multiple watch lists. It identifies and manages sanctioned or high-risk individuals and entities, with real-time name recognition capabilities.
Customer Due Diligence provides integrated risk-based rating and continuous monitoring of accounts throughout the entire customer life cycle, from initial applicant onboarding to periodic rescreening of existing customers.
CTR Processing & Automation provides seamless automated Currency Transaction Reporting (CTR) processing to ensure compliance with Bank Secrecy Act standards and optimize CTR processes for efficiency and cost-effectiveness.
FATCA Compliance helps U.S. and non-U.S. companies establish a structured Foreign Account Tax Compliance Act program – from identifying U.S. owners and customers and managing documentation to generating reports to meet the U.S. Internal Revenue Service requirements.
Card Fraud enables card issuers, acquirers and processors to detect fraudulent transactions, covering ATM, PIN, signature point-of-sale, and where physical cards are not present.
Remote Banking provides cross-channel analytical models for retail online and mobile banking, call center, and IVR channels to enable real-time detection of fraudulent monetary and non-monetary transactions.
Commercial Banking enables multi-channel monitoring and analytics for commercial banking transactions (e.g. wires, ACH, payroll) and non-monetary transactions (e.g. template creation, transaction approval) with user, account, and company-level profiling.
Employee Fraud provides proven rules and analytics, combined with proactive investigation tools, to detect theft of customer and bank assets, self-dealing, embezzlement, collusion, and identity shielding.
Deposit Account Fraud helps institutions minimize deposit fraud losses by providing comprehensive account activity monitoring and by detecting new and evolving forms of deposit fraud using proven analytic techniques not traditionally deployed as a solution to this problem.
Institutional Trade Surveillance provides scenario management for market manipulation and abuse, fair dealings with customers, and insider trading across asset classes such as equities, fixed income, swaps and futures. It includes specific tools for desk supervision, control room surveillance, and trade reporting practices, to ensure comprehensive oversight and sales and trading compliance.
We also deliver a real-time, cloud-based, institutional trade surveillance solution. Furthermore, by leveraging communication surveillance capabilities from our Customer Interactions business, we provide holistic and integrated surveillance solutions that include trade, voice, email, chat and more.
Retail Trade Surveillance addresses organization-wide compliance across a broad range of retail sales practices relating to Know Your Customer (KYC) and Suitability requirements. It enables local and regional branch management to effectively delegate supervision across products and provides automated desk supervision with electronic access and sign-off on individual trades.
Employee Trade Surveillance provides Conflicts of Interest and Rogue Trading detection. It completely automates the submission, review, and approval process for employees’ personal trades, including post-trade reconciliation. It analyzes transactions against rules mapped to the organization’s employee trading policies and procedures.
Enterprise Conflicts Management offers a unified approach to maintain controls and detect conflicts of interest before they occur on a global, enterprise-wide scale.
Sales Practices & Suitability provides coverage for a broad range of sales practices issues and allows firms to meet current and future global regulatory requirements and a comprehensive toolset to enable automation of sales practices compliance processes.
NICE Financial Crime & Compliance solutions are implemented by financial institutions of all kinds such as retail banks, commercial banks, and brokerages, as well as industry regulators, government agencies, insurance companies and energy firms.
III. NICE Security Solutions
Introduction to the Solutions
NICE’s Security solutions help organizations capture, analyze and leverage Big Data to anticipate, manage and mitigate security and safety risks, improve operations, and ensure the safety of the general public. The NICE security, intelligence and cyber offerings provide valuable insights that enable enterprises and governments to take the best action at the right time by correlating structured and unstructured data from multiple sensors and channels, detecting irregular patterns, and recognizing trends.
We are a leading provider of public safety solutions and Physical Security Information Management (PSIM) solutions and a provider of video surveillance solutions and intelligence solutions. As we have a combination of physical security, public safety and intelligence solutions, we can provide innovative modular solutions per specific customer needs.
NICE Security Solutions are used by thousands of customers worldwide, including governments, transportation systems, critical infrastructure, city centers, banks, enterprises and government agencies. Among our customers are some of the largest airports, transportation systems, cities, banks and utility companies in the world.
Security Business Strategy
Our Security business strategy is to strengthen our leading position and accelerate penetration to the critical facilities market, namely organizations where security issues might have direct impact on the entire business operations (e.g. airports, seaports, banks, safe cities, etc.).
Our unique integrated product portfolio consists of capturing and recording systems, analytic engines and advanced management tools, enabling critical facilities’ organizations to minimize risks, improve investigations and optimize their security operations. We help organizations transform Big Data into operational intelligence. Part of our strategy is to further enhance our technology expertise and product excellence to provide advanced correlation, real-time analytics, on-the-fly-adaptive workflows and trend analysis, which promote a high level of situational awareness and effective responses.
As we see a trend of convergence between physical and cyber threats, which is a key concern of critical facilities, we intend to leverage our unique positioning as both a physical security and intelligence solution provider, to deliver a comprehensive solution addressing both domains.
We also plan to address organizations looking to adopt tools that are adequate not only for the management of their security and safety situations, but also for contributing to operational gains, such as increased efficiency and level-of-service.
Our go-to-market strategy revolves around strong partnerships with leading system integrators that help promote, sell and provide the necessary services for our solutions, partnerships with technology partners that customize and tailor our solutions to specific vertical and/or customer needs, and on-going impact in the field through direct touch with end-users and working closely with consultants.
Our Solutions’ Core Capabilities
Multi-sensor event management: >An open architecture that integrates data from third-party devices, systems and web sources, and delivers real-time alerts and information from and about these systems for complete situational awareness and management.
Real-time analytics and correlation: >Proprietary, field-proven algorithms on security data, such as CCTV video feed and audio communications, analyze in real time and correlate data from multiple security sensors to identify security situations or threats.
Real-time decisioning and resolution: >Following analysis, NICE technology highlights decision data and trends, initiates alerts, and provides adaptive workflows to decision makers, enabling the next-best-action for effectively resolving situations.
Multimedia reconstruction:> The ability to integrate text, video, voice recordings, and others into holistic incident timelines for complete investigation and debriefing capabilities.
Trend analysis and reporting:> Data analytics, reporting, and trend analysis that transforms Big Data into operational intelligence for defining and improving best practices, and predicting and preventing future events.
Addressing Business & Operational Needs
The NICE Security portfolio is comprised of five solution families that correlate and address the following needs:
NICE Inform, helping public safety agencies and organizations across various industries consolidate and manage multimedia incident information efficiently and effectively. It captures and processes event information from a variety of media: audio, video, text, Computer-Aided Dispatch (CAD) systems, Geographic Information Systems (GIS), and others. It combines data from multiple sources for a complete, chronological timeline to accurately and efficiently reconstruct and investigate events.
NICE Audio Recording, a wide range of recording platforms that address the needs of command and control centers and Air Traffic Control operations. These solutions can automatically record, analyze, store, quickly retrieve, and instantly replay Time-Division Multiplexing (TDM) and IP voice calls. TDM and VoIP recordings can be used to ensure compliance with regulations, provide audio evidence, and manage and improve departmental quality and productivity.
NICE Inform helps emergency centers manage multimedia incident information efficiently and effectively. It captures all available data, providing all the facts as they unfold and increasing the chances that all vital evidence is available to review.
NiceVision Net, a complete, end-to-end IP video surveillance management solution. The solution includes Smart Video Recorders (SVRs), high-performance encoders and decoders, an advanced video analytics suite, and feature-rich event management and control room visualization. Each component of the solution is managed from the central NiceVision Control Center.
NiceVision Video Analytics, fully integrated into the video recording infrastructure, it includes field-proven applications for intrusion management, crowd management, and situation indication. The solution also presents alerts, highlights decision data, and facilitates complex surveillance operations.
NICE Situator, enabling automatic, real-time situation planning, response, and analysis to improve situational awareness and incident handling. It integrates, analyzes, and correlates information from a wide array of sensors and systems into a common operating picture. It then applies standard operating procedures and automated response plans, ensuring that everyone in the operational chain is aware of what is happening and what needs to be done.
The NICE Cyber & Intelligence Solutions portfolio provides end-to-end solutions for communication interception, analysis and investigation. The solutions support the entire intelligence production cycle both in real-time and offline, and helps law enforcement and intelligence agencies, national and internal security agencies, Signals Intelligence (SIGINT) organizations and corrections authorities fight organized crime, drug trafficking, terrorist activities and other threats to national security. The solutions are designed to provide full, 360° target monitoring by addressing the dynamic and complex nature of communications and the Internet arena.
To provide a comprehensive intelligence picture, NICE Cyber & Intelligence Solutions offer a unified platform for the interception, collection, processing and analysis of telephony and Internet communications data from all types of networks and applications. The NICE Cyber & Intelligence Solutions portfolio includes various products and modules, including:
NICE Security Solutions are used by thousands of customers worldwide, including critical facilities such as airports, utilities and transportation systems, city centers, banks, enterprises and government agencies.
We sell our solutions and products worldwide both directly to customers and indirectly through selected partners to better serve our global customers. We partner with companies in a variety of sales channels, including service providers, system integrators, distributors, value added resellers and complimentary technology vendors. These partners form a vital network for selling and supporting our solutions and products. For our business partners, we have established the NICE Business Partner Program, which provides full support and a broad portfolio of sales supporting tools to help them promote and sell the NICE offerings, helping to drive mutual revenue growth and success.
Through a well-defined collaborative framework, the NICE Business Partner Program aligns and supports the business goals of both NICE and our business partners. Its multi-tiered structure recognizes both commercial achievement and certification in selling and supporting specific NICE offerings.
We also have strategic technology partnerships in place to ensure full integration with NICE’s offerings to deliver value added capabilities that address a variety of technology environments.
We have global distribution agreements as well as alliance and partnership programs with leading vendors, service providers, and consulting firms. The following is a partial list of our main partners, some of which we cooperate across all of our businesses, while others in only a portion of our business: Amdocs, Avaya, BT, Cassidian Communications, Cisco, Dell, Deloitte, Etrali, FIS, Headstrong, Honeywell, IBM, IPC, Motorola, Raytheon Company, SAIC, Siemens, Tata Consulting Services, Thales, Verizon, and Wipro.
Professional Service and Support
The NICE Professional Services and Support organization enables our customers to derive sustainable business value from our solutions. NICE solutions, coupled with the experience, expertise and global presence of our Professional Services and Support teams, continue to assist our customers in meeting regulatory requirements, as well as the increasing demands of their customers.
The Professional Service and Support offerings focus on Enabling and Sustaining Business Value for our customers, addressing all stages of the technology lifecycle, including requirements definition, planning, design, implementation, customization, optimization, proactive maintenance and ongoing support.
Solution Delivery> to optimize solution delivery and enable our customers to achieve their specific business and organizational goals, on time and on budget. NICE solutions are delivered by certified project managers, technical experts, and application experts. We follow a proven methodology that includes business discovery to map solutions to business processes.
Business Consulting >to enable customer success through value added services that are targeted to improve business operations by leveraging and integrating NICE solutions into the customer’s daily practices. This global team consists of industry experts who have accumulated a broad portfolio of best practices and honed domain expertise, with extensive experience in implementing vertical market solutions for many industries. This helps our customers accelerate return on investment, increase revenue and minimize business costs.
Customer Education Services >to provide users with the necessary knowledge and skills to operate NICE solutions and to leverage their capabilities to meet customer needs before and after the deployment of relevant NICE solutions.
Value Realization >to work hand in hand with our customers to identify factors that may be limiting realization of business value and to remove or lessen blocking issues so as to ensure continued delivery of business benefits.
Cloud Services >to ensure that NICE solutions hosted in the NICE cloud run optimally, maximizing availability, performance and quality while ensuring the security of our customers’ information. This includes Hosting Operations, running our Hosting Centers; Development Operations ensuring that our product development teams optimize our solutions for the cloud environment and the Hosted Application Support team that operate the solutions ensuring up-time, scalability and security.
Customer Support & Maintenance> to respond to customer requests for support on a 24x7 basis using advanced tools and methodologies. NICE offers flexible service level agreements (SLAs) to meet the level of service that our customers’ desire. Our solutions are generally sold with a warranty for repairs of hardware and software defects and malfunctions. Software maintenance includes an enhancement program with ongoing delivery of “like-for-like” upgrade releases, service packs and hot fixes.
Proactive Maintenance> to address issues before they can have significant impact on our customers’ business. These offerings include:
Manufacturing and Source of Supplies
Our products are built in accordance with industry standard infrastructure and are PC compatible. The hardware elements in our products are based primarily on standard commercial off-the-shelf components and utilize proprietary in-house developed circuit cards and algorithms and digital processing techniques and software. We also have “software only” solutions for use on standard commercial servers.
We manufacture our products through subcontractors, with the exception of our CSS product line (formerly CyberTech) which is manufactured by us. Under manufacturing agreements with Flextronics Israel Ltd. ("Flextronics"), a subsidiary of a global electronics manufacturing services provider, with Bynet Communications Ltd. (“Bynet”), and with EMET Computing Ltd. (“EMET”), Flextronics, Bynet, and EMET provide us with turnkey manufacturing solutions including order receipt, purchasing, manufacturing, testing, configuration, inventory management and delivery to customers. These agreements cover all of our product lines (with the exception of our CSS product line), including our voice recording family of products, our video product lines, our upgrade lines and our spare parts and return material authorization (RMA). NICE is entitled to, and exercises, various control mechanisms and supervision over the entire production process. In addition, Flextronics, the manufacturer of a significant portion of our products, is obligated to ensure the readiness of a back-up site in the event that the main production site is unable to operate as required. We believe these outsourcing agreements provide us with a number of cost advantages due to Flextronics’ large-scale purchasing power, and greater supply chain flexibility.
Some of the components we use have a single approved manufacturer while others have two or more options for purchasing. In addition, we maintain an inventory for some of the components and subassemblies in order to limit the potential for interruption. We also maintain relationships directly with some of the more significant manufacturers of our components. Although certain components and subassemblies we use in our existing products are purchased from a limited number of suppliers, we believe that we can obtain alternative sources of supply in the event that such suppliers are unable to meet our requirements in a timely manner.
Quality control is conducted at various stages at our manufacturing outsourcers’ facilities and at their subcontractors’ facilities. We generate reports to monitor our operations, including statistical reports that track the performance of our products from production to installation. This comprehensive data allows us to trace failure and to perform corrective actions accordingly.
We have qualified for and received the ISO-9001:2000 quality standard for all of our products, as well as the ISO 27001 and ISO 14001:2004 certifications.
Research and Development
We believe that the development of new products and the enhancement of existing products are essential to our future success. Therefore, we intend to continue to devote substantial resources to research and new product development, and to continuously improve our systems and design processes in order to reduce the cost of our products. Our research and development efforts have been financed through our internal funds and programs sponsored through the Government of Israel and the European community. We believe our research and development effort has been an important factor in establishing and maintaining our competitive position. Gross expenditures on research and development in 2011, 2012 and 2013 were approximately $113.7 million, $126.6 million, and $140.9 million, respectively, of which approximately $3.4 million, $4.1 million, and $3.3 million, respectively, were derived from third-party funding, and $1.2 million, $1.1 million, and $1.0 million, respectively, were capitalized software development costs.
In 2013, we were qualified to participate in 12 programs funded by the Office of the Chief Scientist of the Israeli Ministry of Economy ("OCS") to develop generic technology relevant to the development of our products. Such programs are approved pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, or the Research and Development Law, and the regulations promulgated thereunder. We were eligible to receive grants constituting between 40% and 66% of certain research and development expenses relating to these programs. Some of these programs are members of programs approved for companies with large research and development activities and some of these programs are members of certain Magnet consortiums. Accordingly, the grants under these programs are not required to be repaid by way of royalties. However, the restrictions of the Research and Development Law described below apply to these programs. In 2011, 2012, and 2013 we received a total of $3.1 million, $2.5 million, and $3.3 million from the OCS programs, respectively, and we anticipate receiving approximately $0.7 million in 2014 from 2013 approved programs.
The Research and Development Law generally requires that the product incorporating know-how developed under an OCS-funded program be manufactured in Israel. However, upon the approval of the OCS (or notification in the event set forth below, as the case may be), some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased, which increase might be up to 300% of the grant (depending on the portion of the total manufacturing volume that is performed outside of Israel). Following notification (rather than approval) to the OCS (and provided the OCS did not object), up to 10% of the grant recipient’s approved Israeli manufacturing volume, measured on an aggregate basis, may be transferred out of Israel, subject to payment of the increased royalties referenced above. The OCS is also authorized to approve the transfer of manufacturing rights outside of Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The Research and Development Law also allows for the approval of the program in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the OCS is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the OCS whether to approve a program and the amount and other terms of benefits to be granted. The increased royalty rate and repayment amount may be required in such cases.
The Research and Development Law also provides that know-how developed under an approved research and development program may not be transferred to third parties without the approval of the OCS. Such approval is not required for the sale or export of any products resulting from such research or development. The OCS, under special circumstances, may approve the transfer of OCS-funded know-how outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be, which portion will not exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest, in the event that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer); (b) the grant recipient receives know-how from a third party in exchange for its OCS-funded know-how; (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities; or (d) if such transfer of know-how arises in connection with a liquidation by reason of insolvency or receivership of the grant recipient.
The Research and Development Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify the OCS of any change in control of the recipient, or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient, and requires the new non-Israeli interested party to undertake to the OCS to comply with the Research and Development Law. In addition, the rules of the OCS may require prior approval of the OCS or additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares or ADSs will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the Research and Development Law. Furthermore, the Research and Development Law imposes reporting requirements in the event that proceedings commence against the grant recipient, including under certain applicable liquidation, receivership or debtor's relief law or in the event that special officers, such as a receiver or liquidator, are appointed to the grant recipient.
Failure to satisfy the Research and Development Law’s requirements may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings. In addition, the Government of Israel may from time to time audit sales of products which it claims incorporates technology funded through OCS programs which may lead to additional royalties being payable on additional products.
The funds available for OCS grants out of the annual budget of the State of Israel were reduced in recent years, and the Israeli authorities have indicated in the past that the government may further reduce or abolish OCS grants in the future. Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.
We participate in the European Community Framework Programme for Research, Technological Development and Demonstration, which funds and promotes research. There are no royalty obligations associated with receiving such funding. From time to time we may apply for new grants under the Framework Programme. During 2010 and 2011 we were selected to participate in four FP-7 programs. The programs will continue for three and half years, with a total expected grant of approximately EUR 1.6 million. In addition, we were selected to coordinate one of these programs.
We currently rely on a combination of trade secret, patent, copyright and trademark law, together with non-disclosure and non-compete agreements, to establish and/or protect the technology used in our systems.
We currently hold 127 U.S. patents and 68 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 120 patent applications pending in the United States and other countries. We believe that the improvement of existing products and the development of new products are important in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware continuing to be “trade secrets” or subject to copyright or patent protection. We generally enter into non-disclosure and non-compete agreements with our employees and subcontractors. However, there can be no assurance that such measures will protect our technology, or that others will not develop a similar technology or use technology in products competitive with those offered by us. In most of the areas in which we operate, third parties also have patents which could be found applicable to our technology and products. Such third parties may include competitors, as well as large companies, which invest millions of dollars in their patent portfolios, regardless of their actual field of business. Although we believe that our products do not infringe upon the proprietary rights of third parties, there can be no assurance that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
From time to time, we receive “cease and desist” letters claiming patent infringements. However, no formal claims or other actions have been filed with respect to such alleged infringement, except for past claims which have since been settled or dismissed. Defending infringement claims or other claims could involve substantial costs and diversion of management resources. In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms.
We own the following trademarks and/or registered trademarks in different countries: ACTIMIZE, Actimize logo, Alpha, Customer Engagement Analytics, Decisive Moment, eGlue Interact, FAST, FAST alpha Silver, Fortent, Fortent Logo, IEX, Insight from Interactions, Intent. Insight. Impact., Know More Risk Less, Last Message Replay, Mass Detection Center, Mirra, NICE, NICE Analyzer, NICE Inform, NICE Inform Lite, NICE Inform Media Player, NICE Inform Verify, NICE Logo, NICE Perform, NICE Proactive Compliance, NICE Seamless, NICE Security Recording, NICE Situator, NICE SmartCenter, NICE Systems, NiceLog, NiceTrack, NiceTrack IP Probe, NiceTrack Location Tracking, NiceTrack Mass Detection Center, NiceTrack Monitoring Center, NiceTrack Pattern Analyzer, NiceTrack Traffic Analysis, NiceVision, NiceVision Alto, NiceVision Analytics, NiceVision Control Center, NiceVision Digital, NiceVision Net, NiceVision NVSAT, NiceVision Pro, Open Situation Management, Own the Decisive Moment, Scenario Replay, Searchspace, Syfact, Syfact Investigator and TotalView.
The larger portion of our business operates as an enterprise software model, which is characterized, in part, by uneven business cycles throughout the year and under which a significant number of our licenses are entered into in the fourth quarter of each year. We believe that seasonality in our business may become more prominent as the proportion of advanced software applications out of our overall sales mix continues to increase. We believe that these seasonal factors primarily reflect customer spending patterns and budget cycles. While seasonal factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, also have an impact on our business and financial results. See “Risk Factors” under Item 3 of this annual report for a more detailed discussion of factors which may affect our business and financial results.
The export of certain defense products from Israel, such as our NiceTrack line of products, requires a permit from the Israeli Ministry of Defense (MOD). In addition, the sale of products to certain customers, mostly armed forces, also requires a permit from the Israeli Ministry of Defense. In 2013, the vast majority of our sales were not subject to such permit requirements. To date, we have encountered no difficulties in obtaining such permits. However, the MOD notifies us from time to time not to conduct business with specific countries that are undergoing political unrest, violating human rights or exhibiting hostility towards Israel, or imposes certain requirements as a condition to NICE being permitted to export products which are under the control of the MOD. We may be unable to obtain permits for our intelligence products we could otherwise sell in particular countries in the future.
We also may be subject to applicable export control regulations in other countries from which we export goods and services, including the United States. Such regulations may apply with respect to product components that are developed or manufactured in, or shipped from, the United States, or with respect to certain content contained in our products. There are restrictions that apply to software products that contain encryption functionality, especially in the United States and Israel. In the event that our products and services are subject to such controls and restrictions, we may be required to obtain an export license or authorization and comply with other applicable requirements pursuant to such regulations.
European Environmental Regulations
Our European activities require us to comply with Directive 2002/95/EC of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS 1”), which came into effect on July 1, 2006, and Directive 2011/65/EU of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, which came into effect on January 1, 2013 (together with RoHS 1, “RoHS”). RoHS provides, inter alia, that producers of electrical and electronic equipment may not place new equipment containing lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in amounts exceeding certain maximum concentration values, on the market in the European Union. We are also required to comply with the European Community Regulation on chemicals and their safe use (EC 1907/2006) that deals with the Registration, Evaluation, Authorization and Restriction of Chemical substances (“REACH”), which came into effect on June 1, 2007. REACH requires producers to manage the risks from chemicals used in their products and to provide safety information on the substances found in their products.
Our products meet the requirements of the RoHS and REACH directives and we are making every effort in order to maintain compliance, without adversely affecting the quality and functionalities of our products. If we fail to maintain compliance, including by reason of failure of our suppliers to comply, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
Our European activities also require us to comply with Directive 2002/96/EC of the European Parliament on Waste Electrical and Electronic Equipment (“WEEE”). The WEEE directive covers the labeling, recovery and recycling of IT/Telecommunications equipment, electrical and electronic tools, monitoring and control instruments and other types of equipment, devices and items, and already partly came into effect on August 13, 2005. Our products fall within the scope of the WEEE directive, and we have set up the operational and financial infrastructure required for collection and recycling of WEEE, as stipulated in the WEEE directive, including product labeling, registration and the joining of compliance schemes. We are taking and will continue to take all requisite steps to ensure compliance with this directive. If we fail to maintain compliance, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
Similar regulations are being formulated in other parts of the world. We may be required to comply with other similar programs that might be enacted outside Europe in the future.
United States Conflict Mineral Disclosure Regulations
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals (tantalum, tin, tungsten and gold) that are known as “conflict minerals”, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for public companies that utilize “conflict minerals” mined from the DRC and adjoining countries that are necessary to the functionality or production of the product manufactured or contracted to be manufactured by such company, as well as guidelines regarding efforts to identify the sourcing of such “conflict minerals”. These new requirements require that companies attempt to determine if they are using, directly or indirectly, any such materials, and begin disclosing any such usage beginning in May 2014. There are costs associated with complying with these disclosure requirements, including those costs incurred for due diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. See “Risk Factors” under Item 3 of this annual report for a more detailed discussion of the risks related to “conflict minerals” and how such risks may affect our business and operation results.
We believe that our solutions have a competitive advantage based on their ability to serve large, multi-site, multi-channel, multi-touch point customer service organizations, their holistic integration and capture of various structured and unstructured data sources, their ability to extract insight with a multi-dimensional approach, and their ability to drive cross-departmental action to impact business results.
In the WFO suite domain we are facing competition from vendors such as Aspect, Avaya, Software Inc., Callabrio, Genesys, Interactive Intelligence Inc. and Verint Systems.
In the Real-time Cross-channel Analytics arena we are facing competition from vendors such as Hewlett-Packard (through its acquisition of Autonomy Corp.), CallMiner, ClickFox, Infor, Mattersight (formerly eLoyalty), Nexidia, Pegasystems, and Genesys (through its acquisition of Utopy). Some of these vendors provide solutions which are not Real-time in nature and some provide solutions focused on single channel analytics (e.g. speech analytics).
In the Real-Time Decisioning and Guidance market we are facing competition from vendors such as Oracle ATG, Jacada and OpenSpan.
In the Customer Experience Management market, we are facing competition from vendors such as Medallia and ResponseTek.
In the Fraud and Authentication market, we are facing competition from vendors that offer Voice Biometrics such as Nuance and Victrio (recently acquired by Verint).
As we are expanding our SaaS offering, we are facing competition from some of our traditional competitors mentioned above, offering their solution in a SaaS model as well as competition from specific WFO providers offering their solution in a SaaS model only, such as Interactive Intelligence and InContact.
The Customer Interactions market is highly competitive and includes numerous companies offering a broad range of features and capabilities. As the market is still developing, we anticipate the introduction of new and enhanced products by various companies in this market.
A competitive advantage in the Customer Interactions market can be achieved through differentiation in product offering or business model. With respect to products, we consider breadth of offering, application functionality, system performance and reliability, the ability to integrate with a variety of external systems and ease of use as key factors. With respect to the business model, we consider marketing and distribution capacity, price and global service and support capacity as key factors. We believe that NICE established a competitive advantage in the market based on our ability to service large, multi-site, multi-channel, multi-touch point customer service organizations and their holistic integration, our solutions’ capabilities to capture various structured and unstructured data sources, the ability to extract insight with a multi-dimensional approach, and the ability to drive cross-departmental action to impact business results. Furthermore, we believe the strength of our installed customer base alongside the size and capabilities of our global distribution network, our business partners, and our global service and support capacity provide us a significant differentiation factors in the market.
The driving forces of the Financial Crime and Compliance software solutions market are the introduction of new regulations and financial crime patterns that impact the entire financial services industry. The competitive landscape is highly fragmented. We face no single competitor that competes with us across all our solution areas. That being said, we face significant competition for each solution that we offer. We believe that our focus on the financial services market (and related markets) provides us deep domain expertise that combined with our fast time to market, ability to provide service across the enterprise using one core platform and our ability to serve specific “point” solutions, all serve as levers to establish dominance in the market. Our software solutions face competition from custom solutions developed internally by financial services institutions, as well as software and other solutions offered by commercial competitors that include ACI Worldwide, BAE Systems, FICO, Oracle Corporation, Progress Software, SAS Institute Inc. and Sungard Data Systems.
In the public safety voice recording for emergency calls market, our ability to deliver an integrated recording system that can capture voice, video, data and meta-data information from trunk radio systems and computer aided dispatch systems, provide us a superior market position in respect to our competitors mainly in the large, high-end emergency centers. Another differentiating factor can be found in our applications for scenario reconstruction connecting multiple multimedia sources, including voice, video, data, GIS and meta-data together. Some of our competitors in the public safety market include ASC Telecom, Redbox Recorders, Ultra Electronics AudioSoft and Verint Systems.
In the video platform, applications and analytics market we compete against, amongst others, Bosch Security Systems, Genetec Inc., IndigoVision Group, Milestone Systems A/S, On-Net Surveillance Systems, Schneider Electric (formerly Pelco) and Verint Systems. In this fragmented market we offer a full solution based on our self-developed recording, management software, networking devices and real-time content analysis. This solution provides open interfaces to third party devices and applications and creates a competitive advantage for us in this market.
There are a few competitors who have products in the Physical Security Information Management (PSIM) market that compete with our Situator platform. These include, amongst others, ADT Security Services (formerly Proximex), CNL Software, Verint Systems and VidsSys. We offer a comprehensive and open solution that integrates with dozens of systems and sensors. This has resulted in a significant advantage for us in the market. Furthermore, the domain expertise we have gained across each of our verticals means that we can tailor business logic (such as workflows and rules), specifically to the customer requirements.
There are a number of competitors in the telecommunications monitoring market that have products competing with our NiceTrack family of solutions. The primary competitors are Atis, BAE Systems, JSI Telecom, Pen-link Ltd., SS8 Networks, Inc., Trovicor and Verint Systems. We believe that our solutions offer innovations that provide law enforcement agencies and intelligence organizations the tools and capabilities they require to meet the challenges of today’s advanced telecommunications world.
Moreover, major enterprise software vendors, such as those from the traditional enterprise business intelligence and business analytics sector, CRM, or infrastructure players (mostly telephony or switch vendors), may decide to enter our market space and compete with us in this emerging opportunity, either by internal development of comprehensive solutions or through acquisition of any of our existing competitors.
The following is a list of our significant subsidiaries, including the name and country of incorporation or residence. Each of our significant subsidiaries is wholly-owned by us.
Property, Plants and Equipment
Our executive offices and engineering, research and development operations are located in North Ra’anana, Israel. The offices include three buildings, which occupy approximately 366,464 square feet, with an annual rent and maintenance fee of approximately $12.0 million, paid in NIS and linked to the Israeli consumer price index. The lease for these three buildings in our Northern Ra’anana facilities will expire in December 2022.
We have leased various other offices and facilities in several other countries. Our material leased facilities consist of the following:
We believe that our existing facilities are adequate to meet our current and foreseeable needs.
Item 4A. Unresolved Staff Comments.
Item 5. Operating and Financial Review and Prospects.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes and other financial information included elsewhere in this annual report. This discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under Item 3, “Key Information - Risk Factors” and elsewhere in this annual report, our actual results may differ materially from those anticipated in these forward-looking statements. For more information about forward-looking statements, see the Preliminary Note that precedes the Table of Contents of this annual report.
We are a global leader in software solutions that enable organizations to better operationalize Big Data.
We enable organizations to take the next-best-action by understanding people through analytics of structured and unstructured data. Our solutions help our customers to become more operationally efficient, customer-focused, performance and revenue driven, security aware, and compliant.
Our solutions are used by thousands of organizations in more than 150 countries, including 75 of the Fortune 100 companies.
We have established leadership positions across many of our domains of activities based on comprehensive and innovative enterprise-grade solutions, a unique combination of structured and unstructured data analytics and decisioning technologies, continuous development of our product portfolio, deep domain expertise, global reach and our ability to understand our industry.
We operate in three business areas. Our Customer Interactions business serves customer-facing organizations within Business-to-Consumer enterprises across many verticals, including financial services, telecommunications, travel and healthcare. Our Financial Crime & Compliance business serves financial institutions and regulatory agencies. Our Security business addresses the needs of security sensitive organizations, such as banks, airports, mass transit, utilities, and public safety, law enforcement and intelligence agencies.
We offer our solutions both in an on-premise and cloud-based model. To address growing market demand and our customers’ need for greater operational flexibility and faster implementations, we are continuously expanding our hosted and SaaS offerings.
The following acquisitions were accounted for by the acquisition method of accounting, and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The results of operations related to each acquisition are included in our consolidated statement of income from the date of acquisition.
On August 12, 2013, we completed the acquisition of Causata Inc. (“Causata”), a provider of real-time Big Data analytics. We acquired Causata for total consideration of approximately $22.7 million comprised of $21.4 million in cash and $1.3 million representing the fair value of earn-out based on performance milestones, amounting to an additional maximum payment of $2 million. The acquisition will allow NICE to offer solutions which provide greater visibility into a customer’s activities on the Web and apply the insights from that data in real time, across other touch points such as the contact center. Organizations will be better positioned to enhance the customer experience, increase revenues, and achieve greater operational efficiency. These solutions are further augmented by Causata’s Web-based predictive analytics and machine learning technologies, which, when applied to terabytes of information, allow organizations to improve real-time decisioning and guidance. NICE will benefit from Causata’s real-time Hadoop-based interaction repository, real-time decisioning, dynamic customer profiles, and Web personalization.
On October 22, 2012, we completed the acquisition of RedKite Financial Markets Limited (“RedKite”), an emerging provider of real-time, cloud-based institutional trade surveillance solutions. We acquired RedKite for total consideration of approximately $11.6 million comprised of $9.0 million in cash and $2.6 million representing the fair value of earn-out based on performance milestones, amounting to an additional maximum payment of $5.8 million. NICE Actimize’s enterprise trading compliance platform, broad library of regulatory coverage modules, market leadership, and global tier-one client presence, are expected to benefit from the RedKite acquisition, with the addition of RedKite’s innovative, front-office based approach to real-time trade surveillance to the Actimize trading compliance solutions suite.
On February 7, 2012, we completed the acquisition of Merced Systems, Inc. ("Merced"), the leading provider of performance management solutions that drive business execution in sales and service functions. We acquired Merced for total consideration of approximately $185.9 million. Merced’s performance management solutions help drive sales effectiveness, superior customer experience and operating efficiency across a range of vertical industries. Merced’s products serve Global 2000 customers, and include advanced analytics and reporting, incentive compensation management, coaching, and other performance execution applications. It is expected that integrating Merced and NICE capabilities will create a closed-loop performance management solution.
On October 26, 2011, we completed the acquisition of Fizzback Group (Holdings) Ltd. ("Fizzback"), a global provider of Voice of the Customer (VoC) solutions, providing software solutions for real-time customer feedback that drive customer loyalty and employee performance. The Fizzback solution helps companies listen, respond and act in real-time to their customers’ comments. We acquired Fizzback for a total consideration of approximately $80.9 million. The combination of Fizzback and NICE will both improve Customer Experience Management (CEM) as well as operationalize VoC both for the contact center and across the enterprise.
On March 4, 2011, we completed the acquisition of CyberTech Investments (“CyberTech”), a global provider of compliance recording solutions and value-added applications. We acquired CyberTech for total cash consideration of approximately $59.4 million. The addition of CyberTech solutions to the NICE portfolio broadens our offering for financial institutions, strengthens our commitment to the small and medium size business sector, and adds to our public safety solutions.
We also completed the acquisition of certain assets of Composia Ltd. and MindCite (Israel) Ltd. in 2011 and 2012 respectively. The technologies acquired as part of these acquisitions add to both our Enterprise and Security offerings. These acquisitions were not material to our business and operations.
Off-Balance Sheet Transactions
We have not engaged in nor been a party to any off-balance sheet transactions, as defined in Item 5 of Form 20-F.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the significant accounting policies which affect its more significant judgments and estimates used in the preparation of the Consolidated Financial Statements and those that are the most critical to aid in fully understanding and evaluating our reported results include the following:
Revenue Recognition>. We generate revenues from sales of software products, services, which include support and maintenance, installation, project management, customization, consulting, training, hosting and SaaS, as well as hardware sales. We sell our products directly through our sales force and indirectly through a global network of distributors, system integrators and strategic partners, all of whom are considered end-users.
The basis for our software revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, “Software-Revenue Recognition.” Revenues from sales of product and software licensing are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectability is probable. In transactions where a customer's contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or as the acceptance provision has lapsed.
For multiple element arrangements within the scope of software revenue recognition guidance, revenues are allocated to the different elements in the arrangement under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Under the residual method, at the outset of the arrangement with the customer we defer revenue for the fair value of its undelivered elements and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement when the basic criteria in ASC 985-605 have been met. Any discount in the arrangement is allocated to the delivered element. Revenues from maintenance and professional services are recognized ratably over the contractual period and as services are performed, respectively.
For arrangements that contain both software and non-software components that function together to deliver the products' essential functionality, we allocate revenue to each element based on its relative selling price. In such circumstances, the accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables. The selling price for a deliverable is based on its VSOE, if available, third party evidence (“TPE”) if VSOE is not available, or best estimated selling price (“BESP”) if neither VSOE nor TPE are available. We establish VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. When VSOE cannot be established, we attempt to establish selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, we are typically not able to determine TPE. The BESP price is established considering several external and internal factors including, but not limited to, historical sales, pricing practices and geographies in which we offer our products. The determination of the BESP is subject to discretion.
Our policy for establishing VSOE of fair value of maintenance services is based on the price charged when the maintenance is renewed separately. Establishment of VSOE of fair value of professional services is based on the price charged when these services are sold separately.
Revenues from fixed price contracts that require significant customization, integration and installation are recognized based on ASC 605-35, “Construction-Type and Production-Type Contracts,” using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total fees under the arrangement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact.
We also generate sales from SaaS offerings which provide our customers access to certain of our software within a cloud-based IT environment that we manage and offer to customers on a subscription basis. Revenues for our software SaaS subscription offerings are recognized ratably over the contract term commencing with the date its service is made available to customers and all other revenue recognition criteria have been satisfied.
To assess the probability of collection for revenue recognition, we have established a credit policy that determines the credit limit that reflects an amount that is deemed probably collectible for each customer. These credit limits are reviewed and revised periodically on the basis of new customer financial statement information and payment performance.
For all periods presented, amounts billed to customers related to shipping and handling are classified as revenue, and our respective shipping and handling costs are included in cost of sales.
We maintain a provision for product returns in accordance with ASC 605, “Revenue Recognition.” The provision is estimated based on our past experience and is deducted from revenues. Actual returns could be different from our estimates.
Deferred revenues include advances and payments received from customers, for which revenue has not yet been recognized.
Allowance for Doubtful Accounts>. We regularly review our allowance for doubtful accounts by considering factors such as historical experience, age of the account receivable and current economic conditions that may affect a customer’s ability to pay. We allocate a certain percentage for the provision based on the length of time the receivables are past due.
Impairment of Long-Lived Assets>. Our long-lived assets include goodwill, property and equipment, In Process Research and Development, and identifiable other intangible assets that are subject to amortization. In assessing the recoverability of our goodwill, property and equipment and other identifiable intangible assets that are held and used, we make judgments regarding whether impairment indicators exist based on legal factors, market conditions and operating performances of our reporting units or asset groups. Future events could cause us to conclude that impairment indicators exist and that the carrying values of these long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 “Intangible – Goodwill and Other,” goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires that goodwill be tested for impairment at the reporting unit level on an annual basis or between annual tests in certain circumstances, and written down when impaired. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. The goodwill impairment test is performed according to the following principles:
Fair value is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting units.
We operate in three operation-based segments, which also comprise our reporting units: Customer Interactions Solutions, Security Solutions and Financial Crime and Compliance Solutions. We performed a qualitative assessment for the Customer Interactions Solutions and the Security Solutions reporting units during the fourth quarter of 2013 and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing is required.
For the Financial Crime and Compliance Solutions reporting unit, we elected to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test based on the fact that at the time of our last assessment of fair value of this segment, which was conducted during the fourth quarter of 2012, we estimated that the value of the reporting unit exceeded its carrying amount by only 13%. We performed the first step of the quantitative goodwill impairment test during the fourth quarter of 2013 and concluded that the fair value of the reporting unit exceeded its carrying value by approximately 36%, and therefore, no impairment of goodwill existed and the second step of the goodwill impairment test was not required.
Our long-lived assets and identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, “Property, Plant, and Equipment,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets and significant negative industry or economic trends.
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of the carrying amount over fair value. No impairment of long-lived asset has been recorded in 2013.
Taxes on Income>. We record income taxes using the asset and liability method. Management judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. We have considered future reversal of existing temporary differences, future taxable income, prudent and feasible tax planning strategies and other available evidence in determining the need for a valuation allowance. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome will not be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.
We implement a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (on a cumulative basis) likely to be realized upon ultimate settlement.
We record interest on late tax payments and tax related penalties as a component of our Taxes on Income. Beginning in 2012, we revised our accounting policy and commenced classifying interest and penalties related to income taxes (which includes uncertain tax positions) as a component of the provision for income taxes in taxes on income (tax benefit) on the consolidated statements of income. We believe that the classification of interest and penalties in the provision for income taxes is preferable because we believe these interest and penalties are costs of managing taxes payable (as opposed to, for example, interest being the cost of a debt). It is also more consistent with the way in which we manage the settlement of uncertain tax positions as one overall amount inclusive of interest and penalties and will provide more meaningful information to investors by including only interest income related to the our financial assets within financial income, net.
The change in accounting method for presentation of interest and penalties for income taxes was accounted for in accordance with ASC 250, “Accounting Changes and Error Corrections.” Accordingly, the change in accounting principle has been applied retrospectively by adjusting the financial statement amounts for the prior periods presented. The change to current or historical periods presented herein due to the change in accounting principle was limited to income statement classification, with no effect on net income.
Contingencies>. From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the accrual required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period the change is made.
Business Combination>. We apply the provisions of ASC 805, “Business Combination,” accordingly we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by a third party appraiser in applying the required economic models (such as income approach and cost approach), in order to estimate the fair value of assets acquired and liabilities assumed in the business combination.
Stock-based Compensation>. We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation - Stock Compensation.” Under the fair value recognition provisions of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model and values restricted stock based on the market value of the underlying shares at the date of grant. We recognize compensation costs using the graded vesting attribution method that results in an accelerated recognition of compensation costs.
The fair value of an award is affected by our stock price on the date of grant and other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options. Share-based compensation expense recognized in our consolidated statements of income was reduced for estimated forfeitures.
Valuation of investments in marketable securities>. We review the valuation of our securities for impairment in accordance with ASC 320-10-65. If such assets are considered to be impaired, the impairment charge is recognized in earnings when a decline in the fair value of investments below the cost basis is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that we intend to sell, or it is more likely than not that we will be required to sell before recovery of their amortized cost basis, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors are recognized in other comprehensive income (loss).
We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, as set forth below, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Our marketable securities trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized as Level 2.
We classified foreign currency derivative contracts within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
The actual value at which such securities could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors, including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
Adoption of New Accounting Standards
In February 2013, the FASB issued ASU 2013-02, “Presentation of Comprehensive Income,” codified in ASC 220 “Comprehensive Income.” The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. We adopted the new guidance as of January 1, 2013.
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11), which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 supports the approach for companies to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This approach requires companies to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. We plan to adopt ASU 2013-11 in fiscal 2015 and are currently evaluating the impact to our consolidated financial statements.
Results of Operations
The following table sets forth our selected consolidated statements of income for the years ended December 31, 2011, 2012, and 2013, expressed as a percentage of total revenues. Totals may not add up due to rounding.
(*) Respective revenues
Comparison of Years Ended December 31, 2012 and 2013
Our total revenues increased by approximately 8.0% to $949.3 million in 2013, from $879.0 million in 2012. Revenues from sales of Customer Interactions Solutions were $592.3 million in 2013, an increase of 4.6% from 2012, revenues from sales of Security Solutions were $193.9 million in 2013, an increase of 4.3% from 2012, and revenues from sales of Financial Crime and Compliance Solutions were $163.1 million in 2013, an increase of 28.3% from 2012. The growth in revenues from Customer Interactions Solutions is attributed primarily to increased revenues from Workforce Management solutions, real-time impact solutions and performance management solutions. This growth is driven by customers seeking to improve operational efficiency and customer experience and enhance compliance. The increase in revenues from Security Solutions is attributable primarily to an increase in revenues from cyber and intelligence solutions, which increased because our customers in Law Enforcement and Intelligence agencies are confronted with a growing challenge of IP communications that requires new types of solutions that drive technology refresh cycles as well as adjusting regulation to allow for their implementation. The increase in revenues from Financial Crime and Compliance Solutions is attributed to an increase in fraud attempts and complex financial crimes, resulting in a need for increased regulation and creating the obligation to achieve compliance and to monitor risks using a more centralized approach.
The increase in product revenues is primarily due to growth in our revenues from Financial Crime and Compliance Solutions and Security Solutions, partially offset by a decrease in revenues from Customer Interactions Solutions.
Approximately 66% of the increase in service revenues is attributed to an increase in maintenance revenue resulting primarily from an increase in the install base from previous years’ sales. Approximately 34% of the increase in service revenues is attributed to an increase in professional services and SaaS and hosting revenues resulting primarily from an increase in installations and integrations.
Revenue by Region
The Americas revenue increased by 8.6%, of which approximately 58% is attributable to organic growth in the Customer Interactions Solutions and 42% is attributed to organic growth in the Financial Crime and Compliance Solutions.
The EMEA revenue increased by 6.4%. The increase is primarily attributable to organic growth in the Financial Crime and Compliance Solutions and in the Customer Interactions Solutions, partially offset by a decrease in the Security Solutions.
The APAC revenue increased by 8.2%. The increase is attributable to organic growth in the Security Solutions, partially offset by a decrease in the Customer Interactions Solutions.
Cost of Revenues
Cost of product revenues decreased on a dollar basis and as a percentage of product revenues. The decrease on a dollar basis and as a percentage of product revenues is mostly a result of lower amortization of intangible assets, which is primarily due to the completion of amortization of intangible assets related to the Actimize acquisition as well as a decrease in royalties paid to third parties. Cost of service revenues increased on a dollar basis while decreasing as a percentage of service revenues. The increase on a dollar basis is primarily due to an increase of cost of wages and sub-contractors as a result of additional headcount to support the growth in the business. The decrease in the percentage of cost of service from service revenues is attributed to better utilization of headcount.
The increase in gross profit margin on product revenues is primarily a result of an increase in product revenues, a lower amortization of intangible assets and a decrease in royalties paid to third parties.
The increase in gross profit margin on service revenues is primarily attributed to an increase in service revenues and an improvement in headcount utilization.
Research and Development, Net>. Research and development expenses, before capitalization of software development costs and government grants, increased to $140.9 million in 2013, as compared to $126.6 million in 2012, and represented 14.8% and 14.4% of revenues in 2013 and 2012, respectively. The increase in research and development, net is attributed primarily to an increase in cost of wages and subcontractors, partially resulting from increased headcount.
Capitalized software development costs were $1.0 million in 2013, as compared to $1.1 million in 2012. Amortization of capitalized software development costs included in cost of product revenues were $1.1 million and $1.2 million in 2013 and 2012, respectively.
Selling and Marketing Expenses>. Selling and marketing expenses increased to $248.6 million in 2013, as compared to $230.2 million in 2012 and represented 26.2% of total revenues in 2013 and in 2012. Approximately 65% of the increase in selling and marketing expense is attributed to an increase in cost of wages primarily as a result of increased headcount. The remainder of the increase is primarily due to an increase in travel, exhibitions and client events-related expenses.
General and Administrative Expenses>. General and administrative expenses decreased to $88.3 million in 2013, as compared to $96.1 million in 2012, and represented 9.3% of total revenues in 2013, as compared to 10.9% of total revenues in 2012. The decrease in general and administrative expense is due primarily to a decrease in acquisition-related costs.
Amortization of acquired intangible assets>. Amortization of acquired intangibles included in the operating expenses represent 3.2% and 3.7% of our 2013 and 2012 revenues, respectively. The decrease in amortization of acquired intangible assets is primarily attributable to the completion of amortization of intangible assets related to the Actimize acquisition.
Restructuring expenses>. Restructuring expenses in a total amount of $0.5 million in 2013, as compared to $1.9 million in 2012, was comprised of retirement of leasehold improvements and property evacuation costs.
Financial and Other Income
Financial Income, Net>. The decrease in financial income, net is attributable primarily to a reduction in gains from sales of marketable securities due to a decrease of such sales during 2013.
Taxes on Income>. In 2013, taxes on income amounted to $28.4 million, as compared to a tax benefit of $14.0 million in 2012. Our provision for taxes during 2013 increased as compared with 2012, as our taxes on income for 2012 were favorably affected by certain releases of tax provisions made in prior years together with the effect of a proportionally significant realization of deferred tax liabilities recorded against the amortization of the newly acquired intangible assets related to Merced as well as to those for the first full year of Fizzback.
Our effective tax rate for 2013 was 33.9%, which included an expense of $19.2 million as a result of a settlement with the Israeli Tax Authorities of a multi-year tax audit and our election made to take advantage of a special limited time program initiated by the Israeli government that allowed us to release our previously tax-exempted profits at a discounted tax rate that would otherwise have been due upon actual distribution of these profits. Further information with regards this special program and our election thereunder can be found in Note 13(a)(2) of our Consolidated Financial Statements.
The statutory rate in Israel was 25% for 2013 and was increased to 26.5% for 2014 and thereafter. The impact of this increase will be limited for us as we continue to benefit from our Preferred Enterprise programs, the details of which can be found in Note 13 of our Consolidated Financial Statements under the caption “Taxes on Income.”
As a result of new tax legislation in Israel beginning in 2014 which increases the tax rate on profits arising from Preferred Enterprises, and subject to unpredictable effects of any future settlements with tax authorities, unadjusted expiration of the statute of limitations, future changes in law or accepted practice and effects of potential mergers and acquisitions, we expect our effective tax rate (which includes effects of FIN No. 48 which has been incorporated into ASC 740) to increase to approximately 18-19% for 2014 and future years.
Net Income>. Net income was $55.3 million in 2013, as compared to $67.9 million in 2012. The decrease in 2013 resulted primarily from taxes on income in 2013 as compared to the benefit from taxes on income in 2012.
Comparison of Years Ended December 31, 2011 and 2012
Our total revenues increased by approximately 10.7% to $879.0 million in 2012 from $793.8 million in 2011. Revenues from sales of Customer Interactions Solutions were $566.0 million in 2012, an increase of 18.5% from 2011, revenues from sales of Security Solutions were $185.9 million in 2012, a decrease of 3.1% from 2011, and revenues from sales of Financial Crime and Compliance Solutions were $127.1 million in 2012, an increase of 2.2% from 2011. Approximately 47% of the growth in revenues from Customer Interactions Solutions is attributed to the inclusion of Merced results for the first time in 2012, approximately 27% of the growth in revenues from Customer Interactions Solutions is attributable to the inclusion of full year results of Fizzback compared with two months of results included in 2011 and the inclusion of full year results of Cybertech compared with ten months of results included in 2011. The remaining growth in revenues of 26% from Customer Interactions Solutions is attributed to organic growth driven by accelerated demand for analytics based applications. The decline in revenues from Security Solutions is attributable primarily to a decrease in revenues from communication intelligence solutions due to a deferral of a number of major deals into 2013 which has partially been offset by the increase of sales of our situation management solutions. The increase in revenues from Financial Crime and Compliance Solutions is attributed to organic growth driven by increasing regulation and the need for compliance, increasing fraud attempts and a shift from in-house to best-of-breed shelf solutions.