A slightly disappointing set of results from customer interaction specialist NICE Systems (NASDAQ:NICE) must have left its investors fearing that growth is starting to slow for the company. The company's non-GAAP revenue growth slowed to just 4.2% in the quarter. Is it time to give up on the stock?
NICE Systems lowers guidance
A brief summary of the third-quarter results and outlook:
- Non-GAAP Revenue of $230.1 million vs. guidance of $225 million- $240 million
- Non-GAAP EPS of $0.62 vs. guidance of $0.56-$0.66
- Fourth-quarter revenue guidance of $260 million-$275 million
- Fourth-quarter non-GAAP EPS guidance of $0.72-$0.77
The fourth-quarter guidance means that the company's full-year guidance is now $940 million-$955 million, which represents a lowering of the high end by $15 million. Similarly, the high end of its full-year EPS guidance was lowered by $0.05 to reach $2.55-$2.60.
Data analytics demand is slowing revenue growth
While it's never a good thing to see companies lowering guidance, NICE has some plausible reasons for doing so. In addition, they mirror what its competitor, Verint Systems (NASDAQ:VRNT), is delivering. Both companies specialize in selling systems that monitor and analyze customer interactions. Moreover, increasing awareness of the need for corporations and governments to use data generated from user/customer interactions is creating more demand for analytics solutions.
The good news is that increasing analytics sales should drive stronger cash-flow generation in future because they tend to be higher margin. The bad news is that it has a negative effect on near-term revenue growth. Deals with analytics solutions tend to have longer sales cycles, which means they generate revenue over a longer time period due to having a larger services component.
A quick look at NICE's products and services demonstrates that its services growth is much stronger these days.
In addition, in its last set of results, Verint disclosed that it was signing larger orders this year, with much higher growth rates from its analytics solutions. Turning back to NICE, here is what its management said on the recent conference call:
In the third quarter, new order of advanced applications grew well above 20% compared to the last year's third quarter and represented close to 50% of total new bookings.
Verint and NICE are both seeing sales moving toward value-added analytics solutions.
Reasons to be optimistic
Looking forward to the next quarter, investors shouldn't be worried by the lowering of guidance for the full-year.
First, NICE's management confirmed that it was targeting year-on-year growth in its product revenue. This would be a welcome return to form because product revenue growth has been negative for the last three quarters.
Second, management claimed to be on track for over $1 billion in bookings this year. When you consider that the midpoint of its full-year revenue growth is $948 million, it's clear that bookings are growing faster than revenue. This is fine because the service revenue from these bookings will drop into the top-line over time.
On a more negative note, there was some weakness in the enterprise sector in China and India. Given what NICE's partner, IBM (NYSE:IBM) recently reported in China, this wasn't surprising. NICE incorporates IBM's analytics solutions within its services offering. Unfortunately, IBM's management doesn't expect to return to growth in China until the first quarter of 2014. While this is disappointing, it should be noted that IBM's business analytics solutions were the brightest spark in its recent results, and are still up 8% year-to date.
Where next for NICE Systems?
All told, it was a solid, but slightly disappointing quarter from NICE. Looking ahead, it needs to hit its targets in Q4, and then outline a faster pace of growth in 2014. Analysts have NICE on 8.8% revenue growth in 2014, but given the structural changes in its revenue stream discussed above, it's reasonable to expect forecast be lowered.
The slowing of revenue growth is not a problem in itself, provided that NICE continues to generate good bookings growth and strong analytics sales. Companies will always find it difficult to predict revenue growth when the structure of their sales is changing in this manner.The bottom line is that the company's cash flow remains very strong, and with a P/E ratio of just 13.7 times forecast for 2014, the stock is a good value.
Lee Samaha owns shares of Nice Systems Ltd. (ADR). The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.