Conditions and changes in the local and global economic environments may adversely affect our business and financial results.
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. Our competitors include a number of large, established developers and distributors. 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 better 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.
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.
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, inIn 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 willmay not 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.
We sell our products, either directly or through our other distribution channels, to customers who use Avaya’s infrastructure of our distributors or of other vendors, or operate in Avaya’stheir environment. To the extent that Avaya doescertain infrastructure vendors do not allow or support the integration of our products with itstheir infrastructure or products, or usesuse 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’ssuch infrastructure vendors' direct business with us. This could, of course, influence our ability to attract new customers that use such infrastructure products or continue rendering maintenance services and other services and generate recurring sales to theseexisting customers. As a result, we may sustain loss ofcould lose customers and market share, which maycould have a material adverse effect on our business, financial condition, or results of operation.
We depend on a small number of significant customers.
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.
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.investments, including our recent acquisition of inContact. 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"Operating and Financial Review and Prospects—Recent Acquisitions”Acquisitions" in this annual report), andreport for a description of certain of these acquisitions). We expect to continue to make acquisitions.acquisitions and investments in the future as part of our growth strategy. We frequently evaluate the tactical or strategic opportunity available related to complementary businesses, products or technologies. The process ofThere can be no assurance that we will be successful in making additional acquisitions. Even if we are successful in making additional acquisitions, integrating an acquired company’scompany's business into our operations and/or of investing in new technologies may (1) result in unforeseen operating difficulties and large expenditures and may(2) absorb significant management attention that would otherwise be available for the ongoing development of our business, andboth of which may result in the loss of key customers and/or personnel and expose us to unanticipated liabilities.
In November 2016, we completed our acquisition of inContact. Our success in realizing the anticipated benefits of the acquisition of inContact, and the timing of the realization of such benefits, depends on the successful integration of our business and operations with the acquired business and operations of inContact. The integration of inContact may be complex, costly and time-consuming. The difficulties of integration of inContact include, among others:
• failure to implement our business plan for the combined business;
• unanticipated issues in integrating technologies, products, logistics, information, communications and other systems;
• unanticipated changes in applicable laws and regulations; and
• other unanticipated issues, expenses and liabilities.
Other risks commonly encountered with acquisitions include the effect of the acquisitionacquisitions on our financial and strategic position, the inability to integrate 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 attract, in a timely attractmanner, new skilled employees and management to replace them. From time
In recent years, several of our competitors have also completed acquisitions of companies in our markets or in complementary markets. As a result, it may be more difficult for us to time,identify suitable acquisitions or investment targets or to consummate acquisitions or investments once identified on acceptable terms or at all. If we are not able to execute on our acquisition strategy, 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 willnot be able to acquireachieve our growth strategy, may lose market share, or successfully integrate an acquired company, businessmay lose our leadership position in one or technology, or successfully leverage such complementary technology in the market.more of our markets.
Moreover, there canWe often compete with others to acquire companies, and such competition may result in decreased availability of, or an increase in price for, suitable acquisition candidates. We also may not be no assuranceable to consummate acquisitions or investments that we have identified as crucial to the anticipated benefitsimplementation of anyour strategy for other commercial or economic reasons. Further, 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 or make investments. For those and other reasons, we may ultimately fail to consummate an acquisition, even if we announce the intended acquisition.
We may require significant financing to complete an acquisition or investment, whether through bank loans, raising of debt or otherwise. In connection with the inContact acquisition, we incurred additional indebtedness pursuant to the Credit Facility and, through our wholly owned subsidiary Nice Systems, Inc. ("Nice Systems"), through the issuance of exchangeable senior notes (the "Notes"). In the future, we cannot assure you that such financing options will be realized. available to us on reasonable terms, or at all. If we are not able to obtain the necessary financing, we may not be able to consummate a substantial acquisition or investment and execute our growth strategy. In addition, if we consummate one or more significant acquisitions in which the consideration consists, in whole or in part, of our ordinary shares or American Depositary Shares ("ADSs") representing our ordinary shares, our shareholders may suffer immediate dilution of their interests in us or the value of their interests in us. Our shareholders may also suffer substantial dilution if we issue ADSs upon the conversion of the Notes.
Future acquisitions or investments could result in potentially dilutive issuances of equity securities, the incurrence of debt andmay also require us to incur 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 intoOur seasonal sales patterns could significantly impact our existing business. We may also compete with others to acquire companies,revenues 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.earnings.
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,encounter quarter-to-quarter seasonality, especially given 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.
mix. The sales cycle for our products and services is variable, typically rangingranges 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 or subsequent quarters, 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, whichyear.
We believe this seasonality is typical for many software companies and that it may alsobecome 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 and other overhead costs, are relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have ana material adverse impact on our quarterly operating results.
Fluctuations in our results of operations may result from our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' requirements, the bookingtiming and success of new product introductions and enhancements or product initiation by our competitors, the purchasing and budgeting cycles of our customers and general economic, industry and market conditions, amongst other factors.
In addition, our quarterly operating results may be subject to significant fluctuations due to additional 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 and services for any period between hardware, software and services as well as within the product category between interaction-related platforms and related applications and transactional related platforms and applications. Changes in the mix of products and services across our different business lines may significantly impact our revenues. 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.
We generally provide forecasts as to expected future revenues in the coming fiscal quarters and fiscal year. These forecasts are based on management estimation and expectations, our then-existing backlog and an analysis of assumptions and assessments that may not materialize or end up being inaccurate. We may not meet our expectations or those of industry analysts in a particular future quarter, during which such transactions were to be entered into.including as a result of the factors described in this Item 3.
We operate with certain backlogIn addition, as described above, our revenues reflect seasonal fluctuations related to slower spending activities in the first quarter, and we face factors such as timing and volumethe increased activity related to the year-end purchasing cycles of orders within a given period that affect our ability to fulfill these orders and to determine the amountmany users of our revenues within the period.products.
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 providedepend on our expectations asability to future revenuesrecruit and retain key personnel.
In order to compete, we must recruit and 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. There is no guarantee that additional key management members will not leave the coming quartersCompany, or if they do, that we will be able to identify and year. These expectations are based on management estimation and expectation,hire qualified replacements, or that the existing backlog and an analysistransition of assumptions and assessments that maynew personnel will not materializecause disruption in our business.
In addition, due to our growth, 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 aboveregular 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 other factors mentioned in Item 3, "Key Information" in this annual report.
Risks Relatingqualified personnel to Our Finances
We face foreign exchange currency risks.
Wemarket and sell those products, are impacted by exchange rate fluctuations. We are likelycritical to face risks from fluctuations in the valueour success. As 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 mostDecember 31, 2016, approximately 26% of our businessemployees were devoted to research and revenues are generated in dollars,product development and approximately 22% were devoted to a lesser extent, in GBP, EURmarketing 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, theresales. There can be no assurance that we will be able to successfully recruit and integrate new employees.
There is 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 governing tax authority will notcompensation package that is satisfactory in order to keep them within our employment.
In certain locations in which we have development centers, the rate of attrition is high and could have a different interpretationnegative impact on our ability to retain our employees in such centers, timely develop our products and service our customers. In addition, the migration of the lawdevelopment and assess us with additional taxes. If we are assessed additional taxes, it couldother activities and functions to low-cost countries may result in disruption to our business due to differing levels of employee knowledge, expertise and organizational and leadership skills, greater employee attrition and increased cost of retaining our most highly-skilled employees.
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 condition.
In recent years we have seen changes in tax laws resulting in an increase in applicable tax rates, in part stemming from public pressureposition. Our success also depends, to increase tax liabilitiesa significant extent, upon the continued service of corporations. Such legislative changes in one or more jurisdictions in which we operate may have implications on our tax liabilitya number of key management, sales, marketing and have a material adverse effect on our results of operations and financial condition.
We might recognize adevelopment employees, the 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 marketswhom could materially adversely affect our business, financial income, the liquiditycondition and results 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.operations.
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. Also, in the event that any of these third party vendors is unable to meet our requirements in a timely manner or that our relationship with any such vendor is terminated, we may experience disruption in our business until an alternative source of supply can be obtained. Any disruption, or any other interruption in a vendor's ability to provide components to us, could result in delays in making product deliveries or inability to deliver, which could have a material adverse effect on our business, financial condition and results of operations.
In eitheraddition, some of our third party vendors use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. If we lost the right to use such third party software, 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.
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, there may be inaccurate results. 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.
Undetected problemserrors or malfunctions in our products or solutionsservices 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.claims.
Our software products and services are highly complex. Despite extensive testing by us and by our clients, we have in the past discoveredour products and services may include errors, failures, bugs or other weaknesses. Such errors, failures, bugs or other weaknesses in our software applicationsproducts and will likely continue to do so in the future. Such errors, failures, bugs or other weaknesses in products released by usservices could result in product returns, loss of or delay in market acceptance of our products and services, 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 and services 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 by our customers for among other things,important aspects of their business, such as compliance recording and operational risk management functions that are often critical to our clients and must adhere to certain rules and regulations, any errors or defects in, or other performance problems with, our products and services could hurt our reputation and may damage our customers' business. If that occurs, we arecould lose futures sales, our existing customers could elect not to renew, and we could potentially be 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 protectionsRisks Relating to our Cloud Offering
Our Cloud Software-as-a-Service business model may not be successful or profitable.
The portion of our cloud-based business has grown significantly as a result of the acquisition of inContact and our internal development efforts, and therefore we are more dependent now on the success and profitability of this business area. We may not be able to compete effectively, generate significant revenues or maintain the profitability of our cloud offerings. Additionally, the increasing prevalence of cloud and SaaS delivery models offered by us and our competitors may unfavorably impact pricing in both our on-premise enterprise software business and our cloud business, as well as overall demand for our on-premise software product and service offerings, which could reduce our revenues and profitability. With the move to cloud based solutions, including following the acquisition of inContact, we cannot guarantee that revenues generated from our cloud offerings will compensate for a loss of business in our on-premise enterprise software business. If we do not successfully execute our cloud strategy or anticipate the cloud needs of our customers, our reputation as a cloud services provider could be harmed and our revenues and profitability could decline.
In addition, cloud computing may make it easier for new competitors to enter our markets due to the lower up-front technology costs and easier implementation and for existing market participants to compete with us on a greater scale. Such increased competition is likely to heighten the pressure to decrease pricing, which could have a negative effect on our revenues and results of operations.
The business model of our cloud offerings differs from the business model for the sale of products and services, particularly in that the period for recognizing the revenue from such orders is usually spread over the term of the subscription rather than being tied to a single date. Our cloud offerings are generally purchased by customers on a subscription basis and revenues from these offerings are generally recognized ratably over the term of the subscriptions. Therefore, a significant shift to SaaS-based sales could result in a delay in revenue recognition and materially adversely affect our results of operations and our rate of growth and profitability.
Moreover, the deferred revenue that results from sales of our cloud offerings may prevent any deterioration in sales activity associated with our cloud offerings from becoming immediately observable in our consolidated statement of operations. This is in contrast to revenues associated with our software licenses arrangements in which new software licenses revenues are generally recognized in full at the time of delivery of the related software licenses. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription period.
In addition, the integration of inContact into our cloud strategy may not be as efficient or scalable as anticipated, which could adversely affect our ability to fully realize the benefits we anticipate from this acquisition.
The stability and growth of our cloud related revenues depends on our ability to attract and retain on-going customers, and attract customers in the small to medium business sector.
The revenue model for companies selling software services under the cloud model is to attract customers, retain such customers through the renewal of their monthly subscription contracts and encourage such customers to add additional agent seats and functionality.
As more of our cloud offerings are targeted at small to medium businesses, and not just large size enterprise customers, we may be required to invest more sales efforts in that market segment, diverting our sales resources to a greater number of smaller transactions. In this market segment, we may also encounter greater unpredictability, resulting from the financial stability of customers that may be more vulnerable at times of economic downturn, all of which could negatively impact our results of operation.
As our industry matures, as our clients experience seasonal trends in their businesses, or as competitors introduce lower costs and/or differentiated products or services that are perceived to compete favorably with our services, our ability to add new clients and renew, maintain or up-sell existing clients based on pricing, technology and functionality could be impaired.
We also have relationships with third-party channel partners to attract new customers. Such third-party channel partner relationships may be terminated by either party, and as a result reduce the number of new customers we can attract to our product offering and cause disruptions with existing customer relationships, which could adversely impact our results of operations. The termination of a reseller partner relationship may cause existing customers of that third-party reseller to become more likely to discontinue their services, which could have a significant adverse effect on our results of operations. In addition, acquisitions of our customers or of our third-party channel partners could lead to cancellation of our contracts with those customers or by the acquiring companies.
We are dependent on third-party computer hardware, software and cloud computing platforms that may be difficult to replace.
We rely on computer hardware leased and software licensed from, and cloud computing platforms provided by, third parties in order to offer our services, including Platform as a Service provided by strategic partners. These hardware, software and cloud computing platforms may not continue to provide competitive features and functionality, or may not be available at reasonable prices, on commercially reasonable terms or at all. Any loss of the right to use any of these hardware, software or cloud computing platforms could significantly increase our expenses and otherwise result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained through purchase or license and integrated into our services. As we grow our business, we will continue to depend on both existing and new strategic relationships with such vendors. Our inability to establish and foster these relationships could adversely affect the development of our business, our growth and our results of operations.
Defects or disruptions in our cloud services could impact demand for our services and subject us to substantial liability.
Our cloud services may have errors or defects that could result in unanticipated downtime for our subscribers and harm to our reputation and our business. We have from time to time found defects in, and experienced disruptions to, our services, and new defects or disruptions may occur in the future. In addition, our customers may use our services in unanticipated ways that may cause a disruption in services for other customers attempting to access their data. Since our customers use our services for important aspects of their business, any errors, defects, disruptions in service or other performance problems could harm our reputation and may damage our customers' businesses. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future sales or customers may make warranty or other claims against us, which may harm our business and adversely affect our results.
We currently serve our customers from third-party data center hosting facilities and cloud computing platform providers. Any damage to, or failure of, our systems generally could result in interruptions in our services. We have from time to time experienced interruptions in our services and such interruptions may occur again in the future. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our or our third party vendors' systems and infrastructure. This could result in interruptions in our services, which may cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our attrition rates and our ability to attract new customers, all of which would reduce our revenues. Also, we may not be entitled to indemnification or to recuperate any such loss or damage from third party service providers, which may result in us bearing alone the burden of any such liability or losses.
Facilities at which customer data is stored or through which we render our services may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, as well as local administrative actions, changes to legal or permitting requirements and litigation to stop, limit or delay operation. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our services. Even with disaster recovery and business continuity arrangements in place, our services could be interrupted.
We are also dependent on our computer databases, billing systems and accounting computer programs, network and computer hardware that houses these systems to effectively operate our business and market our services. Our clients may become dissatisfied by any system failures that interrupt our ability to provide our service to them. Substantial or repeated system failures would significantly reduce the attractiveness of our services. Significant disruption in the operation of these systems would adversely affect our business and results of operations.
Privacy concerns and legislation, evolving regulation of cloud computing, cross-border data transfer restrictions and other regulations may limit the use and adoption of our services and adversely affect our business.
Governments are adopting new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information. In some cases, foreign data privacy laws and regulations, such as the European Union's Data Protection Directive, and the country-specific laws and regulations that implement that directive, also govern the processing of personal information. These and other requirements could reduce demand for our services or restrict our ability to store and process data or, in some cases, impact our ability to offer our services in certain locations or our customers' ability to deploy our solutions globally.
In addition, regulatory issues relating to the Internet, in general, could affect our ability to provide our services. In the United States, legislation has been adopted that regulates certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending in the United States Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally.
Furthermore, our customers expect us to meet voluntary certification or other standards established by third parties. If we are unable to maintain these certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain customers and could harm our business. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services, and could limit adoption of our cloud-based solutions.
Industry-specific regulation and other requirements and standards are evolving and unfavorable industry-specific laws, regulations, interpretive positions or standards could harm our business.
Our customers and potential customers conduct business in a variety of industries, including financial services and telecommunications. Regulators in certain industries have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing and other outsourced services. The costs of compliance with, and other burdens imposed by, industry-specific laws, regulations and interpretive positions may limit our customers' use and adoption of our services and reduce overall demand for our services. Compliance with these regulations may also require us to devote greater resources to support certain customers, which may increase costs and lengthen sales cycles. For example, some financial services regulators have imposed guidelines for use of cloud computing services that mandate specific controls or require financial services enterprises to obtain regulatory approval prior to outsourcing certain functions. If we are unable to comply with these guidelines or controls, or if our customers are unable to obtain regulatory approval to use our services where required, our business may be harmed. If in the future we are unable to achieve or maintain industry specific certifications or other requirements or standards relevant to our customers, it may harm our business and adversely affect our results.
In some cases, industry-specific laws, regulations or interpretive positions may also apply directly to us as a service provider. Any failure or perceived failure by us to comply with such requirements could have an adverse impact on our business.
Some of our enhanced services are dependent on leased network connectivity lines, and a significant disruption or change in these services could adversely affect our business.
A significant portion of our cloud software solutions are provided to customers through a dedicated network of equipment we own that is connected through leased network connectivity lines based on Internet protocol with capacity dedicated to us. We also move a portion of our voice long distance service over this dedicated network.
We lease network connectivity lines and space at co-location facilities for our equipment from third-party suppliers. These co-location facilities represent the backbone of our dedicated network. If any of these suppliers is unable or unwilling to provide or, if we desire, expand their current levels of service to us, the services we offer to customers may be adversely affected. We may not be able to obtain substitute services from other providers at reasonable or comparable prices or in a timely fashion. Any resulting disruptions in the services we offer that are provided over our dedicated network would likely result in customer dissatisfaction and adversely affect our operations. Furthermore, pricing increases by any of the suppliers we rely on for our dedicated network could adversely affect our results of operations if we are unable to pass through pricing increases.
We rely on third party network service providers to originate and terminate public switched telephone network calls, and thus significant failures in these networks could harm our operations.
For our business in the unified communications market, we leverage the infrastructure of third party network service providers to provide telephone numbers, public switched telephone network call termination and origination services, and local number portability for our customers rather than deploying our own network throughout the United States. If any of these network service providers ceases operations or otherwise terminate the services that we depend on, the delay in switching our technology to another network service provider, if available, could have an adverse effect on our business, financial condition or operating results.
Interruptions or delays in our services through third-party error, our own error or the occurrence of unforeseeable events, could harm our ability to deliver our services, which could harm our relationships with customers and subject us to liability.
We provide some of our services through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in various locations globally. Our hosting providers do not guarantee that our customers' access to our solutions will be uninterrupted, error-free or secure. Our operations depend on our providers' ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or network connectivity failures, criminal acts and similar events. Our back-up computer hardware and systems may not have sufficient capacity to recover all data and services in the event of an outage occurring simultaneously at all facilities. In the event that our hosting facility arrangements were terminated, or there was a lapse of service or accidental or willful damage to such facilities, we could experience lengthy interruptions in our service as well as delays and/or additional expense in arranging new facilities and services. Any or all of these events could cause our customers to lose access to the services they are purchasing from us. In addition, the failure by our third-party hosting facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.
Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our customers' service to their customers. Any interruptions or delays in our services, whether as a result of third-party error, our own error, natural disasters or security breaches, and whether accidental or willful, could harm our relationships with customers and our reputation. This in turn could cause a reduction in our revenue, subject us to liability, and cause us to issue credits or pay penalties or cause customers to fail to continue service, any of which could adversely affect our business, financial condition and results of operations. In the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.
We provide certain service level commitments to our customers, which could cause us to provide credits for future services if the stated service levels are not met for a given period and could adversely impact our revenue.
Our customer agreements for cloud offerings provide service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our service, we may be contractually obligated to provide these customers with credits for future services. Our revenue could be adversely impacted if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. Any such extended service outages could harm our reputation, revenue and operating results.
Risks Relating to Our Financial Condition
Our debt could adversely affect our financial condition and prevent us from enforcingfulfilling our obligations under our financing arrangements.
In connection with the inContact acquisition, we incurred indebtedness pursuant to the Credit Facility available to us under the Credit Agreement and through the issuance of the Notes. The debt incurred could have important consequences to our financial condition and business. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
make it more difficult for us to satisfy our other financial obligations;
restrict us from making strategic acquisitions or defendingcause us to make non-strategic divestitures;
require us to dedicate a substantial portion of our intellectual propertycash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
expose us to interest rate fluctuations since the interest on the Credit Agreement is imposed at variable rates;
make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such debt;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt;
limit our ability to borrow additional funds as needed;
restrict our ability to prepay the Notes or to pay cash upon exchanges of the Notes; and
limit our ability to pay dividends, redeem stock or make other distributions.
Our ability to make payments on and to refinance our debt, to fund planned capital expenditures and to maintain sufficient working capital will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, business, regulatory and other factors that may be beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Credit Agreement or from other sources in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. If our cash flow and capital resources are insufficient to allow us to make scheduled payments on our debt, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our debt on or before the maturity thereof, any of which could have a material adverse effect on our business, financial condition or results of operations. We cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all, or that the terms of that debt will allow any of the above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our financial condition and the value of our outstanding debt. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
A failure to comply with the covenants and other provisions of our outstanding debt could result in events of default under such instruments, which could permit acceleration of our Notes and borrowings under our Credit Agreement. Any required prepayment or exchange of our Notes or Credit Facility as a result of an event of default or fundamental change triggering such right would lower our current cash on hand such that we would not have those funds available for use in our business, which could adversely affect our operating results.
We are subject to a number of restrictive covenants under the Credit Agreement, which restrict our business and financing activities.
The Credit Agreement imposes, and the terms of any future debt may impose, operating and other restrictions on us. Such restrictions in many respects limit or prohibit, among other things, our and our subsidiaries' ability to:
incur or guarantee additional debt;
pay dividends on our ordinary shares or redeem, repurchase or retire our equity interests or subordinated debt;
transfer or sell our assets:
make certain payments or investments;
make capital expenditures;
create certain liens on assets;
create restrictions on the ability of our subsidiaries to pay dividends or make other payments to us;
engage in certain transactions with our affiliates; and
merge or consolidate with other companies.
The restrictions under the Credit Agreement may, in certain circumstances, prevent us from taking actions that management believes would be in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that do not have similar restrictions. In the event of any event of default under the Credit Agreement, the lenders under the Credit Agreement could elect to terminate their commitments or cease making further loans and accelerate the outstanding loans, and, in any such case, we could ultimately be forced into bankruptcy or liquidation. Because the indenture governing the Notes and the Credit Agreement has customary cross-default provisions, if our obligations under the Credit Agreement are accelerated we may be unable to repay or refinance the amounts due under the Credit Agreement or the Notes.
The conditional exchange feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional exchange feature of the Notes is triggered, holders of Notes will be entitled at their option to exchange the Notes at any time during specified periods. If one or more holders elect to exchange their Notes, we may elect to settle all or a portion of our exchange obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to exchange their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital and adversely affect covenants under the Credit Agreement.
We face foreign exchange currency risks.
Exchange rate fluctuations affect our operations. We experience risks from fluctuations in the value of the NIS, EUR, GBP, INR and other currencies compared to the dollar, the functional currency in our financial statements. A significant portion of the expenses associated with our Israeli and Indian operations, including personnel and facilities related expenses, are incurred in NIS and INR, respectively, whereas most of our business and revenues are generated in dollars, and to a certain extent, in GBP, EUR and other currencies. If the value of the dollar decreases against the NIS, our earnings may be negatively affected. 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 an increase in the costs of our operations, as expressed in dollars, which could adversely affect our earnings.
The announcement of Brexit caused significant currency exchange rate fluctuations that generally resulted in the sharp devaluation of the GBP and the strengthening of the U.S. dollar against foreign currencies in which we conduct business. In addition, the outcome of Brexit and interest rate changes in certain countries, may continue to cause volatility in the currency markets. These currency fluctuations may adversely affect our results of operations.
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. As part of our efforts to mitigate these risks, we use foreign currency hedging mechanisms, which may be ineffective in protecting us against adverse currency fluctuations and can also limit opportunities to profit from exchange rate fluctuations that would otherwise be favorable. 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 liabilityincome 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 eventjurisdictions in which we do business. From time to time, we are subject to income and other tax audits in various jurisdictions, the timing of which is 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 effective tax rates, especially increased liabilities of corporations and limitations on the ability to benefit from strategic tax planning, with these laws particularly focused on international 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.
The Organization for Economic Cooperation and Development has recently introduced the base erosion and profit shifting project. This project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, if adopted by individual countries, could adversely affect our provision for income taxes.
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 our financial investments defaults or undergoes reorganization in bankruptcy, we may lose a portion of such investment and our assets and income may decrease. In addition, a downturn in the credit markets or the downgrading of the credit rating of our investments could result in a reduction in the market value of our holdings and reduce the liquidity of our investments, which could require us to recognize a loss and would adversely affect our assets and income. For information on the types of our investments, see Item 11, "Quantitative and Qualitative Disclosures About Market Risk" in this annual report.
Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with U.S. GAAP. These principles are subject to interpretation by the Securities and Exchange Commission (the "SEC") and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.
For example, the Financial Accounting Standards Board ("FASB") has issued new accounting standards for revenue recognition and leasing, and while we know that these standards will have an impact on us we are still evaluating the extent of the impact these new accounting standards will have on our consolidated financial statements and related disclosures. Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. For additional information regarding these updated standards, see the section titled "Recently Issued Accounting Pronouncements" in Item 5.
Risks Relating to Intellectual Property and Data Protection
We may face risks relating to inadequate intellectual property protection and liability resulting from infringement by our products or solutions infringe on the proprietary rights of third parties and we are not successful in defending such claims.party proprietary rights.
Our success is dependent, to a significant extent, upon our proprietary technology. We currently hold 127202 U.S. patents and 6850 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 12077 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. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could affect our ability to expand to international markets or require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
FromIn the past we received, from time to time, we receive “cease"cease and desist”desist" letters alleging patent infringements. However,Although there are currently no formal infringement claims or other actions have been filed with respectpending against us, in the event that we are required to defend ourselves against any such alleged infringement, except for past claims which have since been settled or dismissed. Defending infringement claims or other claimsactions we could involvebe subject to 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, anyterms. Any of whichthese 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 accessface risks relating to our products or necessitating that we pay licensing fees.use of certain "open source" software tools.
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.
If we fail to prevent information security breaches, our operations, financial condition and reputation may be harmed.
Our services involve the storage and transmission of customers' proprietary information, and security breaches could expose us to a risk of loss of this information and possible liability. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our IT data, our customers' data or our data, including our intellectual property and other confidential business information.
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 end user could negatively affect our business.
Cyber security attacks are becoming increasingly sophisticated and in many cases may not be identified until a security breach actually occurs. If we fail to recognize and deal with such security attacks and threats and if we fail to update our products and solutions and prevent such threatened attacks in real time to protect our customers' or other parties' sensitive information, whether retained in our systems or by our customers using our products, our business and reputation will be harmed.
Third parties may attempt to breach our security measures or inappropriately take advantage of our solutions, including our SaaS and hosting services, through computer viruses, electronic break-ins and other disruptions. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data, our data or our systems. Furthermore, our customers may authorize third party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our services. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our services. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability.
Risks Relating to the Regulatory Environment
Changes in the legal and regulatory environment could materially and adversely affect our business, results of operations and financial condition.
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 business and products, us or our employees (including labor laws and regulations) are newlyconstantly implemented or changed. Such implemented laws and regulations include requirements in the United States, Europe and other territories in relation to, data privacy and protection, anti-bribery and anti-corruption, import and export, labor, tax and environmental and social issues. It is expected that the recently appointed administration in the U.S. will promulgate new or amended or abolish regulations that may impact our customers' business or our operations, such as Dodd –Frank Act or consumer protection laws, and which may reduce the demand for our products and services and may adversely affect our results of operations.
From time to time, we may also operate pursuant to specific authorizations of, and commitments towards, U.S., Israeli or other governmental authorities and agencies. While we make every effort to comply with such requirements, we cannot assure you that we will be fully successful in our efforts, and that our business will not be harmed. Failure to comply with such laws, regulations, authorizations and commitments could results in fines, damages, civil liability and criminal sanctions against us, our officers and our employees, prohibitions on the conduct of our business and damage to our reputation.
We believe there is a global trend toward adoption and enforcement of data privacy, information security and cyber related legislation and procedures. 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 ourselves or our customers to liability resulting from a breach of such regulations. 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.
Failure to comply with privacy legislation or procedures may cause us to incur civil liability to government agencies, customers, shareholders and individuals whose privacy may have been compromised.
In addition, our revenues would be harmedadversely affected if we fail to adapt our products and services to changes in rules and regulations applicable to the business of certain of our clients, such as rules and regulations regarding 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 result in a decrease in demand, which could materially and 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. In addition, we may be limited in our ability to transfer or outsource business to certain jurisdictions, and may be limited in our ability to undertake development activity in certain jurisdictions, which may impede on our efficiency and adversely affect our business results of operations.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, may have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability and equity components of convertible or exchangeable debt instruments (such as the Notes) that may be settled entirely or partially in cash upon exchange in a manner that reflects our economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of shareholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report lower net income (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period's amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results.
In addition, convertible or exchangeable debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method if we have the ability and intent to settle exchanges in cash, the effect of which is that the ADSs deliverable upon exchange of the Notes are not included in the calculation of diluted earnings per share except to the extent that the exchange value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of ADSs that would be necessary to settle such excess (if we elected to settle such excess in ADSs) are deemed issued. We cannot be sure that we will be able to continue to demonstrate the ability or intent to settle in cash or that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to comply with these specific requirements or guidelines, or privacy and information security legislationuse the treasury stock method in general, it could materially adversely affect our business and results of operations.
In recent years,accounting for the European Union issued directives on the RestrictionADSs deliverable upon exchange 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 otherwiseNotes, our diluted earnings per share would be 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.affected.
If we fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002,over financial reporting, it could have a material adverse effect on our business, operating results, and share price.the price of our ordinary shares and ADSs.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our effortsEffective internal controls are necessary for us to comply with the requirements of Section 404, which first applied to ourprovide reliable financial reports and prepare consolidated financial statements for 2006, have resultedexternal reporting purposes in increased generalaccordance with U.S. generally accepted accounting principles and administrative expenses and a devotionU.S. securities laws, as well as to effectively prevent material fraud. Because of management time and attention to compliance activities, and we expect these efforts to require the continued commitment of significant resources. Ifinherent limitations, even effective internal control over financial reporting may not prevent or detect every misstatement. In addition, 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. Furthermore, as we grow our business or acquire businesses, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. 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 our Presence in 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 facilitiesand a substantial percentage of Flextronics Israel Ltd., our key manufacturer,manufacturing capabilities, are located in the State of Israel, and we are directly affected by the political,Israel. Political, economic and securitymilitary conditions to whichin Israel is subject.directly affect our operations. 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 violenceintensity. There have been ongoing hostilities 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.years. There can be no assurance that such attacks will not hithave an impact 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
Israel also faces threats from Hezbollah militants in Lebanon, from ISIS and continuous unrestrebel forces in various countries in the Middle East, including Israel’sSyria, and from Iran. Moreover, some of 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.recently undergone or are undergoing significant political changes. 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 severenegative 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’sIsrael'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 inin 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. 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 officersIt may be difficult to obtain.enforce a U.S. judgment against us and our officers and directors in Israel or the United States, or to serve process on our officers and directors.
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:
| · | subject to limited exceptions, the judgment is final and non-appealable; |
| · | the judgment was given by a court competent under the laws of the state in which the court is located and is otherwise enforceable in such state; |
| · | the judgment was rendered by a court competent under the rules of private international law applicable in Israel; |
| · | the laws of the state in which the judgment was given provides for the enforcement of judgments of Israeli courts; |
| · | adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; |
| · | the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; |
| · | the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and |
| · | an action between the same parties in the same matter was not pending in any Israeli court at thethe time the lawsuit was instituted in the U.S. court. |
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”"Preferred Technology Enterprise" programs and certain grants from the National Association for Technology and Innovation (formerly known as the Office of the Chief Scientist of the Ministry of Economy (“OCS”Economy) of the State of Israel (the "NATI"), for research and development.
To be eligible for tax benefits as a Preferred Technology 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-relatedNATI-related grants and benefits, we must continue to meet certain conditions, including conducting the research, development, manufacturing of products developed with such OCSNATI grants in Israel (unless a special approval has been granted for performing manufacturing activities outside Israel) and as of 2012, providing the OCSNATI 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 ofpaying a fee. See Item 4, “Information"Information on the Company—Research and Development”Development" in this annual report, for additional information about OCSNATI programs.
From timeMoreover, we participate in the European Community Framework Program for Research, Technological Development and Demonstration, which funds and promotes research. Under these programs we need to time,comply with certain conditions. If we fail to comply with these conditions, the Israeli Government has discussed reducingbenefits received could be canceled and we could be required to refund any payments previously received under these programs or eliminatingpay additional amounts with respect to the availability ofgrants received under 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. programs.
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 Technology 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 otherwise impede a merger with, or an acquisition of, us,our company, which could prevent a change of control.control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, and tender offers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders 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 someour shareholders whose country of our shareholders.residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. These and other similar provisions could delay, prevent or impede an acquisition of us. us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
See Item 10, “Additional"Additional Information—Mergers and Acquisitions”Acquisitions" in this annual report, for additional discussion about someregarding anti-takeover effects of Israeli law.
Risks relatedRelating to our Ordinary Shares and ADSsSecurities
Our shareThe market price of each of our ADSs, ordinary shares and the Notes is volatile and may decline.
Numerous factors, some of which are beyond our control, may cause the market price of our ADSs, ordinary shares or our ADSs, each of which represents one ordinary share,and the Notes to fluctuate significantly. These factors include, among other things, announcements of technological innovations, developmentthings:
| · | Quarterly variations in our operating results; |
| · | Changes in expectations as to our future financial performance, including financial estimates by securities |
| · | Perceptions of our company held by analysts and investors; |
| · | Additions or departures of key personnel; |
| · | Announcements related to dividends; |
| · | Development of or disputes concerning our intellectual property rights; |
| · | Announcements of technological innovations; |
| · | Customer orders or new products by us or our competitors; |
| · | Acquisitions or investments by us or by our competitors and partners; |
| · | The exchangeability of the Notes for ADSs; |
| · | Hedging or arbitrage trading activity involving ADSs by holders of the Notes; |
| · | Modification of hedge positions by counterparties to the hedge transactions we entered into simultaneously with the issuance of the Notes, including the possible entry into or unwinding of derivative transactions with respect to the ADSs or the purchase or sale of the ADSs or other NICE securities in secondary market transactions; |
| · | Currency exchange rate fluctuations; |
| · | Earnings releases by us, our partners or our competitors; |
| · | General financial, 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; and |
| · | General stock market volatility. |
Our ADSs and ordinary shares are traded on different markets and this may result in price variations.
Our ADSs have been listed on The NASDAQ Stock Market since 1996 and our ordinary shares have been traded on the Tel Aviv Stock Exchange, or disputes concerningthe "TASE", since 1991. Trading in our intellectual property rights, customer orders or new products by us orsecurities on these markets takes place in different currencies (our ADSs are traded in U.S. dollars and our competitors, acquisitions or investments by us or by our competitorsordinary shares are traded in New Israeli Shekels), and partners, currency exchange rate fluctuations, earnings releases by us, our partners or our competitors, general economicat different times (resulting from different time zones, different trading days and market conditions, political changes and unrest in regions, natural catastrophes, market conditionsdifferent public holidays in the industryUnited States and Israel). As a result the general statetrading prices of our securities on these two markets may differ due to these factors. In addition, any decrease in the price of our securities on one of these markets with particular emphasiscould cause a decrease in the trading price of our securities on the technology and Israeli sectorsother market.
Substantial future sales or the perception of the securities markets.
Future sales of our ADSs may impactor ordinary shares, or the marketexchange of a substantial amount of Notes, or perception thereof, could cause the price of our ADSs.ADSs or ordinary shares to decline.
If we or our shareholders sellSales of substantial amounts of our ADSs or ordinary shares in the public market, or the marketperception that these sales could occur, could adversely affect the price of our ADSs and ordinary shares and could decline. Theseimpair our ability to raise capital through the sale of additional shares. Such sales may also might make it more difficult for us to sell equity or equity-related securities in the future at a time and at a desirable price.
Additionally, future exchanges of the Notes for ADSs, or the perception that these exchanges may occur, could reduce the market price of the ordinary shares or ADSs. This could also impair NICE's abilities to raise additional capital through the sale of its securities.
The market prices of the ordinary shares and the ADSs, which may fluctuate significantly, will directly affect the market price for the Notes.
We expect that the market price of the ordinary shares and the ADSs will affect the market price of the Notes. This may result in greater volatility in the market price of the Notes than would be expected for non-exchangeable notes. The market price of the ordinary shares and the ADSs will likely fluctuate in response to a number of factors, many of which are beyond our control. Holders who receive ADSs upon exchange of the Notes will therefore be subject to the risk of volatility and depressed prices of ADSs. In addition, we expect that the market price of the Notes will be influenced by yield and interest rates in the capital markets, our creditworthiness and the occurrence of certain events affecting us that do not require an adjustment to the exchange rate. Fluctuations in yield rates in particular may give rise to arbitrage opportunities based upon changes in the relative values of the Notes and ADSs. Any such arbitrage could, in turn, affect the market prices of ADSs and the Notes.
Holders of our ADSs are not treated as shareholders of our company.
Holders of our ADSs are not treated as shareholders of our company unless they withdraw the ordinary shares underlying the ADSs from the depositary, which holds the ordinary shares underlying the ADSs. Holders of ADSs therefore do not have any rights as shareholders of our company, other than the rights that they have pursuant to the deposit agreement with the depositary.
We have not registered, and do not currently intend to register, the Notes, the ADSs into which the Notes are exchanged or exchangeable or the ordinary shares represented thereby. There are restrictions on Noteholders' ability to transfer or resell the Notes, ADSs and the underlying ordinary shares.
The Notes, the ADSs deliverable upon exchange of the Notes and the ordinary shares represented thereby were offered and sold pursuant to an exemption from registration under the Securities Act and applicable state securities laws, and we have not registered, and do not currently intend to register, the Notes, the ADSs or such ordinary shares. Therefore, Noteholders may transfer or resell the Notes only in a transaction registered under or exempt from the registration requirements of the Securities Act and applicable state securities laws, and may be required to bear the risk of their investment for an indefinite period of time.
The fundamental change and make-whole fundamental change provisions of the Notes may delay or prevent an otherwise beneficial attempt to acquire our company.
The fundamental change prepayment rights of the Noteholders under the Notes, which would allow Noteholders to require that we deem appropriate. Followingprepay all or a portion of their Note upon the occurrence of a fundamental change, and the provisions under the Notes requiring an increase to the exchange rate for exchanges in connection with a make-whole fundamental change, in certain circumstances may delay or prevent an acquisition of NICE that would otherwise be beneficial to our ADSs held by new holders may become freely tradable.shareholders.
Item 4. Information on the Company.
History and Development of the Company Background
OurNICE was founded on September 28, 1986, as NICE Neptun Intelligent Computer Engineering Ltd., and on October 14, 1991 was renamed NICE-Systems Ltd. On June 6, 2016 we were renamed NICE Ltd., which is our legal and commercial namename. NICE 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 officesheadquarters are located at 2213 Zarchin Street, P.O. Box 690, Ra’anana 43107,Ra'anana 4310602, Israel and the telephone number at that location is +972-9-775-3030. Our agent for service in(Tel. +972-9-775-3151). In the United States, is our subsidiary, NiceNICE Systems, Inc.,is located at 461 From Road, Paramus,221 River Street, Hoboken, New Jersey 07652.07030.
For a summaryIn the last three fiscal years, our principal capital expenditures were the acquisition of other businesses, repurchases of our recentADRs and distributions of dividends. For information regarding our acquisitions and ordinary share repurchases, please see Item 5, “Operating"Operating and Financial Review and Prospects—Recent Acquisitions”Acquisitions," and "Liquidity and Capital Resources," in this annual report. For additional information regarding our ordinary share repurchases, please also see Item 16E, "Purchases of Equity Securities by the Issuer and Affiliated Purchasers," in this annual report.
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.
NICE is a global software leader in omnichannel analytics and cloud solutions for the Customer Engagement and Financial Crime & Compliance markets.
Our mission is to empower organizations to make smart business decisions through deep human understanding.
We provide software solutions that help organizations understand their customers and employees and predict their intentions and their needs to create exceptional customer experiences, understand their workforce to drive greater efficiency, and identify suspicious behaviour to prevent financial crime and non-compliant activities.
We do this by providing customer engagement platforms, capturing interactions and transactions across multiple channels and sources and applying best-in-class analytics to this data to provide real-time insight and uncover intent. NICE helps its customers improve their service and security by applying machine learning to cross-industry data and offering customers collective insights. Our solutions allow organizations to operationalize this insight and embed it within their workflows and daily business processes.
NICE is at the forefront of two industry transformations: the adoption of cloud-delivered fully-integrated customer engagement platforms and the shift of financial institutions to integrated risk management platforms for handling end-to-end financial crime prevention.
In both cases, deep integration of process automation and analytics enables customers to achieve much greater effectiveness and efficiency.
Our advanced technologies and core competencies around customer interaction platforms, data capture, process automation, advanced real-time analytics and cloud services were developed organically and through multiple acquisitions.
We rely on several key assets to drive our growth:
· Our loyal customer base. Today, more than 25,000 organizations in over 150 countries, including 85 of the Fortune 100 companies, are using NICE solutions.
· Our market leadership makes us a well-recognized brand, and creates top-of-mind awareness for our solutions in our areas of operation.
· Our market-leading products and technologies for customer engagement, data capture, analytics, and cloud, which are protected by a broad array of patents.
· Our ability to quickly drive mainstream adoption for innovative solutions and new technologies, which we introduce to the market through our direct sales force and distribution network.
· Our skilled employees and domain expertise in our core markets allows us to bring our customers the right solutions to address key business challenges and build strong customer partnerships.
· Our services, customer support and operations, which enable our customers to quickly enjoy the benefits of our solutions, with multiple deployment models in the cloud or on-premises throughout the world and support for full value realization and customer success.
We have established a leadership position in many of our areas of operation by offering comprehensive and innovative enterprise-grade solutions and technologies. Our customers, across all sizes and verticals, including banking, telecommunications, healthcare, insurance, retail, travel, public safety, state and local government and more, are benefiting from the tangible and practical business value that our solutions provide.
Business Overview
WeNICE is an industry leader operating in two main markets: Customer Engagement and Financial Crime & Compliance. NICE's long term strategy is to strengthen its leadership position in these two market segments and further enhance its position in adjacent markets. During 2016, NICE achieved significant milestones in executing its long term strategy, including the acquisitions of inContact and Nexidia, which significantly enhanced our position as the leader in the Customer Engagement market.
Customer Engagement
Organizations that serve consumers are challenged to provide high quality service that is responsive to their customers' ever-changing needs and to differentiate themselves through efficient and effective customer engagement. In addition, they have to find ways to leverage customer interactions and generate upsell opportunities. They need to accomplish these objectives while containing operational costs and adhering to regulations. NICE Customer Engagement solutions help organizations address these challenges.
NICE is a global leader in softwarethe Customer Engagement market. Our portfolio of solutions serves thousands of organizations worldwide, providing an omnichannel customer engagement platform, data-driven insights that enable organizationsempower businesses to better operationalize Big Data.
We enable organizations to takedeliver consistent and personalized experience across the next-best-action by understanding people through analytics of structuredcustomer journey, delivered both on-premises and unstructured data. Ourin the cloud. Additionally, our solutions help our customers to become more operationally efficient, customer-focused,optimize business performance and revenue driven, security aware, and compliant.ensure compliance.
Our solutions serve contact centers, self-service channels, back office operations and retail branches, spanning multiple industries, including: banking, telecommunications, insurance, healthcare, business process outsourcing (BPO), government, utilities, travel, entertainment and e-commerce.
Our customers use our solutions to engage with their customers in real time, understand who they are used by thousandsand what their needs are, and drive the right "next best action." In addition, they can ensure that their employees are engaged, properly trained and in a position to provide the highest quality of organizations in more than 150 countries, including 75service.
With an engaged workforce and understanding of the Fortune 100 companies.intent and journey of its consumers, NICE allows organizations to provide the consistent and personalized experience that customers expect, as well as improve operational efficiency, ensure regulatory compliance and increase revenues.
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
Financial institutions are regularly challenged with prevention of fraud and money laundering, and compliance adherence. They have a common need for risk management solutions that will help them stay ahead of the evolving landscape of threats and efficiently adapt to changes in business and regulatory requirements. NICE provides organizations with proven capabilities for real-time and cross-channel fraud prevention, anti-money laundering, brokerage compliance and enterprise-wide case management. With this complete set of best-in-class solutions, financial institutions can tighten risk controls, lower operational and IT costs, enhance investigation efficiency and improve customer experience.
NICE serves the financial crime & compliance needs of hundreds of organizations, including some of the world's top financial institutions and regulatory agencies.authorities. Our Security business addressessolutions monitor millions of financial transactions daily, enabling organizations to mitigate the needsrisk of security sensitive organizations, such as banks, airports, mass transit, utilities,financial crime, improve compliance 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 greaterreduce 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.costs.
Industry and Technology Trends
DemandFollowing are the key trends that are driving 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.solutions:
| · | In Consumers demand a single omnichannel effortless and immediate experience with consistent service across all touchpoints. Consumer behavior is significantly changing in terms of expectations and the contact centerway they interact with service providers. Consumers demand immediate, effortless, consistent and personalized experiences across all communication channels, including mobile apps, web, chat, SMS, social, and over the needphone, with the least amount of effort. They easily and often traverse these channels, depending on their task, location, time-of-day or even progress within a certain process. They view all these channels as one, and organizations are expected to record and analyze customer interactions is constantly growingquickly adapt to the large variety of channels as compliance and regulatory pressures are increasing, which may be seen, for example,well to view them in the area of consumer protection regulation and enforcement actions by the CFPB (Consumer Financial Protection Bureau) in the US.same way their consumers do, offering a consistent experience across all touch points. |
| · | GlobalCloud adoption is accelerating and demand is expanding across segments. Cloud delivery is becoming increasingly popular in providing flexible and cost-effective deployment models for enterprise systems. These include SaaS, Contact Center as a Service, Infrastructure as a Service, Platform as a Service, and other cloud-based solutions. By using cloud solutions, customers of all sizes can scale quickly and easily in all geographic locations while paying only for the amount of resources they use. There are several market needs driving this trend, including the desire for business agility, the pressure to continually improve operational efficiency and innovate to reduce total cost of ownership (“TCO”), and to ease implementation complexity. |
| · | Proliferation of analytics as a main driver for successful customer engagement. Organizations are increasingly implementing a customer-centric strategy to get better visibility to their customers’ multi-channel journey. Organizations are now moving from simple Business Intelligence tools to focused decisioning and real-time action solutions – being proactive instead of reactive and predictive/prescriptive instead of descriptive. Front and back office functions seek to employ analytics to better optimize their operations. In addition, organizations today are exploring cognitive engagement solutions, like interactive computing, predictive analytics and machine learning. |
| · | Organizations look at Big Data technologies to analyze a wealth of information, derive new business insight and act in real time. Structured and unstructured data, from millions of omnichannel interactions and transactions, open up an opportunity to gain deep insight and human understanding, regarding customer and employee intentions and behavioral patterns. Organizations keep looking for ways to elevate their usage of Big Data and advance from glimpses of interactions and transactions to a meaningful understanding of behaviors and to identify a customer's underlying concerns. Furthermore, they strive to ensure compliance in real time, which is then translated into action and into providing the best solution and accurate response. |
| · | Automation and Machine Learning are increasingly used to enhance customer experience and efficiency. Smart and self-learning machines allow for the automated enhancement of real-time guidance and analytics-based insights (including speech and text analytics), behavior analytics and technique focused on profiling, trending and pattern detection. As a result, organizations increasingly use these technologies to provide faster and more efficient customer service. |
| · | Preventing financial institutions need to monitor transactionscrime and ensuring stringent compliance and evolving regulatory environments. Financial services regulators are calling for a fundamental change in the underlying culture of the entities that they regulate, in order to send a strong message from the executive suite on down that protecting an institution, its customers and its assets, is of primary importance. The need to ensure compliance duewith requirements for advanced technological solutions can be seen across customer interactions and financial services markets. Financial services organizations are increasingly being asked to document and prove to their regulators that the controls that are in part to the significant increase in enforcement by regulators, particularly across Europeplace are working and the United States, aseffective. This is evidenced by substantial fines that have recently been levied against such institutions. Furthermore, the regulatory requirements are constantly evolving, requiring financial institutions to respond with solutions that are up to date with the latest modifications. |
| · | An unpredictable threat landscape environment. The growing number of data breaches and cyber security incidents puts increasing amounts of personally identifiable information and sensitive data at risk of exposure. This information can be used to open accounts that can be used for laundering money, terrorist financing, account fraud, market manipulation, social engineering, and more. Such potential risks threaten an organization's reputation, as well as create large financial exposures due to both losses as well as fines. In addition, the large volumes of data, having to do with both internal and external threats, place an enormous operational burden on organizations dealing with threats. Having the ability to aggregate, analyze, compare, and decision those incidents and cases increasingly points to the need for a robust and comprehensive way in which cases are handled by large financial services organizations. |
| · | Security-sensitive organizationsAn increasing need to control cost of compliance. The regulatory pressures and increasing threat landscape have driven a sharp increase in the number of risk and compliance personnel, which in turn have dramatically increased the cost of compliance. Customers are expectedturning to continuetechnology to adopt solutions in orderallow them to meet regulations regarding increased physical securitycontrol these costs without compromising their compliance adherence and reliability, such as the North American Electric Reliability Corporation Critical Infrastructure Protection (NERC-CIP). |
II. Growing Need to Drive Revenues and Efficiency with Advanced Software
This trend can be observed across our different business areas.
| · | Contact centers are seeking software solutions powered by Big-Data and advanced analyticswhile continuing to help them identify the motivations behind customer behaviors and thus improve service and sales.lower their exposure to financial crime. |
| · | Voice biometricsAn Integrated Risk Management Platform is being utilizedbecoming more prevalent. The ever-expanding risk landscape and sophistication of financial criminals as well as the need to keep cost in contact centerscheck creates a growing need for caller authenticationa single view of financial crime-related risk, thereby allowing organizations to shorten call handling time, improve efficiencyaggregate and prevent fraud.analyze the different detection signals coming from throughout the financial services organization. Financial institutions are seeking a single platform that aggregates all such information from across the organization, analyzes it, acts on it and presents it in a single dashboard to both operations and executives. |
| · | Security organizations are looking to video analytics to identify and address risks and minimize queues in highly crowded areas. |
Strategy
| · | After investing in creating a more efficient contact center, organizations are looking to benefit from the same type of software solutions to make other areas of their business more efficient, including the back office, retail stores, and branches. |
| · | Organizations are looking to benefit from investments made in systems, such as video analytics for security and safety to also address operations, improve service-levels, and maximization of business continuity. |
III. Increased Focus on Improving Customer Experience
This is another trend we see acrossStrengthening our diverse business areas, as follows:
| · | The nature of customer loyalty is evolving. Consumers today are more prone to switch their service provider or to start doing business with a competing service provider in parallel. Consumers are looking to have an effortless and consistent level of service excellence regardless of the communication channel, e.g. smart phones, web, chat, and social media. Thus, we believe that organizations are seeking to better understand and manage their customers’ journeys across many channels and touchpoints, to provide them with improved experiences. |
market leadership
| · | We also believe that the implementation of software solutions to combat fraud in the area of financial transactions is being driven by the need to protect the consumer and thus improve customer experience. |
| · | In addition, security solutions that are being deployed for security and security operations also carry experience benefits with capabilities for crowd control. |
IV. Growing Need to Safeguard People and Assets
| · | Increased urbanization in both developed and developing countries results in an increased need for ensuring safety and security, which we believe is driving large-scale “safe city” security projects. These large-scale projects include installation and implementation of wide-scale security systems, which better synchronize and correlate multimedia data sources. |
| · | Furthermore, we believe that advanced security solutions are being sought to address the need for (i) heightened national security around the world, (ii) corporations to protect their IT networks, personnel, and corporate facilities, and (iii) governments and companies to prevent and/or combat cyber-attacks. |
| · | The number and variety of physical security sensors is growing substantially, with public and private organizations deploying security systems, such as surveillance cameras and access control and intrusion detection sensors. We believe that organizations, municipalities and governmental entities are seeking to eliminate the number of information silos created by deployment of redundant security systems so they can take the right actions, share information in real time, and successfully mitigate events. |
Technology Trends
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.
| · | We believe that organizations are seeking to collect, analyze, and respond to the enormous amount of Big Data generated by customer interactions and transactions and by security sensors. |
| · | We believe that there is a growing adoption of advanced analytics technologies for enabling organizations to (i) mine insights from customer interactions channels (such as phone, branches, email, chat, social media, etc.) and analyze it with transactional data (usage, action taken in the account, etc.) and the customer personal data (demographics, segments, etc.), (ii) improve customer satisfaction, (iii) increase operational efficiency, and (iv) optimize marketing and sales effectiveness. |
| · | We see the adoption of video analytics to improve the effectiveness of an organization’s surveillance system. The organization can send real-time alerts to security personnel regarding intrusion management, crowd management, and situation indication. |
| · | We also believe that the need for transactional analytics is growing in order to prevent internal and external fraud, and to mitigate other forms of financial risk. |
| · | We believe that governments are realizing that existing intelligence capabilities are insufficient in handling challenges such as asymmetric and cyber warfare, IP-based communication and social networks proliferation, and that they are therefore more open to external solutions, which they expect to deliver not only monitoring capabilities, but also analytics-driven insights. |
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
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 maintainincrease our market-leading position by continuing to offer aand expand our comprehensive portfolio of solutions, that is differentiated by itsthe ability to use analytics and machine learning to drive decisions and actions, in addressing various business needs through multiple business needs.models. Our brand, global reach, financial resources, extensive domain expertise and ability to deliver solutions that address the needs offor large organizations will also continuecontribute to driveincreasing our leadingmarket-leading position.
In recent years we have significantly enhanced our cloud offering, and we will continue to expand this offering. The cloud offering enables us to grow our value to our existing customers, as well as expand NICE's reach to the mid-market, considerably increasing our addressable market size.
We also intend to continue developingdrive additional growth by continuing to develop our direct contactrelationship with customers, nurturing our partner ecosystem, and targetingcreating growth in each of theour business areas in which we operate.areas. Additionally, we intend to lead thein new product categories, we enter as we introduce newnovel solutions and enter newadditional market segments.
Our products and technologies can provide value in markets that are adjacent to our existing markets, such as back office operations, alternative payment service providers, fintech and others. We plan to expand our market reach into such adjacencies, by adapting our products and leveraging technology as well as our customer relationships and brand to expand our addressable market.
Enterprise Software Business Model
Our strategy isContinuing 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 bringdeliver more comprehensive solutions to our existing customers.customers
One of our main assets is our customer base. We believe there are abundantmany opportunities to up-sell and cross-sell within our existing customer base bybase. This includes increasing our customers’ use ofcustomers' exposure to the full breadth of our solutions, migrating them to our next-generation portfolio, and havingproviding them benefit fromthe benefits of our new and broadening offering.expanded offerings.
Continue to develop our solution offering through internalContinuing organic innovation and development, while also pursuing acquisitions.acquisitions
We are committedintend to internalcontinue investing in innovation and development and have a history of successful organic growth in all our business areas. We have also complemented this growth with successful acquisitions. We intendplan to continue augmenting our organic growth with additional acquisitions that broaden our product and technology portfolio, expand our presence in selected vertical and adjacent markets and geographic areas, broaden our customer base, and increase our distribution channels and vertical market access.channels.
MaximizeMaximizing the synergetic potential across some of our businesses.businesses
In various business areas in whichWhile we operate, we offer leading solutionsbring deep domain expertise 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. AnThus, an important pillar of our corporate strategy is to maximize the synergies and cooperation between our business areas.areas, where possible.
Introducing joint offerings and combining go-to-market efforts, andas well as leveraging extensive complementary domain expertise, technological know-how, capabilities and developments maydevelopment, are expected to enable us to grow our business through additional cross-sell and up-sell opportunities. TheMoreover, this synergetic approach reflects a core NICE value forof nurturing a corporate culture that is focused on delivering encompassing and high-quality customer service.
Our Business StrategiesProviding innovative, real-time analytics and Solutions
I. Customer Interactions Business
Introduction to the Customer Interactions Solutions
NICE is a global leader in Customer Interactions Solutions. Our portfolio ofmachine learning and cross-channel solutions helps thousands of organizations, across the world, to transform the way they interact with their customers.significant impact for our customers' businesses
Our customers span multiple industries, such as banking, communications, health care, outsourcing, insurance, travelsolutions address the growing, unmet need to more accurately analyze and utilities. As leaders in their respective industries, 75 of the Fortune 100 companies are NICE Customer Interaction Solution customersextract meaningful information from structured 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 actunstructured data in real timetime; and consistentlyto do so across customer touch points. By doing that,multiple channels, in a wide variety of businesses can deliver an exceptional customer experience, improveand operational efficiency, enhance regulatory complianceenvironments. We enable our customers to embed both real-time and increase revenues.
This is accomplished through:
| · | Capturing customer interactions from the different communication channels; |
| · | Extracting insights through Big Data analytics; |
| · | Driving the next best action in real time; |
| · | Acting upon the voice of the customer; |
| · | Closing the loop across customer touch points; |
| · | Continuously improving employee performance; and |
| · | Optimizing processes for service, sales, marketing and compliance. |
offline analytics into their business processes, positively impacting these processes as they occur, which in turn has a positive impact on their businesses.
We believe thatplan to continue to enhance our leadershipcapabilities in this market is sustained throughoperationalizing Big Data with analytics, behavior prediction, decisioning and guidance. We also plan to continue enabling organizations to address the following key differentiators:full lifecycle of interactions, transactions and events (i.e., before, during, and after they occur).
| · | A broad and comprehensive portfolio meeting a variety of customers’ operational to strategic business initiatives; |
| · | Advanced, robust technology that scales to large organizations needs and meets the demands of mission critical environments; |
| · | Innovative technology including interaction and transaction cross-channel analytics, predictive models, real time decisioning and guidance; |
| · | Proven successful large scale deployments with quantifiable business results, across domains; and |
| · | Global services and consulting organizations, with deep domain expertise. |
Customer Interactions Business StrategyOffering an enterprise software business model
Our strategy is to offer our solutions in alignment with both on-premises and cloud-based enterprise software business models.
In the on-premises model customers purchase a license to use our software indefinitely, while also purchasing related professional services and annual software maintenance. We also offer some of our solutions under a term license, according to which customers purchase a license to use our software for a fixed period of time. Growth in maintenance revenues (which is primarily a result of high maintenance contract renewal rates and the growth of our on-premises client base) is driving an increase in our recurring revenue.
We offer our solutions in cloud-based models, providing our customers access to faster innovation, more flexibility as well as a lower TCO. We see a growing demand for these models and they could enhance our penetration into the smaller business market segment, as well as enable our existing customers to broaden their use of our products. 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.
An increase in the proportion of recurring revenue (both from recurring maintenance and cloud sales) out of our overall revenue mix, is expected to provide increasingly predictable revenue streams.
Customer Engagement Business Strategy
Our strategy is to extend our leadershipmarket leading position in the customer serviceengagement space, while expandingcontinuing to expand beyond the contact center to the many different customer experience channels and across touchpoints. Our broad portfolio oftouch points with multiple delivery models. We will achieve that by providing solutions supports this strategy on three levels, providing benefits beyond the agent, beyond the contact center, and beyond customer service, namely:that focus on:
| ●· | Introducing the next-generation Customer Engagement platform, the Experience Center: Combining omnichannel routing, self-service, customer journey analytics, adaptive WFO and automation in the cloud. |
| · | Creating cloud transformation across the Customer Engagement portfolio for all segments and regions, to enhance flexibility, agility and lower TCO. |
| · | Providing solutions that focus on employees’ engagement and performance optimization, and solutions that deliver a better understandingcomprehensive suite of customer needsservice essentials, from predictive omnichannel routing and the abilityWFO to meet those needs;advanced analytics based applications. |
| · | Infusing Analytics into each and every element of customer engagement. |
| · | Transforming the workforce through Adaptive Workforce Optimization (Adaptive WFO), by creating and managing agent personas through enhancement of the employee experience and engagement, in order to drive their motivation and reduce attrition. |
| ●· | ProvidingLeveraging Artificial Intelligence and advanced process automation technologies to dramatically reduce routine employee activities and improve the efficiency of customer engagement solutions that are
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| · | Extending and increasing our offering to the SMB market segment, through cloud offerings.
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| · | Analyzing individual customer journeys and operationalizing the insights extracted to create business value in real-time for customer experience stakeholders. |
| · | Understanding the voice of the customer, across all touch points, and taking action to address the needs of Customer Experience Officers and other stakeholders in the marketing department. |
| · | Offering solutions to all customer touchpoints implemented in the contact center, andas well as solutions that benefit back office operations, retail branches, and self-service channels; andchannels. |
| ● | Providing solutions that focus on improving customer experience, and solutions that benefit additional business needs, including sales optimization, compliance and customer retention. |
Financial Crime and Compliance Business Strategy
We supportplan to continue extending 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,market leading position by focusing on five themes:on:
| · | Big Data & Predictive Analytics – Utilizing predictive models with interactionDelivering integrated financial crime and transaction analytics; compliance solutions that help financial services organizations to identify issues faster and earlier. |
| · | Real-Time capabilities – Including real time captureLeveraging Big Data, machine learning and analytics, real time authentication, real time guidance, real time decisioningother advanced technologies, integrated with our financial crime and real time web personalization; compliance platform to help customers reduce cost of operations. |
| · | Cross-portfolio workflows – StrengtheningContinuing to cross-sell and up-sell into our existing customer base around the synergistic benefits between our solutions; world. |
| · | Cloud – Enhancing existing and newContinuing to focus on tier 1 clients by providing them with solutions to supportmeet their needs via cloud delivery; and on-premise models. |
| · | Cross-Channel – Continuous advancements towards omni-channel experience. Leveraging cloud and SaaS to expand the reach of our solutions to tier 2 customers, thereby providing us an opportunity to significantly enhance our addressable market. |
| · | Partnering with world-class consultancy and other firms to identify additional significant opportunities. |
| · | Increasingly selling holistic solutions, combining Financial Crime and Compliance offerings with Customer Engagement offerings. |
| · | Offering our solutions to verticals outside of the traditional financial services, such as gaming, energy, insurance, healthcare, industry regulators, government agencies, and alternative payments providers. |
Our Solutions’Solutions
I. Customer Engagement
Our Solutions' Core Capabilities
Omnichannel Routing enables organizations to run their contact center in the cloud, route contacts and interactions to ensure agents positively and productively interact with customers on any channel. Organizations gain business flexibility by quickly deploying agents anytime, anywhere for maximum operational flexibility and implementing routing and interactive voice, IVR and digital channel response changes in hours, not months.
Cross-ChannelOmnichannel, Real-time Interaction Management:Analytics Enablesenables organizations to uncover the valuable data and insights hidden in customer interactions. It uses advanced technology powered by Nexidia Analytics, for analyzing speech, text, call flow, customer sentiment and employee desktop activity, in order to understand the root cause of service issues and to drive business results.
Omnichannel Recording and Interaction Management enables organizations to capture structured and unstructured and structuredcustomer interaction and transaction data from multiple customer interaction channels, includingincluding: phone calls, chat,chats, emails, videos, customer feedback, web sessions, and social media postings.postings, and walk-in centers.
CustomerEmployee Engagement Analytics is a platform that enables organizations to captureimprove agent's individual productivity, identify performance gaps, deliver targeted coaching, and analyze customer transactionseffectively forecast workloads and lifecycle events to get a complete viewschedule staff in an adaptive manner. It fosters performance-driven operations and culture, leverages the power of advanced analytics, and embeds the voice of the customer into daily operations to engage employees.
Customer Journey Solutions enables organizations to analyze the entire customer journey across various touchpoints, transactions and events. These solutions allow our customers to have a comprehensive view of customer intents and actions throughout their journey. Powered by advancedThey also leverage Big Data technology, interaction analyticsinfrastructure and predictive analytics models it identifiesto identify and sequence individual customers and sequences theircustomer interactions across time and touchpoints totouch points, including calls, text, IVR, web, self-service and others. With this analysis, organizations can understand the context of theeach contact, uncover patterns, predict needs and personalize interactions in real time.
Real-time DecisioningProcess Automation and Guidance isenables organizations to have a real-time decisioning engine whichthat supports business decisions. The engine draws on business rules and predictive models to automate mundane manual tasks through process insights derived from analytics during the interactionthat are applied while interactions are taking place, as well as post interactions or in real time.batch mode. This combination enables organizations to make the right decision forduring individual interactions and across a mass amountsnumber of interactions, then drive the best actionwhich in real timeturn drives future next-best-action guidance through employee guidance and process automation.
Cross-Channel Interaction Analytics:Open Cloud Platform Enables companiesenables organizations to uncoverget an enterprise-grade foundation for contact centers of any size to scale securely, deploy quickly, and serve customers globally. We offer an extensive collection of pre-built integrations from 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-causebroadest network of issues and drive business results.ecosystem partners.
The combination of the above capabilities enables organizations to operationalizeimprove customer insights across service, sales,experience and marketing processes.achieve business and operational goals. Solutions are available individually or as an integrated whole.
Addressing Business and Operational Needs
Addressing Business & Operational Needs1. Omnichannel Routing
Solution | Description |
Automatic Contact Distributor (ACD) and Interactive Voice Response (IVR) | Ensure customer requests are routed to qualified agents or resolved with self-service through a skills-based omnichannel routing engine that provides a universal queue for real-time interaction management, and a consolidated interface with a seamlessly integrated IVR for routing strategies across all supported channels. |
Personal Connection | Provide inside sales an easier way to attain quota by connecting with more prospects every day and customer service the ability to reduce inbound calls through personalized, low cost, and proactive outbound notifications. |
Customer Engagement Channels | Enable contact centers to service customers via any channel, with extensive routing options, consolidated reporting and a state-of-the-art agent interface. Channels include inbound and outbound voice, callback, voicemail, email, chat, text/SMS, Social Media and work items. Other channels, such as video, are implemented using work items. |
The NICE Customer Interactions portfolio addresses the following needs: ensuring compliance and mitigating risk, improving operational efficiency, enhancing customer experience, and increasing sales.
2. Voice as a Service
Solution | Description |
Network and Voice Connectivity Solutions | Provide Voice as a Service network connectivity suite that delivers flexible and reliable telephony services built specifically for the contact center. Offering a full range of telephony options, with guaranteed voice quality. Through our partnership with a leading, independent 3rd party, proactive diagnostic tools and extensive telephony expertise we ensure 99.99%. |
The solution suites include:
3. Open Cloud Platform
Solution | Description |
CRM Integrations | Provide pre-built CRM integrations, such as the inContact Agent for Salesforce, empower agents to personalize omnichannel customer service. They provide seamless, bidirectional CRM integrations with your contact center that increase agent efficiency and independence by delivering a real-time 360-degree view of the customer. |
UCaaS Integrations | Provide pre-built or partner-provided integration with Unified Communication tools that enables seamless collaboration between contact center agents and experts in their organization. This easy to deploy integration provides a single solution for formal and informal contact center agents. |
APIs | Empower organizations to customize and integrate their contact center with other business critical solutions to create the optimal customer service environment. |
4. Compliance and Risk
Solution | Description |
Compliance Omnichannel Recording | Proactively captures and retains all customer interactions across multiple touch points to help ensure compliance with government regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), Security Exchange Commission Rule 17a-4, the Health Insurance Portability and Accountability Act, the Sarbanes–Oxley Act, the Payment Card Industry Data Security Standard, the Financial Services Authority and Medicare Improvements for Patients and Providers Act, as well as with internal policies. Compliance Recording is also an invaluable tool to resolve disputes, perform investigations and verify sales, as well as provide redundancy and disaster recovery capabilities to meet business continuity requirements. |
Trading Floor Compliance Solutions | Enables organizations to capture, monitor and analyze interactions and transactions in real time, in order 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 | Enables trading floors to record and store transactions and interactions in any media, as well as securely manage and access archived material on demand and in a flexible manner. Essential Compliance helps financial and energy trading firms ensure compliance with the strict recordkeeping requirements of today's regulatory environment. |
Communication Surveillance | Monitors 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 compliance breaches and fraud can be averted. It also enables firms to meet the requirements of the regulatory environment established with the introduction of the Dodd-Frank Act, and related rules and regulations. |
Complaint Management | Enables organizations to use analytics to identify interactions at risk, and manage the process of handling the complaint. |
Compliance and Script Adherence | Monitors agent interactions, searches for any phrase, at any time, and utilizes the phrases in issue resolution and training exercises. Incorporates real-time monitoring and alerting to guide towards required behaviors. Knows which calls are contained in the audio and helps ensure reading for an audit. |
5. Operational Efficiency
Solution | Description |
Contact Center Omnichannel Recording | Provides comprehensive call recording technology that adapts easily to the unique operational requirements of any contact center. It supports virtually any telephony environment and hybrid networks. This enables a seamless transition during technology migrations as the contact center grows and evolves. It supports thousands of concurrent IP streams in a single platform: capturing, forwarding streams in real time, recording and archiving. It also captures non-voice interactions such as video, chat and email, and stores them in a single recording platform, ensuring regulatory adherence and standardized cross-channel workforce optimization. |
Performance Management | Maps enterprise business objectives to group and individual goals, and tracks and reports performance. It also automates critical managerial activities, including employee coaching, recognition, and performance improvement, allowing front-line managers to become more effective and efficient in developing their teams. Performance Management also includes unique capabilities, such as gamification, to engage and motivate and align employees around common and personalized business goals. |
Workforce Management | Forecasts an organization's interactions load, schedules agent shifts 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. |
Quality Central | Automates quality assurance processes and selection of calls for evaluation based on performance data. The solution facilitates root-cause evaluation, with easy drill down to interactions missing their Key Performance Indicator targets. Quality improvement is thus managed across voice, email, chat, and social media channels. |
Nexidia Interaction Analytics | Analyzes large quantities of customer interactions across multiple channels in real time to identify hot topics and root causes quickly, and to produce actionable insights. These insights are then leveraged to improve processes, enhance customer experience, increase sales, optimize marketing campaigns and reduce operational costs. |
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 own performance. It also provides tools to ensure regulatory compliance and accuracy, elevating the level of service customers receive across the entire enterprise. |
Real-time Authentication | Leverages voice biometrics for authenticating customers in real time. The technology helps organizations to seamlessly enroll customers, expedites agent service, and significantly reduces the risk of fraud for all customers across voice and IVR channels |
Call Volume Optimization | Leverages Big Data infrastructure and advanced predictive analytics to help organizations resolve customer needs in one contact, to predict and preempt follow-up calls, and to enable customers to effectively use self-service tools. |
Real-time Process Optimization | Automatically monitors agent activity in real time, enabling organizations to identify process bottlenecks and implement best practices. With this information, the solution navigates agents through complex processes using on-screen guidance, and automates routine tasks to shorten handle time and eliminate manual processing errors. |
Interactive Voice Response ("IVR") Optimization | The IVR Optimization solution enables customers to reduce customer effort by increasing IVR containment rate, reducing IVR repeat calls, agent transfers, drop-offs and deflections and dramatically improving call center efficiency. |
Robotic Automation | Robotic solution for the automation of routine back office and contact center processes. Operated on virtual machines and monitored centrally, these robots handle end-to-end processes, essentially performing any routine task which the human user would otherwise do manually. |
6. Customer Experience
Solution | Description |
Total Voice of the Customer (TVoC) | Collects and analyzes comprehensive data from multiple interaction touch points and channels; analyzes interactions in real time and provides guidance on the next-best-action; proactively reaches out for customer feedback from any touch point, including text message, email, IVR, mobile app, and online forms immediately following an interaction through their channel of choice; and leverages social media analytics to monitor social networks and address customer issues. This enables companies to drive operations and deliver insights across departments by incorporating the customer's perspective. |
Customer Journey Optimization | Helps organizations optimize their overall customer interactions process across multiple touch points. The solution automatically constructs a cross-channel map of the customer journey, providing insights into trends and focus areas. It automatically assigns contact reasons to every interaction and reveals customer behavior patterns, helping to predict the customer's next action and to respond accordingly. The solution highlights opportunities for self-service channel containment and offers real-time guidance for an improved customer experience. |
1.Customer Satisfaction
| ComplianceUnderstands the business practices and Risk, comprised of:behaviors that drive customer satisfaction. Simplifies the customer experience, through methods such as quicker caller identification. Attracts new customers by offering an easier path to service than the competition. Statistically determines which business processes and agent behaviors have the greatest impact on customer behavior.
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Customer Churn | Analyzes historic defection data to create models for predicting future churn. Understands causes and effects of customer churn and how to design procedures to reduce the defection rate. Prioritizes at-risk customers based on search results combined with customer data. Collects information to refine retention marketing offers that are better tailored to customer types and demographics. |
7. 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.Sales Optimization
Solution | Description |
Sales Performance 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 system that rewards employees for achieving targets aligned with the business strategy. |
Real Time Web Personalization | Uses customer intelligence, predictive models and machine learning to make insightful, real-time personalization decisions during customer interactions over the Web. The solution helps organizations improve customer retention, increase online conversion rates, and deliver better service by taking the next-best-action. |
Sales Effectiveness | Helps organizations optimize their campaigns. Locates and quantifies specific events by building the right metrics to align with corporate objectives such as offers made versus up-sell opportunities. Correlates data points such as customer spend and purchase history to build predictive models, prioritizing customers with a propensity to buy and create the next-best offer. Identifies high-performing agents, and bases best practices off their behavior. Establishes thresholds and works with agents, measuring performance against sales driven metrics. |
Proactive Compliance for Consumer Protection is an end-to-end solution to help organizations adhere to stringent regulations. The solution combines interaction analytics
8. Public Safety Incident Debriefing 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.Investigation
Solution | Description |
NICE Inform | Enables public safety agencies and organizations across various industries to capture, consolidate, synchronize and manage multimedia incident information efficiently and effectively. It captures and processes event information from a variety of media: radio and call audio, video, text, Computer-Aided Dispatch (CAD) systems, Geographic Information Systems, and others. |
NICE Investigate | Automates and expedites the end-to-end collection, analysis and sharing of all digital case evidence – from Records Management Systems, CAD, interview room and emergency call audio, documents, photos, private and public CCTV, body-worn and in-car video, social media and more – to help facilitate building and clearing more cases faster. |
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.
9. Public Safety Emergency Response Optimization
| 2.Solution
| Operational Efficiency, comprised of:Description
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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.
| 3.NICE Multimedia Recording
| Customer Experience, comprised of: Addresses the needs of emergency communications, dispatch and air traffic control operations. The recording platform automatically records, analyzes, stores, quickly retrieves and instantly replays telephony, radio and IP voice calls, operator console screens and SMS Text-to-911. TDM and VoIP recordings can be used to ensure compliance with regulations, provide case or incident evidence, and manage and improve departmental quality and productivity. |
NICE Inform | Helps emergency centers to effectively record, manage and derive valuable insights from today's higher volume and variety of communications. It captures multimedia communications and helps manage, synchronize and put incidents into context – saving time, money and resources, while ensuring quality and compliance. |
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.
| 4.
| Sales Optimization, comprised of:
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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.
Vertical Implementations
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 &and Compliance
Introduction to the SolutionsOur Solutions' Core Capabilities
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 Core platform: 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,(also known 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 solutionssolutions) share a single, flexible and scalable core risk platform that providesenables financial institutions, with the abilityfinancial services providers, and others to expand the use of the company’sNICE's solutions over time, whichtime. This eases implementation and lowers total cost of ownership.
Flexible AnalyticsAnalytical models and Tools:flexible 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 specificDomain-specific advanced analytics: Comprehensive, domain-specific solutions detect anomalous customer or employee behavior in real-time,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.
| 1. | Enterprise Risk Management, comprised of:
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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 servesSolutions are available individually or 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.
| 2. | Anti-Money Laundering,comprised of solutions available individually or as an integrated whole, as follows:
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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.whole.
Addressing Business Needs
1. Enterprise Risk Management
Solution | Description |
Enterprise Risk Case Manager | Enables firms to better manage and mitigate organizational risk by providing a single view of risk across the business. 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, turning them into actionable insights. |
2. 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.Anti-Money Laundering
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.
| 3.Solution | Fraud Prevention,comprised of solutions available individually or as an integrated whole, as follows:Description
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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.
| 4.Suspicious Activity Monitoring | Leverages transaction analytics to offer end-to-end coverage for detection, scoring, alerting, workflow processing and reporting of suspicious activity to make sure nothing slips through the cracks. It supports the full investigation life cycle and, with NICE’s integrated case management platform, improves staff productivity, helping meet regulatory obligations in a Capital Marketscost-effective manner. |
Watch List Filtering | Provides enterprise-wide customer and transaction screening against multiple watch lists, for end-to-end sanctions list coverage. It identifies and manages sanctioned or high-risk individuals and entities, with real-time name recognition capabilities, providing customers the ability to conduct accurate name matching to prevent non-compliance occurrences. |
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 re-screening of existing customers. It is an open, flexible platform that can adapt to unique requirements across business segments, regions, and jurisdictions. |
CTR Processing and Automation | Provides seamless automated Currency Transaction Reporting ("CTR") processing to ensure compliance with U.S. Bank Secrecy Act standards, and to optimize CTR processes for efficiency and cost-effectiveness. This allows for the reduction in manual intervention and errors. Built-in validation tools and flexible capabilities enhance the quality and timeliness of completed reports while letting organizations adapt to changing regulatory and business needs. |
FATCA Compliance | Helps U.S. and non-U.S. financial institutions comply with the Foreign Account Tax Compliance comprisedAct (or FATCA), that requires foreign financial institutions and certain other non-financial foreign entities to report on the foreign assets held by their U.S. account holders). The solution helps establish a structured FATCA program from identifying U.S. owners and customers, and managing their documentation, to generating reports to meet United States Internal Revenue Service requirements. The solution enables complete life cycle assessment for FATCA-status identification, management and reporting, ensuring compliance while minimizing operational and customer impact. |
AML Essentials | Addresses the challenges of financial institutions, with coverage that includes Transaction Monitoring, Customer Due Diligence, and Sanctions Screening. Actimize AML Essentials, a cloud-based offering that uses the same power and experience as our enterprise solutions, available individually or as an integrated whole, as follows:AML Essentials offers rapid deployment and reduces overhead to make compliance easier and at a lower total cost of ownership. |
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.
3. 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.Fraud Prevention
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.
Vertical Implementations
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.Solution | Description |
Card Fraud | Enables card issuers, acquirers and processors to detect fraudulent transactions, whether ATM, PIN, signature point-of-sale, or without a physical card. Market leading profile based behavioral analytics takes into account all available transaction, reference and location data to provide holistic coverage of card and account takeover. Solution includes: The Actimize Digital & Mobile Wallet Fraud protects customers from digital account takeover, and protects organizations from fraud liability and negative brand reputation. Monitors and protects a full range of wallet activity, including card/account provisioning, card present and not present purchases, person-to-person transfers, bill payments, and account-service events. The Actimize Pre-Paid Card Fraud solution identifies and prevents fraud in the pre-paid sector. From ATM to point-of-sale (POS) and Card-Not-Present (CNP), all transactions can be identified, interdicted on and alerted in real time. |
Remote Banking Fraud | Provides end-to-end protection against account takeover from online, mobile, IVR, and contact center transactions. Unique industry-leading analytic models accurately detect anomalies and patterns in real time and Actimize open analytics offer the flexibility to develop in-house models and strategies. A central "risk hub" enables the sharing of internal and third-party data from multiple channels for fraud and cyber detection, operations, and investigations. By accurately and efficiently coordinating customer lifetime value, transaction amounts and service history, the solution optimizes fraud prevention by offering greater insight into cross-channel authentication and facilitates interdiction strategies. |
Commercial Banking Fraud | Specifically designed to address the complexities facing commercial banks, applying targeted analytics to identify fraudulent payments among the high volume of legitimate transactions processed by commercial clients each day. The solution protects payments from origination through approval and processing, allowing organizations to interdict in real time to address suspicious activity and ensure an excellent customer experience. |
Employee Fraud | Offers advanced analytic monitoring capabilities and flexible configuration options to detect fraudulent employee activity and violation of corporate policy across the enterprise, business lines, and channels. Comprehensive investigation tools are supported by multichannel data ingest, multi-country data and policy requirement configurations, secure and auditable user access levels, and automated configurable workflows, enabling banks to efficiently sift through employee audit reports and build cases to support fraudulent employee activity. |
Deposit Account Fraud | Helps institutions minimize deposit fraud losses by providing comprehensive account activity monitoring. The solution analyzes risk across silos of data and lines of business, consolidates suspicious activity notifications into account and customer level alerts, and allows real-time decisioning to safely accelerate fund availability and enhance customer satisfaction. |
Authentication-IQ | Manages multiple authentication methods and risk-based decisions by creating a complete customer profile, based on historical authentication activity, account servicing, and transactional behavior which is then used to identify suspicious behavior at log-in or throughout a session, producing real-time actionable risk scores. Manages the process of step up authentication, choosing the appropriate method, producing alerts and enabling real-time interdiction. Provides alert and case management in a unified context to prioritize investigations and optimize workflow across the enterprise. |
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
4. 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.Financial Markets Compliance
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:
| 1.Solution | Incident DebriefingDescription
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Institutional Trade Surveillance | Provides scenario management for identifying market manipulation and Investigation, comprised of: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 across all channels. |
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.
Retail Trade Surveillance | 2.Addresses organization-wide compliance needs 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 | Public Safety Emergency Response Optimization, comprisedDetects Conflicts of: Interest and Rogue Trading. 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. |
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.
Enterprise Conflicts Management | 3. | Video Surveillance & Analytics, comprisedOffers a unified approach to maintain controls and detect conflicts of:
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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.
| 4. | Situation Management, comprised of:
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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.
| 5. | Intelligence & Law Enforcement, comprised of:
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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:
| · | Advanced IP and voice monitoring interest before they occur on a global, enterprise-wide scale. Enables organizations to effectively manage employee requests for simplifying the workpersonal trades by evaluating details of the intelligence analystproposed trade in real time and generating meaningful Intelligence Products;automatically determining if the request should be approved, rejected, or escalated to a supervisor for approval. The solution includes detection models that compare executions with the employee's trade request history to determine whether the trade was pre-cleared and approved and to reconcile the trade details with the terms and conditions of the approved trade request. |
Sales Practices and Suitability | Provides coverage for a broad range of sales practices and issues, helping firms meet current and future global regulatory requirements and ensure investment recommendations are consistent with each client's investment objectives and suitability profiles. It also includes a comprehensive toolset to automate sales practice compliance processes. By automating oversight and supervision, firms can ensure consistency and maintain a consolidated audit trail, lowering regulatory risk while improving productivity and efficiency. |
| · | Three-dimensional accurate positioning for locating high value targets in real-time; |
| · | Open Source Intelligence (OSINT) for harvesting data from the World Wide Web and social networks; |
| · | Speech and text analytics for creating effective intelligence production; |
| · | Pattern analysis for automatically uncovering hidden communication patterns within billions of daily intercepted interactions; |
| · | Satellite interception for collection, retention and analysis of voice, fax, video, email and other data transmitted via fixed and mobile satellite communication networks; and |
| · | Cellular Off-the-Air interception for collection, retention and analysis of voice calls and SMSs. |
Vertical Implementations
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.
Strategic Alliances
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, consulting firms, distributors, value addedvalue-added resellers and complimentary technology vendors. These partners form a vital network for selling and supporting our solutions and products. For our business partners, weWe have established the NICE Business Partner Program,a 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’sNICE's offerings, to deliverdelivering 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 with across all of our businesses, while others are only involved in only a portion of our business: Amdocs, Avaya, BT, Cassidian Communications,initiatives: Accenture, Boston Consulting Group, Cisco, Dell,Cognizant, Deloitte, Etrali, FIS, Headstrong, Honeywell,Fuze, IBM, Infosys, IPC, Motorola, Raytheon Company, SAIC, Siemens,PWC, Ring Central, Tata Consulting Services Thales, Verizon, and Wipro.Verizon.
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 Enablingenabling and Sustaining Business Valuesustaining business value for our customers, addressingcustomers. We address all stages of the technology lifecycle, including defining requirements, definition, planning, design, implementation, customization, optimization, proactive maintenance and ongoing support.
Enabling Value
Solution Delivery to optimizeoptimizes solution delivery and enableenables 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.specialists. We follow a proven methodology that includes business discovery to map solutions to business processes.
Business Consulting to enablepromotes customer success through value addedvalue-added services that are targeted to improve business operations, by leveraging and integrating NICE solutions into the customer’scustomer's daily practices. This global consulting 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.
Managed Analytics empowers organizations to meet short term objectives, such as lowering handle time or improving sales rates, along with achieving long term goals such as customer retention. Our team of experienced practitioners work with customers, guiding the process of collecting interactions, prioritizing subjects to study, conducting analysis and most importantly, developing plans that put the results of the analysis into action.
Customer Education Services to provide users with the necessary knowledge and skills to operate NICE solutions and to leverage their capabilities to meet customer needsneeds. These services are offered both before and after the deployment of relevant NICE solutions.
Sustaining Value
Value RealizationCustomer Success to work hand in handmeans working hand-in-hand with our customers to identify factorsareas that may be limiting realization ofcan maximize business value and to remove or lessen blocking issues so as to ensureminimize complications, ensuring continued delivery of business benefits.
Cloud Servicesto ensure that NICE solutions hosted in the NICE cloud run optimally, maximizing availability, performance and quality while ensuring the security of our customers’customer information. This includesincludes: Hosting Operations, running our Hosting Centers; Development Operations, ensuring that our product development teams optimize our solutions for the cloud environmentenvironment; and the Hosted Application Support team that operateoperates the solutions, ensuring up-time, scalability and security.
Customer Support &and Maintenance to respondresponds to customer requests for support on a 24x724/7 basis, using advanced tools and methodologies. NICE offers flexible service level agreements (SLAs) to meet the level of service that our customers’ desire.customers' needs. Our solutions are generally sold with a warranty for repairs of hardware and software defects andor malfunctions. Software maintenance includes an enhancement program with (in the majority of cases) an ongoing delivery of “like-for-like”"like-for-like" upgrade releases, service packs and hot fixes. NICE also offers Technical Account Management service or TAM. The TAM is a designated manager responsible for escalation management and overall customer care services.
Proactive Maintenance to address issues before they can have significant impact on our customers’ business. These offerings include:
| · | Proactive Health ChecksMaintenance addresses issues before they can significantly impact our customers' businesses. These offerings include: |
| · | Advanced Services – technicalTechnical experts perform system levelsystem-level audits to ensure ongoing compliance with operational specifications.specifications as well as specific product customizations tailored to the requirements of the customer. |
| · | Network Operations CentreCenter – a 24x7A 24/7 function that proactively monitors NICE hostedNICE-hosted and customer premisecustomer-premises environments with triage, resolution and escalation of system alarms. |
| · | Managed Technical Services – NICE offers a suite of managed technical services that enable the customer to fully outsource all necessary responsibilities & functions required in order to manage the NICE solutions. This service includes: dedicated onsite support engineers, system management, updates and upgrades. |
Manufacturing and Source of Supplies
Our productsThe vast majority of our solutions are built in accordance with industry standard infrastructuresoftware-based and are PC compatible. Thedeployed by customers on standard commercial servers.
There is a small portion of our products that have certain hardware elements in our productsthat 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.These products are IT-grade compatible.
We manufacture those of our products that contain hardware elements 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 EMETsubcontractors. Our manufacturers provide us with turnkey manufacturing solutions including order receipt, purchasing, manufacturing, testing, configuration, inventory management and delivery to customers. These agreements covercustomers for 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).lines. 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 oursuch products, which is a subsidiary of a global electronics manufacturing service provider, 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’such manufacturer's 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-9001:20002008 quality standardmanagement for all of our products, as well as the ISO 2700127001:2013 information security management and ISO 14001:2004 environmental management 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, 20122014, 2015 and 20132016 were approximately $113.7$126.0 million, $126.6$132.0 million, and $140.9$152.0 million respectively, of which approximately $3.4approximately $2.5 million, $4.1$2.2 million, and $3.3$1.7 million, respectively, were derived from third-party funding, and $1.2$0.4 million, $1.1$1.4 million, and $1.0$8.3 million, respectively, were capitalized software development costs.
In 2013,2016, we were qualified to participate in 12nine programs funded by the Office of the Chief Scientist of the Israeli Ministry of Economy ("OCS")NATI 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 ofwere approved as programs approved for companies with large research and development activities and some of these programs are membersin the form of membership in 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, 2012,2014, 2015, and 20132016 we received a total of $3.1$2.2 million, $2.5$2.1 million, and $3.3$1.3 million from the OCSNATI programs, respectively, and we anticipate receiving approximately $0.7$0.6 million in 20142017 from 20132015 and 2016 approved programs.
The Research and Development Law generally requires that the product incorporating know-how developed under an OCS-fundedNATI-funded program be manufactured in Israel. However, upon the approval of the OCSNATI (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 OCSNATI (and provided the OCSNATI did not object), up to 10% of the grant recipient’srecipient'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.NATI. Such approval is not required for the sale or export of any products resulting from such research or development. The OCS,NATI, under special circumstances, may approve the transfer of OCS-fundedNATI-funded know-how outside Israel, including, in the following cases: (a)event of a sale of the know how or sale of the grant recipient, provided that the grant recipient pays to the OCSNATI a portion of the sale price paid in consideration for such OCS-fundedNATI-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 OCSNATI 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 if the interested party is non-Israeli, requires the new non-Israeli interested party to undertake to the OCSNATI to comply with the Research and Development Law. In addition, the rules of the OCSNATI may require prior approval of the OCSNATI 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’sLaw'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 OCSNATI programs which may lead to additional royalties being payable on additional products.
The funds available for OCSNATI 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 OCSNATI 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 may participate from time to time in the European Community Framework ProgrammeProgram 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 127202 U.S. patents and 6850 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 12077 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”"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.
FromIn the past we received, from time to time, we receive “cease"cease and desist”desist" letters claiming patent infringements. However,Although there are currently no formal infringement claims or other actions have been filed with respectpending against us, in the event that we are required to defend ourselves against any such alleged infringement, except for past claims which have since been settled or dismissed. Defending infringement claims or other claimsactions, we could involvebe subject to 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 these may have a material adverse impact on our business or financial condition.
We own the following trademarks and/or registered trademarks in different countries: ACTIMIZE,Actimize, Actimize logo, Alpha,NICE Adaptive WFO, NICE WFM, NICE Voice of the Customer, NICE Work Force Management, NICE Incentive Compensation, NICE Real Time Solutions, NICE Trading Recording, Customer Engagement Analytics, Decisive Moment, eGlue Interact, FAST, FAST alpha Silver, Fortent, FortentFizzback, IEX, inContact, inContact Logo, IEX, Insight from Interactions, Intent. Insight. Impact., Know More Risk Less, Last Message Replay, Mass Detection Center, Mirra, NICE, NICE Analyzer, NICE Engage, NICE Engage Platform, NICE Interaction Management, NICE Sentinel, NICE Inform, NICE Inform Lite, NICE Performance Compliance, NICE Sentinel, NICE Inform Media Player, NICE Inform Verify, NICE Logo, NICE Perform, NICE Incentive Compensation Management, NICE Real Time Solutions, NICE Trading Recording, 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, NiceVisionNexidia, Nexidia ((!)) Logo, Nexidia Interaction Analytics, NiceVision Control Center, NiceVision Digital, NiceVision Net, NiceVision NVSAT, NiceVision Pro, Open Situation Management,Nexidia Advanced Interaction Analytics, Nexidia Search Grid, Neural Phonetic Speech Analytics, Own the Decisive Moment, Scenario Replay, Searchspace, Syfact, Syfact Investigator, TotalView, inContact Cloud Center Solutions, Supervisor on-the-go, VAAS, Voice as a Service, Personal Connection, InTouch, Echo and TotalView.inCloud.
Seasonality
The larger portionmajority 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 calendar 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. In addition, we charge for some of our cloud software based on actual consumption, which may also fluctuate seasonally. 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”"Risk Factors" under Item 3, "Key Information" of this annual report for a more detailed discussion of factors which may affect our business and financial results.
Regulation
Export Restrictions
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 thatWe 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.States, Israel and the United Kingdom. Such regulations may apply with respect to product components that are developed or manufactured in, or shipped from, the United States, Israel and the United Kingdom, 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.functionality. 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"). RoHS provides, inter alia,among other things, that producers of electrical and electronic equipment may not place new equipment containing lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls and polybrominated diphenyl ethers,certain materials, 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”)("REACH", SVHC-173), 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”("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 aseveral competitive advantage based onadvantages (as set forth above in this Item 4 – "Business Overview") as well as: their ability to serve large, multi-site, multi-channel, multi-touch point customer service organizations, their holistic integrationscale, performance and captureaccuracy, comprehensiveness of various structuredsolutions 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.broad functionality.
In the WFO suite domain weWe 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 advantageleaders in the Customer InteractionsEngagement space. We compete against WFO players such as Verint, Aspect, Calabrio and Genesys. In the CCaaS market, can be achieved through differentiation in product offering or business model. With respect to products,which is a part of the Contact Center Infrastructure market that is still mainly held by traditional on-premises players, we consider breadth of offering, applicationcompete against Five9 and Interactive Intelligence (acquired by Genesys), Avaya and other niche vendors. In addition, we are seeing some CRM companies that provide a subset 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 factorsbroader offerings.
We are leaders in the market.
The driving forces of the Financial Crime and Compliance software solutions market are the introductionspace. We compete against niche vendors that provide one subset of new regulationsfunctionality to protect against a specific risk and financial crime patternsagainst vendors 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 thata more comprehensive offering. Such vendors include ACI Worldwide, BAE Systems, FICO, Oracle Corporation, Progress Software,and SAS Institute Inc. and Sungard Data Systems.Institute.
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.
Organizational Structure
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.
| | Country of Incorporation or Residence |
Nice Systems Australia PTY Ltd.Ltd.s | | Australia |
NICE Systems Technologies Brasil LTDA | | Brazil |
NICE Systems Canada Ltd. | | Canada |
Nice Systems China Ltd. | | China |
Nice SystemsFrance S.A.R.L. | | France |
NICE Systems GmbH | | Germany |
NICE APAC Ltd. | | Hong Kong |
NICE Systems Kft | | Hungary |
Nice Interactive Solutions India Private Ltd. | | India |
Nice Technologies Ltd. | | Ireland |
Actimize Ltd. | | Israel |
Nice Japan Ltd. | | Japan |
NICE Technologies Mexico S.R.L. | | Mexico |
NICE SystemsNetherlands B.V. | | Netherlands |
Nice Systems (Singapore) Pte. Ltd. | | Singapore |
Nice Switzerland AG | | Switzerland |
Actimize UK Limited | | United Kingdom |
NICE Systems Technologies UK Limited | | United Kingdom |
NICE Systems UK Ltd. | | United Kingdom |
Actimize Inc. | | United States |
Nice Systems Inc. | | United States |
Nice Systems Latin America, Inc. | | United States |
Nice Systems Technologies Inc. | | United States |
Nexidia Inc. | | United States |
inContact Inc. | | United States |
CallCopy Inc. | | United States |
inContact Bolivia S.R.L. | | Bolivia |
inContact Limited | | United Kingdom |
inContact Philippines Inc. | | Philippines |
Property, Plants and Equipment
Our executive offices and engineering, research and development operations are located in North Ra’anana,Ra'anana, Israel. The offices include three buildings, which occupy approximately 366,464330,000 square feet (which are partially sub-leased as detailed below), with an annual rent and maintenance fee of approximately $12.0$15.8 million, paid in NIS and linked to the Israeli consumer price index. The lease for these three buildingsoffices in our Northern Ra’ananaRa'anana facilities will expire in DecemberOctober 2022.
Due to the sale of our Cyber and Intelligence and Physical Security business units during 2015, some of our office space was sub-leased and our portion of the annual rent and maintenance fee is now approximately $7.0 million, paid in NIS and linked to the Israeli consumer price index.
We have leased various other offices and facilities in several other countries. Our material leased facilitiesheadquarters in each region consist of the following:following facilities:
| · | Our new North American headquarters in Paramus,Hoboken, New Jersey, occupies approximately 34,40460,000 square feet. We consolidated our North American locations into this one office location in November 2016, and we intend to sub-lease our two former facilities in New Jersey and New York during the remainder of the respective lease terms. |
| · | Our EMEA headquarters in London, occupies approximately 22,500 square feet, and includes trainingan office space and lab facilities. We also have an additional officelab; and |
| · | Our APAC headquarters in New York, whichSingapore occupies an aggregate of approximately 47,7798,000 square feet. Both locations arefeet and is used as office space. |
We also have additional material leased facilities, consisting of the following:
| · | Our Americas facilities located in – |
| o | Salt Lake City, Utah – an office that occupies approximately 128,000 square feet and includes office space and training facilities; |
| o | Atlanta, Georgia – two offices that occupy together approximately 40,000 square feet and are used as office space and a lab; and |
Additional offices are located in Colorado, Texas, Ohio and California.
| · | Our office in Denver, ColoradoPune, India - occupies approximately 27,06381,000 square feet and is used as office space and includes a training facilityresearch and lab; |
| · | Our office in Richardson, Texas occupies approximately 37,564 square feetdevelopment and is used as office space; |
| · | Our office in Southampton, U.K. occupies approximately 23,581 square feet and is used as office space and includes a training facility and lab; |
| · | Our offices in London, U.K. occupies approximately 22,508 square feet and is used as office space and includes a lab; |
| · | Our office in Berkshire, U.K. occupies approximately 8,944 square feet and is used as office space; |
| · | Our office in Redwood Shores California occupies approximately 27,776 square feet and is used as office space and includes a lab; |
| · | Our office in the Netherlands occupies approximately 17,407 square feet and is used as office space and includes a training facility, lab, and a production area; and |
| · | Our office in Singapore occupies approximately 7,788 square feet and is used as office space.service center. |
We believe that our existing facilities are adequate to meet our current needs and substantially adequate to meet our foreseeable future needs.
Item 4A. Unresolved Staff Comments.
None.
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"Key Information - Risk Factors”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.
Overview
We areNICE is a global software leader in omnichannel analytics and cloud solutions for the Customer Engagement and Financial Crime & Compliance markets.
Our mission is to empower organizations to make smart business decisions through deep human understanding.
We provide software solutions that enablehelp organizations understand their customers and employees and predict their intentions and their needs to create exceptional customer experiences, understand their workforce to drive greater efficiency, and identify suspicious behaviour to prevent financial crime and non-compliant activities.
We do this by providing customer engagement platforms, capturing interactions and transactions across multiple channels and sources and applying best-in-class analytics to this data to provide real-time insight and uncover intent. NICE helps its customers improve their service and security by applying machine learning to cross-industry data and offering customers collective insights. Our solutions allow organizations to better operationalize Big Data.this insight and embed it within their workflows and daily business processes.
NICE is at the forefront of two industry transformations: the adoption of cloud-delivered fully-integrated customer engagement platforms and the shift of financial institutions to integrated risk management platforms for handling end-to-end financial crime prevention.
We enable organizations to take the next-best-action by understanding people throughIn both cases, deep integration of process automation and analytics of structured and unstructured data. Our solutions help ourenables customers to become more operationally efficient, customer-focused, performanceachieve much greater effectiveness and revenue driven, security aware, and compliant.efficiency.
Our solutions are used by thousands ofadvanced technologies and core competencies around customer interaction platforms, data capture, process automation, advanced real-time analytics and cloud services were developed organically and through multiple acquisitions.
We rely on several key assets to drive our growth:
·Our loyal customer base. Today, more than 25,000 organizations in more thanover 150 countries, including 7585 of the Fortune 100 companies.companies, are using NICE solutions.
·Our market leadership makes us a well-recognized brand, and creates top-of-mind awareness for our solutions in our areas of operation.
·Our market-leading products and technologies for customer engagement, data capture, analytics, and cloud, which are protected by a broad array of patents.
·Our ability to quickly drive mainstream adoption for innovative solutions and new technologies, which we introduce to the market through our direct sales force and distribution network.
·Our skilled employees and domain expertise in our core markets allows us to bring our customers the right solutions to address key business challenges and build strong customer partnerships.
·Our services, customer support and operations, which enable our customers to quickly enjoy the benefits of our solutions, with multiple deployment models in the cloud or on-premises throughout the world and support for full value realization and customer success.
We have established a leadership positions acrossposition in many of our domainsareas of activities based onoperation by offering comprehensive and innovative enterprise-grade solutions a unique combination of structured and unstructured data analyticstechnologies. Our customers, across all sizes 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,banking, telecommunications, healthcare, insurance, retail, 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 enforcementstate and intelligence agencies.
We offerlocal government and more, are benefiting from the tangible and practical business value that 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.provide.
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,November 14, 2016, we completed the acquisition of CausatainContact Inc. (“Causata”("inContact"), a leading provider of real-time Big Data analytics.cloud contact center software and agent optimization tools. We acquired CausatainContact for total consideration of approximately $22.7 million comprised of $21.4 million$1 billion 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.cash. The acquisition will allow NICEenables us to offer solutions whicha fully integrated and complete cloud contact center where companies can interact with customers. The acquisition enables the two market leaders to join forces and provide greater visibility into a customer’s activities on the Webindustry's first fully integrated and apply the insights from that data in real time, across other touch points such as thecomplete cloud 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.center solution suite.
On OctoberMarch 22, 2012,2016, we completed the acquisition of RedKite Financial Markets Limited (“RedKite”Nexidia Inc. ("Nexidia"), an emerginga leading provider of real-time, cloud-based institutional trade surveillance solutions.advanced customer analytics. We acquired RedKiteNexidia for total consideration of approximately $11.6 million comprised of $9.0$135.0 million in cashcash. The acquisition allows us to offer a combined offering, featuring a best-in-class, analytics-based solution with accuracy, scalability and $2.6 million representing the fair value of earn-out based on performance, milestones, amountingenabling organizations to an additional maximum payment of $5.8 millionexpand their analytics usage in critical business use cases. . 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,March 11, 2016, we completed the acquisition of Merced Systems, Inc.Voiceprint International, Inc ("Merced"VPI"), the leadinga provider of performance management solutions that drive business execution in salesworkforce optimization software and service functions.services for enterprises, contact centers, first responders and trading floors. We acquired MercedVPI for total consideration of approximately $185.9 million. Merced’s performance management solutions help drive sales effectiveness, superior customer experience$21.7 million in cash.
In addition, from time to time we complete acquisitions 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 expectedinvestments 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 wereare not considered material to our business and operations.
Discontinued Operations
In September 2015, we sold our Physical Security business unit to Battery Ventures for total consideration of $92.5 million, consisting of $74.6 million in cash, notes of $2.9 million and up to a $15.0 million earn out based on future performance. Through NICE's Physical Security business unit, we previously provided video surveillance technologies and capabilities to security-aware organizations. We previously accounted for the Physical Security unit under the Security Solution segment.
In July 2015, we sold our Cyber and Intelligence business unit to Elbit Systems and one of its subsidiaries (together, "Elbit") for total consideration of $151.6 million, consisting of $111.6 million in cash and $40.0 million earn out based on future performance. In 2016, Elbit made certain claims in relation to the transaction in accordance with the procedures set in the acquisition agreement between the parties, which the parties settled in December 2016. Pursuant to such settlement, we recorded additional expenses in 2016 and a final net working capital price adjustment. Under the settlement agreement, we also agreed to reduce the earnout by $4.0 million. We previously accounted for the Cyber and Intelligence unit under the Security Solution segment.
Following the sale of these two business units, we have classified their results of operations (including the gain on their disposal) and their assets and liabilities as discontinued operations in accordance with ASC 205-20, "Presentation of Financial Statements - Discontinued Operations".
The carrying amount used in determining the gain on disposal of the operations included goodwill in an amount calculated based on the relative fair values of the disposed operations and the portion of the operation that was retained within the segment.
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:
| · | Allowance for doubtful accounts; |
| · | Impairment of long-lived assets; |
| · | Stock-based compensation;compensation |
| · | Marketable securities; and |
| · | ValuationFair value of investment in marketable securities.financial instruments. |
Revenue Recognition. We generate revenues from sales of software products and services, which include SaaS and network connectivity, hosting, support and maintenance, installation,implementation, configuration, 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"Software-Revenue Recognition.”" Revenues from sales of product andour software licensingproducts 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”("TPE") if VSOE is not available, or best estimated selling price (“BESP”("BESP") if neither VSOE nor TPE are available. We establish VSOE of selling pricefair value using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority.separately. When VSOE cannot be established, we attempt to establish selling pricefair value 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’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"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 fromOur 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, and may also include network connectivity services over our network or through third party network connectivity providers on a usage basis. Because such offerings do not grant customers the right to take possession of the software, we consider these arrangements to be service contracts which are not within the scope of ASC 985-605. In addition, we also derive revenue from professional services included in implementing or improving a customer's cloud software solutions experience.
Revenues for our software SaaS subscription offerings are recognized ratably over the contract term or based on actual usage, commencing with the date itsthe service is made available to customers and all other revenue recognition criteria have been satisfied. Revenue from the network connectivity usage is derived based on customer specific rate plans and call usage and is recognized in the period the call is initiated. Upfront fees related to professional services that are not considered to have standalone value, are deferred and recognized over the estimated life of the customer.
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 statementstatements information, credit insurance data 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.57
We maintain a provision for product returns in accordance with ASC 605, “Revenue Recognition.” The provisionwhich 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’scustomer'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 –"Intangible - Goodwill and Other,”" ("ASC 350") goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires that goodwill to be tested for impairment at the reporting unit level on an annual basisat least annually or between annual tests in certain circumstances, and written down when impaired. ApplicationGoodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. ASC 350 allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step 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:test.
| · | An initial qualitative assessment of the likelihood of impairment may be performed. If this indicates that the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test. |
| · | Under the first step of the impairment test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds the carrying value of the net assets allocated to that unit, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform the second step of the two-step impairment test to measure the amount of the impairment. |
| · | Under the second step, the reporting unit’s fair value is allocated to all the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that simulates the business combination principles to derive an implied goodwill value. If the implied fair value of the reporting unit’s goodwill is less than its carrying value, the difference is recorded as impairment. |
Fair value is determined using discounted cash flows. Significant estimates used inDuring the fair value methodologies include estimatesfourth quarter 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. We2016 we performed a qualitative assessment for the Customer Interactions Solutions and the Security Solutionsour 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 iswas required. Accordingly, during 2016, no impairment charge was recognized.
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,"Property, Plant, and Equipment,”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. NoIn 2016 no impairment of long-lived asset has been recorded in 2013.charge was recognized.
Taxes on Income. We record income taxes using the asset and liability method. Management judgment is required in determining our provisionaccount for income taxes in eachaccordance with ASC 740, "Income Taxes". This topic prescribes the use of the jurisdictions in which we operate. The provision for incomeliability method whereby deferred tax is calculatedasset and liability account balances are determined based on our assumptions asdifferences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected 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.reverse. 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 forprovide a valuation allowance. Although we believeallowance, if necessary, to reduce deferred tax assets to the amount 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 willmore likely than not to 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.realized.
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(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 classifyingclassify interest and penalties related toon 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. We are currently involved in various claims and legal proceedings. We review the status of each matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss.
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"Business Combination,”" and accordingly we are required to allocate the fair value of purchase price of acquired companiesconsideration to the tangible and intangible assets acquired, liabilities assumed as well as in-process research and developmentintangible assets acquired based on their estimated fair values. In allocatingThe excess of the fair value of purchase priceconsideration over the fair values of acquired companies tothese identifiable assets and liabilities is recorded as goodwill. When determining the tangible and intangiblefair values of assets acquired and liabilities assumed, we developed the requiredmanagement makes significant estimates and assumptions, underlying the valuation work. Criticalespecially with respect to intangible assets. Significant estimates in valuing certain of the intangible assets include, but are not limited to:to future expected cash flows from customer contracts, customer lists, distribution agreementsrelationships, acquired technology and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flowstrademarks from the projects when completed; the acquired company’s brand awareness anda 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;participant perspective, useful lives and discount rates. Management’sManagement'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. Assumptionsunpredictable and, as a result, actual results 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.differ from estimates.
Stock-based Compensation. We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation"Compensation - Stock Compensation.” UnderCompensation" ("ASC 718"), which requires the measurement and recognition of compensation expense based on estimated fair value recognition provisions ofvalues for all share-based payment awards made to employees and directors. ASC 718 stock-based compensation cost is estimated at the grant date based onrequires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award andthat is ultimately expected to vest is recognized as an expense ratablyover the requisite service periods in our consolidated statement of income.
We recognize compensation expenses for the value of our awards, which have graded vesting, based on the accelerated attribution method over the requisite service period of each of the award. awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model, which requires a number of assumptions: the expected volatility is based upon actual historical stock price movements; the expected term of options granted is based upon historical experience and valuesrepresents the period of time that options granted are expected to be outstanding; the risk-free interest rate is based on the yield from U.S. Federal Reserve zero-coupon bonds with an equivalent term; and the expected dividend rate (an annualized dividend yield) is based on the per share dividend declared by the our Board of Directors.
We measure the fair value of 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.
TheMarketable securities. We account for investments in debt securities in accordance with ASC 320, "Investments - Debt and Equity Securities". Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of an award is affected by our stock priceshareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, 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 recognizeda specific identification basis, in our consolidated statements of income was reduced for estimated forfeitures.income.
Valuation of investments in marketableOur securities. We review the valuation of our securities are reviewed 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 its 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).
Fair Value of Financial Instruments.We apply the provisions of ASC 820, “Fair"Fair Value Measurements and Disclosures.” Disclosures" ("ASC 820 clarifies that820"). Under this standard, fair value is an exitdefined as the price representing the amount that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants. As such,participants at the measurement date.
In determining fair value, iswe use various valuation approaches. ASC 820 establishes a market-based measurementhierarchy for inputs used in measuring fair value that shouldmaximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be determined based on assumptionsused when available. Observable inputs are inputs that market participants would use in pricing anthe asset or a liability. As a basis for considering suchliability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions ASC 820 establishes a three-tier valueabout the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy as set forth below, which prioritizesis broken down into three levels based on the inputs used in the valuation methodologies in measuring fair value:as follows:
| · | Level 1 –- Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. |
| · | Level 2 –- Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| · | Level 3 –- Valuations based on unobservable inputs whichthat are supported by little or no market activityunobservable and significant to the overall fair value measurement. |
The fair value hierarchy also requires an entity to maximize the useavailability of observable inputs can vary from investment to investment and minimizeis affected by a wide variety of factors, including, for example, the usetype of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable inputs when measuringin the market, the determination of fair value.value requires more judgment and the investments are categorized as Level 3.
Our marketable securities trade in markets thatand foreign currency derivative contracts 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 asclassified within Level 2.
The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables and trade payables, approximate their fair value due to the immediate or short-term maturities of these financial instruments. The carrying amount of the long term loan approximates its fair value due to the fact the loan bears a variable interest rate.
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,May 2014, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes2014-09 (ASU 2014-09) "Revenue from Contracts with Customers (Topic 740): Presentation of606)". ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss,amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or a Tax Credit Carryforward Existsservices. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016.
In March 2016, the FASB issued "Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting revenue gross versus net)" (ASU 2013-11)2016-08), which providesclarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued "Identifying Performance Obligations and Licensing" (ASU 2016-10) which amends the revenue guidance on the financial statement presentationidentifying performance obligations and accounting for licenses 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 wouldintellectual property. The new revenue standard may 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 asapplied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting date. period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The guidance in ASU 2016-08 and 2016-10 is effective upon the adoption of ASU 2014-09.
We planwill adopt the standard in the first quarter of 2018 and we have yet to adopt ASU 2013-11 in fiscal 2015 andselect a transition method. We are currently evaluating the impacteffect that the updated standard will have on our consolidated financial statements and related disclosures. While we are continuing to assess all potential impacts of the new standard, we believe the impacts relate to: arrangements that include term-based software licenses, allocation of transaction price to each performance obligation on a relative standalone selling price and capitalization of costs related to obtaining customer contracts.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for us in the first quarter of 2019. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" ("ASU 2016-05"), which clarifies that a change in the counterparty to a derivative instrument designated as a hedging instrument does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria are met. The guidance in ASU 2016-05 is effective for annual periods beginning after December 15, 2016; early adoption is permitted as of the beginning of an interim period on a modified retrospective basis. We expect no material impact of this guidance on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for financial statements issued for the first quarter of 2017. We will apply this guidance using a modified retrospective transition method and expect to record a total cumulative-effect adjustment in retained earnings as of January 1, 2017 for the revision of the forfeiture fair value and for excess tax benefits that have not previously been recognized in an amount of approximately $6 million.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments." The guidance addresses the classification of cash flow related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact of this standard on our consolidated statement of cash flows.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. ASU 2016-16 will be effective for financial statements issued for the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" (ASU 2017-04). ASU 2017-04 eliminates step two of the goodwill impairment test, which requires the calculation of the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (ASU 2017-04), which provides a more robust framework to use in determining when a set of assets and activities constitute a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders previously indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. ASU 2017-04 provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. This update is effective for annual and interim periods beginning after December 15, 2018. We expect no material impact of this guidance on 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, 2012,2014, 2015, and 2013,2016, expressed as a percentage of total revenues. Totals may not add up due to rounding.
| | 2011 | | | 2012 | | | 2013 | |
Revenues | | | | | | | | | |
Products | | | 44.8 | % | | | 42.0 | % | | | 39.8 | % |
Services | | | 55.2 | | | | 58.0 | | | | 60.2 | |
| | | 100.0 | | | | 100.0 | | | | 100.0 | |
Cost of revenues | | | | | | | | | | | | |
Products* | | | 32.7 | | | | 33.3 | | | | 31.2 | |
Services* | | | 43.6 | | | | 44.8 | | | | 43.2 | |
| | | 38.7 | | | | 40.0 | | | | 38.4 | |
| | | | | | | | | | | | |
Gross profit | | | 61.3 | | | | 60.0 | | | | 61.6 | |
| | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Research and development, net | | | 13.7 | | | | 13.8 | | | | 14.4 | |
Selling and marketing | | | 25.1 | | | | 26.2 | | | | 26.2 | |
General and administrative | | | 12.0 | | | | 10.9 | | | | 9.3 | |
Amortization of acquired intangibles | | | 3.0 | | | | 3.7 | | | | 3.2 | |
Restructuring expenses | | | - | | | | 0.2 | | | | 0.1 | |
Total operating expenses | | | 53.8 | | | | 54.8 | | | | 53.2 | |
| | | | | | | | | | | | |
Operating income | | | 7.5 | | | | 5.2 | | | | 8.4 | |
Financial income, net | | | 1.3 | | | | 0.9 | | | | 0.4 | |
| | | | | | | | | | | | |
Income before taxes | | | 8.8 | | | | 6.1 | | | | 8.8 | |
Taxes on income | | | 1.6 | | | | (1.6 | ) | | | 3.0 | |
| | | | | | | | | | | | |
Net income | | | 7.2 | | | | 7.7 | | | | 5.8 | |
_______________________
(*) Respective revenues
| | 2014 | | | 2015 | | | 2016 | |
Revenues | | | | | | | | | |
Products | | | 33.2 | % | | | 34.3 | % | | | 30.2 | % |
Services | | | 66.8 | | | | 65.7 | | | | 69.8 | |
| | | 100.0 | | | | 100.0 | | | | 100.0 | |
Cost of revenues | | | | | | | | | | | | |
Products | | | 22.1 | | | | 20.9 | | | | 17.3 | |
Services | | | 41.1 | | | | 38.9 | | | | 40.1 | |
| | | 34.8 | | | | 32.8 | | | | 33.3 | |
| | | | | | | | | | | | |
Gross profit | | | 65.2 | | | | 67.2 | | | | 66.7 | |
| | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Research and development, net | | | 14.1 | | | | 13.9 | | | | 13.9 | |
Selling and marketing | | | 26.5 | | | | 24.4 | | | | 26.4 | |
General and administrative | | | 9.6 | | | | 9.8 | | | | 11.5 | |
Amortization of acquired intangibles | | | 2.2 | | | | 1.3 | | | | 1.7 | |
Restructuring expenses | | | 0.6 | | | | 0.0 | | | | 0.0 | |
Total operating expenses | | | 53.0 | | | | 49.3 | | | | 53.5 | |
| | | | | | | | | | | | |
Operating income | | | 12.2 | | | | 17.9 | | | | 13.2 | |
Financial income, net | | | 0.5 | | | | 0.7 | | | | 1.1 | |
Other expenses, net | | | (0.1 | ) | | | (0.1 | ) | | | (0.1 | ) |
| | | | | | | | | | | | |
Income before taxes | | | 12.6 | | | | 18.5 | | | | 14.2 | |
Taxes on income | | | 1.1 | | | | 3.3 | | | | 2.1 | |
| | | | | | | | | | | | |
Net income from continuing operations | | | 11.5 | | | | 15.2 | | | | 12.1 | |
Income (loss) from discontinued operations | | | 0.6 | | | | 16.4 | | | | (0.8 | ) |
Taxes on income (tax benefits) from discontinued operations | | | 0.2 | | | | 3.7 | | | | (0.2 | ) |
Net income (loss) from discontinued operations | | | 0.4 | | | | 12.7 | | | | (0.6 | ) |
Net income | | | 11.9 | | | | 27.9 | | | | 11.5 | |
Comparison of Years Ended December 31, 20122015 and 20132016
Revenues
Our total revenues increased by approximately 8.0%9.6% to $949.3$1,015.5 million in 2013,2016 from $879.0$926.9 million in 2012.2015. Revenues from sales of Customer InteractionsEngagement 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 in 2016 were $163.1$754.4 million in 2013,and $261.1 million, respectively, an increase of 28.3%9.6% and 9.4% from 2012. 2015, respectively.
The growth in revenues from our Customer InteractionsEngagement Solutions is mainly attributed primarily to increased revenues from Workforce Managementdemand for our solutions real-time impact solutionsdelivered over the cloud and performance management solutions. This growth is driven by customers seekingto our expanded analytics offerings, as these offerings enable organizations to improve operational efficiency and customer experience, enhance compliance and enhance compliance. improve sales optimization.
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 increasegrowth in revenues from Financial Crime and Compliance Solutions is attributed to an increase inprimarily driven by increased demand of financial institutions across the globe for solutions that secure financial transactions and prevent fraud attempts and complex financial crimes, resultingmagnified by the continued evolution of advancements in a need for increased regulation and creating the obligation to achieve compliance and to monitor risks using a more centralized approach.
our technology.
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2012 | | | 2013 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Product Revenues | | $ | 369.4 | | | $ | 377.6 | | | $ | 8.2 | | | | 2.2 | % |
Service Revenues | | | 509.6 | | | | 571.7 | | | | 62.1 | | | | 12.2 | |
Total Revenues | | $ | 879.0 | | | $ | 949.3 | | | $ | 70.3 | | | | 8.0 | % |
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2015 | | | 2016 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Product revenues | | $ | 317.9 | | | $ | 306.2 | | | $ | (11.7 | ) | | | (3.7 | )% |
Service revenues | | | 609.0 | | | | 709.3 | | | | 100.3 | | | | 16.5 | |
Total revenues | | $ | 926.9 | | | $ | 1,015.5 | | | $ | 88.6 | | | | 9.6 | % |
The increasedecrease of $27.1 million in product revenues is primarily dueattributed to growthour Customer Engagement Solutions, offset by an increase of $15.4 million in our revenues from our Financial Crime and Compliance Solutions and Security Solutions, partially offset by aSolutions. The decrease in product revenues from Customer Interactions Solutions.is mainly the result of a transition to cloud based solutions in which SaaS revenues are recognized as service revenues and over a subscription period.
Approximately 66% of the increaseThe growth in service revenues is attributedmainly due to an increase inour solutions delivered over cloud, which constitute approximately 52% of such growth, maintenance revenueservices resulting primarily from an increase in the install base from previous years’ sales. Approximately 34%years' sales, which constitute approximately 29% of the increase in service revenues is attributed to an increase insuch growth, and professional services, and SaaS and hosting revenues resulting primarily from an increase in installations and integrations.which constitute approximately 19% of such growth.
Revenue by Region
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2015 | | | 2016 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
United States, Canada and Central and South America ("Americas") | | $ | 630.1 | | | $ | 720.5 | | | $ | 90.4 | | | | 14.4 | % |
Europe, the Middle East and Africa ("EMEA") | | | 196.9 | | | | 193.5 | | | | (3.4 | ) | | | (1.7 | ) |
Asia-Pacific ("APAC") | | | 99.9 | | | | 101.5 | | | | 1.6 | | | | 1.6 | |
Total revenues | | $ | 926.9 | | | $ | 1,015.5 | | | $ | 88.6 | | | | 9.6 | % |
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2012 | | | 2013 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
United States, Canada and Central and South America (“Americas”) | | $ | 549.6 | | | $ | 596.7 | | | $ | 47.1 | | | | 8.6 | % |
Europe, the Middle East and Africa (“EMEA”) | | | 210.4 | | | | 223.9 | | | | 13.5 | | | | 6.4 | |
Asia-Pacific (“APAC”) | | | 119.0 | | | | 128.7 | | | | 9.7 | | | | 8.2 | |
Total Revenues | | $ | 879.0 | | | $ | 949.3 | | | $ | 70.3 | | | | 8.0 | % |
The Americas revenue increased by 8.6%, of which approximately 58% is attributable14.4% driven by our Customer Engagement Solutions, mainly due to organic growth inincreased demand for our solutions delivered over the Customer Interactions Solutionscloud and 42% is attributed to organic growth in the Financial Crime and Compliance Solutions.our analytics offerings.
The EMEA revenue increaseddecreased by 6.4%. The increase is primarily attributable to organic growth in the Financial Crime and Compliance Solutions and in the Customer Interactions Solutions,1.7%, driven mainly by unfavorable currency effects, partially offset by a decreaseour Customer Engagement Solutions due to an increase in the Security Solutions.our analytics offerings.
The APAC revenue increased by 8.2%. The increase is attributable1.6% mainly due to organic growth in the Securityincreased demand for our Financial Crime and Compliance Solutions, partially offset by a decrease in the Customer InteractionsEngagement Solutions.
Cost of Revenues
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2012 | | | 2013 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Cost of product revenues | | $ | 122.9 | | | $ | 117.8 | | | $ | (5.1 | ) | | | (4.1 | )% |
Cost of service revenues | | | 228.3 | | | | 247.1 | | | | 18.8 | | | | 8.2 | |
Total cost of revenues | | $ | 351.2 | | | $ | 364.9 | | | $ | 13.7 | | | | 3.9 | % |
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2015 | | | 2016 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Cost of product revenues | | $ | 66.4 | | | $ | 53.0 | | | $ | (13.4 | ) | | | (20.2 | )% |
Cost of service revenues | | | 237.2 | | | | 284.7 | | | | 47.5 | | | | 20.0 | |
Total cost of revenues | | $ | 303.6 | | | $ | 337.7 | | | $ | 34.1 | | | | 11.2 | % |
Cost of product revenues decreased both on a dollar basis and as a percentage of product revenues. The decrease is mostly a result of a decrease in royalties and third party product costs payable to vendors, partially offset by higher amortization of intangible assets arising from our recent acquisitions.
Cost of service revenues increased both on a dollar basis and as a percentage of product revenuesservice revenues. The increase is mostly a result of lowerprimarily due to increased personnel and amortization of intangible assets whicharising from our recent acquisitions.
Gross Profit
| | Years Ended December 31, (U.S. dollars in millions) | | | | |
| | 2015 | | | 2016 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Gross profit on product revenues | | $ | 251.5 | | | $ | 253.2 | | | $ | 1.7 | | | | 0.7 | % |
as a percentage of product revenues | | | 79.1 | % | | | 82.7 | % | | | | | | | | |
Gross profit on service revenues | | | 371.8 | | | | 424.6 | | | | 52.8 | | | | 14.2 | % |
as a percentage of service revenues | | | 61.0 | % | | | 59.9 | % | | | | | | | | |
Total gross profit | | $ | 623.3 | | | $ | 677.8 | | | $ | 54.5 | | | | 8.7 | % |
as a percentage of total revenues | | | 67.2 | % | | | 66.7 | % | | | | | | | | |
The increase in gross profit on product revenues is primarily duea result of increased sales of software based solutions with higher margins and a decrease in royalties and third party product costs payable to vendors.
The increase in service gross profit is mainly attributed to the completion ofincrease in service revenues. The decrease in service gross margin is primarily attributed to amortization of intangible assets as a result of our recent acquisitions, partially offset by higher margins on SaaS revenues.
Operating Expenses
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2015 | | | 2016 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Research and development, net | | $ | 128.5 | | | $ | 141.5 | | | $ | 13.0 | | | | 10.2 | % |
Selling and marketing | | | 225.8 | | | | 268.3 | | | | 42.5 | | | | 18.8 | |
General and administrative | | | 90.4 | | | | 116.6 | | | | 26.2 | | | | 29.0 | |
Amortization of acquired intangible assets | | | 12.5 | | | | 17.2 | | | | 4.7 | | | | 37.5 | % |
Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased by $19.5 million to $151.5 million in 2016, as compared to $132.0 million in 2015, and represented 14.9% and 14.2% of revenues in 2016 and 2015, respectively. The increase in research and development is attributed primarily to additional personnel as a result of recent acquisitions. Research and development, net increased by $13.0 million following an increase in capitalized software development costs to $8.4 million in 2016, as compared to $1.4 million in 2015. The increase in capitalized software development is related to our cloud based solutions. Amortization of capitalized software development costs included in cost of product revenues were $0.5 million in 2016 and $0.4 million in 2015.
Selling and Marketing Expenses. Selling and marketing expenses increased to $268.3 million in 2016 as compared to $225.8 million in 2015, and represented 26.4% and 24.4% of total revenues in 2016 and in 2015, respectively. The increase in selling and marketing expenses is attributed primarily to additional personnel as a result of recent acquisitions, an increase in sales incentives and an increase in marketing expenses.
General and Administrative Expenses. General and administrative expenses increased to $116.6 million in 2016 as compared to $90.4 million in 2015, and represented 11.5% of total revenues in 2016 as compared to 9.8% of total revenues in 2015. The increase in general and administrative expenses is attributed primarily to recent acquisitions and integration related expenses, mainly related to the Actimize acquisition of inContact, an increase in rent costs following restructuring of our Americas offices and additional personnel as wella result of recent acquisitions.
Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represented 1.7% and 1.3% of our revenues in 2016 and 2015, respectively. The increase in amortization of acquired intangible assets is attributable to our recent acquisitions, mainly inContact and Nexidia.
Financial and Other Income
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2015 | | | 2016 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Financial income, net | | $ | 5.7 | | | $ | 10.8 | | | $ | 5.1 | | | | 89.5 | % |
Other expenses, net | | | 0.4 | | | | 0.5 | | | | 0.1 | | | | 25 | % |
Financial Income and Other, net. Financial income, net, was $10.8 million in 2016 compared to $5.7 million in 2015. The increase in financial income, net is attributable primarily to gain on realization of investments and gain on currency exchange, partially offset by credit facility expenses related to financing of the inContact acquisition. Other, net amounted to $0.5 million in 2016, compared to $0.4 million in 2015. The expenses comprised primarily of loss on disposal of assets.
Taxes on Income. In 2016, taxes on income amounted to $21.4 million, as compared to $30.8 million in 2015. Our provision for taxes during 2016 decreased as compared with 2015, primarily due to a proportionally significant realization of deferred tax liabilities recorded against the amortization of the newly acquired intangible assets of inContact and Nexidia, and which was partially offset by an increase in our provision for uncertain tax positions.
Our effective tax rate for 2016 was 14.8%, compared to 18.0% in 2015. Our effective tax rate in 2016 was lower due to the above realization of deferred tax liabilities being mainly realized at higher tax rates, as compared with 2015, thus increasing the offseting effect on the effective tax rate.
The majority of our income in Israel continues to benefit from lower tax rates, which were 16.0% in 2016 and 2015, pursuant to our Preferred Enterprise programs, which is discussed in Note 12 of our Consolidated Financial Statements under the caption "Taxes on Income".
Net Income. Net income was $123.1 million in 2016, as compared to $140.6 million in 2015. The decrease in 2016 resulted primarily from acquisition and integration related expenses, inclusion of inContact and Nexidia results with lower operating margin, amortization of intangible assets resulting from our recent acquisitions and increase in rent costs following restructuring of our Americas offices.
Discontinued operations. During 2015 we sold our Cyber and Intelligence and Physical Security business units for gains of $101.8 million and $45.5 million, respectively, which is presented as part of the net income on discontinued operations. During 2016 we recorded additional expenses following a settlement agreement and final net working capital price adjustment.
Comparison of Years Ended December 31, 2014 and 2015
Revenues
Our total revenues increased by approximately 6.3% to $926.9 million in 2015 from $872.0 million in 2014. Revenues from sales of Customer Engagement Solutions and Financial Crime and Compliance Solutions in 2015 were $688.1 million and $238.8 million, respectively, an increase of 2.0% and 21.1% from 2014, respectively. The growth in revenues from Customer Engagement Solutions is primarily driven by increased demand for our portfolio of solutions, as they enable organizations to improve operational efficiency and customer experience, enhance compliance and improve sales optimization. The increase in revenues from Financial Crime and Compliance Solutions is primarily driven by increased scrutiny by regulatory authorities to ensure that financial institutions across the globe have adequate controls in place to secure financial transactions and prevent fraud attempts and complex financial crimes, amplified by the continued evolution of advancements in technology.
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2014 | | | 2015 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Product revenues | | $ | 289.6 | | | $ | 317.9 | | | $ | 28.3 | | | | 9.8 | % |
Service revenues | | | 582.4 | | | | 609.0 | | | | 26.6 | | | | 4.6 | |
Total revenues | | $ | 872.0 | | | $ | 926.9 | | | $ | 54.9 | | | | 6.3 | % |
The increase in product revenues is attributable to an increase of $14.4 million in our revenues from Financial Crime and Compliance Solutions and an increase of $13.9 million in our Customer Engagement Solutions.
The increase in service revenues is attributable to an increase in professional services, of which 58% of the increase is attributed to installations and integrations services and the rest is attributed in maintenance services resulting primarily from an increase in the install base from previous years' sales.
Revenue by Region
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2014 | | | 2015 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
United States, Canada and Central and South America ("Americas") | | $ | 591.1 | | | $ | 630.1 | | | $ | 39.0 | | | | 6.6 | % |
Europe, the Middle East and Africa ("EMEA") | | | 189.2 | | | | 196.9 | | | | 7.7 | | | | 4.1 | |
Asia-Pacific ("APAC") | | | 91.7 | | | | 99.9 | | | | 8.2 | | | | 8.9 | |
Total revenues | | $ | 872.0 | | | $ | 926.9 | | | $ | 54.9 | | | | 6.3 | % |
The Americas revenue increased by 6.6%, of which approximately $23.1 million is attributed to growth in the Financial Crime and Compliance Solutions and $15.9 million is attributable to growth in the Customer Engagement Solutions.
The EMEA revenue increased by 4.1%. The increase is primarily attributable to growth in the Financial Crime and Compliance Solutions of$15.9 million, partially offset by a decrease in royalties paidthe Customer Engagement Solutions of $8.2 million.
The APAC revenue increased by 8.9%. The increase is primarily attributable to third parties. growth in Customer Engagement and Financial Crime and Compliance Solutions.
Cost of serviceRevenues
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2014 | | | 2015 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Cost of product revenues | | $ | 63.9 | | | $ | 66.4 | | | $ | 2.5 | | | | 3.9 | % |
Cost of service revenues | | | 239.6 | | | | 237.2 | | | | (2.4 | ) | | | (1.0 | ) |
Total cost of revenues | | $ | 303.5 | | | $ | 303.6 | | | $ | 0.1 | | | | 0.0 | % |
Cost of product revenues increased on a dollar basis, while decreasingbut decreased as a percentage of serviceproduct revenues. The increase on a dollar basis is mostly a result of an increase in royalties payable to third party vendors, partially offset by lower amortization of intangible assets following previous years' acquisitions. The decrease in the percentage of cost of product from product revenue is mainly attributed to revenue increase from software based solutions.
Cost of service revenues decreased on a dollar basis and as a percentage of service revenues. The decrease on a dollar basis is primarily due to an increase ofa decrease in cost of wages and travel expenses, partially offset by an increase in sub-contractors as a result of additional headcount to support the growth in the business.and consultants. The decrease in the percentage of cost of service from service revenues is mainly attributed to increasing efficiency and better utilization of headcount.service resources.
Gross Profit
| | Years Ended December 31, | | | | | |
| | (U.S. dollars in millions) | | | | | | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2012 | | | 2013 | | | Dollar Change | | | Percentage Change | | | 2014 | | | 2015 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit on product revenues | | $ | 246.5 | | | $ | 259.7 | | | $ | 13.2 | | | | 5.4 | % | | $ | 225.7 | | | $ | 251.5 | | | $ | 25.8 | | | | 11.4 | % |
as a percentage of product revenues | | | 66.7 | % | | | 68.8 | % | | | | | | | | | | | 77.9 | % | | | 79.1 | % | | | | | | | | |
Gross profit on service revenues | | | 281.3 | | | | 324.6 | | | | 43.3 | | | | 15.4 | % | | | 342.8 | | | | 371.8 | | | | 29.0 | | | | 8.4 | % |
as a percentage of service revenues | | | 55.2 | % | | | 56.8 | % | | | | | | | | | | | 58.9 | % | | | 61.0 | % | | | | | | | | |
Total gross profit | | $ | 527.8 | | | $ | 584.3 | | | $ | 56.5 | | | | 10.7 | % | | $ | 568.5 | | | $ | 623.3 | | | $ | 54.8 | | | | 9.6 | % |
as a percentage of total revenues | | | 60.0 | % | | | 61.6 | % | | | | | | | | | | | 65.2 | % | | | 67.2 | % | | | | | | | | |
| | | | | | | | |
The increase in gross profit margin on product revenues is primarily a result of an increase in product revenues, continued increase in software based solutions with higher margins and a lower amortization of intangible assets and a decrease in royalties paid to third parties.assets.
The increase in gross profit margin on service revenues is primarily attributed to an increase in service revenues and an improvement in headcount utilization.improved efficiency.
Operating Expenses
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2014 | | | 2015 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Research and development, net | | $ | 123.1 | | | $ | 128.5 | | | $ | 5.4 | | | | 4.4 | % |
Selling and marketing | | | 231.1 | | | | 225.8 | | | | (5.3 | ) | | | (2.3 | ) |
General and administrative | | | 83.4 | | | | 90.4 | | | | 7.0 | | | | 8.4 | |
Amortization of acquired intangible assets | | | 19.2 | | | | 12.5 | | | | (6.7 | ) | | | (34.9 | ) |
Restructuring expenses | | | 5.4 | | | | 0.0 | | | | (5.4 | ) | | | (100 | ) |
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2012 | | | 2013 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Research and development, net | | $ | 121.4 | | | $ | 136.6 | | | $ | 15.2 | | | | 12.5 | % |
Selling and marketing | | | 230.2 | | | | 248.6 | | | | 18.4 | | | | 8.0 | |
General and administrative | | | 96.1 | | | | 88.3 | | | | (7.8 | ) | | | (8.0 | ) |
Amortization of acquired intangible assets | | | 32.6 | | | | 30.6 | | | | (2.0 | ) | | | (6.1 | ) |
Restructuring expenses | | | 1.9 | | | | 0.5 | | | | (1.4 | ) | | | (73.7 | ) |
Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased to $140.9$132.0 million in 2013,2015, as compared to $126.6$125.9 million in 2012,2014, and represented 14.8%14.2% and 14.4% of revenues in 20132015 and 2012,2014, 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.
travel expenses. Capitalized software development costs were $1.0$1.4 million in 2013,2015, as compared to $1.1$0.4 million in 2012.2014. The increase is a result of capitalization of software development for internal use software that supports our SaaS business. Amortization of capitalized software development costs included in cost of product revenues were $1.1 million and $1.2$0.4 million in 2013each of 2015 and 2012, respectively.2014.
Selling and Marketing Expenses. Selling and marketing expenses increaseddecreased to $248.6$225.8 million in 2013,2015 as compared to $230.2$231.1 million in 20122014, and represented 26.2%24.4% and 26.5% of total revenues in 20132015 and in 2012. Approximately 65% of the increase2014, respectively. The decrease in selling and marketing expense is attributed primarily to an increasea decrease in cost of wages primarily asfollowing a result of increased headcount. The remainder of the increase is primarily due todecrease in headcount, sales incentives and travel, partially offset by an increase in travel, exhibitionsadvertising and client events-relatedother marketing expenses.
General and Administrative Expenses. General and administrative expenses decreasedincreased to $88.3$90.4 million in 2013,2015 as compared to $96.1$83.4 million in 2012,2014, and represented 9.3%9.8% of total revenues in 2013,2015 as compared to 10.9%9.6% of total revenues in 2012.2014. The decreaseincrease in general and administrative expense is due primarily to an additional administrative cost incurred in 2015 partially offset by a decrease in acquisition-related costs.rent and utilities expenses following a reorganization and operational efficiency of our facilities, while in 2014 we recorded an income due to re-measurement of earn-out liabilities that resulted from prior year's acquisitions.
Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represent 3.2%represented 1.3% and 3.7%2.2% of our 2013revenues in 2015 and 2012 revenues,2014, 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.previous years' acquisitions.
Restructuring expenses. RestructuringWe did not incur restructuring expenses in a total amount of $0.5 million in 2013,2015, as compared to $1.9$5.4 million in 2012, was comprised2014. The restructuring expenses in 2014 were attributed mainly to restructuring of retirement of leasehold improvements and property evacuation costs.
our workforce in certain geographies in order to improve efficiency.
Financial and Other Income
| | Years Ended December 31, (U.S. dollars in millions) | | | | | | | |
| | 2014 | | | 2015 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Financial income, net | | $ | 3.8 | | | $ | 5.7 | | | $ | 1.9 | | | | 50 | % |
Other expenses, net | | | 0.0 | | | | 0.4 | | | | 0.4 | | | | 100 | % |
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2012 | | | 2013 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Financial income, net | | $ | 6.7 | | | $ | 4.0 | | | $ | (2.7 | ) | | | (40.3 | )% |
Other income (expenses), net | | | 1.5 | | | | (0.1 | ) | | | (1.6 | ) | | | (106.7 | )% |
Financial Income, Netincome and other, net. .Financial income, net, was $5.7 million in 2015 compared to $3.8 million in 2014. The decreaseincrease in financial income, net is attributable primarily to a reductionhigher cash volume invested. Other, net amounted to $0.4 million in gains from sales2015, comprised primarily of marketable securities due to a decreaseloss on disposal of such sales during 2013.assets.
Taxes on Income. In 2013,2015, taxes on income amounted to $28.4$30.8 million, as compared to a tax benefit of $14.0$9.9 million in 2012.2014. Our provision for taxes during 20132015 increased as compared with 2012,2014, mainly as our taxes on income for 20122014 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.years.
Our effective tax rate for 20132015 was 33.9%, which included an expense18.0% compared to 9.0% in 2014. Our tax rate in 2014 was lower due to being favorably affected by releases of $19.2 million as a result oftax provisions made in prior years upon a settlement with the Israeli Tax Authoritiesduring 2014 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.audit.
The statutory ratemajority of our income 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 continuecontinues to benefit from lower tax rates pursuant to our Preferred Enterprise programs which were 16.0% in 2014 and 2015, the details of which can be found in Note 1312 of our Consolidated Financial Statements under the caption “Taxes"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.Income".
Net IncomeIncome.. Net income was $55.3$140.6 million in 2013,2015, as compared to $67.9$100.2 million in 2012.2014. The decreaseincrease in 20132015 resulted primarily from increase in revenues and operating margin, offset by an increase in 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
Revenues
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.
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2011 | | | 2012 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Product Revenues | | $ | 355.8 | | | $ | 369.4 | | | $ | 13.6 | | | | 3.8 | % |
Service Revenues | | | 438.0 | | | | 509.6 | | | | 71.6 | | | | 16.3 | |
Total Revenues | | $ | 793.8 | | | $ | 879.0 | | | $ | 85.2 | | | | 10.7 | % |
Approximately 54% of the increase in product revenues is due to organic growth driven by increased demand for our analytics based applications and Financial Crime and Compliance Solutions, partially offset by a decrease in revenues from Security Solutions. Approximately 46% of the increase in product revenues is attributed to the inclusion of Merced results for the first time in 2012.
Approximately 47% of the increase in service revenues is attributed to an increase in maintenance revenue resulting from an increase in the install base from previous years’ sales and due to the inclusion of Merced results for the first time in 2012. Approximately 40% of the increase in service revenues is attributed to an increase in SaaS and hosting revenues resulting from the inclusion of full year results for Fizzback in 2012 compared to two months in 2011 and the inclusion of Merced results for the first time in 2012. The remaining 13% of the increase in service revenues is attributed to an increase in professional services revenues primarily as a result of the inclusion of Merced results for the first time in 2012.
Revenue by Region
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2011 | | | 2012 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
United States, Canada and Central and South America (“Americas”) | | $ | 499.2 | | | $ | 549.6 | | | $ | 50.4 | | | | 10.1 | % |
Europe, the Middle East and Africa (“EMEA”) | | | 196.6 | | | | 210.4 | | | | 13.8 | | | | 7.0 | |
Asia-Pacific (“APAC”) | | | 98.0 | | | | 119.0 | | | | 21.0 | | | | 21.4 | |
Total Revenues | | $ | 793.8 | | | $ | 879.0 | | | $ | 85.2 | | | | 10.7 | % |
The Americas revenue increased by 10.1%, of which approximately 69% is due to the inclusion of Merced results for the first time in 2012, approximately 19% is attributable to the inclusion of Fizzback and Cybertech results for a full year and the remaining 12% is attributed to organic growth in the Customer Interactions Solutions partially offset by a decrease in the Security Solutions.
The EMEA revenue increased by 7.0%. The increase is primarily attributable to the inclusion of full year 2012 results for Fizzback and Cybertech, the inclusion of Merced for the first time in 2012 and organic growth in the Security Solutions, partially offset by a decrease in the Customer Interactions Solutions.
The APAC revenue increased by 21.4%, of which approximately 36% is attributable to organic growth in the Security Solutions, approximately 30% is attributable to organic growth in the Customer Interaction Solutions revenues, approximately 18% is attributed to the inclusion of Merced results for the first time in 2012, approximately 9% is attributable to organic growth in Financial Crime and Compliance Solutions revenues and the remaining 7% is attributable to the inclusion of Fizzback and Cybertech results for a full year in 2012.
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2011 | | | 2012 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Cost of product revenues | | $ | 116.3 | | | $ | 122.9 | | | $ | 6.6 | | | | 5.7 | % |
Cost of service revenues | | | 191.0 | | | | 228.3 | | | | 37.3 | | | | 19.5 | |
Total cost of revenues | | $ | 307.3 | | | $ | 351.2 | | | $ | 43.9 | | | | 14.3 | % |
Cost of product revenues increased on a dollar basis and as a percentage of product revenues. The increase on a dollar basis is mostly a result of increase in product revenues and higher amortization of intangible assets in a total amount of $42.8 million in 2012 compared to $30.2 million in 2011, which is primarily a result of the acquisition of Merced and the inclusion of Cybertech and Fizzback for a full year. The increase as a percentage of product revenues is primarily due to higher amortization of intangible assets. Cost of service revenues increased on a dollar basis and as a percentage of service revenues. The increase on a dollar basis is primarily due to an increase of cost of wages as a result of additional headcount to support the growth in the business and amortization of intangibles assets due to the acquisition of Merced. The increase in the percentage of cost of service from service revenues is attributed to higher amortization of intangible assets.
Gross Profit
| | Years Ended December 31, | | | | |
| | (U.S. dollars in millions) | | | | |
| | 2011 | | | 2012 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Gross profit on product revenues | | $ | 239.5 | | | $ | 246.5 | | | $ | 7.0 | | | | 2.9 | % |
as a percentage of product revenues | | | 67.3 | % | | | 66.7 | % | | | | | | | | |
Gross profit on service revenue | | | 247.0 | | | | 281.3 | | | | 34.3 | | | | 13.9 | % |
as a percentage of service revenues | | | 56.4 | % | | | 55.2 | % | | | | | | | | |
Total gross profit | | $ | 486.5 | | | $ | 527.8 | | | $ | 41.3 | | | | 8.5 | % |
as a percentage of total revenues | | | 61.3 | % | | | 60.0 | % | | | | | | | | |
The decrease in gross profit margin on product revenues and service revenues is a result of a higher amortization of intangible assets due to the acquisition of Merced and the inclusion of Fizzback and Cybertech for a full year in 2012.
Operating Expenses
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2011 | | | 2012 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Research and development, net | | $ | 109.1 | | | $ | 121.4 | | | $ | 12.3 | | | | 11.3 | % |
Selling and marketing | | | 199.0 | | | | 230.2 | | | | 31.2 | | | | 15.7 | |
General and administrative | | | 95.7 | | | | 96.1 | | | | 0.4 | | | | 0.4 | |
Amortization of acquired intangible assets | | | 23.7 | | | | 32.6 | | | | 8.9 | | | | 37.6 | |
Restructuring expenses | | | - | | | | 1.9 | | | | 1.9 | | | | N/A | |
Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased to $126.6 million in 2012, as compared to $113.7 million in 2011 and represented 14.4% and 14.3% of revenues in 2012 and 2011, respectively. The increase in research and development, net is attributed primarily to an increase in cost of wages and subcontractors, primarily as a result of the Merced acquisition and the inclusion of Fizzback results for a full year in 2012.
Capitalized software development costs were $1.1 million in 2012, as compared to $1.2 million in 2011. Amortization of capitalized software development costs included in cost of product revenues were $1.2 million and $1.3 million in 2012 and 2011, respectively.
Selling and Marketing Expenses. Selling and marketing expenses increased to $230.2 million in 2012, as compared to $199.0 million in 2011, and represented 26.2% of total revenues in 2012, as compared to 25.1% of total revenues in 2011. Approximately 48% of the increase in selling and marketing expense is attributed to an increase in cost of wages as a result of increased headcount and approximately 32% of the increase is attributed to the inclusion of Merced results for the first time in 2012. The remainder of the increase is primarily due to an increase in travel and exhibitions expenses.2015.
GeneralDiscontinued operations. During 2015 we sold our Cyber and Administrative Expenses. GeneralIntelligence and administrative expenses increased to $96.1Physical Security business units for gain of $101.8 million and $45.5 million, respectively, which is presented as part of the net income on discontinued operations. There were no divestment activities in 2012, as compared to $95.7 million in 2011, and represented 10.9% of total revenues in 2012, as compared to 12.0% of total revenues in 2011. The increase in general and administrative expense is due primarily to an increase in acquisition-related costs partially offset by a reduction in legal fees.2014.
Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represent 3.7% and 3.0% of our 2012 and 2011 revenues, respectively. The increase in amortization of acquired intangible assets is primarily attributable to amortization of intangible assets related to the acquisition of Merced, and the amortization of intangible assets related to Fizzback for a full year in 2012.
Restructuring expenses. Restructuring expenses were $1.9 million in 2012. This amount was comprised of retirement of leasehold improvements and property evacuation costs.
Financial and Other Income
| | Years Ended December 31, | | | | | | | |
| | (U.S. dollars in millions) | | | | | | | |
| | 2011 | | | 2012 | | | Dollar Change | | | Percentage Change | |
| | | | | | | | | | | | |
Financial income, net | | $ | 10.8 | | | $ | 6.7 | | | $ | (4.1 | ) | | | (38.0 | )% |
Other income (expenses), net | | | (0.2 | ) | | | 1.5 | | | | 1.6 | | | | --- | |
Financial Income, Net. The decrease in financial income, net is attributable primarily to the decrease in cash and cash equivalents and marketable securities average balance in 2012 as compared to 2011.
Taxes on Income. In 2012 we recorded a benefit for taxes on income amounting to $14.0 million, as compared to an expense of $12.4 million in 2011. The tax benefit arose as a result of the combination of (i) the release of tax provisions made in prior years, primarily as a result of the unadjusted expiration of the statute of limitations, and settlements of routine tax audits with certain tax authorities together with (ii) the realization of deferred tax liabilities which in a business combination is initially recorded due to the significant difference between the amounts assigned to the acquired intangible assets for financial reporting and tax purposes. This deferred tax liability was correspondingly realized against the amortization of the acquired intangible assets related to Merced as well as to those for the first full year of Fizzback.
The introduction of our Preferred Enterprise program from 2012 and the resultant substitution of our Approved and Privileged Enterprises had only a minor impact on our effective tax rate. This is because the benefits from the reduced tax rates under the Preferred Enterprise programs are largely similar to those we previously enjoyed under the Approved and Privileged Enterprise programs.
Further information with regard to our Approved and Privileged Enterprise programs can be found in Item 3, “Risk Factors” under the caption “We currently benefit from local government programs as well as international programs and local tax benefits that may be discontinued or reduced” and in Note 13 of our Consolidated Financial Statements under the caption “Taxes on Income.”
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 be approximately 15-17% in the coming years.
Net Income. Net income was $67.9 million in 2012, as compared to $57.3 million in 2011. The increase in 2012 resulted primarily from the increase in revenues and the benefit from taxes on income.
Liquidity and Capital Resources
In recent years, the cash generated from our operating activities has financed our operations as well as the repurchase of our ordinary shares and payment of dividends. Generally, we invest our excess cash in highly liquid investment grade securities. As of December 31, 2013,2016, we had $443.2million$286.0 million of cash and cash equivalents and short-term and long-term investments, as compared to $444.7$828.4 million at December 31, 20122015 and $562.6$500.0 million at December 31, 2011.2014.
Cash provided by operating activities was $124.3$220.3 million, $135.6$244.7 million, and $154.4$182.3 million in 2013, 2012,2016, 2015, and 2011,2014, respectively. Net cash from operations in 20132016 consisted primarily of net income of $55.3$126.1 million (excluding loss on disposal of discontinued operations of $9.1 million), adjusted for non-cash activities such as depreciation and amortization of $77.8 million, stock-based compensation of $40.5 million as well as working capital changes derived from an increase in accrued expenses and other liabilities of $15.1 million, decrease in deferred taxes of $25.9 and decrease in trade receivables of $31.7 million. Net cash from operations in 2015 consisted primarily of net income of $111.5 million (excluding gain on disposal of discontinued operations of $147.3 million), adjusted for non-cash activities such as depreciation and amortization of $57.9 million, stock-based compensation of $28.4 million as well as working capital changes derived from an increase in accrued expenses and other liabilities of $38.5 million and increase in deferred revenues of $54.9 million, which were partially offset by a decrease in trade receivables of $56.3 million. Net cash from operations in 2014 consisted primarily of net income of $103.1 million and adjustments for non-cash activities including depreciation and amortization of $91.4$73.3 million, stock-based compensation of $26.3$29.8 million and an increase in trade payables of $5.1 million which were partially offset by an increase in trade receivables of $34.6 million, and deferred tax of $17.3 million. Net cashworking capital changes derived from operations in 2012 consisted primarily of net income of $67.9 million and adjustments for non-cash activities including depreciation and amortization of $95.5 million, stock-based compensation of $23.6 million,an increase in accrued expenses and other liabilities of $9.2 million and a decrease in other receivables and prepaid expenses of $3.8$10.3 million, which were partially offset by a decrease in deferred revenues,taxes, net of $27.1$27.8 million deferred tax of $24.2 and an increase in trade receivablespayables of $11.9 million. Net cash from operations in 2011 consisted primarily of net income of $57.3 million and adjustments for non-cash activities including depreciation and amortization of $67.0 million, increase in accrued expenses and other liabilities of $22.9 million, increase in deferred revenues, net of $12.8 million and stock-based compensation of $21.2 million which were partially offset by an increase in trade receivables of $20.6 million and deferred tax of $8.8$13.8 million.
Net cash used in investing activities was $33.4$800.0 million, $28.3 million and $8.9 million in 2013. Net cash used in investing activities was $164.3 million in 20122016, 2015 and net cash provided by investing activities was $9.4 million in 2011.2014, respectively. In 2013,2016, net cash used in investing activities consisted primarily of payment for the acquisition of CausatainContact, Nexidia and other acquisitions in an aggregate amount of $24.2 million, net purchase of property and equipment of $20.2 million and net investment in short-term deposits of $ 6.1$1,157 million, which were partially offset by net proceedproceeds received from the sale of marketable securities of $17.4$403.0 million. In 2012,2015, net cash used in investing activities consisted primarily of payment fornet investment in marketable securities and short term bank deposits of $195.0 million and purchase of property and equipment of $16.6 million, which were offset by proceeds from the acquisitionsale of Merced, RedKite and other acquisitionsdiscontinued operations of $186.1 million. In 2014, net cash used in an aggregateinvesting activities consisted primarily of $164.5net investment in marketable securities of $28.4 million and net purchase of property and equipment of $27.7$16.8 million, which were partially offset by net proceed of marketable securities andproceeds from short-term bank deposits of $27.9$37.8 million.
Net cash provided by (used in) financing activities was $413 million, $(71.8) million and $(101.8) million in 2016, 2015 and 2014, respectively. In 2011,2016, net cash provided by investingfinancing activities consistedwas attributed primarily to the long term loan of net$464.8 million and proceeds from marketable securitiesissuance of $174.2 million which funded payment for the acquisitionsshares upon exercise of Fizzback, Cybertech and other acquisitions in an aggregate of $143.4 millionoptions and purchase of propertyshares under employee share purchase plans of $23.5 million, which were partially offset by payment of dividends of $38.2 million and equipmentrepurchase of $17.3our ordinary shares of $43.6 million.
Net In 2015, net cash used in financing activities was $68.9attributed primarily to the repurchase of our ordinary shares of $68.4 million in 2013 and $76.6payment of dividends of $38.2 million, in 2012. Net cash providedwhich were offset by financing activities was $68.8 million in 2011.proceeds from the issuance of shares upon exercise of options and purchase of shares under employee share purchase plans of $27.5 million. In 2013,2014, net cash used in financing activities was attributed primarily to the purchase of our ordinary shares of $79.4 million under the third program to repurchase ordinary shares in a total amount of up to $100$94.3 million and payment of dividends of $29.0$38.0 million, which were partially offset by proceeds from issuance of shares upon exercise of options and purchase of shares under employee share purchase plans of $38.4 million. In 2012, net cash used in financing activities was attributed primarily to the purchase of our ordinary shares of $107.0 million under the three programs to repurchase ordinary shares in a total amount of up to $300 million, which were offset by proceeds from issuance of shares upon exercise of options and purchase of shares under employee share purchase plans of $30.4 million. In 2011, net cash used in financing activities was attributed primarily to the repurchase of our ordinary shares of $95.9 million under the first program to repurchase ordinary shares in a total amount up to $100.0 million which were offset by proceeds from the issuance of shares upon exercise of options and purchase of shares under employee share purchase plans of $26.8$29.5 million.
We believe that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations will be sufficient to finance our ongoing operations for the next twelve months.
Research and Development and Intellectual Property
For information on our research and development policies and intellectual property, please see Item 4, “Information"Information on the Company”Company" in this annual report.
Trend Information
Our development efforts are aimed at addressing several industry trends, including: 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. The technology trends addressed: 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 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 institutions as well as governments as a result of the proliferation of IP-based communications including VoIP, as well as mobile devices and the use of social networks.
In connection with our Customer Interaction Solutions, the need to record and analyze customer interactions is constantly growing as compliance and regulatory pressures are increasing.
In connection with our Financial Crime and Compliance Solutions, such trends include the need to monitor transactions in order to ensure compliance due in part to the significant increase in enforcement by regulators, particularly across Europe and the United States, as is evidenced by substantial fines that have recently been levied against financial institutions.
In the Security sector we believe that security-conscious organizations are expected to continue to adopt solutions in order to meet regulations regarding increased physical security and reliability, such as the North American Electric Reliability Corporation Critical Infrastructure Protection (NERC-CIP).
For more information on trends in our industry, please see Item 4, “Information"Information on the Company—Business Overview—Industry Background and Trends”Technology Trends" in this annual report.
For more information on trends, uncertainties, demands, commitments or events that are reasonably likely tomay have a material effect on revenue, please see Item 3, “Key"Key Information—Risk Factors”Factors" in this annual report.
Contractual Obligations
Set forth below are our contractual obligations and other commercial commitments over the medium term as of December 31, 20132016 (in thousands of U.S. dollars).
| | Payments Due by Period | |
Contractual Obligations | | Total | | | Less than 1 year | | | 1- 3 years | | | 3-5 years | | | More than 5 years | |
Operating Leases | | | 109,218 | | | | 16,799 | | | | 27,909 | | | | 21,232 | | | | 43,278 | |
Unconditional Purchase Obligations | | | 15,301 | | | | 10,905 | | | | 4,257 | | | | 139 | | | | - | |
Severance Pay* | | | 26,652 | | | | | | | | | | | | | | | | | |
Total Contractual Cash Obligations | | | 151,171 | | | | 27,704 | | | | 32,166 | | | | 21,371 | | | | 43,278 | |
Uncertain Income Tax Positions ** | | | 33,158 | | | | | | | | | | | | | | | | | |
72
| | Payments Due by Period | |
Contractual Obligations | | Total | | | Less than 1 year | | | 1- 3 years | | | 3-5 years | | | More than 5 years | |
Operating Leases | | | 140,633 | | | | 22,886 | | | | 38,940 | | | | 31,967 | | | | 46,840 | |
Unconditional Purchase Obligations | | | 22,700 | | | | 17,318 | | | | 5,382 | | | | - | | | | - | |
Severance Pay* | | | 16,885 | | | | | | | | | | | | | | | | | |
Total Contractual Cash Obligations | | | 180,218 | | | | 40,204 | | | | 44,322 | | | | 31,967 | | | | 46,840 | |
Uncertain Income Tax Positions ** | | | 26,659 | | | | | | | | | | | | | | | | | |
| * | Severance pay relates to accrued obligations to employees as required under applicable labor laws. These obligations are payable only upon termination, retirement or death of the respective employees. | |
| ** | Uncertain income tax positions under ASC 740 are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13(h)12(h) of our Consolidated Financial Statements for further information regarding our liability under ASC 740. |
| | | | | Amount of Commitment Expiration Per Period | |
Other Commercial Commitments | | Total Amounts Committed | | | Less than 1 year | | | 1- 3 years | | | 3-5 years | | | More than 5 years | |
Guarantees – Continuing operations | | | 4,377,987 | | | | 3,932,011 | | | | 360,879 | | | | 85,097 | | | | - | |
Guarantees – Discontinued operations* | | | 19,910,444 | | | | 78,500 | | | | 19,831,944 | | | | - | | | | - | |
Total Guarantees | | | 24,288,431 | | | | 4,010,511 | | | | 20,192,823 | | | | 85,097 | | | | - | |
| | | | | Amount of Commitment Expiration Per Period | |
Other Commercial Commitments | | Total Amounts Committed | | | Less than 1 year | | | 1- 3 years | | | 3-5 years | | | More than 5 years | |
Guarantees – continuing operations | | | 36,312 | | | | 15,665 | | | | 5,079 | | | | 13,560 | | | | 2,008 | |
* Represents guarantees which were not endorsed and remain in effect in relation to contracts assumed as part of the sale of the Cyber and Intelligence business for which we have a back to back contractual commitment and are entitled to indemnification to the extent that these guarantees are realized.
Qualitative and Quantitative Disclosure About Market Risk
For information on the market risks relating to our operations, please see Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in this annual report.
Item 6. Directors, Senior Management and Employees.
6.A. Directors and Senior Management
The following table setstables set forth, as of March 17, 2014,April 13, 2017, the name, age and position of each of our directors and executive officers:officers and, in regard to our directors, any of the committees of our board of directors on which they serve and whether any such director is an outside director:
Members of the Board of Directors
| | | Audit Committee Member | Compensation Committee Member | Internal Audit Committee Member | Mergers and Acquisitions Member | Nominations Committee Member | Outside Director* |
| 4952 | Chairman of the Board of Directors | X | | | X | X | |
Rimon Ben-Shaoul | 72 | Director | X | | | X | | |
Dan Falk | 72 | Director | X | X | X | X | X | X |
Yocheved Dvir | 64 | Director | X | X | X | | | X |
Yehoshua Ehrlich | 67 | Director | | | | X | | |
Leo Apotheker | 63 | Director | | X | | X | | |
Joe Cowan | 68 | Director | | X | | X | | |
Zehava Simon | 58 | Director | X | X | X | | | X |
* See Item 6, "Directors, Senior Management and Employees—Board Practices— Outside Directors."
Members of Management
Name | Age | Position |
Barak Eilam | 42 | Chief Executive Officer |
Miki Migdal Joseph Atsmon(1)(3) (5)
| 6556 | President, Enterprise Product Group Vice-Chairman of the Board of Directors
|
Joseph Friscia Rimon Ben-Shaoul(2)(4)
| 6962 | President, NICE-Actimize Director
|
Paul Jarman Dan Falk(1)(2)(3)(4)(5)(6)
| 6947 | |
Yocheved Dvir(1)(2)(3)(6)
| 61 | |
| 64 | |
| 60 | |
| 65 | |
| 52 | President, Chief Executive Officer, and Director
InContact |
Beth Gaspich Barak Eilam(7)
| 38 | 51 President, NICE Americas, and Chief Executive Officer-appointee
|
| 52 | President, Enterprise Group
|
| 53 | President, Security Group and Executive Vice President Business Operation
|
| 38 | President and Chief Executive Officer, NICE-Actimize
|
| 49 | |
| 5760 | Corporate Vice President, General Counsel and Corporate Secretary |
Eran Porat | 5154 | Corporate Vice President, Finance |
| 4649 | Executive Vice President, Marketing and Corporate Development |
Barry Cooper | 46 | Chief Operating Officer |
Sigal Gill-More - Feferman Benny Einhorn
| 5847 | |
| 51 | |
| 44 | Executive Vice President, Human Resources |
| 43 | Executive Vice President, Professional Services and Customer Support
|
___________________________
(1) | Member of the Audit Committee. |
(2) | Member of the Compensation Committee. |
(3) | Member of the Internal Audit Committee. |
(4) | Member of the Mergers and Acquisitions Committee. |
(5) | Member of the Nominations Committee. |
(6) | Outside Director. See Item 6, “Directors, Senior Management and Employees—Board Practices— Outside Directors.” |
(7) | Mr. Bregman will be retiring from his positions as President and Chief Executive Officer of our company, and Mr. Eilam will assume theIn May 2016, Ms. Sarit Sagiv retired from her position of Chief Executive Officer. The transition is expected to be completed by the end of April 2014. |
At our annual meeting of shareholders held on August 27, 2013, we elected the following seven (7) members to the Board of Directors, in addition to the two outside directors of the Company, to serve as directors of the Company until the next annual general meeting of the shareholders, or until termination of office according to the Company’s articles of associationChief Financial Officer, and applicable law: Mr. David Kostman, Mr. Joseph Atsmon, Mr. Rimon Ben-Shaoul, Mr. Yehoshua (Shuki) Ehrlich, Mr. Zeev Bregman, Mr. Leo Apotheker and Mr. Joe Cowan, to increase the number of directors to nine, and to add to our board additional directors with relevant hi-tech experience and background.
Mr. Yoseph Dauber did not stand for reelection at the annual shareholders’ meeting held on August 27, 2013.
Mr. Bregman will be retiring from his positions as President and Chief Executive Officer of our company, and Mr. Eilam will assume the position of Chief Executive Officer of our company. The transition is expected to be completed by the end of April 2014.
As of August 1, 2013, Barry Cooper hasMs. Beth Gaspich assumed the position of Executive Vice President, Professional Services and Customer Support.
On February 13, 2013, Ron Gutler resigned from his position as Chairman of the Board of Directors, and David Kostman was appointed by the Board of Directors and assumed the position of Chairman of the Board of Directors.effective October 2016.
Set forth below is a biographical summary of each of the above-named directors and executive officers of NICE. Other than Mr. Zeev Bregman, eachEach of our directors qualifies as an independent director under applicable NASDAQ rules.
David Kostman has served as one of our directors since 2001, with the exception of the period between June 2007 and July 2008, and as our Chairman of the Board since February 2013. Mr. Kostman is currently Executive Chairman of Nanoosh LLC and Chairman of Leisure Class LLC. He recently served on the board of directors of publicly traded Retalix Ltd., which was acquired by NCR Corporation, and serves on the board of directors of several other private companies.Outbrain, Inc., ironSource Ltd. and Tivit S.A. From 2006 until 2008, Mr. Kostman was a Managing Director in the investment banking division of Lehman Brothers, heading the Global Internet Group. From April 2003 until July 2006, Mr. Kostman was Chief Operating Officer and then Chief Executive Officer of Delta Galil USA, a subsidiary of publicly traded Delta Galil Industries Ltd. From 2000 until 2002, Mr. Kostman was President of the International Division and Chief Operating Officer of publicly traded VerticalNet Inc. Prior to that Mr. Kostman worked in the investment banking divisions of Lehman Brothers (1994-2000) focusing on the technology and Internet sectors and NM Rothschild & Sons (1992-1993), focusing on M&A and privatizations. Mr. Kostman holds a Bachelor’sBachelor's degree in Law from Tel Aviv University and a Master’sMaster's degree in Business Administration from INSEAD.
Joseph Atsmon has served as one of our directors since September 2001 and Vice-Chairman of the Board since May 2002. Since 2001, Mr. Atsmon has been a director of Ceragon Networks Ltd. From 1995 until 2000, Mr. Atsmon served as Chief Executive Officer of Teledata Communications Ltd., a public company acquired by ADC Telecommunications Inc. in 1998. Mr. Atsmon had a twenty-year career with Tadiran Ltd. In his last role at Tadiran Ltd., Mr. Atsmon served as Corporate VP for business development. Prior to that, he served as President of various military communications divisions. Mr. Atsmon holds a Bachelor’s degree in Electrical Engineering from the Technion – Israel Institute of Technology.
Rimon Ben-Shaoul has served as one of our directors since September 2001. Since 2001, Mr. Ben-Shaoul has served as Co-Chairman, President, and Chief Executive Officer of Koonras Technologies Ltd., a technology investment company controlled by LEADER Ltd., an Israeli holding company. Mr. Ben-Shaoul also serves as a director of MIND C.T.I. Ltd. and several private companies, and served as a director of BVR Systems Ltd. In addition, he isserved as the President and Chief Executive Officer of Polar Communications Ltd., which manages media and communications investments. Mr. Ben-Shaoul also servesserved as the Chairman of T.A.T Technologies Ltd., a public company listed on NASDAQ and TASE. Between 1997 and 2001, Mr. Ben-Shaoul was the President and Chief Executive Officer of Clal Industries and Investments Ltd., one of the largest holding companies in Israel with substantial holdings in the high tech industry. During that time, Mr. Ben-Shaoul also served as Chairman of the Board of Directors of Clal Electronics Industries Ltd., Scitex Corporation Ltd., and various other companies within the Clal Group. Mr. Ben-Shaoul also served as a director of ECI Telecom Ltd., Fundtech Ltd., Creo Products, Inc. and Nova Measuring Instruments Ltd. From 1985 to 1997, Mr. Ben-Shaoul was President and Chief Executive Officer of Clal Insurance Company Ltd. and a director of the company and its various subsidiaries. Mr. Ben-Shaoul holds a Bachelor’sBachelor's degree in Economics and Statistics and a Master’sMaster's degree in Business Administration, both from Tel-Aviv University.
Dan Falk has served as one of our statutory outside directors since 2001. From 1999 to 2000, Mr. Falk was President and Chief Operating Officer of Sapiens International Corporation N.V. From 1985 to 1999, Mr. Falk served in various positions in Orbotech Ltd., the last of which were Chief Financial Officer and Executive Vice President. From 1973 to 1985, he served in several executive positions in the Israel Discount Bank. Mr. Falk also serves as the Chairman of ORAD Hi-Tech Systems Ltd., and serves on the board of directors of Orbotech Ltd., Ormat Technologies Inc., and Attunity Ltd. and Nova Measuring Systems Ltd. Mr. Falk holds a Bachelor’sBachelor's degree in Economics and Political Science and a Master’sMaster's degree in Business Administration, both from the Hebrew University, Jerusalem.
Yocheved Dvir has served as one of our statutory outside directors since January 2008. Since 2000, Ms. Dvir has served as a strategic advisor in business development affairs to multiple companies and initiatives that were being founded. Ms. Dvir also serves on the board of directors of Menorah Insurance Company and its subsidiary, Alrov Real Estate Visa Cal,and Endey Med and Psagot Bituach.Med. She recently served on the boards of Visa Cal, Trendline Business Information & Communications Ltd., Menorah Insurance Company Ltd., Israel Corporation Ltd., ECI Telecom Ltd., Strauss Industries Ltd., Phoenix Holding and Phoenix Insurance Co. Between 1990 and 2000, Ms. Dvir served as a Senior Vice President of the Migdal Group. Ms. Dvir joined the Migdal Group in 1981 and, until late 2000, held a number of senior financial and managerial positions, including Head of the Group’sGroup's Economics Department (1986-1988), Head of the Group’sGroup's Corporate Office (1989-1992), Head of the Group’sGroup's General Insurance Division and Corporate Office (1993-1997), Group CFO (1997-1999), Head of the Group’sGroup's Strategic Development Division and Marketing Array and Risk Manager (2000). Ms. Dvir holds a Bachelor’sBachelor's degree in Economics and Statistics from the University of Haifa and completed studies towards a second degree in Statistics from the Hebrew University of Jerusalem.
Yehoshua (Shuki) Ehrlich has served as one of our directors since September 2012. Mr. Ehrlich is an active social investor, serving as Chairman of "Committed to Give", a group formed by Israeli social investors for promoting philanthropy in Israel and several other social organizations. Mr. Ehrlich also serves as a member of the executive board of Israel Venture Network and a board member of AfterDox, an angels' investment group. Between the years 2000 and 2010, Mr. Ehrlich served as Managing Director at Giza Venture Capital, where he focused on the communications, enterprise software and information technology sectors. Formerly, Mr. Ehrlich had a fifteen-year career with Amdocs, a public software company specializing in billing, CRM, order management systems for telecommunications and Internet service providers. In his last role at Amdocs, Mr. Ehrlich served as Senior Vice President of Business Development. Mr. Ehrlich holds a Bachelor of Science in Mathematics and Computer Science from the Tel Aviv University.
Leo Apothekerhas served as one of our directors since August 2013. Mr. Apotheker iswas the Managing Partner and co-founder of efficiency capital SAS, a growth capital advisory firm, since 2012.from 2012 to 2014. From 2010 to 2011, Mr. Apotheker served as Chief Executive Officer of Hewlett Packard Company. From 2008 to 2010, he served as Chief Executive Officer of SAP AG. In addition, he is currently chairman of the board of each of KMD, one of Denmark’sDenmark's leading IT and software companies, as well asUnit4, a leading Dutch software company, and Signavio GmbH, Vice Chairman and Lead Director of Schneider SE, and a member of the boardsboard of several international companies including Schneider Electric SA and Steria.Taulia Inc. Mr. Apotheker holds a Bachelor’sBachelor's degree in Economics and International Relations from the Hebrew University of Jerusalem.
Joe Cowan has served as one of our directors since August 2013. Mr. Cowan has been the CEO and director of Epicor since October 2013.2013, and since Sept 2016 has been a director of ChannelAdvidsor, Inc. During 2013 Mr. Cowan served as President of DataDirect Networks, Inc., and Fromfrom 2010 until 2013, Mr. Cowan served as the Chief Executive Officer and President of Online Resources Corp. SinceDuring 2009, he has served as an Operating Executive and Consultant at Vector Capital. From 2007 to 2009, Mr. Cowan served as the Chief Executive Officer of Interwoven Inc. From 2004 to 2006, Mr. Cowan served as the President and Chief Executive Officer of Manugistics Inc. and Manugistics Group Inc. Prior to that, Mr. Cowan served in various senior executive positions, including as the Chief ExecutiveOperating Officer of Baan Co. NV and Avantis GOB NV. He has been a Director of DataDirect Networks, Inc. between 2011 and February 2014.2013. Mr. Cowan has also served on the boards of various publicly traded companies, including ChannelAdvidsor Inc., Interwoven Inc., Online Resources Corporation, Manugistics Group Inc. and Blackboard Inc., as well as several private companies. Mr. Cowan holds a M.S. degree in Electrical Engineering from Arizona State University and holds a B.S. degree in Electrical Engineering from Auburn University.
Zeev Bregman Zehava Simon has served as one of our statutory outside directors since MarchJuly 2015. Ms. Simon served as a Vice President of BMC Software Inc. from 2000 until 2013, andmost recently as ourVice President of Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and Chief Executive Officer since September 2009. Mr. Bregman will be retiring from hisGeneral Manager of BMC Software in Israel. Prior to that, Ms. Simon held various positions as Presidentat Intel Israel, which she joined in 1982, including leading of Finance & Operations and Chief Executive Officer of our company, and Mr. Barak Eilam will assume the position of Chief Executive Officer of our company, followingBusiness Development for Intel in Israel. Ms. Simon is currently a transition period that is expected to be completed by the end of April 2014. Mr. Bregman will be retaining his position as aboard member of our BoardAudiocodes, a public company traded on NASDAQ and TASE, Nova Measurements, a publicly-traded company on NASDAQ and TASE, and Amiad Water Systems, a public company traded on the London Stock Exchange. Ms. Simon is a former member of Directors. From 2001 to 2007, Mr. Bregmanthe board of directors of Insightec Ltd., M-Systems Ltd. (acquired by SanDisk Corp.) and Tower Semiconductor Ltd. Ms. Simon holds a B.A. in Social Sciences from the Hebrew University, Jerusalem, a law degree (LL.B.) from the Interdisciplinary Center in Herzliya and an M.A. in Business and Management from Boston University.
Barak Eilam has served as Chief Executive Officer of Comverse Inc. From 1987 to 2001, he served in various research and development, sales, marketing, and management positions within Comverse, including Vice President Head of the EMEA division, Vice President and Head of the Messaging division, and Chief Operating Officer. Mr. Bregman holds a Bachelor’s degree in Mathematics and Computer Science from Tel-Aviv University, a Master's degree in Computer Science from Tel-Aviv University and a Master's degree in Business Administration from a joint program of Kellogg Business School and Tel Aviv University.
Barak Eilam has served as President of our American division since July 2012. Mr. Eilam has been appointed Chief Executive Officer of our company and will assume such position following a transition period, which is expected to be completed by the end of April 2014. In his previous position with NICE, Mr. Eilam was President of our American division from July 2012 to March 2014. Prior to that, Mr. Eilam was the head of sales and the general manager of the Enterprise Group in the Americas. From 2007 to 2009, Mr. Eilam founded and served as the general manager of the NICE Interaction Analytics Global Business Unit. Mr. Eilam has also served in a variety of executive positions within NICE, managing different aspects of the business in product development, sales and product management. Before joining NICE in 1999, Mr. Eilam was an officer for an elite intelligence unit in the Israeli defense forces. Mr. Eilam holds a Bachelor's degree in Electrical &and Electronics Engineering from Tel Aviv University.
Yochai Rozenblat Miki Migdal has served as President of the NICE Enterprise Product Group since July 2012. From September 2009 to June 2012, Mr. Rozenblat was President and Chief Executive Officer of our American division.2014. Prior to that,joining NICE, Mr. RozenblatMigdal was Presidentthe CEO of the Enterprise Group in the Americas. From 2003 to 2007, Mr. Rozenblat served as ourSAP Israel and held additional leadership roles at SAP including Senior Vice President of Sales, responsible for North AmericaDevelopment at SAP Global and from 2007 his responsibilitiesPresident of SAP Labs Israel. He also extended to South America. Before joining NICEserved in 2004,executive positions at B.V.R Systems, Amdocs and Mercury Interactive (HP Software). Mr. Rozenblat led the Enterprise Sales Team at Clarify, the CRM division of Amdocs. Mr. Rozenblat hasMigdal holds a Bachelor’s degreeB.Sc. in LawMath and Computer Science from Tel Aviv University.
Yaron Tchwella Joseph Friscia has served as President of the Security GroupNICE Actimize since June 2011.April 2014. Prior to joining NICE, he served as chief executive officer of Blue Phoenix Solutions Ltd. During 2007 and 2008 Mr. TchwellaFriscia served as President of Comverse Inc. Prior to this position and as part of his 10 years at Comverse, Mr. TchwellaBAE Systems' Applied Intelligence Americas business. He joined BAE when BAE Systems acquired Norkom Technologies, where he had served as president of the Messaging Division and a member of the executive management team at Comverse. Mr. Tchwella also held various executive managerial positions within the product, services and customer-facing organizations at Comverse. Prior to joining Comverse, Mr. Tchwella held engineering and managerial positions over a 13-year period in the security and defense division at Advanced Technology Ltd., known today as Ness Technology Ltd. Mr. Tchwella holds a Bachelor’s degree in Electronic Engineering from Tel Aviv University.
Amir Orad has served as President and Chief Executive Officer of NICE-Actimize since April 2010. From 2007 until 2010, Mr. Orad served in various positions in NICE-Actimize, including President of the Americas, Executive Vice President of Product Management and Business Development, and Chief Marketing Officer. From 2005 until 2006, Mr. Orad was VP Marketing of RSA Security and from 1999 until 2005, he was a member of the founding teamGeneral Manager and Executive Vice President of Marketingthe Americas. Prior to Norkom, Mr. Friscia was a co-founder of CyotaPegasystems, Inc., an online securitythe leading Business Process Management software company, from its origin and anti-fraud company that was acquired by RSA Security.through taking it public in 1996. Mr. OradFriscia holds an MBA degree from Columbia University's executive programAdelphi University and a B.S. in Computer Science and ManagementB.A. from Tel AvivLong Island University.
Paul Jarman has served as NICE inContact CEO since November 2016, and served as inContact CEO since January 2005 until we acquired inContact. Prior to becoming CEO, Mr. Jarman served as inContact's President from December 2002. Prior to December 2002, he served as inContact's Executive Vice President. Mr. Jarman was instrumental in guiding inContact from its roots in telecommunications to its strategic offering of cloud-based contact center solutions and has been a part of every major enhancement the company has made since 1997. Mr. Jarman led inContact's listing on NASDAQ. Prior to joining inContact, he was an executive with HealthRider, Inc. Mr. Jarman holds a Bachelor of Science degree in Accounting from the University of Utah.
Dafna Gruber Beth Gaspich has served as our Chief Financial Officer since June 2007. From 2001 until May 2007,October 2016. Ms. Gaspich joined NICE as CFO of the financial crime and compliance division NICE Actimize in September 2011, where she served as thewas responsible for finance, legal and business operations. Prior to joining NICE, she was Chief Financial Officer of Alvarion Ltd.for Archive Systems, Inc., a NASDAQ-listedprivately held document management software provider. She also served as VP of Finance at RiskMetrics Group, Inc., a cloud based risk management software company. Ms. Gaspich was one of the founding members of RiskMetrics Group and assisted in taking the company through a successful public offering on the NYSE in January 2008. Prior to that, provides innovative wireless network solutions. From 1997 to 2001, Ms. Gruber was the Chief Financial Officer of BreezeCOM Ltd., which was merged with Floware Wireless Systems Ltd. to create Alvarion, prior to which she was the controller of BreezeCOM from 1996 to 1997. From 1993 to 1996,Gaspich held several other senior positions throughout her career at large global financial institutions, including JP Morgan and Price Waterhouse. Ms. Gruber was a controller at Lannet Data Communications Ltd., subsequently acquired by Lucent Technologies Inc. Ms. Gruber is a certified public accountant andGaspich holds a Bachelor’s degreeBA in Accounting and Economics from Tel Aviv University.the University of Missouri.
Yechiam Cohen has served as our Corporate Vice President, General Counsel and Corporate Secretary since 2005. From 1996 to 2004, he served as General Counsel of Amdocs, a publicly traded company and a leading provider of billing and CRM software solutions to the telecommunications industry. Before joining Amdocs, Mr. Cohen was a partner in the Tel Aviv law firm of Dan Cohen, Spigelman & Company. From 1987 to 1990, he was an associate with the New York law firm of Dornbush, Mensch, Mandelstam and Schaeffer. Mr. Cohen served as a law clerk to Justice Beijski of the Supreme Court of Israel in Jerusalem. He holds a Bachelor’sBachelor's degree from the Hebrew University School of Law and is admitted to practice law in Israel and New York.
Eran Porat has served as our Corporate Vice President, Finance since 2004. From March 2000 to 2004, he served as our Corporate Controller. From 1997 to February 2000, Mr. Porat served as Corporate Controller of Tecnomatix Technologies Ltd. From 1996 to 1997, he served as Corporate Controller of Nechushtan Elevators Ltd. Mr. Porat is a certified public accountant and holds a Bachelor’sBachelor's degree in economics and accounting from Tel Aviv University.
Eran Liron has served as our Executive Vice President, Marketing and Corporate Development since October 2013, and as Executive Vice President, Corporate Development since February 2006. From 2004 to 2006, he served as Director of Corporate Development at Mercury Interactive Corporation, a software company, and prior thereto he held several business development positions at Mercury Interactive. Before joining Mercury, Mr. Liron served in several marketing roles at software startups and at Tower Semiconductor. Mr. Liron holds a Bachelor of Science degree from the Technion – Israel Institute of Technology and a Doctorate in Business from the Stanford Graduate School of Business in California.
Benny Einhorn Barry Cooper has servedbeen with NICE since 2011 and serves as our President of NICE EMEAChief Operating Officer (COO) since July 2012.May 2016. Prior to serving as COO, Mr. Einhorn also acted as Chief Marketing Officer between April 2012 and October 2013, and was responsible for NICE’s global marketing, business partner and channel activities. From 2008 to 2009, Mr. Einhorn served as the Vice President of Sales & Marketing in Modu, an innovative manufacturer of the world’s lightest modular mobile phones. From 2001 to 2008, he was the Chief Marketing Officer and President of EMEA at Comverse Inc. Mr. Einhorn holds an MBA degree and a Bachelor's degree in Industrial Engineering from Tel Aviv University.
Raghav Sahgal has served as President of NICE APAC since October 2010. From 2008 to 2010, Mr. SahgalCooper served as Vice President, Communications, Global Business Unit –Operations for APAC from March, 2011 until June 2013, and as of Oracle. July 2013 and until assuming the role of CCO, he served as Executive Vice President, Professional Services and Cloud. Prior to that,joining NICE, Mr. Sahgal held various senior positionsCooper was a Management Consultant at Accenture; the Head of Customer Service, IT and Billing at Time Telekom, Malaysia; and Vice President of Professional Services, APAC for CSG Systems, later Comverse. Mr. Cooper holds a First Class Bachelor of Computer Science and Mathematics with Honors from Salford University in the management, strategic planning, global field operations, sales and marketing groups at Intense Technologies Inc., Suntec Inc., Comverse Technology, CSG Systems and Lucent Technologies. Mr. Sahgal is a graduate of the Harvard Business School Executive General Management Program, has a Master's degree in Computer System Management from the University of Maryland and a Bachelor's degree in Computer Engineering from Tulane University.United Kingdom.
Sigal GillmoreGill-More-Feferman has served as Executive Vice President, Human Resources since September 2009. From 1996 until 2009, Ms. GillmoreGill-more-Feferman held several field, regional and corporate roles at Microsoft. In her most recent role at Microsoft, Ms. GillmoreGill-more-Feferman led the staffing function across all international regions (EMEA, Asia, Latin America) overseeing both Sales and R&D sites. Ms. GillmoreGill-more-Feferman holds a Master’sMaster's degree in organizational behavior from Tel Aviv University.
Barry Cooper has served as Executive Vice President, Professional Services and Customer Support since August 2013. In his previous position with NICE, Mr. Cooper served as Vice President, Business Operations, for APAC. Prior to joining NICE, Mr. Cooper was a Management Consultant at Accenture; the Head of Customer Service, IT & Billing at Time Telekom, Malaysia; and VP Professional Services, APAC for CSG Systems (later Comverse). Mr. Cooper holds a First Class Bachelor of Science with Honors in Computing Science from the University of Salford in the UK.
There are no family relationships between any of the directors or executive officers named above.
(a) Aggregate Executive Compensation
The aggregate compensation paid to or accrued on behalf of all our directors and executive officers as a group of 2319 persons during 20132016 consisted of approximately $7.4$7.3 million in salary, fees, bonus, commissions and directors’directors' fees and approximately $0.5$0.8 million in amounts set aside or accrued to provide pension, retirement or similar benefits, but excluding amounts we expended for automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
We have a performance-based bonus plan for our executive management team. The plan is based on our overall performance, the particular unit performance, individual performance and the results of the customer satisfaction survey conducted annually. The measurements can change year over year, and are a combination of financial parameters, including revenues, booking and operating income and collection.income. The plan is reviewed and approved by our Board of Directors annually, as is any bonus payment under the plan.
During 2013,2016, our officers and directors received, in the aggregate, (i) options to purchase 605,792211,674 ordinary shares, that include 91,700 options with an exercise price equal to the par value of the ordinary shares (the “par value options”), and 27,251(ii) 163,535 restricted share units, under our equity based compensation plans. The options (other than the par value options) have a weighted average price of $33.08$52.64 and all options will expire six years after the date of grant. The restricted shares units are granted at par value of the ordinary shares. For information regarding our option exchange program, see "Share Ownership–Option Exchanges and Price Adjustment" below.
Pursuant to the requirements of the Israeli Companies Law, 5759–1999, or the Israeli Companies Law, remuneration of our directors requires shareholder approval. Compensation and reimbursement for outside directors (as described below) is statutorilystatuto-rily determined pursuant to the Israeli Companies Law. Effective as of OctoberJuly 1, 2013,2015, our shareholders approved the payment to each of our non-executive directors, including outside directors, of an annual fee of NIS 120,000 (equivalent to approximately $34,572)$40,000 and a meeting attendance fee of $1,500 for each Board meeting attended (whether in person or through media), and $1,000 for each Board committee meeting attended (whether in person or through media) (in each case paid in U.S. dollars or in NIS 3,250 (equivalent to approximately $936), including for meetings of committeesbased on the exchange rate on the date of the Board of Directors. The cash amounts set forth above areapproval by shareholders), subject to adjustment for changes in the Israeli consumer price index.additional value added tax, as applicable.
On August 27, 2013,July 9, 2015, at our 20132015 annual general meeting of shareholders, our shareholders approved a number of items. First, following the recommendation of our compensation committee and approval by our Board of Directors, our shareholders approved a newan amended compensation policy for directors and officers.
In addition, our shareholders approved a supplemental annual cash fee for the Chairman of the Board in the amount of NIS 450,000 (equivalent to approximately $129,646), effective retroactively from the date of his appointment of as Chairman of the Board on February 13, 2013.$115,652). The supplemental annual fee is subject to adjustment for changes in the Israeli consumer price index after September 2012.
Our shareholders also approved the payment(b) Individual Compensation of a special separation bonus to Ron Gutler, our former Chairman of the Board, in the amount of $100,000, without any conditions.
Finally, upon the recommendation of the compensation committee and Board of Directors, our shareholders approved certain components of Zeev Bregman’s (our Chief Executive Officer) compensation for 2013. Such shareholder approval was required pursuant to the recently enacted amendment No. 20 to the Israeli Companies Law. The compensation components included (i) an annual cash bonus payment of up to 150% of the chief executive officer’s annual base salary (subject to the fulfillment of certain performance-based targets) and (ii) a grant of 140,000 options in accordance with NICE’s 2008 Incentive Plan.Covered Executives
The following describes the compensation of our five most highly compensated executive officers in 2016, based on the total of salary costs, bonus cost and equity costs expensed in 2016 ("Covered Executives").
The compensation specified below is broken down into the following components (all amounts specified below are in terms of cost to the Company, as recorded in our financial statements). U.S. dollar amounts indicated for Salary, Bonus and Equity Costs are in thousands of dollars and for Covered Executives in Israel are based on the Shekel exchange rate of 3.82, which represents the average rate for the year, and for the Covered Executive in Singapore are based on the Singapore dollar exchange rate of 1.42, which represents the average rate for that year.
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| (1) | Salary Costs. Salary Costs include gross salary, benefits and perquisites, including those mandated by applicable law which may include, to the extent applicable to each Covered Executive, payments, contributions and/or allocations for pension, severance, vacation, travel and accommodation, car or car allowance, medical insurances and risk insurances (e.g., life, disability, accidents), phone, convalescence pay, relocation, payments for social security, and other benefits consistent with the Company's guidelines. |
| (2) | Bonus Costs. Bonus Costs represent bonuses granted to the Covered Executive with respect to the year ended December 31, 2016, paid in accordance with the Company's performance-based bonus plan or as detailed in footnotes below. |
| (3) | Equity Costs. Represents the expense recorded in our financial statements for the year ended December 31, 2016, with respect to equity granted in 2016 and in previous years (if applicable). For assumptions and key variables used in the calculation of such amounts see note 13b of our audited Consolidated Financial Statements. |
i. | Barak Eilam – CEO. Salary Costs - $831; Bonus Costs - $1,204; Equity Costs - $1,601 expense recorded in 2016 for equity granted in 2016 and $1,951 expense recorded in 2016 for equity granted in previous years. |
ii. | Tom Dziersk – former President, NICE Americas. Salary Costs - $492; Bonus Costs - $350; Equity Costs - $676 expense recorded in 2016 for equity granted in 2016 and $573 expense recorded in 2016 for equity granted in previous years. |
iii. | John O'Hara – President, NICE EMEA. Salary Costs - $437; Bonus Costs - $336 and $721 expense recorded in 2016 for equity granted in 2016. |
iv. | Joseph Friscia – President, NICE Actimize. Salary Costs - $406; Bonus Costs - $424; Equity Costs - $622 expense recorded in 2016 for equity granted in 2016 and $409 expense recorded in 2016 for equity granted in previous years. |
v. | Raghav Sahgal – former President, NICE APAC. Salary Costs - $419; Bonus Costs - $356; Equity Costs - $432 expense recorded in 2016 for equity granted in 2016 and $389 expense recorded in 2016 for equity granted in previous years. |
Board Practices
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, relating to such matters as outside directors, the internal audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of the NASDAQ and other relevant provisions of U.S. securities laws. Under applicable NASDAQ rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of comparable NASDAQ requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further information see Item 16G, “Corporate Governance”"Corporate Governance" of this annual report.
General Board Practices
Our articles of association provide that the number of directors serving on the Board shall be not less than three but shall not exceed thirteen. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by an extraordinary resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The Board may appoint additional directors (whether to fill a vacancy or create new directorships) to serve until the next annual shareholders meeting, provided, however, that the Board shall have no obligation to fill any vacancy unless the number of directors is less than three.
The Board may, subject to the provisions of the Israeli Companies Law, appoint a committee of the Board and delegate to such committee all or any of the powers of the Board, as it deems appropriate. Notwithstanding the foregoing and subject to the provisions of the Israeli Companies law, the Board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The Board has appointed an internal audit committee under the Israeli Companies Law that has three members, an audit committee that has fourfive members, a compensation committee that has fourfive members, a nominations committee that has threetwo members and a mergers and acquisitions committee that has fivesix members. We do not have, nor do our subsidiaries have, any directors’directors' service contracts granting to the directors any benefits upon termination of their employment. In addition, from time to time the Board may appoint an ad hoc committee for certain purposes, such as the review, negotiation and recommendation of approval of M&A transactions.
UnderExcept as discussed below, under the Israeli Companies Law companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint at least two “outside”"outside" directors. Pursuant to regulations under the Israeli Companies Law that took effect in April 2016, a Nasdaq-listed company that does not have a controlling shareholder is entitled to opt out of the provisions of the Israeli Companies Law requiring at least two outside directors and certain related requirements, so long as the company complies with the SEC regulations and Nasdaq listing rules regarding independent directors and the composition of the audit and compensation committees. In December 2016, our shareholders approved amendments to our articles of association, pursuant to which our Board of Directors may elect to opt out of such requirements and we would not be required to have outside directors serve on our Board of Directors (together the "2016 Relief Amendments"). According to these new regulations, an outside director that was appointed prior to a company opting out of such requirements may continue in office until the end of his or her then-current term or until the end of the second annual general meeting convened after the applicable company opts out of the requirement, whichever is earlier.
Outside directors are required to possess professional qualifications as set out in regulations promulgated under the Israeli Companies Law. The Israeli Companies Law provides that a person may not be appointed as an outside director if (i) such person or person’sperson's relative or affiliate has, at the date of appointment, or had at any time during the two years preceding such date, any affiliation with the company, a controlling shareholder thereof or their respective affiliates; or (ii) in a company that does not have a 25% shareholder, such person has an affiliation with any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company. In general, the term “affiliation”"affiliation" includes:
| ·•an employment relationship;
| an employment relationship; |
| ·•a business or professional relationship maintained on a regular basis;
| a business or professional relationship maintained on a regular basis; |
| ·•service as an office holder.
| service as an office holder. |
No person may serve as an outside director if the person’sperson's position or other activities create, or may create a conflict of interest with the person’sperson's responsibilities as an outside director or may otherwise interfere with the person’sperson's ability to serve as an outside director. Until the lapse of two years from termination of office, a company or its controlling shareholder may not give any direct or indirect benefit to the former outside director.
Outside directors are to be elected by a majority vote at a shareholders’shareholders' meeting, provided that either:
| · | the majority of shares voted at the meeting shall include at least a majority of the shares of non-controlling shareholders present at the meeting and voting on the matter (without taking into account the votes of the abstaining shareholders); or |
| · | the total number of shares of non-controlling shareholders voted against the election of the outside directors does not exceed two percent of the aggregate voting rights in the company. |
The initial term of an outside director is three years and may be extended for up to two additional three-year terms. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the internal audit committee and the Board of Directors confirm that, in light of the outside director’sdirector's expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is beneficial to the company. Reelection of an outside director may be effected through one of the following mechanisms: (1) the Board of Directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint outside directors for their initial term; or (2) a shareholderone or more shareholders holding one percent or more of a company’scompany's voting rights or the outside director proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than two percent of the voting rights in the company. EachAn outside director may be removed only in a general meeting, by the same percentage of shareholders as is required for electing an outside director, or by a court, and in both cases only if the outside director ceases to meet the statutory qualifications for appointment or if he or she has violated the duty of loyalty to us. Unless we actually adopt the applicable relief provided under the 2016 Relief Amendments, each committee of a company’scompany's Board of Directors which is empowered to exercise any of the Board’sBoard's powers is required to include at least one outside director, provided that each of the internal audit committee audit committee, and compensation committee must include all of the outside directors.
An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the company. In accordance with such regulations, our shareholders approved that our outside directors are to receive compensation equal to that paid to the other members of the boardBoard of directors.Directors. For further information, please see Item 6, “Directors,"Directors, Senior Management and Employees—Compensation”Compensation" in this annual report.
Financial and Accounting Expertise
Pursuant to the Israeli Companies Law, our Board of Directors has determined that at least one member of our Board of Directors must be an “accounting"accounting and financial expert.”" The Israeli Companies Law requires that all outside directors must be “professionally"professionally qualified.”" Under applicable NASDAQ rules, each member of our audit committee must be financially literate and at least one of the members must have experience or background that results in such member’smember's financial sophistication. Our Board of Directors has determined that each of Dan Falk and Yocheved Dvir is an “accounting"accounting and financial expert”expert" for purposes of the Israeli Companies Law and is financially sophisticated for purposes of applicable NASDAQ rules. See also Item 16A, “Audit"Audit Committee Financial Expert”Expert" in this annual report.
Independent Directors
In addition, our Articles of Association provide that, if we do not have a shareholder that holds 25% or more of our issued and outstanding share capital, then a majority of the directors shallmust be "independent" as defined in the Israeli Companies Law and the regulations promulgated thereunder. If we have a shareholder that holds 25% or more of our issued and outstanding share capital, then at least one third of the directors shallmust be "independent." Other than Zeev Bregman, allAll of our directors satisfy the respective independence requirements of the Israeli Companies Law. The qualifications for independent directors under the Israeli Companies Law are similar to those for outside directors, as described above under "—Outside Directors", including the nine-year term limit and the ability to extend such term beyond nine years upon the approval of our internal audit committee and Board of Directors.