A NICE Way to Play the VoIP Boom

S&P sees continued strength for NICE Systems, thanks to its IP-based technologies, smart acquisitions, and a growing customer base

by Ari Bensinger From Standard & Poor's Equity Research

As one of the two primary suppliers of enterprise-interaction offerings, NICE Systems (NICE; recent price, $34.60) should benefit from a migration toward VoIP (Voice over Internet Protocol) and a stricter regulatory compliance environment, in Standard & Poor's view. We also see a tremendous growth opportunity related to the company's video security offerings, as government and public agencies shift toward proactive security management given the growing threat of terrorism. We view NICE's broad product portfolio and strong global presence, in terms of distribution and service and support capacity, as significant competitive advantages over the smaller specialty providers.

Given our view of its expanding market opportunities, we believe NICE can post sales and earnings growth above peers. On both a relative and intrinsic basis, we view the stock's current valuation as compelling. Our recommendation on the shares is 5 STARS (strong buy).

Headquartered in Israel, NICE is a leading provider of solutions that capture, manage, and analyze multimedia content. The content includes calls to contact centers and back offices, video captured on closed-circuit television cameras, radio communications, e-mail, and instant messaging. The company's major customer segments include the enterprise market, comprising financial services, outsourced service providers, and telecom, and the public safety and security market, comprising air traffic control, homeland security, and public transportation. NICE has more than 23,000 customers, including over 75 of the Fortune 100 companies, across over 40,000 sites around the world.

Strategic Alliances

The majority of sales are derived from the enterprise division (75% of the total), which primarily targets contact centers and trading floors, although the security-group division (25%), which offers digital video and multimedia logging for government and law-enforcement agencies, is growing rapidly.

The company's strategy is focused on driving the penetration of next-generation business-intelligence offerings in the company's chosen customer segments by a targeted sales and marketing effort and continuous investments in research and development. We think NICE's strategic alliances with industry leaders such as Avaya (AV), SAS, and Motorola (MOT) will help capture potential revenue opportunities and increase market share. With its broad product portfolio, we think NICE's offerings cover the entire gamut of activities required to fulfill customer needs.

The market in which NICE operates is characterized by rapidly evolving technological standards and intense competition, in our view. NICE recently introduced active VoIP recording in IP environments and developed an active VoIP recording protocol based on session initiation protocol. Contact centers and trading floors, which are major customers of NICE, have witnessed a rapid expansion toward VoIP technology.

Good Buys

IP-based technologies are becoming increasingly common, with wider deployments and larger scale deals, as evidenced by NICE's 2006 annual revenue from VoIP offerings roughly doubling from the prior year. Longer term, however, we believe NICE will face further competition from telecom vendors that may supply embedded VoIP recording with their switches.

The company has employed an aggressive acquisition strategy to augment organic growth. During mid-2006, NICE acquired IEX and Performix Technologies, leading providers of contact center performance and workforce-management offerings. These acquisitions increased NICE's contact-center business by over 30%, significantly adding new top-tier customers and expanding the company's product portfolio.

In January, 2006, the company acquired Switzerland-based FAST Video Security to enhance its digital video security offering.