Analytics is an under-appreciated component of Big Data, but one that companies like IBM (NYSE:IBM) and SAS have targeted as key growth areas. Although Israel's NICE Systems (Nasdaq:NICE) is perhaps better known for its surveillance and security applications, enterprise interaction and transaction analysis looks like an increasingly valuable addressable market for the company.
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OK Performance, but Orders a Concern
NICE Systems did alright for the first quarter, as revenue rose 15% enterprise revenues rose 16%, while security revenue rose 11%. Margins were not especially strong, though, as GAAP gross margins fell more than three points and operating income dropped 45%. On a non-GAAP basis, operating income kept pace with revenue at 15% growth.
These results were consistent with analyst expectations, as was management's guidance, but orders did soften to a point where the company's book-to-bill slipped below 1.
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Data Analysis Is Where Value Is Created
There's no question that companies like EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP) have made quite a lot of money from selling equipment to store data. Likewise, companies like Oracle (Nasdaq:ORCL) and SAP (NYSE:SAP) have built large businesses on the back of software that organizes, sorts and manipulates that data to inform or support business decisions.
It's all well and good to collect, save and sort data, but the real value comes from figuring out what the data really means and how companies can use it to improve their operations. With NICE, that means capturing data from phone calls (voice logging), email, chat or IM and so on and then analyzing that interaction and transaction data.
Call centers can use this information to reduce wait times, improve customer satisfaction and retention or even inform real-time sales floor decisions. It's also useful in fraud detection, and NICE has been looking to sell more of its analytical solutions to commercial banks, investment banks and other financial institutions.
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NICE Would Make a Nice Fit
I'm a little surprised that NICE is still an independent company. With Verint (Nasdaq:VRNT), it's one of two companies that sell voice logging and analysis solutions. Moreover, as companies like IBM, Oracle and SAP all look to improve their analytical software and service capabilities, this would seem like a natural fit.
Consider the case of IBM. IBM already sells mainframe systems, servers, storage equipment and an array of software solutions, not to mention extensive consulting services. It would seem that NICE Systems' solutions would naturally fit into the ecosystem and allow IBM to offer an even more robust array of analytical capabilities to its customers.
The Bottom Line
Given the rate at which companies are accumulating data, it seems reasonable to project strong ongoing demand for analytical solutions. While NICE's GAAP-based fundamental valuation metrics look high, the stock actually looks undervalued on a discounted cash flow basis. Even with just modest high single-digit free cash flow growth, NICE shares could be worth over $50. Although the company is vulnerable to the somewhat cyclical enterprise IT market, ongoing demand for data and data analytics suggests this is a stock worth further investigation.
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.