In early 2001, NICE Systems (Nasdaq: NICE; TASE: NICE) took upon itself one of the biggest challenges in the Israeli high-tech industry. With eyes wide open, the company embarked upon what seemed at the time one of the biggest gambles ever in the industry.
Now, four years later, NICE CEO Haim Shani can sigh with relief. His company is on a growth track, and the number of investment houses covering the share has almost doubled. In the two months since NICE published its third-quarter results, the share has risen in a straight line. The market share that NICE lost in the dark days of 2000 is starting to find its way back to the company; in certain areas, the company has even regained its lead in the market. The best news at the moment is the fact that between November 2, 2004, just before the publication of its third quarter results, and December 30, 2004, the NICE Systems (Nasdaq: NICE; TASE: NICE) share surged 45.5%, reaching a market cap of $490 million.
NICE has come a long way since Shani became CEO. The share recently topped the level at which it stood on February 8, 2001, the fateful day on which the company announced a revision in its financial report and the resignation of preceding CEO Benny Levin.
Shani joined NICE in January 2001, but officially became CEO only when Levin resigned. In an exclusive “Globes” interview one month after officially taking up his post, Shani spoke very modestly, but expressed confidence in NICE’s ability to get back on its feet. Shani said at the time that he believed that in a few years, NICE would regain its market share, become the market leader again, and also operate in the market for analysis of information gathered from voice and video recordings.
Whether Shani really was so confident, or whether he had to say so in order to deliver a message, he can now show concrete results. Last July, NICE launched its NICE Perform system, which enables enterprises to analyze data from digital recording systems, draw conclusions based on the data, and use those conclusions to make customer relations more efficient.
A study published by research company Frost & Sullivan found that NICE was the global leader in monitoring quality of service, and held a 34.7% share of the products and services market. The study further reported that NICE also leads the global integrated software and hardware market with a 41.1% market share.
Frost & Sullivan wrote that in the market for improving performance at service centers, NICE had a 34% market share in North America; a 51% share in Europe, the Middle East, and Africa; and a 54.4% market share in Asia Pacific.
The progress of NICE’s share shows that investors also have reason to smile. There are several plausible reasons for the boom in the share. One is probably an intensive series of meetings in which NICE management, headed by Shani and corporate VP and CFO Ran Oz, explained to large US investors what the company is doing.
Another reason is probably NICE’s third quarter results, and its guidance for the fourth quarter of 2004 and for 2005. These forecasts have given investors a good feeling about the company’s progress. Another factor is the improvement in NICE’s visibility. When the company reported its third-quarter results, NICE told analysts that its large orders backlog now enabled it to see one quarter ahead, and that its orders in the second and third quarters had reached broken all records. Better visibility, together with other changes, indicates improvement in the company’s business model.
It cannot be ruled out that a third reason for the NICE share’s performance is the addition of three investment houses to the list of those covering the company: RBC Capital Markets, William Blair & Co., and CE Unterberg, Towbin. Seven investment houses now cover the share.
Finally, it is reasonable to assume that the launching of the NICE Perform system, which is designed for the enterprise market, has contributed a great deal to the rise in the share price.
In early November, together with the publication of its third-quarter financial report, NICE announced that it had sold eight NICE Perform systems, and that revenue from these sales was not included in the report. This fact means that at least some of the revenue from these sales will be included in NICE’s fourth-quarter report. Furthermore, if NICE has sold more NICE Perform systems after the publication of its third-quarter report, these sales will provide an important additional lever for increasing the company’s revenue.
It can be assumed that the share price of Verint Systems (Nasdaq: VRNT) also has a certain influence on the NICE share price. The businesses of the two companies do overlap, but the overlap covers only a third of their activities. 70-75% of NICE’s revenue comes from the civilian market, while 60% of Verint’s business consists of sales to the homeland security market. For historical reasons, however, most analysts still regard Verint and NICE as belonging to the same sector.
Obstacle course
In order to understand NICE’s achievement, it is necessary to go back to February 2001. On that date, NICE published a severe profit warning, indicating that $6.2 million in revenue reported in 2000 were due to sales of systems sent to NICE’s distributor, Stevens Communications, which NICE had acquired in the fourth quarter of 2000. This revenue should not have been recognized in NICE’s financial report. NICE announced the retroactive revision in its financial statements, a severe profit warning for the first three quarters of 2001, and Levin’s resignation as CEO, all on the same day. NICE’s troubles did not stop there, though. A few months later, research company Data Monitor published a very unflattering report, saying that NICE had lost market share in call centers, and had in effect lost its lead in this market.
One after another, capital market sources joined the chorus of elegies for NICE, with gloomy predictions that the company would sink. The conventional wisdom in the capital market was that NICE’s $90 million cash reserves would give the company a breathing space of at least a year, but also constituted an attraction for outside parties to attempt a takeover.
These beliefs were reinforced by the fact that not a single shareholder owned a significant stake in the company. NICE’s shares were distributed among a large number of investment institutions and private investors, each of which owned only a few percent. In short, almost everyone expected NICE to sink into oblivion.
Into this depressing state of affairs, in which it was clear to no one how long NICE would survive, came Haim Shani as CEO. At the time, telephone calls poured into “Globes” from “confidants” shaking their heads at someone they thought was committing professional suicide. Comments ranged from, “He has no managing experience at all; how does he think he can heal a company, when even its experienced founders couldn’t get it out of the mud,” to “He has nothing to lose. He’ll get a CEO’s salary for a few months, then tell investors that he tried, but the damage was too great.”
Shani was presumably not unaware of those concerns, but he turned a deaf ear to them, and went for broke. His first year as CEO was perhaps the most difficult for NICE since the company was founded. Shani had to overcome innumerable obstacles, from the severe profit warning, which led to a long series of class action lawsuits, to an upheaval in the company’s management and structure, which forced Shani to lay off many employees. At one point during restructuring, long-standing employees of the company demonstrated considerable hostility toward Shani, which was no accident.
As part of his restructuring, Shani upset time-hallowed arrangements at NICE. He fired 25% of the company’s staff, cut costs wherever possible, and stunned the company’s employees by demanding that they punch a time clock, a measure no previous CEO at the company had dared to propose. NICE began to count its employees’ work hours, and probably to measure their output, too.
For many years, NICE took pride in its lack of formality. Employees came and went whenever they felt like it. Shani pooped the party. When he first started, employees said he was instituting a reign of terror. Many of them regarded the time clock requirement as the beginning of a separation fence between management and workers.
New structure
Another act that angered some workers was the replacement of several division heads. The measure was aimed at creating a new structure, which would facilitate continuous communication between development and marketing units. The absence of such communication in the period preceding Shani’s appointment was probably one of NICE’s weaknesses, but many employees saw the measure as a threat to their status, and even to their future in the company.
Five months later, in July 2001, the workers’ mood began to improve. Despite far-reaching changes in work methods, most of the employees were content. Several of them told “Globes” that despite the concern they felt during Shani’s early days at the company, he had not created a hierarchal separation between himself and the employees. They felt that their opinions were important to him. They said that he was a practical man, who kept in direct contact with the workers by talking frequently with them, among other ways.
In addition to internal trouble, however, Shani also faced another problem at NICE a takeover attempt by Poalim Investments Ltd. (now Polar Investments Corp.) and Koor Industries (NYSE: KOR; TASE: KOR). Both companies acquired 5% of NICE, and joined forces in an attempt to appoint Rimon Ben-Shaoul as chairman of the board.
In June 2001, boardroom power struggles created chaos. Things went so far that directors were being informed about board meetings by word of mouth. Shani, who tried to prevent the takeover, devoted his efforts to recruiting fresh forces on the board to help him get the company back on track. These new faces helped him defeat the takeover. The would-be raiders learned that, in contrast to low-tech industrial companies, a hostile takeover of a high-tech company is an almost impossible task. Just accumulating shares is not enough. Biting criticism of Koor’s behavior also had an effect, and the attempt was abandoned.
While all this was happening, another obstacle emerged the report by Data Monitor in the first half of 2001, which said that NICE had lost its lead in the market. As if that weren’t enough, NICE’s new management also had to deal with the high-tech crisis, and the total halt in IT spending by enterprises. Given that most of NICE’s revenue was derived from enterprises’ IT spending, this must have been one of the more difficult problems that Shani had to deal with.
The turning point came in mid-2002. A look at the measure adopted by NICE shows that dealing with the crisis, overcoming it, and restoring growth took place in several stages. In the first stage, which took eighteen months, the company was stabilized, and its rapid decline was halted. In the second stage, NICE made the strategic acquisition of one of its largest competitors, Thales Contact Solutions (TCS), a subsidiary of French company Thales. The third stage was devoted to absorbing TCE and exploiting its advantages for NICE.
Market sources believe that the acquisition and successful absorption of TCS is one of the main factors in NICE’s increased sales to Europe. Furthermore, a comparison of NICE’s $150 million revenue in 2002, before the announcement of the TCS acquisition, with the $250 million revenue forecast for 2004 (while subtracting the effect of the sale of NICE’s location systems division to Elta Electronic Industries) shows that NICE has increased its business by over $100 million in two years.
The fourth stage, which has been underway for a year already, is building the company’s vision. NICE is now putting new systems on the market, headed by NICE Perform. A few months ago, the company announced that, in the coming years, it would focus on developing systems that would analyze interactions recorded on voice and video recording systems. This is a new field, and it has great growth potential.
Published by Globes [online], Israel business news - www.globes.co.il - on January 17, 2005