UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐
☒☒☒☒
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
Commission file number 0-27466
NICE LTD.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
13 Zarchin Street, P.O. Box 690, Ra’anana 4310602, Israel
(Address of principal executive offices)
Tali Mirsky, +972-9-7753151, tali.mirsky@nice.com,
13 Zarchin Street, P.O. Box 690, Ra’anana 4310602, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
American Depositary Shares, each representing
one Ordinary Share, par value one
New Israeli Shekel per share
Name of Each Exchange
On Which Registered
NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 60,925,954 Ordinary Shares,
par value NIS 1.00 per share (which excludes 12,529,213 treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒ Yes ☐ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such reports).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated
filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒
Non-Accelerated Filer ☐
Accelerated Filer ☐
Emerging Growth Company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April
5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ U.S. GAAP
☐ International Financial Reporting Standards as issued by the International Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous question indicate by check mark which financial statements the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
☐ Item 17 ☐Item 18
PRELIMINARY NOTE
This annual report contains historical information and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to NICE’s
business, financial condition and results of operations. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “strategy,” “continue,” “goal”
and “target” and similar expressions, as they relate to NICE or its management, are intended to identify forward-looking statements. Such statements reflect the current beliefs, expectations
and assumptions of NICE with respect to future events and are subject to risks and uncertainties. The forward-looking statements relate to, among other things: operating results; anticipated
cash flows; gross margins; adequacy of resources to fund operations; our ability to maintain our average selling prices despite the aggressive marketing and pricing strategies of our
competitors; our ability to maintain and develop profitable relationships with our key distribution channels; the financial strength of our key distribution channels; and the market’s
acceptance of our technologies, products and solutions.
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate,
could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following
cautionary statements. Many factors could cause the actual results, performance or achievements of NICE to be materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including, among others, competition with existing or new competitors, success and growth of cloud Software-as-a-Service
business, cyber security attacks or other security breaches, privacy concerns and legislation, dependency on third-party cloud computing platform providers, hosting facilities and service
partners, changes in general economic and business conditions, rapidly changing technology, changes in currency exchange rates and interest rates, difficulties in making additional
acquisitions or effectively integrating acquired operations, products, technologies and personnel, whether we are successful in executing our growth strategy, the effects of the recent
comprehensive tax reform in the United States and various other factors, both referenced and not referenced in this annual report. These risks are more fully described under Item 3, “Key
Information – Risk Factors” of this annual report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. NICE does not intend or assume any obligation to update these forward-
looking statements. Investors should bear this in mind as they consider forward-looking statements and whether to invest or remain invested in NICE’s securities.
In this annual report, all references to “NICE,” “we,” “us,” “our” or the “Company” are to NICE Ltd., a company organized under the laws of the State of Israel, and its wholly owned
subsidiaries. For a list of our significant subsidiaries, please refer to page 55 of this annual report.
In this annual report, unless otherwise specified or unless the context otherwise requires, all references to “$” or “dollars” are to U.S. Dollars, all references to “EUR” are to Euros, all
references to “GBP” are to British Pounds, all references to “CHF” are to Swiss Francs, all references to “NIS” are to New Israeli Shekels and all references to “INR” are to Indian Rupee. Except as
otherwise indicated, the financial statements of and information regarding NICE are presented in U.S. dollars.
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other than Equity Securities
TABLE OF CONTENTS
PART I
PART II
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
[Reserved]
Item 13.
Item 14.
Item 15.
Item 16.
Item 16A. Audit Committee Financial Expert
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H. Mine Safety Disclosure
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Item 17.
Item 18.
Item 19.
Index to Financial Statements
Financial Statements
Financial Statements
Exhibits
PART III
Page
1
1
1
31
57
57
78
95
96
98
100
119
122
124
124
124
125
125
125
125
126
126
126
126
127
127
128
F-1
PART I
Item 1. Identity of Directors, Senior Management and Advisers.
Not Applicable.
Item 2. Offer Statistics and Expected Timetable.
Not Applicable.
Item 3. Key Information.
Selected Financial Data
The following selected consolidated balance sheet data as of December 31, 2016 and 2017 and the selected consolidated statements of income data for the years ended December 31,
2015, 2016 and 2017 have been derived from our audited Consolidated Financial Statements included in this annual report. These financial statements have been prepared in accordance with
United States generally accepted accounting principles, or U.S. GAAP, and audited by Kost, Forer, Gabbay & Kasierer, a member of EY Global. The selected consolidated statements of income
data for the years ended December 31, 2013 and 2014 and the selected consolidated balance sheet data as of December 31, 2013, 2014 and 2015 have been derived from other Consolidated
Financial Statements not included in this annual report and have also been prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a member of EY Global. The
selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5, “Operating and Financial Review and Prospects”, the
Consolidated Financial Statements and notes thereto and other financial information included elsewhere in this annual report.
$
OPERATING DATA:
Revenues
Products
Services
Cloud
Total revenues
Cost of revenues
Products
Services
Cloud
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Amortization of acquired intangible assets
Restructuring expenses
Total operating expenses
Operating income
Financial and other income (expense), net
Income before taxes on income
Taxes on income (tax benefits)
Net income from continuing operations
Discontinued operations:
Gain on disposal and income (loss) from discontinued operations
Taxes on income (tax benefits)
Net income from discontinued operations
Net income
Basic earnings per share from continuing operations
Basic earnings per share from discontinued operations
Basic earnings per share
Weighted average number of shares used in computing basic earnings per
share (in thousands)
Diluted earnings per share from continuing operations
Diluted earnings per share from discontinued operations
Diluted earnings per share
Weighted average number of shares used in computing diluted earnings per
share (in thousands)
$
$
$
$
$
$
2013
Year Ended December 31,
2014
2016
2015
(U.S. dollars in thousands, except per share data)
2017
$
$
306,252
623,783
85,507
1,015,542
318,946
652,040
361,166
1,332,152
$
280,140
507,636
33,739
821,515
69,335
222,430
7,849
299,614
521,901
115,431
214,579
86,467
29,438
527
446,442
75,459
3,927
79,386
26,915
52,471
4,294
1,490
2,804
55,275
$
289,560
543,548
38,887
871,995
63,919
226,499
13,093
303,511
568,484
123,141
231,097
83,360
19,157
5,435
462,190
106,294
3,765
110,059
9,909
100,150
4,965
2,040
2,925
103,075
317,900
573,033
35,934
926,867
66,363
222,783
14,436
303,582
623,285
128,485
225,817
90,349
12,528
-
457,179
166,106
5,304
171,410
30,832
140,578
152,459
34,206
118,253
258,831
0.87
0.05
$
$
0.92
$
1.69
0.05
$
$
1.74
$
2.36
1.99
$
$
4.35
$
60,388
59,362
59,552
59,667
0.85
$
0.04
$
0.89
$
1.64
$
0.05
$
1.69
$
2.29
$
1.93
$
4.22
$
2.02
$
(0.10) $
1.92
$
61,380
60,895
61,281
61,035
53,032
250,022
34,679
337,733
677,809
141,528
268,349
116,569
17,187
-
543,633
134,176
10,305
144,481
21,412
123,069
(8,235)
(2,086)
(6,149)
116,920
2.06
$
(0.10) $
1.96
$
51,065
225,020
192,588
468,673
863,479
181,107
361,328
129,071
41,902
-
713,408
150,071
(20,411)
129,660
(13,631)
143,291
-
-
-
143,291
2.37
-
2.37
60,444
2.31
-
2.31
62,119
*Including assets and liabilities that are accounted for as discontinued operations.
**Including deferred revenues and advances from customers that are classified as long-term liabilities.
2
BALANCE SHEET DATA*:
Working capital**
Total assets
Shareholders’ equity
Risk Factors
2013
2014
At December 31,
2015
(U.S. dollars in thousands)
2016
2017
$
$
61,023
1,646,030
1,204,796
$
107,090
1,632,952
1,213,456
$
256,089
1,849,613
1,415,149
$
13,713
2,631,876
1,511,332
132,154
2,845,086
1,749,561
Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the SEC, including the following risk
factors which we face and which are faced by our industry. The risks and uncertainties described below are not the only ones facing us. Other events, circumstances or factors that we do not
currently anticipate or that we currently do not deem to be material risks may also affect our business, results of operations and financial condition. Our business, financial condition and
results of operations could be materially and adversely affected by any of these risks.
Risks Relating to our Business, Competition and Markets
Conditions and changes in the local and global economic environments may adversely affect our business and financial results.
Adverse economic conditions in markets in which we operate can harm our business, and our results of operations can be affected by adverse changes in local and global economic
conditions, slowdowns, recessions and economic instability. To the extent that our business suffers as a result of such unfavorable economic and market conditions, our operating results may
be materially adversely affected. In particular, enterprises may reduce spending in connection with their contact centers, financial institutions may reduce spending in relation to trading floors
and operational risk management (as IT-related capital expenditures are typically lower priority in times of economic slowdowns), and our customers may prioritize other expenditures over our
solutions. In addition, enterprises’ ordering and payment patterns are influenced by market conditions and could cause fluctuations in our quarterly results. If any of the above occurs, and our
customers or partners significantly reduce their spending or significantly delay or fail to make payments to us, our business, results of operations, and financial condition would be materially
adversely affected.
Disruption to the global economy could also result in a number of follow-on effects on our business, including a possible (i) slow-down in our business, resulting from lower customer
expenditure, inability of customers to pay for products and services, insolvency of customers or insolvency of key partners and vendors, (ii) negative impact on our liquidity, financial condition
and share price, which may impact our ability to raise capital in the market, obtain financing and secure other sources of funding in the future on terms favorable to us, and (iii) decreases in the
value of our assets that are deemed to be other than temporary, which may result in impairment losses.
In addition, a majority of our sales are generated from North America. If there is deterioration or a crisis in the economic and financial stability in the United States, particularly in the
financial services sector (which is our main industry vertical), our top tier customers could reduce spending, delay or postpone orders or fail to make payments to us. This could have a material
adverse effect on our sales in this region and our results of operations. Any such deterioration in the economic condition in the United States could also negatively impact the accuracy of our
forecast of future trends and our plans for future business development.
3
We face risks relating to our global operations.
We sell our products and solutions throughout the world and intend to continue to increase our penetration of international markets. Our future results could be materially adversely
affected by a variety of factors relating to international transactions, including:
•
•
•
•
•
•
•
•
•
governmental controls and regulations, including import or export license requirements, trade protection measures and changes in tariffs;
compliance with applicable international and local laws, regulations and practices, including those related to trade compliance, anticorruption, data privacy and protection, tax,
labor, employee benefits, customs, currency restrictions and other requirements;
fluctuations in currency exchange rates;
longer payment cycles in certain countries in our geographic areas of operations;
potential adverse tax consequences, including the complexities of foreign value added tax systems;
political instability, terrorism or the threat of terrorism and general security concerns;
political unrest, armed conflicts or natural disasters around the world
reduced or differing protection for intellectual property rights in some countries; and
general difficulties in managing our global operations.
On June 23, 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit”, and on March 29, 2017 the U.K.
delivered to the E.U. the official separation notice in accordance with Article 50 of the Lisbon Treaty. Although it is unknown what the exact terms of separation will be and what the interactions
between the U.K. and E.U. countries will be following such separation, it is likely that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and increased
regulatory complexities. In addition, as a result of such separation, traditional financial centers may shift to different locations within the E.U., in which we have little or no presence. These
changes may impact our business in the U.K. and E.U. and therefore may adversely affect our operations and financial results.
In addition, it remains difficult to predict the legislative and regulatory changes that will be enacted following the political changes in the U.S. administration at the beginning of 2017,
including possible changes and impact on U.S. trade relationships and agreements. The U.S. administration has taken a position with respect to international trade agreements, indicating a
strong interest in renegotiating existing trade agreements, which could result in the increase of our costs and decrease of our margins. Just recently, the U.S. administration made an
announcement regarding a new trade policy. We do not know at this time what additional changes, if any, the U.S. administration will make, and what the impact on us of any of those changes
may be. However any such changes may have a significant impact on our business and operation, which may adversely affect our financial results.
Changes in the political or economic environments, business spending, and the availability and cost of capital in the countries in which we operate, including the impact of such
changes on foreign currency rates and interest rates, and the impact of economic conditions on underlying demand for our products and services, could have a material adverse effect on our
financial condition, results of operations and cash flow.
4
As a result of our global presence, especially in emerging markets, we face increasing challenges that could adversely impact our results of operations, reputation and business.
In light of our global presence, especially in emerging markets such as those in Asia, Eastern Europe and Latin America, we face a number of challenges in certain jurisdictions that
provide reduced legal protection, including poor protection of intellectual property, inadequate protection against crime (including bribery, corruption and fraud) and breaches of local laws or
regulations, as well as challenges relating to competition from companies that already have a local presence in the market, difficulties in recruiting sufficient personnel with appropriate skills and
experience, unstable governments and economies, and governmental actions that may affect the flow of goods and currency.
In addition, local business practices in jurisdictions in which we operate, and particularly in emerging markets, may be inconsistent with international regulatory requirements, such as
anti-corruption and anti-bribery laws and regulations (including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act) to which we are subject. Although we implement policies and
procedures designed to ensure compliance with these laws, we cannot guarantee that none of our employees, contractors and agents, as well as those companies to which we outsource certain
of our business operations, will not take actions in violation of our policies or applicable law. Any such violation could have an adverse effect on our business and reputation, and may expose
us to criminal or civil enforcement actions, including penalties and fines.
Furthermore, the increased presence of our global operations in lower-cost locations, including outsourcing of certain operations to service providers in such lower-cost locations (such
as India), could impact the control over our operations, as well as create dependency on such external service providers. Such mode of operation may impact our business and adversely affect
our results of operation.
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 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.
Additional competition from new potential entrants to our markets may lead to the widespread availability and standardization of some of the products and services, which could result
in the commoditization of our products and services, reduce the demand for our products and services and drive us to lower our prices.
In recent years, some of our competitors have increased their presence in our markets through internal development, partnerships and acquisitions. Infrastructure vendors, including
suppliers of telecommunication infrastructure equipment, have decided or may decide in the future to enter our market space and compete with us by offering comprehensive solutions.
Moreover, major enterprise software vendors, such as those from the traditional enterprise business intelligence and business analytics sector or Customer Relationship Management (or
“CRM”), have entered or may decide to enter our market space and compete with us, either by internal development of comprehensive solutions or through acquisition of any of our existing
competitors. If we are not able to compete effectively with these market entrants or other competitors, we may lose market share and our business, financial condition or results of operations
could be adversely affected.
5
In light of the intense competition in our markets, successful development, positioning and sales execution of our products is a critical factor in our ability to successfully compete and
maintain growth. Therefore we must continue making significant expenditures on research and development, marketing and sales to compete effectively. In addition, our software solutions may
compete with software developed internally by potential clients, as well as software and other solutions offered by competitors. We cannot ensure that the market awareness or demand for our
new products or applications will grow as rapidly as we expect, or that the introduction of new products or technological developments by others will not adversely impact the demand for our
products.
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 a broad range of product offerings, 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.
As we expand into new markets, we are faced with new competition, which may be able to more quickly develop or adapt to new or emerging technologies, better respond to changes in
customer requirements or preferences, or devote greater resources to the development, promotion, and sale of their products. Additionally, prices of most of our solutions have decreased
throughout the market in recent years, primarily due to competitive pressures, and may continue to decrease. Further, in relation to our cloud offering, we may be affected by the pricing of certain
infrastructure services, such as in the area of Platform as a Service and network connectivity, which would in turn affect the rates we offer to customers. This could have a negative effect on our
gross profit and results of operations.
Our Cloud Software-as-a-Service business model may not be successful or profitable.
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 area of our business. If we are not able to compete effectively, generate significant revenues or maintain the profitability of our cloud offerings, or 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, 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 our move to
cloud-based solutions, we cannot guarantee that revenues generated from our cloud offerings will compensate for a loss of business in our on-premise enterprise software business.
Further, 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. 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 (based on actual usage). 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.
6
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.
The stability and growth of our cloud related revenues depends on our ability to attract and retain on-going customers.
The revenue model for companies selling software services under the cloud model is to attract customers, retain such customers through the renewal of their periodic subscription
contracts and encourage such customers to add additional agent seats and functionality.
Although the majority of our sales are generated through large enterprise customers, our cloud offerings are targeted also at small to medium businesses, which requires us 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, if our clients experience seasonal trends in their businesses or our 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 cloud computing platform providers, hosting facilities and service partners that may be difficult to replace.
We rely on computer hardware leased and software licensed from, as well as cloud computing platforms provided by, third parties in order to offer our services, including Platform as a
Service provided by strategic partners, such as Amazon. 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
impact our business, increase our expenses and otherwise result in delays in providing 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.
7
If our security measures or those of our third party hosting facility providers, cloud computing platform providers, or third-party service partners are breached and unauthorized access is
obtained to customers’ data, our data or our IT systems, our services may be perceived as not being secure, customers may stop using our services, and we may incur significant legal and
financial exposure and liabilities.
Our services involve the storage and transmission of customers’ and their end users’ proprietary and other sensitive information, including financial information and other personally
identifiable information. Security breaches could expose us to a risk of loss of this information, litigation 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
systems, our customers’ data or our data, including our intellectual property and other confidential business information.
In addition, 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 and services, 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.
While we maintain insurance coverage to protect us against a broad range of risks, including in relation to security breaches and cyber security attacks, we could still be subject to risks
of losses that might be beyond the limits, or outside the scope, of coverage of our insurance and that may limit or prevent indemnification under our insurance policies. This potential
insufficiency of insurance coverage could result in an adverse effect on our business, financial position, profit, and cash flows.
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Defects or disruptions in our cloud-based services could impact demand for our services and subject us to substantial liability.
Cloud-based 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. As 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 some of our
solutions and services in certain locations or our customers’ ability to deploy our solutions globally.
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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.
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.
We may not be able to successfully execute our growth strategy.
Our strategy is to continue investing in, enhancing and securing our business and operations and growing our business, both organically and through acquisitions. Investments in,
among other things, new markets, products, solutions, and technologies, research and development, infrastructure and systems, geographic expansion, and additional qualified and experienced
personnel, are critical to achieving our growth strategy. Growth of our revenue depends on the success of all these factors, including our ability to capture market share, attract new clients,
develop our strategic partnerships, introduce our solutions and services to new global markets, strengthen and improve our solutions through significant investments in research and
developments and successfully consummate and integrate acquisitions. However, such investments and efforts may not be successful, and, even if successful, may negatively impact our short-
term profitability. Furthermore, in the event of an acquisition, our profits may be reduced over the short-term with the objective of achieving long-term expansion or growth, which may involve
risks. Additionally, the terms of the credit agreement (the “Credit Agreement”) that we entered into in connection with our senior secured credit facility (the “Credit Facility”) contains restrictions
that could restrict our ability to make strategic acquisitions or investments.
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Our success depends on our ability to execute our growth strategy effectively and efficiently. If we are unable to execute our growth strategy successfully and properly manage our
investments and expenditures, our results of operations and stock price may be materially adversely affected. In addition, as a result of the execution of our growth strategy, our short term
profitability may be negatively impacted, including as a result of an acquisition.
We cannot guarantee that we will be able to sustain our growth in future years. The increasing proportion of advanced software applications in our overall sales mix might not
compensate for the slowing growth rates of our recording solutions and other more mature products. In addition, our new solutions might not achieve wide market acceptance, and therefore
might fail to support revenue growth. The failure to implement our growth strategy successfully could affect our ability to sustain growth and could materially adversely affect our results of
operations.
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments. 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 (see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions” in this annual
report for a description of certain of these acquisitions). We expect to continue to make 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. There 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’s business into our operations or investing in new technologies may (1) result in unforeseen
operating difficulties and large expenditures and (2) absorb significant management attention that would otherwise be available for the ongoing development of our business, both of which may
result in the loss of key customers or personnel and expose us to unanticipated liabilities.
Other risks commonly encountered with acquisitions include the effect of acquisitions on our financial and strategic position, the inability to integrate successfully 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 manner, new skilled employees and management to replace them.
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
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 not be able to achieve our growth strategy, may lose market share, or may lose our leadership position in one or more of our markets.
We 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 able to consummate acquisitions or investments that we have identified as crucial to the implementation of our 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.
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We may require significant financing to complete an acquisition or investment, whether through bank loans, raising of debt or otherwise. In connection with our November 2016
acquisition of inContact, 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 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 may 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.
We depend on a small number of significant customers.
We have a number of significant customers in each sector of our business, each of which could be material to a particular area of our business, including one customer that accounts for
approximately five percent of our aggregate revenues in 2017.
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.
We depend on the stability of the financial services sector.
The financial services sector is our main industry vertical. If there is deterioration or a crisis in the economic and financial stability of financial institutions, as well as any change in rules
and regulations that apply to this sector (such as deregulation in the area of compliance), customers in this sector, including our top tier customers, could fail to make payments to us, reduce
spending or delay or postpone orders. This could have a material adverse effect on our sales to this sector and our results of operations.
If we are unable to develop or maintain our relationships with existing and new distributors and strategic partners, our business and financial results could be materially adversely affected.
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 across all geographies in
which we operate. In 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, including through the implementation of our partnership programs, is an important factor in the successful marketing of
our products and execution of our growth strategy. In some markets we have only recently started to develop a number of partnerships and strategic alliances. We may 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.
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We leverage strategic relationships with third parties such as system integrators and technology and telephony providers. We also license technology from certain third parties. Certain
of these license agreements permit either party to terminate all or a portion of the agreement without cause at any time.
As our market opportunities change and as we grow our business, our dependency on particular distribution channels and strategic partners may increase or we may need to create new
strategic partnerships and alliances to address changing market needs. We may not be successful in maintaining, creating or expanding these channels and partnerships, which may negatively
impact the development of our business, our growth, gross margins and results of operations. We may also develop dependency on certain strategic partners and vendors, and should we have
to find alternatives in the market, our development efforts and business may be negatively impacted.
In addition, the execution of our growth strategy also depends on our ability to create new alliances and enter into strategic partnerships with certain market players and maintain those
relationships. Even if we are able to enter into such alliances, it may be under terms that are not favorable to us, or we may not be able to realize the benefits that are anticipated through such
alliances. If we are not successful at these efforts, we may lose sales opportunities, customers and market share, which may have a material adverse effect on our business and results of
operations.
The markets in which we operate are characterized by rapid technological changes and frequent new products and service introductions.
We operate in several markets, each characterized by rapidly changing technology, new product introductions and evolving industry standards. The introduction of products
embodying new technology and the emergence of new industry standards might exert price pressures on our existing products or render them obsolete. Our markets are also characterized by
consistent demand for state of the art technology and products. Existing and potential competitors might introduce new and enhanced products that could adversely affect the competitive
position of our products. Our markets are dominated by a group of highly competitive vendors that are introducing dynamic competitive offerings around evolving industry standards.
We believe that our ability to anticipate changes in technology and industry standards and to successfully develop and introduce new, enhanced and differentiated products, on a
timely basis, in each of the markets in which we operate, is a critical factor in our ability to grow our business. As a result, we expect to continue to make significant expenditures on research and
development, particularly with respect to new software applications, which are continuously required in all our business areas. Moreover, in the event that we do not anticipate changes in
technology or industry practices or fail to timely address market needs or not be able to provide the products that are in demand, we may lose market share and our results of operations may be
materially adversely affected.
The growth of new communication channels could require substantial modification and customization of our current cross-channel products, as well as the introduction of new multi-
channel products. Also, new products and technologies are being used by our customers to communicate with their customers, e.g., use of chatbots. Such introduction of new products and
technologies may change the usage patterns of our products and applications by our customers, which may result in some of our products and applications becoming obsolete. We may not be
able to timely and effectively address such market trends and needs.
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Further, customer adoption of these new technologies may be slower than we anticipate. We cannot assure you that the market or demand for our products and solutions will be
sustained or grow as rapidly as we expect (if at all), that we will successfully develop new products or introduce new applications for existing products, that such new products and applications
will achieve market acceptance, or that the introduction of new products or technological developments by others will not render our products obsolete. In addition, our products must readily
integrate with major third party telephone, security, front-office and back-office systems. Any changes to these third party systems could require us to redesign our products, and any such
redesign might not be possible on a timely basis or achieve market acceptance. Our inability to develop products that are competitive in technology and price and responsive to customer needs
could have a material adverse effect on our business, financial condition and results of operations.
Therefore, some of the factors that could have a material adverse effect on our business, financial condition and results of operations include industry-specific factors; our ability to
continuously develop, introduce, deliver and support commercially viable products, solutions and technologies; the market’s rate of acceptance of the product solutions and technologies we
offer; our ability to keep pace with market and technology changes; and our ability to compete successfully.
We depend on certain infrastructure vendors’ installation base for a portion of our new and recurring sales.
We sell some of our products, either directly or through our other distribution channels, to customers who use infrastructure of our distributors or of other vendors, or operate in their
environment. To the extent that certain infrastructure vendors do not allow or support the integration of our products with their infrastructure or products, or use other means to prevent us from
selling our products to such customers, we may experience a reduction in sales to these customers, which is broader than such infrastructure vendors’ direct business with us. This could impact
our ability to attract new customers that use such infrastructure products or continue rendering maintenance services and other services and generate recurring sales to existing customers. As a
result, we could lose customers and market share, which could have a material adverse effect on our business, financial condition, or results of operation.
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.
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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.
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General Risks Relating to Our Offerings and Operations
We depend on the success of our recording solutions.
We are dependent on the success of our recording solutions to maintain profitability and sustain growth. Our recording solutions currently generate, and in recent years have
generated, a significant portion of our revenues, and we will continue to be dependent on the sales of our recording solutions and recurring revenues, such as maintenance services, in the next
several years. However, there can be no assurance that the recording market will not decline significantly or that revenues generated from our recording solutions will not be significantly
impacted. Also, certain switch manufacturers offer various types of recording solutions, which could result in a significant decline in sales of our recording solutions and in sales of related
applications, or a significant decrease in the profit margin on such solutions, any of which could have a material adverse effect on our business, financial condition or results of operations.
The trend of enterprise customers moving from voice to other means of communication with the enterprise (such as self-service, e-mail, instant messaging, social media and chat), may
result in a reduction in the demand for our voice recording platform and applications. If such trend continues, and to the extent not mandated under applicable regulations, our customers may
cease to record voice and switch to recording other means of communication. In addition, changes in regulations could reduce the need for recording, which would reduce the demand for our
recording and platform. Any of the above may have a material adverse effect on our business, financial condition or results of operations.
The sale of advanced software applications and a multi-product offering requires significant resources and may also delay our recognition of revenues.
The sale of advanced software applications and multi-product offering is complex, and requires, among other things, customization and implementation, and is subject to a prolonged
sale process. Therefore, the sale of advanced software applications and multi-product offering may impact the time we recognize the revenue from such orders. These factors could result in a
delay in revenue recognition and materially adversely affect our results of operations.
A significant portion of our business relies on software applications. We cannot guarantee that our customers’ adoption of advance software applications will meet our expectation and
planning. As a result, certain applications may not reach the critical mass in sales and revenues necessary to offset the high cost of developing and maintaining such advanced applications,
which could negatively affect our results of operation.
Our seasonal sales patterns could significantly impact our revenues and earnings.
We encounter quarter-to-quarter seasonality, especially given the increasing proportion of advanced software applications in our overall sales mix. The sales cycle for our products and
services ranges 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. 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.
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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 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 a 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
timing 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, including as a result of the factors described in this Item 3.
In addition, as described above, our revenues reflect 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 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, as most of our expenses are not variable in the short
term.
We depend on our ability to recruit 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 Company, or if they do,
that we will be able to identify and hire qualified replacements, or that the transition of new personnel will not cause disruption in our business.
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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, 2017, approximately 27% of our employees were devoted to research and product development and approximately 22% 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 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 employment.
In certain locations in which we have development centers, the rate of attrition is high and could have a negative impact on our ability to retain our employees in such centers, timely
develop our products and service our customers. In addition, the migration of development and other activities and functions to low-cost countries (such as India) 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 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.
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 addition, 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.
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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 errors or malfunctions in our products or services could directly impair our financial results and we could face potential product liability claims.
Our software products and services are highly complex. Despite extensive testing by us and by our clients, our products and services may include errors, failures, bugs or other
weaknesses. Such errors, failures, bugs or other weaknesses in our products and services 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, as our products are used by our customers for 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 could lose future 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.
Risks Relating to Our Financial Condition
Our debt could adversely affect our financial condition and prevent us from fulfilling our obligations under our financing arrangements.
In connection with our November 2016 acquisition of inContact, 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 adverse consequences to our financial condition and business. For example, it could:
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increase our vulnerability to general adverse economic and industry conditions;
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make it more difficult for us to satisfy our other financial obligations;
make it more difficult for us to make strategic acquisitions;
require us to dedicate a substantial portion of our cash 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.
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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 limit or prohibit, among other things, our and our
subsidiaries’ ability to incur or guarantee additional debt, pay dividends, repurchase or retire our equity interests or subordinated debt, transfer or sell our assets, make certain payments or
investments and capital expenditures, create liens, 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.
The Notes will mature on January 15, 2024, unless earlier prepaid, redeemed or exchanged. In the event certain conditions are met during set periods, the conditional exchange feature of
the Notes will be triggered, meaning that holders of Notes will be entitled at their option to exchange the Notes at any time during such 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 U.S. 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 these foreign currencies, our earnings may be negatively affected. As a result, we may experience an increase in the costs of our operations, as expressed in dollars, which
could adversely affect 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. 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.
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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 in Israel, the United States 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 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 (“OECD”) introduced the base erosion and profit shifting project in 2013, which set out a plan to address international
taxation principles in a globalized, digitized business world. In November 2015, the G20 adopted the OECD’s published guidance on domestic legislation and administrative changes to address
the plan’s action points. As a result of participant countries adopting the international tax policies set out under the plan, changes have been and continue to be made to numerous international
tax principles, as well as national tax incentives, which could adversely affect our provision for income taxes.
The recent comprehensive tax reform in the United States could adversely affect our results of operations and financial condition.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), a comprehensive tax legislation that includes significant changes to the taxation of
business entities. These changes include, among others, (i) a permanent reduction to the corporate federal income tax rate, (ii) a partial limitation on the deductibility of business interest expense,
(iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax
base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate. We are in the process of assessing the overall impact of the
U.S. Tax Reform on our business and financial condition. Currently such impact is not entirely clear, and it is possible that our assessment of our business, effective income tax rate and our
profitability may be adversely affected as a result of tax regulations and guidance to this new legislation, which are anticipated to be provided by the regulators during the coming year.
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 at the time of liquidation and would adversely affect our
assets and income.
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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.
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.
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 principal 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 not required to be included in our diluted share count if
we have the ability and intent to settle exchanges in cash. If we elect to settle such excess in ADSs, according to the treasury stock method, the transaction is accounted for in the diluted share
count, as if the number of ADSs that would be necessary to settle such excess are deemed issued. We cannot be sure that we will be able to continue to demonstrate the ability or intent to settle
exchanges 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 use the treasury stock method in accounting for
the ADSs deliverable upon exchange of the Notes, our diluted earnings per share would be adversely affected.
If we fail to maintain effective internal controls over financial reporting, it could have a material adverse effect on our business, operating results, and the price of our ordinary shares and
ADSs.
Effective internal controls are necessary for us to provide reliable financial reports and prepare consolidated financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles and U.S. securities laws, as well as to effectively prevent material fraud. Because of inherent 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 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.
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Current and future accounting pronouncements and other financial reporting standards, might negatively impact our financial results.
We regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new
standards, changes to existing standards and changes in their interpretation, we might be required to change our accounting policies.
This could lead to risks in the following areas, among others: not being able to react in a timely manner to new accounting pronouncements and financial reporting standards concerning
revenue recognition (including the new ASC 606 guidance on revenue from contracts with customers that we will need to adopt in 2018) and unpredictable changes in interpretation of standards.
Any one or more of these events could have an adverse effect on our business, financial position, and profit.
Risks Relating to Intellectual Property, Data Protection and Regulatory Environment
We may face risks relating to inadequate intellectual property protection and liability resulting from infringement by our products or solutions of third party proprietary rights.
Our success is dependent, to a significant extent, upon our proprietary technology. We currently hold 225 U.S. patents and 49 patents issued in additional countries covering
substantially the same technology as the U.S. patents. We have over 64 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, 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.
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In the past we received, from time to time, “cease and desist” letters alleging patent infringements. Although there are currently no formal infringement claims or other actions pending
against us, in the event that we are required to defend ourselves against any such claims or actions we could be 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 face risks relating to our 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.
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 and adversely affected if laws, regulations or standards relating to our business and products, us or our
employees (including labor laws and regulations) are constantly 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 current U.S.
administration will promulgate new or amended or abolish regulations that may impact our customers’ business or our operations, such as the 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.
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From time to time, we may also operate pursuant to specific authorizations of, and commitments towards, U.S., Israeli, E.U. 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. For example, on April 14, 2016, the
European Parliament formally adopted the General Data Protection Regulation (the “GDPR”), which formally go into effect on May 25, 2018. The GDPR provides that companies must comply with
certain standards regarding the protection of the personal data of their customers or risk significant financial penalties. Regulations or interpretive positions may be enforced specifically with
respect to the use of SaaS, hosting and cloud-based services, as well as 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 adversely affected if we fail to adapt our products and services to changes in rules and regulations applicable to the business of certain clients, such
as rules and regulations regarding securities trading, broker sales compliance and anti-money laundering, 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 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.
In certain industries in which we operate, there may be regulations or guidelines for use of SaaS, hosting and cloud-based 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.
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Risks Relating to our Presence in Israel
We are subject to the political, economic and security conditions in Israel.
Our headquarters, primary research and development facilities, and a substantial percentage of our manufacturing capabilities, are located in Israel. Political, economic and military
conditions in Israel directly affect our operations. Since the establishment of the State of Israel, a number of armed conflicts have taken place, varying in degree and intensity. 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. There can be no assurance
that such attacks will not have an impact on our premises or major infrastructure and transport facilities in the country, which may have a material adverse effect on our ability to conduct
business.
Israel also faces threats from Hezbollah militants in Lebanon, from ISIS and rebel forces in Syria, and from Iran. Moreover, some of Israel’s neighboring countries have 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 negative impact on our ability to operate. 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’s policies and agenda. This may also seriously harm
our operating results, financial condition and the ability to expand our business.
Some of our officers and employees are obligated to perform up to 36 days of annual military reserve duty, and in the event of a military conflict, these persons could be called to active
duty at any time, for extended periods of time and on very short notice. The absence of a number of our officers and employees for significant periods could disrupt our operations and impact
our business. We cannot assess the full impact of these obligations on our workforce or business if conditions should change.
It may be difficult to 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, most of whom reside outside the United States,
may be difficult to obtain 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:
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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;
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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 the 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 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) 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 have met and continue to meet the conditions
that entitle us to previously obtained Israeli tax benefits, there can be no assurance that the Israeli Tax Authorities will agree.
To be eligible for NATI-related grants and benefits, we must continue to meet certain conditions, including conducting the research, development, manufacturing of products developed
with such NATI grants in Israel, and providing the NATI with an undertaking that the know-how to be funded, and any derivatives thereof, is wholly owned by us, upon its creation. 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, paying a fee. See Item 4,
“Information on the Company—Research and Development” in this annual report, for additional information about NATI programs.
Moreover, we participated in the European Community Framework Program for Research, Technological Development and Demonstration, which funds and promotes research. Under
these programs we had to comply with certain conditions. If it is apparent we failed 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. Our last program under this Framework ended in
August 2015.
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.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a
transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, 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 our shareholders whose country of 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 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 Information—Mergers and Acquisitions” in this annual report, for additional discussion regarding anti-takeover effects of Israeli law.
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Risks Relating to our Securities
The 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 and the Notes to fluctuate significantly. These factors include,
among other things:
ö Quarterly variations in our operating results;
ö
ö
Changes in expectations as to our future financial performance, including financial estimates by securities
Perceptions of our company held by analysts and investors;
ö Additions or departures of key personnel;
ö Announcements related to dividends;
ö Development of or disputes concerning our intellectual property rights;
ö Announcements of technological innovations;
ö
Customer orders or new products by us or our competitors;
ö Acquisitions or investments by us or by our competitors and partners;
ö
The exchangeability of the Notes for ADSs;
ö Hedging or arbitrage trading activity involving ADSs by holders of the Notes;
ö 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;
ö
ö
Currency exchange rate fluctuations;
Earnings releases by us, our partners or our competitors;
ö General financial, economic and market conditions;
ö
Political changes and unrest in regions, natural catastrophes;
ö 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
ö General stock market volatility.
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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 the “TASE”, since 1991. Trading in
our securities on these markets takes place in different currencies (our ADSs are traded in U.S. dollars and our ordinary shares are traded in New Israeli Shekels), and at different times (resulting
from different time zones, different trading days and different public holidays in the United States and Israel). As a result the trading 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 could cause a decrease in the trading price of our securities on the other market.
Substantial future sales or the perception of sales of our ADSs or ordinary shares, or the exchange of a substantial amount of Notes, or perception thereof, could cause the price of our ADSs
or ordinary shares to decline.
Sales of substantial amounts of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could adversely affect the price of our ADSs and
ordinary shares and could impair our ability to raise capital through the sale of additional shares. Such sales may also 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.
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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 prepay 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 shareholders.
Item 4. Information on the Company.
Company Background
NICE 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 name. NICE is a company limited by shares organized under the laws of the State of Israel. Our headquarters are located at 13 Zarchin Street,
P.O. Box 690, Ra’anana 4310602, Israel (Tel. +972-9-775-3151). In the United States, our subsidiary, NICE Systems, Inc. is located at 221 River Street, Hoboken, New Jersey 07030.
In the last three fiscal years, our principal capital expenditures were the acquisition of other businesses, repurchases of our ADRs and distributions of dividends. For information
regarding our acquisitions and ordinary share repurchases, please see Item 5, “Operating and Financial Review and Prospects—Recent 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.
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About NICE
NICE is a global enterprise software leader providing solutions for the Customer Engagement and Financial Crime and Compliance markets. NICE’s solutions use advanced omnichannel
analytics and automation based on an open cloud platform to improve customer experience as well as prevent financial crime.
NICE’s core mission is to empower organizations to act smarter and respond faster, both to provide superior customer service and to prevent financial crime. Our software is used by
customer service organizations of enterprises of all sizes and verticals and by compliance and fraud prevention groups in financial institutions.
With an integrated cloud platform and advanced analytics solutions we help organizations understand their customers, engage their employees and improve their processes.
Additionally, we help them predict needs and identify risks to create an excellent customer experience, prevent fraud and ensure compliance. These capabilities are enhanced through the
utilization of advanced automation and artificial intelligence capabilities. Our most advanced solutions constantly improve by applying machine learning to cross-industry and cross-
organizations data and by offering collective insights.
NICE is at the forefront of two industry transformations; the adoption of cloud platforms by enterprises and the shift by financial institutions to integrated risk management solutions for
end-to-end financial crime prevention.
In both cases, our ability to deeply integrate analytics and automation and apply it across multiple data sources and workflows enables customers to achieve greater effectiveness and
efficiency.
We rely on several key assets to drive our growth:
ö Our market-leading integrated open cloud platform and solutions for omnichannel routing, data capture, analytics, automation and artificial intelligence, many of which are
protected by a broad array of patents.
ö Our ability to provide solutions that cover all market segments, from small to mid-sized business to large scale Fortune 100 enterprises.
ö Our extensive portfolio of applications as well as a large partner ecosystem allow NICE’s customers to benefit from a wide range of cloud solutions.
ö Our market leadership makes us a well-recognized brand, and creates top-of-mind awareness for our solutions in our areas of operation.
ö Our loyal customer base. Today, more than 25,000 organizations in over 150 countries, including 85 of the Fortune 100 companies, use NICE solutions.
ö 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.
ö 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.
ö Our access to data for improving our algorithms through machine learning and artificial intelligence, which relies on a combination of our extensive customer base, cloud-base
deployments and domain expertise.
ö 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-
premise throughout the world and support for full value realization and customer success.
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We have established a leadership position in many of our areas of operation by offering comprehensive and innovative enterprise-grade platforms, solutions and technologies. Our
customers, across multiple sizes and verticals, including banking, telecommunications, healthcare, insurance, retail, travel, gaming, public safety, state and local government, are benefiting from
the tangible and practical business value that our solutions provide.
Business Overview
NICE is an industry leader operating in two main markets: Customer Engagement and Financial Crime and Compliance. NICE’s long-term strategy is to further strengthen its leadership
position in these two market segments and further enhance its position in adjacent markets. During 2017, NICE continued to execute its long-term strategy through both innovation and
acquisitions, enhancing our position as a leader in both markets.
Customer Engagement
Organizations that serve consumers are challenged to provide high quality service that is responsive to consumers’ ever-changing needs across all touch points, and to differentiate
themselves through efficient and effective customer experience. 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’s customer experience platform helps organizations address these challenges.
NICE is a global leader in the Customer Engagement market. Our platform and solutions serve thousands of organizations worldwide, providing a powerful combination of omnichannel
routing in the cloud with workforce optimization (including recording and workforce management), analytics, automation and artificial intelligence capabilities. Our platform and solutions
empower businesses to deliver consistent and personalized experience across the customer journey, optimize business performance and ensure compliance and are delivered both in the cloud as
well as on-premise.
NICE serves contact centers, back office operations and retail branches, spanning multiple industries, including, banking, telecommunications, insurance, healthcare, business process
outsourcing, government, utilities, travel, entertainment and e-commerce.
Our unified, enterprise-grade open cloud foundation supports contact centers of all sizes and geographic locations – from small single sites, to distributed remote agents, to global
enterprises. The foundation is open and extensible, with over 250 Application Program Interfaces (APIs) and over 100 development partners.
Our smart omnichannel routing capabilities empower organizations to connect customer journeys across any channel to the right employee, provide a superior experience in the
customer’s preferred channel, offer Interactive Voice Response (IVR) together with different channels consumers use today and be ready for future channels the organization wants to add.
Our advanced analytics solutions help organizations understand their customers, their employees and their processes to improve customer experience. Our solutions analyze both
unstructured and structured data, coming from all touchpoints of the customer journey and data systems, allowing organizations to deliver the consistent and personalized experience that
customers today expect, as well as improving operational efficiency, ensuring regulatory compliance and increasing revenues.
Our adaptive persona-based and analytics-driven approach for agent engagement and improvement allows organization to drive employee productivity and motivation. Our workforce
optimizations solutions enable organizations to ensure that their employees are engaged, properly trained and in a position to provide the highest quality of service.
Our automation and artificial intelligence solutions streamline service delivery by releasing employees from the manual execution of repetitive processes and employing software robots
to handle them, leading to reduced handle time and costs, improved response times and happier customers and employees.
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Financial Crime and 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.
Furthermore, many organizations that are not traditional financial institutions, including alternative payment platforms, cryptocurrency exchanges, gaming, fintech, etc. find themselves
under similar threats and under increasing regulatory scrutiny and need to quickly adjust and ensure they adhere with those requirements.
NICE is a global leader in advanced analytics based applications to fight financial crime and ensure compliance. 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 set of solutions, financial institutions can tighten risk controls,
lower operational and information technology costs, enhance investigation efficiency and improve customer experience.
NICE serves the financial crime and compliance needs of hundreds of organizations, including many of the world’s top financial institutions, regulatory authorities and emerging fintech
companies. Our solutions monitor millions of financial transactions daily, enabling organizations to mitigate the risk of financial crime, improve compliance and reduce operational costs.
Our open platform serves as an end-to-end financial crime and compliance solution, this allows our customers to use a unified platform instead of integrating multiple solutions, whether
home-grown or from third party vendors. The NICE platform handles the entire process, including detection, investigation, remediation and reporting. Such integrated open platform allows our
customers to improve detection, lower costs, keep tight control over their process and automate regulatory reporting.
Our recently introduced Autonomous Financial Crime capabilities, that incorporate artificial intelligence and robotic automation into our platform allows to further increase detection,
reduce noise and automate many previously manual routine tasks.
Our Actimize Watch solution allows us to better protect financial institutions from criminal threats by leveraging the cloud and machine learning technologies. Each customer that
subscribes to the cloud delivered service can tune their data, and any new threat pattern that is detected is shared with all other customers of the service. As such, Actimize Watch serves as an
inoculation – protecting all organizations from an attack perpetrated against a specific organization.
Mid-size financial institutions are finding themselves under increased pressure to adopt compliance best practices. Our Essentials platform is a cloud-based financial crime and
compliance solution that enables smaller organizations to enjoy the capabilities previously only afforded to large organizations.
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We plan to continue to expand our addressable market by providing cloud solutions to smaller institutions and by expanding to non-traditional financial institutions. We also expand our value to
our customers by leveraging artificial intelligence, the cloud and robotic automation which facilitate both better protection and significant cost reductions.
Industry and Technology Trends
Following are the key trends that are driving demand for our solutions:
ö Organizations are looking for open software platforms to be the foundation for their applications. Open platforms provide unified fully-integrated solutions that are all based on a
shared framework of service, allowing for fast innovation, easy deployment, flexible functionality and an enhanced ecosystem of solution providers. Third party solutions can be easily
added to extend the functionality of the platform to match a customer’s or industry specific needs.
ö Cloud adoption is accelerating and demand is expanding across segments. Cloud solutions have become the most popular way to achieve flexible and cost-effective deployment models
for enterprise systems. These include SaaS, Contact Center as a Service (“CCaaS”), Infrastructure as a Service, Platform as a Service, and other cloud-based solutions. By using cloud
solutions, customers of all sizes can scale their operation quickly and easily 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.
ö Consumers demand a holistic omnichannel experience that is effortless and consistent across all touchpoints. Consumers demand immediate, effortless, consistent and personalized
experiences across all communication channels, including mobile apps, web, chat, SMS, social, and over the phone, 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 quickly adapt
to the large variety of channels as well to view them in the same way their consumers do, offering a consistent experience across all touch points.
ö Analytics has become the main driver for improving customer experience. Organizations are increasingly adopting a customer-centric strategy to get better understanding of customer
behaviors and gain insight into the omnichannel customer journey. Organizations are increasing the use of artificial intelligence empowered tools in order to achieve 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. These tools include, among others, cognitive engagement solutions, like interactive communications, predictive analytics and machine learning.
ö
Process automation and machine learning are increasingly being used to automate financial investigation tasks where it may not be necessary to have human involvement. This frees
up investigators from low value, high volume manual tasks so that they may better focus on more important and strategic tasks. This leads to better resource utilization, increased
accuracy and productivity, and improved return on investment.
ö Companies are looking for ways to engage their employees in personalized and adaptive ways to improve workforce productivity and satisfaction. Contact center employees are
heterogenic with different needs and requirement. These employees, especially those that belong to the “millennial” generation, expect organizations to hear their voice and engage
them individually. Successfully engaging and motivating these employees in a personalized manner reduces attrition levels, hiring and on boarding efforts and improves the experience
level of the team, resulting in an improved experience for the end customers.
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ö Organizations look at Big Data technologies to analyze a wealth of information, derive new business insights 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 an accurate response.
ö
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.
ö Chat and conversational bots to contain and deflect calls and interactions into self-service. Companies are looking for new and advanced digital means to improve customer
satisfaction. Further development of intelligent bots will improve operational processes, increase flexibility in customer interactions with the contact center, as well as decrease wait time
while providing a personalized experience. This technology will allow the human workforce to focus on more complex added value services.
ö
Preventing financial crime 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 with 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 place are working and effective. 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.
ö 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.
ö An 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 turning to technology to allow them to control these costs without compromising their
compliance adherence and while continuing to lower their exposure to financial crime.
ö An integrated risk management platform is becoming more prevalent. The ever-expanding risk landscape and sophistication of financial criminals, as well as the need to keep costs in
check, creates a growing need for a single view of financial crime-related risk, thereby allowing organizations to aggregate and 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, with the capabilities
to analyze it, act on it and present it in a single dashboard to both operations and executives.
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Strategy
Strengthening our market leadership
We intend to solidify and increase our market-leading position by continuing to offer and expand our comprehensive portfolio of solutions and by leveraging several major industry
trends:
ö
ö
The shift to the cloud – we provide a cloud offering for both Customer Engagement as well as for Financial Crime and Compliance. This allows us to provide a broader set of
functionalities with the strength of our integrated offering.
Expanding our market share in the mid-market - our cloud platforms as well as our expanded partner network and our marketing and sales organizations allow us to reach and to serve
smaller organizations in a more cost effective way than in the past, significantly enhancing our market opportunity
ö Adoption of artificial intelligence and automation – NICE expertise and technology in the domains of Machine Learning, Artificial Intelligence and Automation as well as our unique
access to data to train these algorithms via our cloud offering, allows us to provide market leading solutions in these domains.
Our brand, global reach, financial resources, extensive domain expertise and ability to deliver solutions for large organizations, as well as small and mid-sized companies, will also
contribute to increasing our market-leading position.
In 2017 we considerably enhanced our cloud offering through NICE inContact CXone™, the global leading cloud customer experience platform as well as NICE Actimize Essentials, our
financial crime and compliance cloud offering. These offerings enable us to grow our value to our existing customers, as well as expand NICE’s reach to the mid-market and open up new
opportunities in large enterprises, considerably increasing our addressable market size.
We plan to continue to develop our open cloud platforms, for both the Customer Engagement and Financial Crime markets, to enable unified integrated solutions that offer fast
innovation and easy implementation. We also plan to continue to develop DevOne, our partners and developers ecosystem, and our advanced applications marketplace, CXExchange. These
allow our customers to expand the functionality of CXOne™ to cover even more business needs.
In 2017 we also introduced Autonomous Financial Crime and Compliance – a platform that leverages big data, artificial intelligence and advanced automation. Autonomous Financial
Crime and Compliance allows financial institutions that have been burdened by significant increases in compliance demands as well as an ever increasing rate of fraud attempts to automate many
remedial tasks and to increase their detection rate, all leading to significant savings in operational cost.
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We intend to drive additional growth by continuing to develop our direct relationships with customers, nurturing our partner ecosystem, and creating growth in each of our business
areas. Additionally, we intend to lead in new product categories, as we introduce novel solutions and enter additional 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,
gaming 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.
Continuing to deliver more comprehensive solutions to our existing customers
One of our main assets is our customer base. We believe there are many opportunities to up-sell and cross-sell within our existing customer base. This includes increasing our
customers’ exposure to the full breadth of our portfolio that we continue to enhance to provide our customers with new benefits by expanding the offering they already use and adding new
products.
Continuing organic innovation and development, while also pursuing acquisitions
We intend to continue investing in innovation and development, and continue to augment our organic growth with additional acquisitions that will broaden our product and technology
portfolio, expand our presence in selected verticals, adjacent markets and geographic areas, broaden our customer base, and increase our distribution channels.
Maximizing the synergetic potential across some of our businesses
A lot of our solutions are based on the same methodology of capturing and analyzing massive amounts of structured and unstructured data, providing real-time insight and driving
process automation. Thus, an important pillar of our corporate strategy is to maximize the synergies and cooperation between our business areas, where possible.
We have already introduced several joint offerings and combined go-to-market efforts. We will continue leveraging our extensive complementary domain expertise, technological know-
how, capabilities and development, in order to grow our business through additional cross-sell and up-sell opportunities. Moreover, this synergetic approach reflects a core NICE value of
nurturing a corporate culture focused on delivering high-quality customer service.
Providing innovative, real-time analytics and machine learning and cross-channel solutions with significant impact for our customers’ businesses
Our solutions 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 across
multiple channels, in a wide variety of businesses and operational environments. We enable our customers to embed both real-time and offline analytics into their business processes, positively
impacting these processes as they occur, which in turn has a positive impact on their businesses.
We plan to continue enhancing our capabilities in operationalizing Big Data with analytics, behavior prediction, decisioning and guidance. We also plan to continue enabling
organizations to address the full lifecycle of interactions, transactions and events (i.e., before, during, and after they occur).
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Offering a flexible business model
Our strategy is to offer our solutions in alignment with both on-premises and cloud-based enterprise software business models, adjusting our solutions to our clients’ changing needs.
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, the growth of our on-premises client base and the increase in cloud sales) is driving an increase in our recurring revenue.
We offer our solutions in cloud-based models as well, providing our customers access to faster innovation, more flexibility as well as a lower TCO. Given the growing demand for these
models, we’ve expanded our portfolio and penetrated the mid-market segment, as well as enabled 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 market leading position in the customer engagement space, while continuing to expand beyond the contact center to the different customer experience
channels and touch points with multiple delivery models. We intend to achieve this by providing solutions that focus on:
ö Offering a unified, open, cloud platform that combines omnichannel routing, IVR, self-service, customer journey analytics, adaptive WFO and automation: NICE inContact CXone™, a
global leading cloud customer experience platform.
ö Offering solutions to all customer touchpoints, as well as solutions that benefit back office operations, retail branches, and self-service channels with the ability to easily connect future
channels.
ö Offering our clients the possibility to extend our solutions through innovative third party solutions that they can self-select using our platform’s CXexchange application marketplace as
part of our DEVone dedicated partner ecosystem for developers.
ö
ö
ö
Leading cloud transformation across the entire Customer Engagement portfolio for all segments and regions to enhance flexibility, agility and lower TCO.
Providing a comprehensive suite of customer service essentials, from predictive omnichannel routing and WFO to advanced analytics based applications.
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.
39
ö
ö
Infusing analytics into each and every element of customer engagement.
Leveraging artificial intelligence and advanced process automation technologies to automate customer engagement and to dramatically reduce routine employee activities, while using
our advanced analytics to identify processes suitable for automation.
ö Analyzing individual customer journeys and operationalizing the insights extracted to create business value in real-time for customer experience stakeholders.
ö
ö
Capturing customer feedback across all touch points, driving specific insights and taking action to address the needs of Customer Experience Officers and other stakeholders in the
marketing department in order to improve customer loyalty and satisfaction.
Extending Workforce Management functionality to proactively identify and solve staffing gaps, manage agent communication and adjust schedules.
Financial Crime and Compliance Business Strategy
We plan to continue to extend our market leading position by focusing on:
ö Delivering integrated financial crime and compliance solutions that help financial services organizations to identify issues faster and earlier.
ö
ö
ö
ö
ö
ö
ö
Providing a new platform for Financial Crime and Compliance solutions with data and analytics agility, driving forward the Autonomous Financial Crime Management (AFCM) vision
and our ability to cross sell solutions, leveraging Big Data, machine learning, advanced automation and other technologies to help customers reduce the cost of operations while
increasing their adherence and capturing more crime.
Leveraging our cloud based platform Essentials to expand our market reach to mid-size banks and financial institutions.
Continuing to cross-sell and up-sell into our existing customer base around the world.
Continuing to focus on tier 1 and tier 2 clients by providing them with solutions to meet their needs via cloud and on-premise models.
Introducing cloud based solutions to monitor procurement, payments, and travel and expense data within organizations
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.
ö 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.
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Our Solutions
I. Customer Engagement
Our Platform and Solutions’ Core Capabilities
Omnichannel Routing and IVR enables organizations to run their contact center in the cloud, and 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.
Omnichannel, Real-time Interaction Analytics enables 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 customer interaction and transaction data from multiple channels,
including: phone calls, chats, emails, videos, customer feedback, web sessions, social media postings, and walk-in centers.
Employee Engagement enables organizations to improve agent’s individual productivity, identify performance gaps, deliver targeted coaching, and effectively forecast workloads and
schedule staff in an adaptive manner enabling intra-day scheduling. 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 enable 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. They also leverage Big Data infrastructure and predictive analytics models to identify and sequence
individual customer interactions across time and touch points, including calls, text, IVR, web, self-service and others. With this analysis, organizations can understand the context of each
contact, uncover patterns, predict needs and personalize interactions in real time.
Advanced Process Automation provides organizations with a real-time decisioning engine that supports business decisions. The engine draws on business rules and predictive models
to automate mundane manual tasks through process insights derived from analytics that are applied while interactions are taking place, for attended and unattended automation environments.
This combination enables organizations to make the right decision during individual interactions and across a mass number of interactions, which in turn drives future next-best-action guidance
through process automation.
Open Cloud Platform powers rapid innovation with an extensible enterprise-grade platform that scales securely, deploys quickly, and serves customers of all sizes globally. We
guarantee industry-best availability and offer easy customization through RESTful APIs and our developer program, plus CXexchange marketplace for pre-built integrations from ecosystem
partners. The combination of the above capabilities enables organizations to improve customer experience and achieve business and operational goals. Solutions are available individually or as
an integrated whole.
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Addressing Business and Operational Needs
1. Omnichannel Routing
Solution
Description
Automatic Contact Distributor and Interactive
Voice Response
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
Customer Interaction Channels
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.
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.
2. Open Cloud Platform
Solution
CRM Integrations
UCaaS Integrations
Network and Voice Connectivity Solutions
APIs
3. Compliance and Risk
Description
Provide pre-built CRM integrations, such as Salesforce, and empower agents to personalize omnichannel customer service. Provide seamless,
bidirectional CRM integrations with the contact center that increase agent efficiency and independence by delivering a real-time 360-degree
view of the customer.
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.
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 guarantee voice quality based on mean opinion score (MOS).
Empower organizations to customize and integrate their contact center with other business critical solutions to create the optimal customer
service environment.
Solution
Description
Compliance Omnichannel Recording
Trading Floor Compliance Solutions
Communication Surveillance
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, the General Data Protection
Regulation (GDPR) 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.
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.
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.
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4. Operational Efficiency
Solution
Description
Contact Center Omnichannel Recording
Performance Management
Workforce Management
Employee Engagement Management
Quality Central
Nexidia Interaction Analytics
Back Office Workforce Optimization
Real-time Authentication
Call Volume Optimization
Desktop Automation
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.
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.
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.
Real-time analysis of understaffing and overstaffing combined with mobility and dynamic scheduling to facilitate agents with the flexibility
required, while ensuring that a company's operational goals and KPIs are achieved. The application also allows self-management of schedules
through an intuitive mobile application anytime, anywhere and on-the-go, allowing employees to perform sophisticated transactions like shift
bidding and shift swaps, setting preferences, reporting absences, and receiving immediate confirmation;
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.
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, reduce
attrition, optimize marketing campaigns and reduce operational costs.
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.
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
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.
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
Desktop analytics
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.
Monitors and collects data for every application log-in, screen navigation, mouse selection, field entry or any other activity that employees
are performing on their desktop to analyze processes for weaknesses, measure concrete results and identify best practices.
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5. Customer Experience
Solution
Voice of the Customer
Customer Journey Optimization
Customer Loyalty
Customer Churn
6. Sales Optimization
Description
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.
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.
Understands the business practices and behaviors that drive customer loyalty by calculating Net Promoter Score (NPS). 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.
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.
Solution
Description
Sales Performance Management
Real Time Web Personalization
Sales Effectiveness
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.
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.
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.
7. Public Safety Incident Debriefing and Investigation
Solution
NICE Inform
NICE Investigate
Description
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.
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.
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8. Public Safety Emergency Response Optimization
Solution
Description
NICE Multimedia Recording
NICE Inform
II. Financial Crime and Compliance
Our Solutions’ Core Capabilities
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.
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.
Autonomous Financial Crime Management (AFCM): By merging data, analytics and automation technologies, financial services organizations are able to improve detection, improve
their operational efficiencies, and reduce costs. Raw data becomes actionable intelligence by applying machine learning, advanced analytics and automation. This innovative process will create a
unique environment that more effectively addresses the challenges and pain points that financial services organizations are facing by allowing them to tailor their operations to lower costs and
drive greater profitability, all while improving accuracy and throughput. Autonomous Financial Crime Management also allows organizations to configure which decisions to direct to human
experts, supporting either semi-autonomous to fully autonomous operations.
Core platform: Financial Crime and Compliance solutions (also known as NICE Actimize solutions) share a single, flexible and scalable core platform that enables financial institutions,
financial services providers, healthcare providers and gaming providers to expand the use of NICE’s solutions over time. This eases implementation and lowers total cost of ownership.
Analytical models and flexible tools: The core platform provides dozens of out-of-the-box analytical models with each specific solution, as well as flexible 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-specific advanced analytics: Comprehensive, domain-specific solutions detect anomalous customer or employee behavior in 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 allow effective alert management.
Solutions are available individually or as an integrated whole.
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Addressing Business Needs
1. Enterprise Risk Management
Solution
Description
Enterprise Risk Case Manager
Robotic Process Automation (RPA)
Quality Assurance
Productivity Studio
Notifications & Attestations
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.
Robotic Process Automation (RPA) includes attended robots that are digital assistants that live in the case manager on analysts’ desktops
and collaborate with them as needed during the day. These robots can be used on demand – as for copying and pasting or navigating
between systems and screens – to help analysts complete their evidence gathering processes and get to a decision point faster and more
accurately. It also includes unattended robots which are a digital workforce, working 24/7 without human intervention. These robots can be
used to fetch data from legacy systems and update enterprise systems so data is always in the right place when you need it. As no
integrations are needed, implementations are faster and cheaper.
Actimize Quality Assurance helps risk & compliance teams create a truly closed-loop, end-to-end investigation process. With it, compliance
and quality teams can collaborate in order to reduce re-opens, work more efficiently and lower risk.
Actimize Productivity Studio allows organizations to increase speed and efficiency, without compromising on accuracy. Teams are
empowered to understand their productivity by seeing gaps and bottlenecks in their workflows, as well as patterns and trends in their
activities.
With Actimize Notifications & Attestations, management and internal audit can gain oversight of their teams, ensuring everyone is aligned;
teams can mitigate risk by lowering organizational and personal accountability risk; and finally, teams can improve their efficiency with quick
access to all past and present notifications without leaving the case management platform.
Investigation Management
Actimize Investigation Management is an automation and discovery suite for investigators. The solution helps automate evidence gathering,
so that more time is spent analyzing and assessing risks.
2. Anti-Money Laundering
Solution
Description
Suspicious Activity Monitoring
Watch List Filtering
Customer Due Diligence
CTR Processing and Automation
FATCA Compliance
AML Essentials
Anti-Bribery & Corruption (ABC)
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 cost-effective manner.
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.
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.
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.
Helps U.S. and non-U.S. financial institutions comply with the Foreign Account Tax Compliance Act (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.
A cloud-based offering that uses the same power and experience as our enterprise solutions, with coverage that includes Transaction
Monitoring, Customer Due Diligence, and Sanctions Screening, offers rapid deployment and reduces overhead to make compliance easier and
at a lower total cost of ownership.
Anti-Bribery and Corruption is a cloud-based solution that provides ongoing monitoring of procurement, payments, and travel & expense
data within organizations. Based upon two decades of transactional analytics experience, Actimize ABC analyzes transactions and behavior
across the organization and the supply chain, for a real-time, up to date view of their bribery and corruption risk across business, geographic,
vendor and customer lines.
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3. Fraud Prevention
Solution
ActimizeWatch
Fraud Essentials
Card Fraud
Payment Gateway Protection
Omni-channel Protection for Retail
Omni-Channel Protection for
Commercial/Wholesale
Employee Fraud
Deposit Account Fraud
Authentication-IQ
Description
ActimizeWatch is a cloud-based managed services solution to optimize analytics. ActimizeWatch continuously monitors the transactional
data for individual FIs to assess when analytics must be tuned, and leverages insights from a market-wide view to proactively optimize
analytics for members of the service. ActimizeWatch uses machine learning analytics to assess cross-market transactional data, identify fraud
patterns within individual organizations and across the market. ActimizeWatch proactively optimizes analytics using automation for quick
delivery of implementation-ready models and features.
A cloud-based offering that uses the same power and experience as our enterprise solutions. The Fraud Essentials solution serves as both a
single and cross-channel solution for online banking and mobile banking channels. It can detect fraud perpetrated against enrollments,
address or account-based bill payments, and inter-bank transactions such as wire, ACH, etc.
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 which 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.
Actimize’s Payment Gateway Protection solution provides real-time fraud monitoring for all payments transactions before they leave the
banking environment to travel onto payment rails, as well as monitoring of inbound transactions. The solution applies payment level analytics
that seek out anomalies in transaction patterns and flows without need for channel data.
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.
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.
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.
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.
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. In addition, the solution manages the process of step up authentication, choosing the appropriate
method, producing alerts and enabling real-time interdiction. Finally, it provides alert and case management in a unified context to prioritize
investigations and optimize workflow across the enterprise.
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4. Financial Markets Compliance
Solution
Description
Institutional Trade Surveillance
Retail Trade Surveillance
Employee Trade Surveillance
Enterprise Conflicts Management
Sales Practices and Suitability
Provides scenario management for identifying 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 across all channels.
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.
Detects 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.
Offers a unified approach to maintain controls and detect conflicts of interest before they occur on a global, enterprise-wide scale. Enables
organizations to effectively manage employee requests for personal trades by evaluating details of the proposed trade in real time and
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.
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.
Markets Surveillance Cloud (MSC)
Actimize Markets Surveillance Cloud (MSC) is a turnkey solution that effectively detects market manipulation and reduces false positives by
enabling firms to create rules and tailor alert thresholds based on their trading activity.
Holistic Surveillance
Holistic Behavioral Analytics
Actimize Holistic Surveillance view puts the pieces together and NICE Actimize Holistic Surveillance allows a holistic view across both trade
and communications data, proactively analyzing all trading interactions, while monitoring the full trade life cycle in conjunction with relevant
news events.
Actimize Holistic Behavioral Analytics enables sell side, buy side, and retail brokerage firms to easily pinpoint individuals whose actions are
putting their firms at risk. The solution does this by analyzing a wide range of data and identifying deviations from normal behavior. In
addition, Actimize Holistic Behavioral Analytics is the natural complement to traditional analytics, allowing you to cover both sides of
compliance — known and hidden threats.
Trade Reconstruction
Trade Reconstruction dramatically simplifies the reconstruction of a trade by normalizing, analyzing, indexing and correlating data across
structured and unstructured data sources.
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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-added resellers and complimentary technology vendors. These partners form a vital
network for selling and supporting our solutions and products. We have established a business partner program, which provides full support and a broad portfolio of sales tools to help our
partners promote the NICE offerings, helping to drive mutual revenue growth and success.
We also have strategic technology partnerships in place to ensure full integration with NICE’s offerings, delivering value added capabilities that address a variety of technology
environments. Our DEVone program allows third party software providers to integrate with our platform and extend its functionality. We currently have over 100 DEVone partners.
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 a portion of our initiatives: Accenture,
Bain, Boston Consulting Group, Cisco, Cognizant, ConvergeOne, Deloitte, Fuze, IBM, Infosys, IPC, Motorola, PWC, RingCentral, Salesforce.com, Servion, Tata Consulting Services and Verizon.
Professional Service and Support
The NICE Professional Services and Support organization enables our customers to derive sustainable business value from our solutions.
The Professional Service and Support offerings focus on enabling and sustaining business value for our customers. We address all stages of the technology lifecycle, including
defining requirements, planning, design, implementation, customization, optimization, proactive maintenance and ongoing support.
Enabling Value
Solution Delivery optimizes solution delivery and enables 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 specialists. We follow a proven methodology that includes business discovery to map solutions to business processes.
Business Consulting promotes customer success through Value Realization Services (VRS) targeted to improve business operations, by leveraging and integrating NICE solutions into the
customer’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. Their focus on continuous value realization helps our customers accelerate return on investment, increase revenue and
minimize business costs.
Managed Services 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 provide users with the necessary knowledge and skills to operate NICE solutions and to leverage their capabilities to meet customer needs. These services are
offered both before and after the deployment of NICE solutions.
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Sustaining Value
Customer Success means working hand-in-hand with our customers to identify areas that can maximize business value and minimize complications, ensuring continued delivery of business
benefits.
Cloud Services ensure that solutions hosted in the NICE cloud run optimally, maximizing availability, performance and quality while ensuring the security of customer information. This is done
by use of very sophisticated proprietary utilities and automations that perform in a proactive manner allowing the means to avoid impacting customer and business interruption. This includes:
NICE Cloud Services Operations, running our Hosting Centers as well as our newly launched AWS Global Regions; a mature DevOps team who design and develop the utilities and automations
while working with our product development teams to optimize our solutions for the cloud environment, and the 7X24 Cloud Application Support teams that monitor and manage the solutions
for our customers, ensuring world class up-time, performance, scalability and security.
Customer Support and Maintenance responds to customer requests for support on a 24/7 basis, using advanced tools and methodologies. NICE offers flexible service level agreements to meet
our customers’ needs. Our solutions are generally sold with a warranty for repairs of hardware and software defects or malfunctions. Software maintenance includes an enhancement program
with (in the majority of cases) an ongoing delivery of “like-for-like” upgrade releases, service packs and hot fixes. NICE also offers a Technical Account Management service or TAM. The TAM
is a designated manager responsible for escalation management and overall customer care services.
ö
Proactive Maintenance addresses issues before they can significantly impact our customers’ businesses. These offerings include:
ö Advanced Services – Technical experts perform system-level audits to ensure ongoing compliance with operational specifications as well as specific product customizations tailored to
the requirements of the customer.
ö Application Performance Services – A 24/7 function that proactively monitors NICE-hosted and customer-premise environments with triage, resolution and escalation of system alarms.
ö Managed Technical Services (Technical & Operation) – NICE offers a suite of managed technical & operation 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 and remote support engineers, system management, system
operation, updates and upgrades.
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Manufacturing and Source of Supplies
The vast majority of our solutions is software-based and is deployed by customers on standard commercial servers.
There is a small portion of our products that have certain hardware elements that are based primarily on standard commercial off-the-shelf components and utilize proprietary in-house
developed circuit cards and algorithms, digital processing techniques and software. These products are IT-grade compatible.
We manufacture those of our products that contain hardware elements through subcontractors. Our manufacturers provide us with turnkey manufacturing solutions including order
receipt, purchasing, manufacturing, testing, configuration, inventory management and delivery to customers for all of our product lines. NICE is entitled to, and exercises, various control
mechanisms and supervision over the entire production process. In addition, the manufacturer of a significant portion of such 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 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.
We have qualified for and received the ISO-9001:2008 quality management for all of our products, as well as the ISO 27001:2013 information security management and ISO 14001:2015
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 through some 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 2015, 2016 and 2017 were
approximately $132.0 million, $151.7 million, and $211.4 million respectively, of which approximately $2.1 million, $1.7 million, and $2.4 million, respectively, were derived from third-party funding,
and $1.4 million, $8.5 million, and $27.9 million, respectively, were capitalized software development costs.
In 2017, we were qualified to participate in seven programs funded by the Israeli 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 (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 were approved as programs
for companies with large research and development activities and some of these programs are in 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 2015, 2016 and 2017 we
received a total of $2.1 million, $1.3 million, and $2.1 million from the NATI programs, respectively.
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The Research and Development Law generally requires that the product incorporating know-how developed under an NATI-funded program be manufactured in Israel. However, upon
the approval of the NATI (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 NATI (and provided the NATI did not object), up to 10% of the
grant recipient’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 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 NATI. Such approval is not required for the sale or export of any products resulting from such research or development. The NATI, under special circumstances, may approve the
transfer of NATI-funded know-how outside Israel, including, in the event of a sale of the know how or sale of the grant recipient, provided that the grant recipient pays to the NATI a portion of
the sale price paid in consideration for such NATI-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).
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, its
controlling shareholders and non-Israeli interested parties to notify the NATI 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 becoming an interested party directly in the recipient. Further, if the interested party is non-Israeli, requires the party to undertake to the NATI to comply with the Research and
Development Law. In addition, the rules of the NATI may require prior approval of the NATI or additional information or representations in respect of certain of such events. 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’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 NATI programs
which may lead to additional royalties being payable on additional products.
The funds available for NATI 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 NATI 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 Program for Research, Technological Development and Demonstration, which funds and promotes
research. There are no royalty obligations associated with receiving such funding.
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Intellectual Property
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 225 U.S. patents and 49 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 64 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” 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.
In the past we received, from time to time, “cease and desist” letters claiming patent infringements. Although there are currently no formal infringement claims or other actions pending
against us, in the event that we are required to defend ourselves against any such claims or actions, we could be 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 logo, NICE Adaptive WFO, NICE WFM, NICE Voice of the Customer, NICE
Work Force Management, NICE Incentive Compensation, NICE Real Time Solutions, NICE Trading Recording, NICE Uptivity, NICE Air, NICE Communication Surveillance, Customer
Engagement Analytics, Decisive Moment, Fizzback, IEX, inContact, inContact Logo, NICE inContact, Insight from Interactions, Intent. Insight. Impact., Last Message Replay, Mirra, NICE, NICE
Analyzer, NICE Engage, NICE Engage Platform, NICE Interaction Management, NICE Sentinel, NICE Inform, NICE Inform Lite, NICE Performance Compliance, 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 SmartCenter, NICE, NiceLog, Nexidia, Nexidia ((!)) Logo, Nexidia Interaction Analytics, Nexidia Advanced Interaction Analytics, Nexidia Search Grid, Neural Phonetic
Speech Analytics, Own the Decisive Moment, Scenario Replay, Syfact, Syfact Investigator, TotalView, inContact Cloud Center Solutions, Supervisor on-the-go, VAAS, Voice as a Service,
Personal Connection, InTouch, Echo, inCloud, CXone, CXone Logo, NICE inContact CXone, NICE Perform Compliance, NICE Performance Management, inContact Automatic Contact
Distributor, inContact Personal Connection, inContact Interactive Voice Response and inContact Work Force Management.
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Seasonality
The majority 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” 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
Data Privacy and Cyber-Related Security Restrictions
We are subject to applicable data privacy and cyber-related security restrictions in countries in which our customers and their end-users are located, specifically in relation to our SaaS,
hosting and cloud-based services, as well as other outsourced services, including the United States, Israel and the European Union. For example, on April 14, 2016, the European Parliament
formally adopted the General Data Protection Regulation, which formally goes into effect on May 25, 2018. In the event we do not comply with such data privacy and cyber-related security
restrictions, we may be subject to significant financial penalties.
Export Restrictions
We are subject to applicable export control regulations in countries from which we export goods and services, including the United 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. 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, and Directive 2011/65/EU of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (together
“RoHS”). RoHS provides, among other things, that producers of electrical and electronic equipment may not place new equipment containing 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”, SVHC-173), which 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”). 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 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.
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Competition
We believe that our solutions have several competitive advantages (as set forth above in “Our Solutions” section in this Item 4 – “Business Overview”) as well as their scale,
performance and accuracy, comprehensiveness of solutions and broad functionality.
We are leaders in the Customer Engagement space. We compete against WFO players such as Aspect, Calabrio, Genesys and Verint. In the CCaaS market, which is a part of the Contact
Center Infrastructure market that is still mainly held by traditional on-premises players, we compete against Amazon Connect, Avaya, Five9 and Genesys, as well as other niche vendors. We also
compete against certain cloud communications vendors (UCaaS), such as 8x8, which offer basic CCaaS capabilities. In addition, we are seeing some CRM companies that provide a subset
functionality of our broader offerings.
We are leaders in the Financial Crime and Compliance space. We compete against niche vendors that provide one subset of functionality to protect against a specific risk and against
vendors that provide a more comprehensive offering. Such vendors include BAE Systems, FICO, NASDAQ Smarts, Oracle and SAS Institute.
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.
Name of Subsidiary
Nice Systems Australia PTY Ltd.
NICE Systems Technologies Brasil LTDA
NICE Systems Canada Ltd.
Nice Systems China Ltd.
Nice France S.A.R.L.
NICE Systems GmbH
NICE APAC Ltd.
NICE Systems Kft
Nice Interactive Solutions India Private Ltd.
Nice Technologies Ltd.
Actimize Ltd.
Nice Japan Ltd.
NICE Technologies Mexico S.R.L.
NICE Netherlands B.V.
Nice Systems (Singapore) Pte. Ltd.
Nice Switzerland AG
Actimize UK Limited
NICE Systems Technologies UK Limited
NICE Systems UK Ltd.
Actimize Inc.
Nice Systems Inc.
Nice Systems Latin America, Inc.
Nice Systems Technologies Inc.
Nexidia Inc.
inContact Inc.
inContact Bolivia S.R.L.
inContact Philippines Inc.
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Country of Incorporation or Residence
Australia
Brazil
Canada
China
France
Germany
Hong Kong
Hungary
India
Ireland
Israel
Japan
Mexico
Netherlands
Singapore
Switzerland
United Kingdom
United Kingdom
United Kingdom
United States
United States
United States
United States
United States
United States
Bolivia
Philippines
Property, Plants and Equipment
Our executive offices and engineering, research and development operations are located in North Ra’anana, Israel. The offices occupy approximately 242,000 square feet, with an annual
rent and maintenance fee of approximately $9.1 million in 2018 and thereafter, paid in NIS and linked to the Israeli consumer price index. The lease for these offices in our Northern Ra’anana
facilities will expire in October 2022.
We have leased various other offices and facilities in several other countries. Our headquarters in each region consist of the following facilities:
ö Our North American headquarters in Hoboken, New Jersey, occupies approximately 60,000 square feet. We consolidated our North American locations into this one office location
in November 2016, and we sub-leased our two former facilities in New Jersey and New York for the remainder of their respective lease terms through 2023 and 2021, respectively;
ö Our EMEA headquarters in London, occupies approximately 22,500 square feet (of which 5,543 square feet are sub-leased for a term ending in 2023), and includes an office space
and lab; and
ö Our APAC headquarters in Singapore occupies approximately 8,000 square feet and is used as office space.
We also have additional material leased facilities, consisting of the following:
ö 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
o Additional offices are located in Colorado, Texas, Ohio and California.
ö Our APAC facilities are located in Pune, India - occupies approximately 108,000 square feet and includes a research and development and service center. There are also additional
APAC offices located in Bangalore, Manila, Hong Kong and Tokyo.
We believe that our existing facilities are adequate to meet our current needs and substantially adequate to meet our foreseeable future needs.
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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 Information - Risk 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
NICE is a global enterprise software leader providing solutions for the Customer Engagement and Financial Crime and Compliance markets. NICE’s solutions use advanced omnichannel
analytics and automation based on an open cloud platform to improve customer experience as well as prevent financial crime.
NICE’s core mission is to empower organizations to act smarter and respond faster both to provide superior customer service and to prevent financial crime. Our software is used by
customer service organizations of enterprises of all sizes and verticals and by compliance and fraud prevention groups in financial institutions.
With an integrated cloud platform and advanced analytics solutions we help organizations understand their customers, engage their employees and improve their processes.
Additionally, we help them predict needs and identify risks to create an excellent customer experience, prevent fraud and ensure compliance. These capabilities are enhanced through the
utilization of advanced automation and artificial intelligence capabilities. Our software constantly improves by offering collective insights and some of our newer software offerings apply
machine learning to cross-industry and cross-organizations data and by offering collective insights.
NICE is at the forefront of two industry transformations; the adoption of cloud platforms by enterprises and the shift by financial institutions to integrated risk management solutions for
end-to-end financial crime prevention.
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In both cases, our ability to deeply integrate analytics and automation and apply it across multiple data sources and workflows enables customers to achieve greater effectiveness and
efficiency.
We rely on several key assets to drive our growth:
ö Our market-leading integrated open cloud platform and solutions for omnichannel routing, data capture, analytics, automation and artificial intelligence, many of which are
protected by a broad array of patents.
ö Our ability to provide solutions that cover all market segments, from small to mid-sized business to large scale Fortune 100 enterprises.
ö Our extensive portfolio of applications as well as a large partner ecosystem allow NICE’s customers to benefit from a wide range of cloud solutions.
ö Our market leadership makes us a well-recognized brand, and creates top-of-mind awareness for our solutions in our areas of operation.
ö Our loyal customer base. Today, more than 25,000 organizations in over 150 countries, including 85 of the Fortune 100 companies, use NICE solutions.
ö 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.
ö 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.
ö Our access to data for improving our algorithms through machine learning and artificial intelligence, which relies on a combination of our extensive customer base, cloud-base
deployments and domain expertise.
ö 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-
premise 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 platforms, solutions and technologies. Our
customers, across all sizes and verticals, including banking, telecommunications, healthcare, insurance, retail, travel, gaming, public safety, state and local government and more, are benefiting
from the tangible and practical business value that our solutions provide.
Recent Acquisitions
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
November 14, 2016, we completed the acquisition of inContact, a leading provider of cloud contact center software and agent optimization tools. We acquired inContact for total consideration of
approximately $1 billion in cash. The acquisition enables us to offer a fully integrated and complete cloud contact center where companies can interact with customers. The acquisition enabled
the two market leaders to join forces and provide the industry’s first fully integrated and complete cloud contact center solution suite.
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On March 22, 2016, we completed the acquisition of Nexidia, a leading provider of advanced customer analytics. We acquired Nexidia for total consideration of approximately $135
million in cash. The acquisition allows us to offer a combined offering, featuring a best-in-class, analytics-based solution with accuracy, scalability and performance, enabling organizations to
expand their analytics usage in critical business use cases.
On March 11, 2016, we completed the acquisition of Voiceprint International, Inc. (“VPI”), a provider of workforce optimization software and services for enterprises, contact centers,
first responders and trading floors. We acquired VPI for total consideration of approximately $21.7 million in cash.
In addition, from time to time we complete acquisitions and investments that are not considered material to our business and operations. During 2017, we completed two acquisitions for
a total consideration of approximately $77 million in cash. For additional information see Note 1b to our Consolidated Financial Statements included elsewhere in this annual report.
Discontinued Operations
In September 2015, we completed the sale of our Physical Security operation to Battery Ventures for total consideration of $92.5 million, compromised of $74.6 million in cash, notes of
$2.9 million and up to $15.0 million earn out based on future business performance. Through the Physical Security operation we previously provided video surveillance technologies and
capabilities to security-aware organizations. We previously accounted for the Physical Security operation under the Security Solution segment.
In July 2015, we completed the sale of our Cyber and Intelligence operation to Elbit Systems and one of its subsidiaries (together, “Elbit”) for total consideration of $151.6 million,
compromised of $111.6 million in cash and $40.0 million in earn out based on future business performance conditions, which were not met. 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 operation under the Security Solution segment.
Following the sale of these two operations, 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.
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Critical Accounting Policies
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions 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 estimates, judgments and assumptions used are reasonable based upon information available at
the time they are made. 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:
ö
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ö
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Revenue recognition;
Impairment of long-lived assets;
Income taxes;
Legal contingencies;
Business combination;
Stock-based compensation;
Marketable securities;
Fair value of financial instruments; and
Exchangeable senior notes.
Revenue Recognition. We generate revenues from sales of software products, services and cloud, which include software license, SaaS and network connectivity, hosting, support and
maintenance, implementation, configuration, project management, consulting, training 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 Recognition“. Revenues from sales
of our software products 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.
Revenues from maintenance and professional services are recognized ratably over the contractual period and as services are performed, respectively. 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, 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 elements.
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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”) if VSOE is not available, or best estimated selling price (“BESP”) if neither VSOE nor TPE are
available. We establish VSOE of fair value using the price charged for a deliverable when sold separately. When VSOE cannot be established, we attempt to establish fair 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’ 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 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.
Our SaaS offerings provide customers access to certain of our software within a cloud-based IT environment 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 SaaS offerings are recognized ratably over the contract term or based on actual usage, commencing with the date the 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 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 statements information, credit insurance data and payment performance.
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We maintain a provision for product returns and other contractual rights, which are estimated based on our past experience and are deducted from revenues.
Deferred revenues and advances from customers include payments received from customers for which revenue has not yet been recognized.
Impairment of Long-Lived Assets. Our long-lived assets include goodwill, property and equipment and identifiable other intangible assets that are subject to amortization.
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 -
Goodwill and Other," ("ASC 350") goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at the reporting unit level at
least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill 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 us to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill
impairment test.
During the fourth quarter of each of the fiscal years ended December 31, 2015, 2016 and 2017, we performed a qualitative assessment for our reporting units and concluded that the
qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required. Accordingly, no impairment charge was
recognized during any of such fiscal years.
Our other long-lived assets (besides goodwill) and identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant, and
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. No
impairment charge was recognized during any of such fiscal years.
Income Taxes. We account for income taxes in accordance with ASC 740, "Income Taxes". This topic prescribes the use of the liability method whereby deferred tax asset and liability
account balances are determined based on differences 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 reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Deferred
tax assets and deferred tax liabilities are presented under long-term assets and long-term liabilities, respectively.
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% (cumulative basis) likely to be realized upon
ultimate settlement.
62
We classify interest and penalties on income taxes (which includes uncertain tax positions) as taxes on income.
Legal 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.
Business Combination. We apply the provisions of ASC 805, “Business Combination“, and we allocate the fair value of purchase consideration to the tangible assets acquired,
liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and
liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect
to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships, acquired technology and
acquired trademarks from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but
which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Stock-based Compensation. We account for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" ("ASC 718"), which requires the
measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. ASC 718 requires companies to
estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model.
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 awards.
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 represents 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. For information on our dividend payments, see Note 13d to our Consolidated Financial Statements included elsewhere
in this annual report.
We measure the fair value of restricted stock based on the market value of the underlying shares at the date of grant.
Marketable 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
shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific identification basis, in our consolidated statements of
income.
63
Our securities are reviewed for impairment in accordance with ASC 320-10-35. 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 accumulated other comprehensive income (loss).
Fair Value of Financial Instruments. We apply ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"). Under this standard, fair value is defined as the price 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 at the measurement date. We measure our investments in money
market funds classified as cash equivalents, marketable securities and its foreign currency derivative contracts at fair value.
In determining fair value, we use various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the
asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market
participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy is broken down into three levels based on the inputs as follows:
ö
ö
ö
Level 1 - Valuations based on quoted prices in active markets for identical assets 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 inputs that are unobservable and significant to the overall fair value measurement.
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type 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 in the market, the determination
of fair value requires more judgment and the investments are categorized as Level 3.
Our marketable securities and foreign currency derivative contracts are classified within Level 2. For more information, see Note 3 and Note 10 to our Consolidated Financial Statements
included elsewhere in this annual report.
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.
64
Exchangeable Senior Notes. We apply ASC 815 “Derivative and Hedging” (“ASC 815”) and ASC 470 “Debt” (“ASC 470”). Under these standards, we separately account for the
liability and equity components of convertible debt instruments that may be settled in cash in a manner that reflects our nonconvertible debt borrowing rate. The liability component at issuance
is recognized at fair value, based on the fair value of a similar instrument that does not have a conversion feature. The equity component is based on the excess of the principal amount of the
debentures over the fair value of the liability component, after adjusting for an allocation of debt issuance costs, and is recorded as capital in excess of par. Debt discounts are amortized as
additional non-cash interest expense over the expected life of the debt.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 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 became effective for us beginning the first quarter of 2017, at which time we changed our accounting policy to account for forfeitures as they occur. The change was applied on a
modified retrospective basis with a cumulative effect adjustment to retained earnings of $6,208 as of January 1, 2017. In addition, historically, excess tax benefits or deficiencies from our equity
awards were recorded as additional paid-in capital in our consolidated balance sheets and were classified as a financing activity in the consolidated statements of cash flows. As a result of the
adoption, we will prospectively record any excess tax benefits or deficiencies from our equity awards as part of our provision for income taxes in our consolidated statements of operations in the
reporting periods in which equity vesting occurs. Excess tax benefits for share-based payments are now presented as an operating activity in the statements of cash flows rather than financing
activity. We elected to apply the cash flow classification requirements related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to cash generated by
operating activities and in a decrease to cash generated by financing activities in the consolidated statements of Cash Flows of $7,868 and $7,595 for the years ended December 31, 2016 and
December 31, 2015, respectively.
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update 2014-09 (“ASU 2014-09”) "Revenue from Contracts with Customers (Topic 606)". 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 amount that reflects
the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequently, the FASB issued several additional ASUs related to ASU 2014-09,
collectively they are referred to as the “new revenue standards”, which become effective for us beginning January 1, 2018. We have adopted the new revenue standards using the modified
retrospective transition method.
We estimated the analysis of all potential impacts of the new revenue standards. The impacts mainly 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. Based on work performed to date, on
January 1, 2018 we expect to record a cumulative-effect of approximately $39 million attributed to Deferred Revenues and approximately $45 million attributed to costs related to obtaining
customer contracts. These amounts will be recorded as adjustment to retained earnings. The impact derives from arrangements that based on "Revenue Recognition (Topic 605)" were to be
recognized in future years during 2018 to 2022.
65
In January 2016, the FASB issued ASU 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 for interim and annual periods
beginning on or after January 1, 2018. We expect no material impact 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 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. We expect no
material impact on our statement of cash flows.
In October 2016, the FASB issued Accounting Standards Update 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 us for interim and annual periods beginning
after December 15, 2017. We expect no material impact 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 2 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 2017-01”), which provides guidance to evaluate
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is
concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. ASU 2017-01 is effective for us for fiscal years beginning after
December 15, 2017, including interim periods within those periods. . We expect no material impact on our Consolidated Financial Statements.
66
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"). The amendments in this update require a financial asset (or a group of
financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in
developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of
expected credit loss, which will be of greater use to users of the financial statements. ASU 2016-13 is effective for us for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the
effect that this guidance will have on our Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The objectives of this ASU are
to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and to make certain targeted
improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods
within those fiscal years. We are currently evaluating the effect that this guidance will have 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, 2015, 2016, and 2017, expressed as a percentage of total revenues. Totals
may not add up due to rounding.
2015
2016
2017
Revenues
Products
Services
Cloud
Cost of revenues
Products
Services
Cloud
Gross profit
Operating expenses
Research and development, net
Selling and marketing
General and administrative
Amortization of acquired intangibles
Total operating expenses
Operating income
Financial income (expense), net
Other expenses, net
Income before taxes
Taxes on income (tax benefits)
Net income from continuing operations
Income (loss) from discontinued operations
Taxes on income (tax benefits) from discontinued operations
Net income (loss) from discontinued operations
Net income
67
34.3%
61.8
3.9
100.0
7.2
24.0
1.6
32.8
67.2
13.9
24.4
9.8
1.3
49.3
17.9
0.7
(0.1)
18.5
3.3
15.2
16.4
3.7
12.7
27.9
30.2%
61.4
8.4
100.0
5.2
24.6
3.5
33.3
66.7
13.9
26.4
11.5
1.7
53.5
13.2
1.1
(0.1)
14.2
2.1
12.1
(0.8)
(0.2)
(0.6)
11.5
23.9%
49.0
27.1
100.0
3.8
16.9
14.5
35.2
64.8
13.6
27.1
9.7
3.1
53.5
11.3
(1.5)
-
9.8
(1.0)
10.8
-
-
-
10.8
Comparison of Years Ended December 31, 2016 and 2017
Revenues
Our total revenues increased by approximately 31.2% to $1,332.2 million in 2017 from $1,015.5 million in 2016. Revenues from sales of Customer Engagement Solutions and Financial
Crime and Compliance Solutions in 2017 were $1,051.4 million and $280.8 million, respectively, an increase of 39.4% and 7.5% from 2016, respectively.
The growth in revenues from our Customer Engagement Solutions is mainly attributed to increased demand for our solutions delivered over the cloud and to our expanded analytics
offerings primarily due to the full year inclusion of inContact and Nexidia, respectively. These offerings enable organizations to improve operational efficiency and customer experience, enhance
compliance and improve sales optimization.
The growth in revenues from Financial Crime and Compliance Solutions is primarily driven by increased demand of financial institutions throughout our markets for solutions that secure
financial transactions and prevent fraud and complex financial crimes, magnified by the continued evolution of advancements in our technology.
Product revenues
Service revenues
Cloud revenues
Total revenues
Years Ended December 31,
(U.S. dollars in millions)
2016
2017
Dollar
Change
Percentage
Change
$
$
306.2
623.8
85.5
1,015.5
$
$
318.9
652.1
361.2
1,332.2
$
$
12.7
28.3
275.7
316.7
4.1%
4.5
322.4
31.2%
The increase of $12.7 million in product revenues is attributed to the increased demand for our Financial Crime and Compliance Solutions products mainly due to increased demand of
financial institutions throughout our markets.
The growth in service revenues is mainly due to increase in maintenance services resulting primarily from an increase in install base from previous years' sales, partially offset by a
decrease in professional services due to the growing transition from on-premise to cloud-based solutions.
The growth in cloud revenues is mainly due to the full year inclusion of inContact and Nexidia and due to the growing transition from on-premise to cloud-based solutions.
68
Revenue by Region
Years Ended December 31,
(U.S. dollars in millions)
2016
2017
Dollar
Change
Percentage
Change
United States, Canada and Central and South America (“Americas”)
Europe, the Middle East and Africa (“EMEA”)
Asia-Pacific (“APAC”)
Total revenues
$
$
720.5
193.5
101.5
1,015.5
$
$
1,035.9
190.0
106.3
1,332.2
$
$
315.4
(3.5)
4.8
316.7
43.8%
(1.8)
4.7
31.2%
The Americas revenue increased by 43.8%, driven by our Customer Engagement Solutions, mainly due to increased demand for our solutions delivered over the cloud and our analytics
offerings, primarily due to the full year inclusion of inContact and Nexidia, respectively.
The EMEA revenue decreased by 1.8%, mainly driven by a lower demand for our solutions, partially offset by an increase in our analytics offerings.
The APAC revenue increased by 4.7%, mainly driven by increased demand for both our Financial Crime and Compliance Solutions and our Customer Engagement Solutions.
Cost of Revenues
Cost of product revenues
Cost of service revenues
Cost of cloud revenues
Total cost of revenues
Years Ended December 31,
(U.S. dollars in millions)
2016
2017
Dollar
Change
Percentage
Change
$
$
53.0
250.0
34.7
337.7
$
$
51.1
225.0
192.6
468.7
$
$
(1.9)
(25)
157.9
131
(3.6)%
(10)
455
38.8%
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 amortization of intangibles assets
and third party royalties payable to vendors.
Cost of service revenues decreased both on a dollar basis and as a percentage of service revenues. The decrease is primarily due to increased efficiency in service organization,
migration of certain functions to low-cost countries and a decrease in amortization of intangible assets.
Cost of cloud revenues increased both on a dollar basis and as a percentage of cloud revenues. The increase is primarily due to the full year inclusion of inContact and Nexidia and the
growing transition from on-premise to cloud-based solutions.
69
Gross Profit
Gross profit on product revenues
as a percentage of product revenues
Gross profit on service revenues
as a percentage of service revenues
Gross profit on cloud revenues
as a percentage of cloud revenues
Total gross profit
as a percentage of total revenues
$
$
$
$
Years Ended December 31,
(U.S. dollars in millions)
2016
2017
$
$
$
$
253.2
82.7%
373.8
59.9%
50.8
59.4%
677.8
66.7%
$
$
267.9
84.0%
427.0
65.5%
168.6
46.7%
863.5
64.8%
Dollar
Change
Percentage
Change
14.7
53.2
117.8
185.7
5.8%
14.2
231.9
27.4%
The increase in gross profit on product revenues is primarily a result of increased sales of software based solutions with higher margins and a decrease in third party royalties payable to
vendors and amortization of intangible assets.
The increase in gross profit on service revenues is mainly attributed to the increase in service revenues, a decrease in costs due to efficiency in service organization and a decrease in
amortization of intangible assets.
The increase in gross profit on cloud revenues is due to an increase in our cloud sales, which is primarily due to the full year inclusion of inContact and Nexidia. The decrease in cloud
gross margin is mainly due to inContact cloud which historically had a lower gross margin.
Operating Expenses
Research and development, net
Selling and marketing
General and administrative
Amortization of acquired intangible assets
Years Ended December 31,
(U.S. dollars in millions)
2016
2017
Dollar
Change
Percentage
Change
$
$
141.5
268.3
116.6
17.2
$
$
181.1
361.3
129.1
41.9
$
$
39.6
93.0
12.5
24.7
28.0%
34.7
10.7
143.6%
Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased by $57.2 to $211.4 million
in 2017, as compared to $151.7 million in 2016, and represented 15.7% and 14.9% of revenues in 2017 and 2016, respectively. The increase in research and development is attributed primarily to the
full year inclusion of inContact and Nexidia and to an increase in cost of wages. Capitalized software development costs increased by $19.4 million to $27.9 million in 2017 from $8.5 million in 2016
primarily due to increase in capitalized software development costs related to our cloud based solutions.
70
Selling and Marketing Expenses. Selling and marketing expenses increased to $361.3 million in 2017 as compared to $268.3 million in 2016, which represented 27.1% and 26.4% of total
revenues in 2017 and in 2016, respectively. The increase in selling and marketing expenses is attributed primarily to the full year inclusion of inContact and Nexidia and to an increase in cost of
wages.
General and Administrative Expenses. General and administrative expenses increased to $129.1 million in 2017, as compared to $116.6 million in 2016, which represented 9.7% of total
revenues in 2017, as compared to 11.5% of total revenues in 2016. The increase in general and administrative expenses is attributed primarily to the full year inclusion of inContact and Nexidia,
partially offset by a decrease in acquisition and integration related expenses and a decrease in rent costs.
Amortization of acquired intangible assets. Amortization of acquired intangible assets included in the operating expenses represented 3.1% and 1.7% of our revenues in 2017 and 2016,
respectively. The increase in amortization of acquired intangible assets is attributable to our recent acquisitions, mainly inContact.
Financial Income (Expense), net, and Other Expense, net
Years Ended December 31,
(U.S. dollars in millions)
2016
2017
Dollar Change
Percentage
Change
Financial income (expense), net
Other expenses, net
$
$
10.8
0.5
(20.4) $
-
(31.2)
(0.5)
(288.9)%
(100)%
Financial Expense and Other, net. Financial expenses, net, were $20.4 million in 2017, compared to financial net income of $10.8 million in 2016. The increase in financial expenses, net is
attributable primarily to the long term loan and the exchangeable notes expenses related to financing of the acquisition of inContact, a decrease in gain on realization of investments and a
decrease in interest income as a result of lower average cash balance versus previous years.
Other expenses, net amounted to $0.5 million in 2016, and are comprised primarily of loss on disposal of assets.
Taxes on Income. In 2017, tax benefits amounted to $13.6 million, as compared to tax expenses of $21.4 million in 2016. Our tax expenses during 2017 decreased as compared with 2016
primarily due to realization of $31.0 million net deferred tax liabilities as a one-time tax adjustment as a result of a decrease in the U.S. federal tax rate under the U.S. Tax Reform. See Note 2 and
Note 12 to the Consolidated Financial Statements included elsewhere in this annual for more details about the U.S. Tax Reform and its effects.
Our effective tax rate for 2017 was (10.5%), compared to 14.8% in 2016. Our effective tax rate in 2017 was lower mainly due to the above realization of net deferred tax liability.
The majority of our income in Israel continues to benefit from lower tax rates, which were 12.0% in 2017 and 16% in 2016, 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 from continuing operations. Net income was $143.3 million in 2017, as compared to $116.9 million in 2016. The increase in 2017 resulted primarily from an increase in our
revenue and gross profit, partially offset by higher operating expenses and an increase in our interest expenses attributable primarily to long term debt and tax benefits due to the U.S Tax Reform.
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Comparison of Years Ended December 31, 2015 and 2016
Revenues
Our total revenues increased by approximately 9.6% to $1,015.5 million in 2016 from $926.9 million in 2015. Revenues from sales of Customer Engagement Solutions and Financial Crime
and Compliance Solutions in 2016 were $754.4 million and $261.1 million, respectively, an increase of 9.6% and 9.4% from 2015, respectively.
The growth in revenues from our Customer Engagement Solutions is mainly attributed to increased demand for our solutions delivered over the cloud and to our expanded analytics
offerings, as these offerings enable organizations to improve operational efficiency and customer experience, enhance compliance and improve sales optimization.
The growth in revenues from Financial Crime and Compliance Solutions is primarily driven by increased demand of financial institutions across the globe for solutions that secure
financial transactions and prevent fraud and complex financial crimes, magnified by the continued evolution of advancements in our technology.
Product revenues
Service revenues
Total revenues
Years Ended December 31,
(U.S. dollars in millions)
2015
2016
Dollar Change
Percentage
Change
$
$
317.9
609.0
926.9
$
$
306.2
709.3
1,015.5
$
$
(11.7)
100.3
88.6
(3.7)%
16.5
9.6%
The decrease of $27.1 million in product revenues is attributed to our Customer Engagement Solutions, offset by an increase of $15.4 million in revenues from our Financial Crime and
Compliance Solutions. The decrease in product revenues 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.
The growth in service revenues is mainly due to our solutions delivered over cloud, which constitute approximately 52% of such growth, maintenance services resulting primarily from
an increase in install base from previous years’ sales, which constitute approximately 29% of such growth, and professional services, 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”)
Europe, the Middle East and Africa (“EMEA”)
Asia-Pacific (“APAC”)
Total revenues
$
$
630.1
196.9
99.9
926.9
$
$
720.5
193.5
101.5
1,015.5
$
$
90.4
(3.4)
1.6
88.6
14.4%
(1.7)
1.6
9.6%
The Americas revenue increased by 14.4% driven by our Customer Engagement Solutions, mainly due to increased demand for our solutions delivered over the cloud and to our
analytics offerings.
The EMEA revenue decreased by 1.7%, mainly driven by unfavorable currency effects, partially offset by our Customer Engagement Solutions due to an increase in our analytics
offerings.
The APAC revenue increased by 1.6% mainly due to increased demand for our Financial Crime and Compliance Solutions, offset by a decrease in Customer Engagement Solutions.
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Cost of Revenues
Cost of product revenues
Cost of service revenues
Total cost of revenues
Years Ended December 31,
(U.S. dollars in millions)
2015
2016
Dollar
Change
Percentage
Change
$
$
66.4
237.2
303.6
$
$
53.0
284.7
337.7
$
$
(13.4)
47.5
34.1
(20.2)%
20.0
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 service revenues. The increase is primarily due to increased personnel and amortization of intangible
assets arising from our recent acquisitions.
Gross Profit
Gross profit on product revenues
as a percentage of product revenues
Gross profit on service revenues
as a percentage of service revenues
Total gross profit
as a percentage of total revenues
$
$
Years Ended December 31,
(U.S. dollars in millions)
2015
2016
$
$
251.5
79.1%
371.8
61.0%
623.3
67.2%
$
$
253.2
82.7%
424.6
59.9%
677.8
66.7%
Dollar
Change
Percentage
Change
1.7
52.8
54.5
0.7%
14.2%
8.7%
The increase in gross profit on product revenues is primarily a 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 increase 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.
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Operating Expenses
Research and development, net
Selling and marketing
General and administrative
Amortization of acquired intangible assets
Years Ended December 31,
(U.S. dollars in millions)
2015
2016
Dollar
Change
Percentage
Change
$
$
128.5
225.8
90.4
12.5
$
141.5
268.3
116.6
17.2
13.0
42.5
26.2
4.7
10.2%
18.8
29.0
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
$8.5 million in 2016, 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 acquisition of inContact, an increase in rent costs following restructuring of our Americas offices and additional personnel as a 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.
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Financial and Other Income
Years Ended December 31,
(U.S. dollars in millions)
2015
2016
Dollar
Change
Percentage
Change
Financial income, net
Other expenses, net
$
$
5.7
0.4
$
10.8
0.5
5.1
0.1
89.5%
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 offsetting 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.
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, 217, we had $525.1 million of cash and cash equivalents and short-term and long-term investments, as
compared to $286.0 million at December 31, 2016 and $828.4 million at December 31, 2015.
75
Cash provided by operating activities was $394.7 million, $228.2 million, and $252.3 million in 2017, 2016, and 2015, respectively. Net cash from operations in 2017 consisted primarily of
net income of $143.3 million, adjusted for non-cash activities such as depreciation and amortization of $156.3 million, stock-based compensation of $57.0 million as well as working capital changes
derived from an increase in deferred revenues of $41.6 million, increase in accrued expenses and other liabilities of $25.5 million, decrease in deferred taxes of $70.8 million and decrease in trade
receivables of $37.7 million. Net cash from operations in 2016 consisted primarily of net income of $126.1 million (excluding non-cash gain 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 $18.0 million, decrease in deferred taxes of $25.9 million and increase in trade receivables of $31.7 million. Net cash from operations in 2015 consisted
primarily of net income of $111.5 million (excluding non-cash 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 an increase in trade receivables of $56.3 million.
Net cash used in investing activities was $213.0 million, $800.0 million and $28.4 million in 2017, 2016 and 2015, respectively. In 2017, net cash used in investing activities consisted
primarily of payment for acquisitions in an aggregate amount of $76.0 million, net investment in marketable securities and short term bank deposits of $69.1 million and purchase of property,
equipment of $39.9 million and capitalization of internal use software costs of $27.9 million. In 2016, net cash used in investing activities consisted primarily of payment for the acquisition of
inContact, Nexidia and other acquisitions in an aggregate amount of $1,157 million, which were partially offset by net proceeds received from the sale of marketable securities of $402.7 million. In
2015, net cash used in investing activities consisted primarily of net 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 sale of discontinued operations of $186.1 million.
Net cash provided by (used in) financing activities was $(14.8) million, $405.4 million and $(79.4) million in 2017, 2016 and 2015, respectively. In 2017, net cash used in financing activities
was attributed primarily to the repayment of long term debt of $260.0 million, repurchase of our ordinary shares of $24.4 million and payment of dividends of $9.6 million, which were offset
primarily by proceeds from issuance of exchangeable notes of $260.1 million and proceeds from issuance of shares upon exercise of share options and purchase of shares under employee share
purchase plans of $19.24 million. In 2016, net cash provided by financing activities was attributed primarily to the long term loan of $464.8 million and proceeds from issuance of shares upon
exercise of options and purchase of shares under employee share purchase plans of $23.5 million, which were partially offset by payment of dividends of $38.2 million and repurchase of our
ordinary shares of $43.6 million. In 2015, net cash used in financing activities was attributed primarily to the repurchase of our ordinary shares of $68.4 million and payment of dividends of $38.2
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 $27.5 million. For more information
regarding the long term debt, see Note 14 to our Consolidated Financial Statements.
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 “Research and Development” and “Intellectual Property” under Item 4, “Information on
the Company” in this annual report.
Trend Information
For information on trends in our industry, please see Item 4, “Information on the Company—Business Overview—Industry and Technology Trends” in this annual report.
For more information on trends, uncertainties, demands, commitments or events that may have a material effect on revenue, please see Item 3, “Key Information—Risk Factors” in this
annual report.
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Contractual Obligations
Set forth below are our contractual obligations and other commercial commitments as of December 31, 2017 (in thousands of U.S. dollars).
Contractual Obligations
Long-term debt obligations, including estimated interest *
Operating Leases
Unconditional Purchase Obligations
Severance Pay**
Total Contractual Cash Obligations
Uncertain Income Tax Positions ***
Total
526,622
97,378
31,773
17,250
673,383
43,984
Less than 1 year
218,785
18,626
20,646
258,057
Payments Due by Period
1- 3 years
3-5 years
11,352
32,127
10,924
54,403
7,188
27,593
203
34,984
More than 5 years
289,297
19,392
-
308,689
*
**
Long-term debt obligations mainly include senior exchangeable notes and long-term loan as disclosed in Note 14 to our Consolidated Financial Statements.
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 12(i) of our
Consolidated Financial Statements for further information regarding our liability under ASC 740.
Other Commercial Commitments
Guarantees – Continuing operations
Guarantees – Discontinued operations*
Total Guarantees
Total
Amounts
Committed
4,792,805
19,488,497
24,281,302
Amount of Commitment Expiration Per Period
Less
than 1 year
1- 3 years
3-5 years
More
than 5 years
4,202,626
18,324,591
22,527,217
400,673
1,163,906
1,564,579
189,506
-
189,506
-
-
--
* Represents guarantees that were not endorsed and are still in effect with respect to contracts assumed as part of the sale of the Cyber and Intelligence line of business, for which we have a
back to back contractual commitment and entitlement to indemnification upon realization of the guarantees.
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Item 6. Directors, Senior Management and Employees.
6.A. Directors and Senior Management
The following tables set forth, as of March 20, 2018, the name, age and position of each of our directors and executive 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
Committee
Member
Nominations
Committee
Member
Outside
Director*
Name
David Kostman
Age
53
Position
Chairman of the
Board of
Directors
Rimon Ben-Shaoul
73
Director
Dan Falk
73
Director
Yocheved Dvir
65
Director
Yehoshua Ehrlich
68
Director
Leo Apotheker
64
Director
Joe Cowan
69
Director
X
X
X
X
Zehava Simon
59
Director
X
* See Item 6, “Directors, Senior Management and Employees—Board Practices— Outside Directors.”
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X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Members of Management
Name
Barak Eilam
Miki Migdal
Joseph Friscia
Paul Jarman
Beth Gaspich
Eran Liron
Barry Cooper
Tali Mirsky
Hagit Ynon
Age
Position
42
57
63
48
52
50
47
45
46
Chief Executive Officer
President, Enterprise Product Group
President, NICE-Actimize
Chief Executive Officer, inContact
Chief Financial Officer
Executive Vice President, Marketing and Corporate Development
Chief Operating Officer
Corporate Vice President, General Counsel and Corporate Secretary
Corporate Vice President, Finance
In December 2017, Mr. Yechiam Cohen retired from his position as Corporate Vice President, General Counsel and Corporate Secretary, effective December 31, 2017, and Mrs. Tali Mirsky
assumed the position effective March 2018.
In January 2018, Mr. Eran Porat retired from his position as Corporate Vice President, Finance, effective January 2018, and Ms. Hagit Ynon assumed the position effective January
2018.Set forth below is a biographical summary of each of the above-named directors and executive officers of NICE. Each of our directors qualifies as an independent director under applicable
NASDAQ rules.
David Kostman has served as one of our directors for most of the period since 2001 and as our Chairman of the Board since February 2013. Mr. Kostman is currently co-CEO and board
member of Outbrain, Inc. and serves on the board of directors of ironSource Ltd. and Tivit S.A., and is a member of Nanoosh LLC. Mr. Kostman is also a former board member of publicly traded
Retalix Ltd. (acquired by NCR). 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 from 1994 to 2000, focusing on the technology and Internet sectors, and NM Rothschild & Sons from 1992 to 1993, focusing on mergers and acquisitions and
privatizations. Mr. Kostman holds a Bachelor’s degree in Law from Tel Aviv University and a Master’s degree in Business Administration from INSEAD.
Rimon Ben-Shaoul has served as one of our directors since September 2001. Between 2001 and 2005, 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. Since 2002 Mr. Ben-Shaoul serves as Chairman of Grand AutoMotive
LLP. Mr. Ben-Shaoul also served as a director of MIND C.T.I. Ltd., BVR Systems Ltd. and several private companies. In addition, he served as the President and Chief Executive Officer of Polar
Communications Ltd., which manages media and communications investments. Mr. Ben-Shaoul also served 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’s
degree in Economics and Statistics and a Master’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 on the board of directors of Orbotech Ltd., Ormat Technologies Inc. and Attunity Ltd. Mr. Falk holds a Bachelor’s degree in
Economics and Political Science and a Master’s degree in Business Administration, both from the Hebrew University, Jerusalem.
79
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 and Endey Med.
She recently served on the boards of Visa Cal, Trendline Business Information & Communications 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’s Economics Department (1986-1988), Head of the Group’s Corporate Office from 1989 to1992, Head of the Group’s General
Insurance Division and Corporate Office from 1993 to 1997, Group CFO from 1997 to 1999, and Head of the Group’s Strategic Development Division and Marketing Array and Risk Manager in
2000. Ms. Dvir holds a Bachelor’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. Additionally, 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 Apotheker has served as one of our directors since August 2013. Mr. Apotheker was the Managing Partner and co-founder of Efficiency Capital SAS, a growth capital advisory
firm, from 2012 to 2014. From 2010 to 2011, Mr. Apotheker served as Chief Executive Officer of Hewlett Packard. From 2008 to 2010, he served as Chief Executive Officer of SAP AG. In addition, he
is currently chairman of the board of Unit4, a leading Dutch software company, and Signavio GmbH, Vice Chairman and Lead Director of Schneider SE, and a member of the board of KMD, P2
Energy Services and Taulia Inc. Mr. Apotheker holds a Bachelor’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. From October 2013 until September 2017, Mr. Cowan was the CEO and director of Epicor, and since September 2016
has been a director of ChannelAdvidsor, Inc. During 2013, Mr. Cowan also served as President of DataDirect Networks, Inc. From 2010 until 2013, Mr. Cowan served as the Chief Executive
Officer and President of Online Resources Corp. During 2009, he 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 Operating Officer of Baan Co. NV and Avantis GOB NV. He has been a Director of DataDirect Networks, Inc. between 2011 and
February 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.
80
Zehava Simon has served as one of our statutory outside directors since July 2015. Ms. Simon served as a Vice President of BMC Software Inc. from 2000 until 2013, most recently as
Vice President of Corporate Development. From 2002 to 2011, Ms. Simon also served as Vice President and General Manager of BMC Software in Israel. Prior to that, Ms. Simon held various
positions at Intel Israel, which she joined in 1982, including acting as leader of Finance and Operations and Business Development for Intel in Israel. Ms. Simon is currently a board member of
Audiocodes, 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 the 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 since 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.
Miki Migdal has served as President of the NICE Enterprise Product Group since July 2014. Prior to joining NICE, Mr. Migdal was the CEO of SAP Israel and held additional leadership
roles at SAP including Senior Vice President of Development at SAP Global and President of SAP Labs Israel. He also served in executive positions at B.V.R Systems, Amdocs and Mercury
Interactive (HP Software). Mr. Migdal holds a B.Sc. in Math and Computer Science from Tel Aviv University.
Joseph Friscia has served as President of NICE Actimize since April 2014. Prior to joining NICE, Mr. Friscia served as President of BAE Systems’ Applied Intelligence Americas
business. He joined BAE when BAE Systems acquired Norkom Technologies, where he had served as General Manager and Executive Vice President of the Americas. Prior to Norkom, Mr.
Friscia was a co-founder of Pegasystems, Inc., the leading Business Process Management software company, from its origin and through taking it public in 1996. Mr. Friscia holds an MBA
degree from Adelphi University and a B.A. from Long 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.
Beth Gaspich has served as our Chief Financial Officer since October 2016. Ms. Gaspich joined NICE as CFO of the Financial Crime and Compliance division NICE Actimize in
September 2011, where she was responsible for finance, legal and business operations. Prior to joining NICE, she was Chief Financial Officer for Archive Systems, Inc., a privately held document
management software provider. She also served as Vice President 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, Ms. Gaspich held several other senior
positions throughout her career at large global financial institutions, including JP Morgan and Price Waterhouse. Ms. Gaspich holds a BA in Accounting from the University of Missouri.
81
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.
Barry Cooper has been with NICE since 2011 and serves as our Chief Operating Officer (COO) since May 2016. Prior to serving as COO, Mr. Cooper served as Vice President, Business
Operations for APAC from March, 2011 until June 2013, and as of July 2013 and until assuming the role of COO, he served as Executive Vice President, Professional Services and Cloud. Prior to
joining NICE, Mr. Cooper 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 United Kingdom.
Tali Mirsky has served as our Corporate Vice President, General Counsel and Corporate Secretary since March 2018. From 2010 to early 2018, she served as Global Vice President of
Legal Affairs and Corporate Secretary at Frutarom Industries Ltd., where she led the company’s M&A transactions in addition to managing the company’s legal department and handling all legal
matters and corporate and securities related items. Prior to that, Tali served as Vice President, General Counsel and Corporate Secretary of Alvarion, led Business and Legal Affairs at Nicast and
Midbar Tech and was an associate with Naschitz Brandes & Co law office. She holds an LL.B in Law and Business Administration from IDC, Herzliya and is admitted to practice law in Israel.
Hagit Ynon has served as our Corporate Vice President, Finance since January 2018. Prior to serving as Corporate Vice President Finance, Ms. Ynon served as Vice President
Accounting, Treasury and Tax from 2008 until 2017. From 2000 to 2007, Ms. Ynon served as Corporate Controller and other managerial positions in the finance department. Ms. Ynon is a certified
public accountant and holds a Bachelor’s degree in Business and Accounting from the College of Management Academic Studies and a Masters in Business Administration from the College of
Management Academic Studies.
There are no family relationships between any of the directors or executive officers named above.
6.B. Compensation
(a) Aggregate Executive Compensation
The aggregate compensation paid to or accrued on behalf of all our directors and executive officers as a group of 17 persons during 2017 consisted of approximately $7.7 million in
salary, fees, bonus, commissions and directors’ fees and approximately $0.7 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. The plan is reviewed and approved by our Board of Directors annually, as is any bonus payment under the plan.
82
During 2017, our officers and directors received, in the aggregate, (i) options to purchase 146,800 ordinary shares, that include 56,800 options with an exercise price equal to the par value
of the ordinary shares (the “par value options”), and (ii) 182,500 restricted share units, under our equity based compensation plans. The options (other than the par value options) have a
weighted average price of $79.21 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 (the “Israeli Companies Law”), remuneration of our directors requires shareholder approval. Compensation and
reimbursement for outside directors (as described below) is statuto-rily determined pursuant to the Israeli Companies Law. Effective as of July 1, 2015, our shareholders approved the payment to
each of our non-executive directors, including outside directors, of an annual fee of $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 based on the exchange rate on July 1,
2015), subject to additional value added tax, as applicable.
On July 9, 2015, at our 2015 annual general meeting of shareholders, following the recommendation of our compensation committee and approval by our Board of Directors, our
shareholders approved an amended compensation policy for directors and officers. In addition, our shareholders approved a special annual cash fee for the Chairman of the Board in the amount
of NIS 450,000 (equivalent to approximately $129,348). The special annual fee is subject to adjustment for changes in the Israeli consumer price index after September 2012. At the Company's
special general meeting held on December 21, 2016, following the recommendation of our compensation committee and approval by our Board of Directors, our shareholders approved certain
amendments to the current compensation policy.
(b) Individual Compensation of Covered Executives
The following describes the compensation of our five most highly compensated executive officers in 2017, based on the total of salary costs, bonus cost and equity costs expensed in
2017 ("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. For Covered Executives in Israel these amounts are based on the Shekel exchange rate
of 3.60, which represents the average rate for 2017, and for the Covered Executive in Singapore are based on the Singapore dollar exchange rate of 1.42, which represents the average rate for 2017.
(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, 2017, 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, 2017, with respect to equity granted in 2017 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.
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i.
Barak Eilam – CEO. Salary Costs - $788; Bonus Costs - $1,257; Equity Costs - $1,913 expense recorded in 2017 for equity granted in 2017 and $2,313 expense recorded in 2017 for equity
granted in previous years.
ii. Paul Jarman – CEO, inContact. Salary Costs - $424; Bonus Costs - $367; Equity Costs - $2,352 expense recorded in 2017 for equity granted in 2017 and $793 expense recorded in 2017
for equity granted in previous years.
iii. Yaron Hertz – President, NICE Americas. Salary Costs - $386; Bonus Costs - $437 and $997 expense recorded in 2017 for equity granted in 2017 and $161 expense recorded in 2017 for
equity granted in previous years.
iv. Joseph Friscia – President, NICE Actimize. Salary Costs - $437; Bonus Costs - $438; Equity Costs - $694 expense recorded in 2017 for equity granted in 2017 and $692 expense recorded
in 2017 for equity granted in previous years.
v. Miki Migdal –President, NICE Enterprise Product Group. Salary Costs - $457; Bonus Costs - $406; Equity Costs - $543 expense recorded in 2017 for equity granted in 2017 and $608
expense recorded in 2017 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” 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 five members, a
compensation committee that has five members, a nominations committee that has two members and a mergers and acquisitions committee that has six members. 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. We do not have, nor do our subsidiaries
have, any directors’ service contracts granting to the directors any benefits upon termination of their service.
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Outside Directors
Except 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” 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 for appointment of outside directors
(together the "2016 Relief Amendments"). According to the 2016 Relief Amendments, 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.
At this time, our Board of Directors has not made an election to opt out of such requirements.
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’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” includes: an
employment relationship; a business or professional relationship maintained on a regular basis; control; and service as an office holder.
No person may serve as an outside director if the person’s position or other activities create, or may create a conflict of interest with the person’s responsibilities as an outside director
or may otherwise interfere with the person’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’ meeting, provided that either:
ö
ö
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.
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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’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 in the same manner required to appoint outside
directors for their initial term; or (2) one or more shareholders holding one percent or more of a company’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. An 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 the Company’s Board of Directors which is empowered to exercise any of the Board’s powers is required to
include at least one outside director, provided that each of the internal audit committee and compensation committee must include all of the outside directors. At this time, our Board of Directors
has not made an election to opt out of such requirements.
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 Board of Directors. For further information, please see Item 6, “Directors, Senior Management and Employees—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 and financial expert.” The
Israeli Companies Law requires that all outside directors must be “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’s financial sophistication. Our Board of Directors has determined that each of Dan Falk and
Yocheved Dvir is an “accounting and financial expert” for purposes of the Israeli Companies Law and is financially sophisticated for purposes of applicable NASDAQ rules. See also Item 16A,
“Audit Committee Financial Expert” in this annual report.
Independent Directors
Under the rules of the NASDAQ, a majority of our directors are required to be “independent” as defined in applicable NASDAQ rules. All of our directors satisfy the respective
independence requirements of NASDAQ.
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, a majority of the directors must
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 must be "independent." All 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.
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Internal Audit Committee
The Israeli Companies Law requires public companies to appoint an internal audit committee. The role of the internal audit committee under the Israeli Companies Law is to examine flaws
in the management of the company’s business in consultation with the internal auditors and the independent accountants, and to propose remedial measures to the Board. The internal audit
committee also reviews interested party transactions for approval as required by law, including approval of the remuneration of a director in any capacity, which also requires Board,
Compensation Committee and shareholder approval. The internal audit committee also assesses our internal audit system and the performance of our internal auditor, and oversees the
implementation and enforcement of our compliance program. Under the Israeli Companies Law, an internal audit committee must consist of at least three directors, including all of the outside
directors. The members of the internal audit committee must satisfy certain independence standards under the Israeli Companies Law, and the chairman of the internal audit committee must be an
outside director. The chairman of the Board of Directors, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, a
director who regularly provides services to the company or to its controlling shareholder, any director who derives most of its income from the controlling shareholder and a controlling
shareholder or any relative of a controlling shareholder, may not be a member of the internal audit committee. Pursuant to the 2016 Relief Amendments, the Company may elect to opt out of the
composition and attendance rules set with respect to the internal audit committee under the Israeli Companies Law, so long as the company complies with the SEC regulations and NASDAQ
listing rules regarding the composition and attendance rules in that respect. At this time, our Board of Directors has not made an election to opt out of such requirements.
All of the current members of our internal audit committee (presently comprised of Yocheved Dvir (Chairman), Dan Falk and Zehava Simon) meet these qualifications.
Internal Auditor
Under the Israeli Companies Law, the Board of Directors must appoint an internal auditor, proposed by the internal audit committee. The role of the internal auditor is to examine, among
other matters, whether the company’s activities comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company
but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its
representative. We have appointed an internal auditor in accordance with the requirements of the Israeli Companies Law.
Audit Committee
The NASDAQ rules require that the audit committee of a listed company be composed of at least three directors, each of whom is (i) independent; (ii) does not receive any
compensation (except for board fees) from the company; (iii) is not an affiliated person of the company or any subsidiary; and (iv) has not participated in the preparation of the company’s (or a
current subsidiary’s) financial statements during the past three years. All of the current members of our audit committee (presently comprised of Rimon Ben-Shaoul (Chairman), David Kostman,
Dan Falk, Yocheved Dvir and Zehava Simon) meet the NASDAQ standards described above.
Our audit committee has adopted a charter specifying the committee’s purpose and outlining its duties and responsibilities which include, among other things, (i) appointing, retaining
and compensating the company’s independent auditor, subject to Board of Directors and shareholder approval, (ii) pre-approving all services of the independent auditor, (iii) reviewing the
annual audited financial statements and quarterly financial statements and the content of our earnings press releases, and (iv) overseeing our accounting and financial reporting processes and
the audits of our financial statements. Our audit committee is also authorized to act as our “qualified legal compliance committee.” As such, our audit committee will be responsible for
investigating reports made by attorneys appearing and practicing before the SEC in representing us, of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary
duty or similar material violations of U.S. law by us or any of our agents.
We believe we currently meet the applicable NASDAQ requirements with respect to our Audit Committee and we intend to continue to take all actions as may be necessary for us to
maintain our compliance with applicable NASDAQ requirements with respect to our Audit Committee.
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Compensation Committee
As required by NASDAQ rules, our compensation committee approves the compensation of our executive officers. The compensation committee is also authorized to approve the grant
of stock options and other securities to eligible grantees under our benefit plans pursuant to guidelines adopted by our Board of Directors. However, grants of stock options and other securities
to our executive officers also require approval of our Board of Directors. Under the Israeli Companies Law, the Board of Directors of a public company must establish a compensation committee.
Pursuant to the 2016 Relief Amendments, the Company may elect to opt out of the relevant composition and attendance rules set under the Israeli Companies Law, and to comply with the SEC
regulations and NASDAQ listing rules that apply to the composition and attendance rules of a compensation committee. At this time, our Board of Directors has not made an election to opt out
of such requirements and we have continued to comply with the Israeli Companies Law with respect to the composition and attendance rules of a compensation committee, as our compensation
committee consists of at least three directors who satisfy the independence qualifications detailed above in “Internal Audit Committee”, and the chairman of the compensation committee is an
outside director.
Under the Israeli Companies Law, the role of the compensation committee is to recommend to the Board of Directors, for ultimate shareholder approval by a special majority, a policy
governing the compensation of office holders based on specified criteria, to review modifications to the compensation policy from time to time, to review its implementation and to approve the
actual compensation terms of office holders prior to the approval thereof by the Board of Directors.
Pursuant to the NASDAQ rules, our compensation committee is required to consist of at least two members, with all members of the compensation committee required to be
independent, unless we elect to take advantage of the exemption provided to "foreign private issuers" to comply with home country practice instead of the listing rules of exchanges such as
NASDAQ, which we do not presently intend to do. The determination of whether a director is independent takes into account all factors relevant to whether a director has a relationship with the
Company which would be material to such director’s ability to be independent from management in connection with carrying out the duties of a compensation committee member. Factors
required for consideration in making this determination specifically include (i) the source of compensation of such director (including any consulting, advisory or other compensatory fee paid to
such director) and (ii) whether such director is affiliated with the Company or one of its affiliates or subsidiaries. Pursuant to the NASDAQ rules, we are also required to have a compensation
committee charter, which, among other things, must set forth the scope of the compensation committee’s responsibilities and how they will be carried out, as well as grant the compensation
committee the power to retain compensation advisers following consideration of certain factors that may be indicative of a conflict of interest by the compensation adviser in rendering
compensation advice.
Our Board of Directors adopted a compensation committee charter that includes the requirements of the NASDAQ rules. However, the charter provides that if there is any conflict
between the responsibilities and requirements set forth therein and either the Israeli Companies Law or compensation policy approved by our Board of Directors upon the recommendation of our
compensation committee and subsequently approved by our shareholders (the “Compensation Policy”), the latter will govern. For information regarding the Compensation Policy, see Item 10 -
“Additional Information - Memorandum and Articles of Association – Approval of Office Holder Compensation” in this annual report.
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We do not believe that there are any existing conflicts between the compensation committee charter and either of the Israeli Companies Law or the Compensation Policy. However, if any
such conflict should develop, such that we are no longer in compliance with the requirements of the NASDAQ rules, we intend to utilize the foreign private issuer exemption described above
with respect to such requirement, and in accordance with the NASDAQ rules we will disclose the practice that we follow in lieu of the applicable NASDAQ requirement in our future annual
reports.
All of the current members of the compensation committee, Dan Falk (chairman), Yocheved Dvir, Joe Cowan, Leo Apotheker and Zehava Simon, satisfy the respective independence
requirements of both the NASDAQ rules and the Israeli Companies Law.
Nominations Committee
As required by NASDAQ rules, our nominations committee recommends candidates for election to our Board of Directors pursuant to a written charter. Both of the current members of
this committee, David Kostman and Dan Falk, are independent directors.
Mergers and Acquisitions Committee
Our Board of Directors has delegated powers with respect to the review and recommendation of mergers and acquisitions and related investments and transactions, which are then
subject to approval by the Board of Directors. The committee also has limited authority to approve mergers and acquisitions for consideration up to a certain amount. All of the current members
of this committee, David Kostman (chairman), Dan Falk, Rimon Ben Shaoul, Yehoshua Ehrlich, Leo Apotheker and Joe Cowan, are independent directors.
Employees
As of December 31, 2017, we had 5,208 employees worldwide, which represented an increase of approximately 5.6% from December 31, 2016.
The following table sets forth the number of our full-time employees at the end of each of the last three fiscal years as well as the main category of activity and geographic location of
such employees:
Category of Activity
Operations
Customer Support
Sales & Marketing
Research & Development
General & Administrative
Total
Geographic Location
Israel
Americas
Europe
Asia Pacific
Total
2015
At December 31,
2016*
2017
107
1,374
682
801
352
3,316
946
1,263
564
543
3,316
66
1,928
1,069
1,294
573
4,930
944
2,544
530
912
4,930
67
2,028
1,169
1,396
548
5,208
913
2,557
510
1,228
5,208
* The substantial increase in number of employees in 2016 resulted mainly from acquisitions and an increase in personnel in certain locations (for more information, please see Item 5, “Operating
and Financial Review and Prospects—Recent Acquisitions” in this annual report).
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We also utilize temporary employees in various activities. On average, we employed 68 temporary employees and obtained services from 876 consultants (not included in the numbers
set forth above) during 2017.
Our future success will depend in part upon our ability to attract and retain highly skilled and qualified personnel. Although competition for such personnel is generally intense, we
believe that adequate personnel resources are currently available in Israel to meet our requirements.
In almost all jurisdictions, we are not a party to any collective bargaining agreement with our employees or with any labor organization. However, we are subject to certain labor related
statutes and certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (includ-
ing the Industrialists’ Association of Israel) that apply to our Israeli employ-ees by order of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally deal with the
length of the work day and the work week, minimum wages, insurance coverage of work-related accidents, determination of severance pay and the provisions of other employment matters. Israeli
law generally requires the payment of severance pay by employers upon an employee’s death, retirement or termination of employment by the employer without due cause. We currently fund
our ongoing severance payment obligations in Israel by making monthly payments to approved severance funds or insurance policies. For more information please see Note 2p of our
Consolidated Financial Statements. In addition, according to the National Insurance Law, Israeli employers and employees are required to pay predetermined sums to the National Insurance
Institute, an organization similar to the U.S. Social Security Administration. These contributions entitle the employees to benefits in periods of unemployment, work injury, maternity leave,
disability, reserve military service and bankruptcy or winding-up of the employer. Since January 1, 1995 these contributions also include payments for national health insurance. The payments to
the National Insurance Institute are equal to approximately 16.37% of an employee’s wages (up to a certain cap as determined from time to time by the law), of which the employee contributes
approximately 60.58% and the employer contributes approximately 39.42%.
In addition, we pay severance benefits to our employees located elsewhere in accordance with local laws and practices of the countries in which they are employed, including our U.S.
based employees pursuant to the U.S. Federal Department labor legislation and requirements and local state regulations.
Employment Agreements
We have employment agreements with our officers. Pursuant to these employ-ment agreements, each party may terminate the employment without cause by giving a 30, 60 or 90 day
prior written notice (six to twelve months in the case of certain senior officers). In addition, we may terminate such agreement for cause with no prior notice. The agreements generally include
non-competition and non-disclosure provisions, although the enforceability of non-competition provisions in employment agreements may be limited under applicable law.
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Share Ownership
As of March 8, 2018, our directors and executive officers serving at that time beneficially owned an aggregate of 385,633 options to purchase ordinary shares that were vested on such
date or that are scheduled to vest within 60 days thereafter, or approximately 0.63% of our outstanding ordinary shares. The options have an average exercise price of $48.27 per share and expire
between 2019 and 2026. No individual director or executive officer beneficially owns 1% or more of our outstanding ordinary shares.
The following is a description of each of our option equity plans, under which awards were outstanding during 2017.
2008 Share Incentive Plan and 2016 Share Incentive Plan
In June 2008 the Company adopted the 2008 Share Incentive Plan (the “2008 Plan”) and in February 2016 the Company adopted the 2016 Share Incentive Plan (the “2016 Plan”, and
together with the 2008 Plan, the “Plans”). The Company adopted the Plans to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and
encouraging behavior that will improve the Company’s profitability.
Under each of the Plans, the Company's employees, directors, consultants and/or contractors may be granted any equity-related award, including: any type of an option to acquire the
Company ordinary shares; share appreciation right; share and/or restricted share award (“RSA”); restricted stock unit (“RSU”) and/or other share unit; and/or other share-based award and/or
other right or benefit under the Plans, including any such equity-related award that is a performance based award (each an "Award"). In regard to the 2008 Plan, please see the discussion below
regarding performance-based awards beginning calendar year 2014.
Generally, under the terms of the Plans, unless determined otherwise by the administrator of the Plans, 25% of an Award granted becomes exercisable on the first anniversary of the date
of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Specifically with respect to RSUs and options granted with an exercise price equal to the nominal
value of an ordinary share ("par value options"), unless determined otherwise by the Board of Directors, 25% of the RSUs and the par value options granted become vested on each of the four
consecutive annual anniversaries following the date of grant. Certain executive officers are entitled to acceleration of vesting of Awards in the event of a change of control, subject to certain
conditions. Awards with a vesting period expire six years after the date of grant. Pursuant to a resolution of the Company's Board of Directors dated February 4, 2014, options that are
performance-based and that were granted during calendar year 2014 and thereafter shall expire seven years following the date of grant. The maximum number of shares that may be subject to
Awards granted under each of the Plans is calculated each calendar year as 3.5% of the Company’s issued and outstanding share capital as of December 31 of the preceding calendar year. Such
amount is reset for each calendar year. Awards are non-transferable except by will or the laws of descent and distribution.
Following an amendment made in December 2010 to the 2008 Plan and also applied under the 2016 Plan (the “2010 Amendment”), options granted under such plan are granted at an
exercise price equal to the average of the closing prices of one ADR as quoted on the NASDAQ market during the 30 consecutive calendar days preceding the date of grant, unless determined
otherwise by the administrator of the Plans (including par value options in some cases).
Prior to the 2010 Amendment, the options were granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain
exceptions that could be approved by the Company's Board of Directors, including in some cases par value options.
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The Company’s Board of Directors also adopted an addendum to the Plans for Awards granted to residents of Israel (the "Addendum") and resolved to elect the "Capital Gains
Route" (as defined in Section 102(b)(2)) of the Israeli Income Tax Ordinance-5721-1961 (“Tax Ordinance”) for the grant of Awards to Israeli grantees. There is also a U.S. addendum under each of
the Plans that applies to non-qualified stock options for purposes of U.S. tax laws.
The Plans are generally administered by our Board of Directors and compensation committee, which determine the grantees under the Plan and the number of Awards to be granted. As
of March 8, 2018, options and restricted share units to purchase 722,158 ordinary shares were outstanding under the 2008 Plan at a weighted average exercise price of $20.47. As of March 8, 2018,
options and restricted share units to purchase 2,092,265 ordinary shares were outstanding under the 2016 Plan at a weighted average exercise price of $7.13.
Nexidia Inc. 2005 Stock Incentive Plan
In 2005, Nexidia adopted the Nexidia Inc. 2005 Stock Incentive Plan (the “Nexidia Plan”), to attract and retain Nexidia’s employees, directors, consultants and advisors and to align the
interests of such recipients with the interests of Nexidia’s shareholders. Under the Nexidia Plan, the grantees can receive incentive and non-qualified options to acquire shares of Nexidia’s
common stock, restricted stock awards, restricted stock units and stock appreciation rights.
Pursuant to the terms of the Nexidia acquisition agreement, we assumed and converted Nexidia’s stock options and restricted stock units originally granted under the Nexidia Plan into
stock options and restricted stock units of NICE, respectively.
As of March 8, 2018, assumed Nexidia options to purchase 11,863 shares of NICE and 85,550 assumed restricted share units were outstanding under the Nexidia Plan, at a weighted
average exercise price of $0.78. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, 173,860 ordinary shares for issuance under
the Nexidia Plan.
inContact, Inc. 2008 Equity Incentive Plan
In 2008, inContact adopted the inContact, Inc. 2008 Equity Incentive Plan, as subsequently amended in June 14, 2012 (as amended, the “inContact Plan”) to enhance inContact’s ability
to attract and retain those employees, officers, directors and consultants who are expected to make important contributions to inContact and any of its subsidiaries and to align the interests of
such recipients with the interests of inContact’s shareholders. Under the inContact Plan, the grantees can receive incentive and non-qualified options to acquire shares of inContact’s common
stock and can receive stock appreciation rights.
Pursuant to the terms of the inContact Merger Agreement, we assumed and converted inContact’s stock options, restricted stock awards and restricted stock units originally granted
under the inContact Plan into stock options, restricted stock awards and restricted stock units of NICE, respectively.
As of March 8, 2018, assumed inContact options to purchase 159,859 shares of NICE and 84,719 assumed restricted share units and restricted shares were outstanding under the
inContact Plan, at a weighted average exercise price of $27.28. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, 476,114
ordinary shares for issuance under the inContact Plan.
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e-Glue Software Technologies Inc., 2004 Stock Option Plan
In 2004, e-Glue adopted the 2004 Stock Option Plan that was further amended by e-Glue on June 9, 2010 (the “2004 e-Glue Plan”), for the grant of awards to employees, directors and
service providers of e-Glue and its subsidiaries. The 2004 e-Glue Plan provides for the grant of options to acquire e-Glue’s stock, for the grant of restricted stock and for the grant of restricted
share units.
Pursuant to the terms of the e-Glue acquisition agreement, we assumed the outstanding stock options and restricted share units granted by e-Glue under the 2004 e-Glue Plan that did
not expire upon closing of the e-Glue acquisition. Following such assumption, the options represent rights to purchase ordinary shares of NICE or restricted share units of NICE, pursuant to a
set formula (such options and restricted share units, together the “Assumed e-Glue Options”). Some of the Assumed e-Glue Options have a three year vesting period, with a third becoming
vested and exercisable one year from their date of grant and the remainder vesting and become exercisable in equal installments on an annual basis over the following two years. The remaining
portion of the Assumed e-Glue Options vest as follows: 25% vest and become exercisable one year from their date of grant, and the remaining 75% vested and became exercisable on December
31, 2011. Certain Assumed e-Glue Options are subject to acceleration rights if employment is terminated within a limited time period and under certain circumstances. Assumed e-Glue Options
generally expire ten years after the date of grant. When applicable, the Assumed e-Glue Options shall be held by, and registered in the name of, a trustee, according to Section 102(b) of the Tax
Ordinance.
As of March 8, 2018, assumed e-Glue Options and restricted share unit to purchase 420 ordinary shares of NICE were outstanding under the 2004 e-Glue Plan. The exercise price per
share underlying the options and restricted share units is equal to the nominal value of an ordinary share. We have registered, through the filing of a registration statement on Form S-8 with the
SEC under the Securities Act, 76,035 ADRs for issuance under the 2004 e-Glue Plan.
Fizzback Group (Holdings) Limited Employee Share Option Scheme
In July 2010, Fizzback adopted the Fizzback Group (Holdings) Limited Employee Share Option Scheme, as amended (the "Fizzback Plan"), to grant options to employees, directors and
consultants, as applicable, of Fizzback. Under the Fizzback Plan, the grantees could be granted options which are deemed "qualifying options" for the purposes of the EMI Code (as that term is
defined in the United Kingdom’s Income Tax (Earnings and Pensions) Act 1993) to acquire Fizzback’s ordinary shares, restricted share units and unapproved options.
Pursuant to the terms of the Fizzback share purchase agreement, we replaced the options and restricted share units originally granted under the Fizzback Plan with stock options to
purchase ordinary shares of NICE and restricted share units of NICE, respectively.
Under the Fizzback Plan, the exercise price per option shall be determined by the Board of Directors in its sole and absolute discretion provided that such price shall not be less than the
nominal value per option, or (when applicable) such price as from time to time adjusted pursuant to the Fizzback Plan. If a grantee ceases to be an employee, all options which have not become
exercisable or which, having become exercisable, have not been exercised, shall lapse.
Options generally expire, inter alia, ten years after the date of grant, upon an insolvent liquidation of Fizzback or upon the grantee being adjudged bankrupt.
As of March 8, 2018, assumed Fizzback options and restricted share units to purchase 1,742 ordinary shares of NICE were outstanding under the Fizzback Plan, at a weighted average
exercise price of $0.69. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, 165,695 ordinary shares for issuance under the
Fizzback Plan.
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Merced Plans
Merced Systems, Inc. 2001 Stock Plan
In 2001, Merced adopted the Merced Systems, Inc. 2001 Stock Plan, as amended (the "2001 Merced Plan"), to afford an incentive to employees and consultants of Merced and to
promote the success of Merced’s business. Under the 2001 Merced Plan, the grantees could be granted options to acquire Merced’s ordinary shares and restricted shares.
Pursuant to the terms of the Merced acquisition agreement, we assumed and converted Merced's options and replaced Merced’s restricted shares that were originally granted under the
2001 Merced Plan into stock options to purchase ordinary shares of NICE and with restricted shares of NICE, respectively.
Under the 2001 Merced Plan, the exercise price per share of incentive stock options granted to an employee shall be no less than 100% of the fair market value per share on the date of
grant, or 110% of the fair market value if the employee was a 10% shareholder of Merced at the date of grant. The exercise price per share of non-statutory stock options granted shall be no less
than 85% of the fair market value per share on the date of grant, or 110% of the fair market value if the person was a 10% shareholder of Merced at the date of grant, if required by applicable law
and, if not so required, the exercise price per share shall be determined by the plan administrator. Notwithstanding the foregoing, options may be granted with an exercise price per share other
than as required above pursuant to a merger or other corporate transaction.
An option granted under the 2001 Merced Plan is exercisable at the rate of at least 20% per year over five years from the date the option was granted. Options generally expire ten years
after the date of grant.
Merced Systems, Inc. 2011 Stock Plan
In 2011, Merced adopted the Merced Systems, Inc. 2011 Stock Plan (the "2011 Merced Plan"), to afford an incentive to employees and consultants of Merced and to promote the
success of Merced’s business. Under the 2011 Merced Plan, the grantees could be granted options to acquire Merced’s ordinary shares and restricted share units.
Pursuant to the terms of the Merced acquisition agreement, we assumed and converted Merced's options and restricted share units originally granted under the 2011 Merced Plan into
stock options to purchase ordinary shares of NICE and restricted share units of NICE, respectively.
Under the 2011 Merced Plan, the exercise price per share of incentive stock options granted to an employee shall be no less than 100% of the fair market value per share on the date of
grant, or 110% of the fair market value if the employee was a 10% shareholder of Merced at the date of grant. The exercise price per share of non-statutory stock options shall be no less than 85%
of the fair market value per share on the date of grant, or 110% of the fair market value if the person was a 10% shareholder of Merced at the date of grant, if required by applicable law and, if not
so required, the exercise price per share shall be determined by the plan administrator. Notwithstanding the foregoing, options may be granted with an exercise price per share other than as
required above pursuant to a merger or other corporate transaction.
An option granted under the 2011 Merced Plan is exercisable at the rate of at least 20% per year over five years from the date the option was granted. Options generally expire ten years
after the date of grant.
As of March 8, 2018, assumed Merced options, restricted share units and restricted shares to purchase 4,619 ordinary shares of NICE were outstanding under the 2001 Merced Plan and
the 2011 Merced Plan, at a weighted average exercise price of $14.13. We have registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, 343,288
ordinary shares for issuance under the 2001 Merced Plan and the 2011 Merced Plan.
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Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table sets forth certain information with respect to the beneficial ownership of our ordinary shares, with respect to each person known to us to be the beneficial owner of
5% or more of our outstanding ordinary shares, reported as of March 20, 2018. None of our shareholders has any different voting rights than any other shareholder.
Name and Address
Number of Shares
Percent of Shares
Beneficially
Owned (1)
Janus Henderson Group plc
201 Bishopsgate EC2M 3AE
United Kingdom
Massachusetts Financial Services Company
111 Huntington Avenue
Boston, Massachusetts 02199
__________
(1) Based upon 61,212,874 ordinary shares issued and outstanding as of March 20, 2018.
4,947,800(2)
8.1%
4,594,141(3)
7.5%
(2) Janus Henderson Group plc reported that these shares are held by managed portfolios. This information is based upon a Schedule 13G filed by Janus Henderson Group plc with the SEC
on February 13, 2018.
(3) This information is based upon a Schedule 13G/A filed by Massachusetts Financial Service Company with the SEC on February 9, 2018.
As of March 14, 2018, we had approximately 44 registered ADS holders of record in the United States, with our ADS holders holding in total approximately 49% of our outstanding
ordinary shares, as reported by JPMorgan Chase Bank, N.A., the depositary for our ADSs.
As of October 26, 2017, Migdal Insurance & Financial Holdings Ltd. (“Migdal”) reported that it held 3,005,795, or 4.95%, of our ordinary shares. This information is based upon a
Schedule 13G filed by Migdal with the SEC on October 31, 2017. Of these shares, (i) 2,791,731 ordinary shares are held for members of the public through, among others, provident funds, mutual
funds, pension funds and insurance policies, which are managed by subsidiaries of Migdal, according to the following segmentation: 1,517,114 ordinary shares are held by profit-participating life
assurance accounts, 1,102,469 ordinary shares are held by Provident funds and companies that manage Provident funds, and 172,148 ordinary shares are held by companies for the management
of funds for joint investments in trusteeship, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, and
(ii) 214,064 are beneficially held for their own account (Nostro account).
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As of December 29, 2017, Psagot Investment House Ltd. (“Psagot”) reported that it held 2,979,017, or 4.89%, of our ordinary shares. This information is based upon a Schedule 13G/A
filed by Psagot with the SEC on February 12, 2018. These securities are beneficially owned by portfolio accounts managed by Psagot Securities Ltd., Psagot Exchange Traded Notes Ltd., mutual
funds managed by Psagot Mutual Funds Ltd., and provident funds and pension funds managed by Psagot Provident Funds and Pension Ltd. managed savings managed by Psagot Insurance
Company Ltd. according to the following segmentation: 1,410,642 ordinary shares are held by portfolio accounts managed by Psagot Securities Ltd., 781,272 ordinary shares are held by Psagot
Exchange Traded Notes Ltd., 63,676 ordinary shares are held by mutual funds managed by Psagot Mutual Funds Ltd. (of this amount, 12,000 shares may also be considered beneficially owned
by Psagot Securities Ltd., but are not included in the shares beneficially owned by Psagot Securities Ltd., as indicated above), 712,203 ordinary shares are held by provident funds and pension
funds managed by Psagot Provident Funds and Pension Ltd. and 11,224 ordinary shares are held by Psagot Insurance Company Ltd. Each of the foregoing companies is a wholly-owned
subsidiary of Psagot Investment House Ltd.
To our knowledge, we are not directly or indirectly owned or controlled by another corporation or by any foreign government and there are no arrangements that might result in a
change in control of our company.
Related Party Transactions
None.
Item 8. Financial Information.
Consolidated Statements and Other Financial Information
See Item 18, “Financial Statements” in this annual report.
Legal Proceedings
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of our business. While the outcome of these matters cannot
be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash flows.
We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of
operation, except as noted below.
Patent Lawsuit by NICE
On August 27, 2015, we initiated a lawsuit in the United States District Court for the District of Delaware by filing a complaint against ClickFox for infringement of NICE's U.S. Patent No. 8,976,955
(“the ‘955 patent”) entitled “System and method for tracking web interactions with real time analytics”. On October 11, 2017, the Court of Appeals affirmed without opinion the district court’s
judgment granting ClickFox’s motion to dismiss.
California Lawsuit
In May 2009, inContact was served a lawsuit titled California College, Inc., et al., v. UCN, Inc., et al. in connection with the sale of services with those Insidesales.com, Inc. California
College originally sought damages in excess of $20.0 million. Insidesales.com and inContact filed cross-claims against one another, which they subsequently agreed to dismiss with prejudice. In
October 2011, California College reached a settlement with Insidesales.com, the terms of which have not been disclosed and remain confidential. In June of 2013, California College amended its
damages claim to $14.4 million, of which approximately $5.0 million was alleged to be pre-judgment interest. On September 10, 2013, the court issued an order on inContact's Motion for Partial
Summary Judgment. The court determined that factual disputes exist as to several of the claims, but dismissed California College's cause of action for intentional interference with prospective
economic relations and the claim for prejudgment interest. Dismissing the claim for prejudgment interest effectively reduced the claim for damages to approximately $9.2 million. The trial court
granted inContact’s motion to stay the trial without date pending an interlocutory appeal to the Utah Supreme Court of the trial court’s ruling with respect to allowing California College’s experts
to testify at trial. The briefs were filed in the matter and oral arguments were made in August 2017. The Utah Court of Appeals has yet to rule on the matter. At this stage we are unable to
evaluate the probability of a favorable or unfavorable outcome in this litigation.
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Gordon Complaint
On June 10, 2016, a complaint captioned Natalie Gordon v. inContact, Inc., et al., was filed in the Third Judicial District Court of Salt Lake County, State of Utah (the “Court”) naming as
defendants inContact and its Board of Directors (the “Gordon Action”). On August 4, 2016 the parties entered into a Memorandum of Understanding for the settlement of the three actions. The
parties have completed the negotiation of the settlement agreement, and the Utah Third District Court has approved the settlement, formally dismissing this action.
Dividends
Our Board of Directors previously approved a dividend plan under which we paid quarterly cash dividends to holders of our ordinary shares and ADRs subject to declaration by the
Board. The annual dividend amount under the dividend plan was $0.64 per share or $0.16 per share quarterly. Under Israeli law, dividends may be paid only out of profits and other surplus (as
defined in the law) as of our most recent financial statements or as accrued over a period of two years, whichever is higher, provided that there is no reasonable concern that the dividend
distribution will prevent us from meeting our existing and foreseeable obligations as they come due.
On January 6, 2017, our Board of Directors approved the termination of this dividend plan in connection with our adoption of a capital return strategy to optimize our long term growth
profile. Accordingly, we do not have any plans at this time to make any future dividend payments. Payment of future dividends, if any, will be at the discretion of our Board of Directors and will
depend on various factors, such as our statutory profits, financial condition, operating results and current and anticipated cash needs. In the event cash dividends are declared by us, we may
decide to pay such dividends in Israeli currency. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel
with non-Israeli currency may be freely repatriated in such non-Israeli currency, at the rate of exchange prevailing at the time of conversion. For more information regarding the taxation
implications of the dividend plan, see “Item 10 - Additional Information - Taxation” of this annual report.
Significant Changes
There are no significant changes that occurred since December 31, 2017, except as otherwise disclosed in this annual report and in the annual consolidated financial statements included
in this annual report.
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Item 9. The Offer and Listing.
Trading in the ADSs
Our ADSs have been quoted on the NASDAQ Stock Market under the symbol “NICEV” from our initial public offering in January 1996 until April 7, 1999, and thereafter under the
symbol “NICE.” Prior to that time, there was no public market for our ordinary shares in the United States. Each ADS represents one ordinary share. The following table sets forth, for the periods
indicated, the high and low reported market (sale) prices for our ADSs.
Annual
2013
2014
2015
2016
2017
Quarterly
Quarterly 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Quarterly 2018
First Quarter (through March 29, 2018)
Monthly
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018
March 2018 (through March 29, 2018)
On March 29, 2018, the last reported price of our ADSs was $93.93 per ADS.
JPMorgan Chase Bank, N.A. is the depositary for our ADSs. Its address is 4 New York Plaza, Floor 12, New York, New York 10004.
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$
$
$
ADSs
High
Low
$
42.12
51.75
68.38
69.79
92.33
$
$
70.84
81.16
83.95
92.33
98.48
83.95
83.78
88.52
92.33
95.65
98.06
98.48
33.63
37.08
47.95
54.12
65.59
65.59
66.57
73.65
78.49
84.49
77.24
78.49
81.35
86.01
90.36
84.49
89.28
Trading in the Ordinary Shares
Our ordinary shares have been listed on the Tel-Aviv Stock Exchange, or TASE, since 1991. Our ordinary shares are not listed on any other stock exchange and have not been publicly
traded outside Israel (other than through ADSs as noted above). The table below sets forth the high and low reported market (sale) prices of our ordinary shares (in NIS and U.S. dollars) on the
TASE. The translation into dollars is based on the daily representative rate of exchange published by the Bank of Israel.
Annual
2013
2014
2015
2016
2017
Quarterly 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Quarterly 2018
First Quarter
Monthly
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018
March 2018 (through March 29, 2018)
Ordinary Shares
High
Low
NIS
$
NIS
$
149.10
203.30
262.6
268.0
320.4
269.5
288.7
289.9
320.4
342.9
289.9
293.4
311.0
320.4
326.0
342.5
342.9
42.21
51.94
68.76
69.76
92.28
71.19
81.44
82.48
92.28
99.33
82.48
83.59
88.76
92.28
95.13
98.33
99.33
122.10
130.60
189.4
207.2
239.3
239.3
240.9
263.4
280.9
296.0
274.9
280.9
281.7
306.3
308.1
296.0
312.0
33.27
36.90
47.95
53.29
65.58
65.58
66.66
73.36
79.86
84.94
76.45
79.86
80.35
86.73
90.04
84.94
89.65
As of March 29, 2018, the last reported price of our ordinary shares on the TASE was NIS 325.7 (or $92.69) per share.
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Item 10. Additional Information.
Memorandum and Articles of Association
Organization and Register
We are a company limited by shares organized in the State of Israel under the Israeli Companies Law. We are registered with the Registrar of Companies of the State of Israel and have
the company number 52-0036872.
Objectives and Purposes
Our objectives and purposes include a wide variety of business purposes, including all kinds of research, development, manufacture, distribution, service and maintenance of products
in all fields of technology and engineering and to engage in any other kind of business or commercial activity. Our objectives and purposes are set forth in detail in Section 2 of our memorandum
of association.
Directors
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. As discussed above in Item 6, “Directors,
Senior Management and Employees – Board Practices – Outside Directors”, 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. 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 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 directorship) 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. Our officers serve at
the discretion of the Board.
The Board of Directors may meet and adjourn its meetings according to the Company’s needs but must meet at least once every three months. A meeting of the Board may be called at
the request of any two directors. The quorum required for a meeting of the Board consists of a majority of directors who are lawfully entitled to participate in the meeting and vote thereon. The
adoption of a resolution by the Board requires approval by a simple majority of the directors present at a meeting in which such resolution is proposed. In lieu of a Board meeting, a resolution
may be adopted if all of the directors lawfully entitled to vote thereon consent not to convene a meeting.
Subject to the Israeli Companies law, the Board may appoint a committee of the Board and delegate to such committee all or any of the powers of the Board, as it deems appropriate.
Under the Israeli Companies Law, the Board of Directors must appoint an internal audit committee comprised of at least three directors. The function of the internal audit committee is to review
irregularities in the management of the Company’s business and recommend remedial measures. The committee is also required, under the Israeli Companies Law, to approve certain related party
transactions and to assess our internal audit system and the performance of our internal auditor. Notwithstanding the foregoing, 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 which has three members, an audit committee which has five members, a
compensation committee which has five members, a nominations committee which has two members and a mergers and acquisitions committee which has six members. For more information on
the Company’s committees, please see Item 6, “Directors, Senior Management and Employees—Board Practices” in this annual report.
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Fiduciary Duties of Officers
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of
a duty of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any
competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any
information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder.
Approval of Certain Transactions
The Israeli Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him
or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must
also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandpar-ents, descendants, spouse’s descendants and the spouses of any of the foregoing. In addition,
the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right
to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to
have a material impact on the company’s profitability, assets or liabilities.
In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only Board approval is required unless the
articles of association of the company provide otherwise. The transaction must not be adverse to the company’s interest. Furthermore, if the transaction is an extraordinary transaction, then, in
addition to any approval stipulated by the articles of association, it also must be approved by the company’s internal audit committee and then by the Board of Directors, and, under certain
circumstances, by a meeting of the shareholders of the company. An office holder who has a personal interest in a transaction that is considered at a meeting of the Board of Directors or the
internal audit committee generally may not be present at the deliberations or vote on this matter, unless the chairman of the Board or chairman of the internal audit committee, as the case may be,
determined that the presence of such person is necessary to present the transaction to the meeting. If a majority of the directors have a personal interest in an extraordinary transaction with the
company, shareholder approval of the transaction is required.
It is the responsibility of the audit committee to determine whether or not a transaction should be deemed an extraordinary transaction. In addition, as a result of a recent amendment to
the Israeli Companies Law, the audit committee must also establish (i) procedures for the consideration of any transaction with a controlling shareholder, even if it is not extraordinary, such as a
competitive process with third parties or negotiation by independent directors, and (ii) approval requirements for controlling shareholder transactions that are not negligible.
The Israeli Companies Law applies the same disclosure requirements to a controlling share-holder of a public company, which includes a shareholder that holds 25% or more of the
voting rights if no other shareholder owns more than 50% of the voting rights in the company. Extraor-dinary transactions with a controlling shareholder or in which a controlling shareholder has
a personal interest, and the terms of management fees of a controlling shareholder or compensation of a controlling shareholder who is an office holder, require the approval of the audit
committee, the Board of Directors and the shareholders of the company by simple majority; provided that either such majority vote must include at least a simple majority of the shareholders who
have no personal interest in the transaction and are present at the meeting (without taking into account the votes of the abstaining shareholders), or that the total shareholdings of those who
have no personal interest in the transaction who vote against the transaction represent no more than two percent of the voting rights in the company. Any such extraordinary transaction whose
term is longer than three years requires further shareholder approval every three years, unless (with respect to transactions not involving management fees or employment terms) the internal
audit committee approves that a longer term is reasonable under the circumstances.
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In addition, under the Israeli Companies Law, a private placement of securities requires approval by the Board of Directors and the shareholders of the company if it will cause a person
to become a controlling shareholder or if:
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the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance;
some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
the transaction will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights or that will cause any person
to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights.
According to the Company’s articles of association, certain resolutions, such as resolutions regarding mergers and windings up, require approval of the holders of 75% of the shares
represented at the meeting and voting thereon.
Approval of Office Holder Compensation
Under the Israeli Companies Law, we are required to adopt a compensation policy, recommended by the compensation committee, and approved by the Board of Directors and the
shareholders, in that order, at least once every three years. Following the recommendation of our compensation committee and approval by our Board of Directors, our shareholders approved
such compensation policy at our 2013 annual general meeting of shareholders held on August 27, 2013, and an amended compensation policy at our 2015 annual general meeting of shareholders
held on July 9, 2015. At the Company's special general meeting held on December 21, 2016, following the recommendation of our compensation committee and approval by our Board of Directors,
our shareholders approved certain amendments to the current compensation policy. The shareholder approval requires a majority of the votes cast by shareholders, excluding any controlling
shareholder and those who have a personal interest in the matter (similar to the threshold described above). In general, all office holders’ terms of compensation – including fixed remuneration,
bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability - must comply with the company's
compensation policy. Although NASDAQ rules generally require shareholder approval when an equity based compensation plan is established or materially amended, as a foreign company we
follow the aforementioned requirements of the Israeli Companies Law.
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder generally must be
approved separately by the compensation committee, the Board of Directors and the shareholders of the company, in that order. Notwithstanding, a company's compensation committee and
board of directors are permitted to approve the compensation terms of a chief executive officer or of a director, without convening a general meeting of shareholders, provided however, that such
terms: (1) are not more beneficial than such officer’s former terms or than the terms of his predecessor, or are essentially the same in their effect; (2) are in line with the compensation policy; and
(3) are brought for shareholder approval at the next general meeting of shareholders.
102
The compensation terms of other officers require the approval of the compensation committee and the Board of Directors. An amendment of existing compensation terms of an office
holder who is not a director, if the compensation committee determines that the amendment is not material, requires the approval of the compensation committee only. Pursuant to a recent
amendment to regulations promulgated under the Israeli Companies Law governing the relaxation in transactions with interested parties - an amendment of the existing compensation terms of
office holders who are subordinate to the chief executive officer, if the amendment is not material and the changes are in line with the existing compensation policy, requires only the chief
executive officer’s approval (in accordance to such amendment, on December 21, 2016, our shareholders approved an amendment to the compensation policy, which provided our Chief Executive
Officer the authority to approve non-material changes to the compensation terms of office holders subordinated to him, without seeking the approval of the compensation committee).
Duties of Shareholders
Under the Israeli Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his or her power in the company
including, among other things, voting in a general meeting of shareholders on the following matters:
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any amendment to the articles of association;
an increase of the company’s authorized share capital;
a merger; or
approval of interested party transactions which require shareholder approval.
In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the
provisions of a company’s articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the
company. The Israeli Companies Law does not describe the substance of this duty but provides that a breach of his duty is tantamount to a breach of fiduciary duty of an officer of the company.
Exemption, Insurance and Indemnification of Directors and Officers
We provide our directors with indemnification letters whereby we agree to indemnify them to the fullest extent permitted by law. On September 19, 2011, at our 2011 annual general
meeting of shareholders, after the approval of the audit committee and the Board, our shareholders approved a modified form of indemnification letter to ensure that our directors are afforded
protection to the fullest extent permitted by law.
Exemption of Office Holders
Under the Israeli Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from
liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided the articles of association of the company allow it to do so. Our
articles of association do not allow us to do so.
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Office Holder Insurance
Our articles of association provide that, subject to the provisions of the Israeli Companies Law, including the receipt of all approvals as required therein or under any applicable law, we
may enter into an agreement to insure an office holder for any responsibility or liability that may be imposed on such office holder in connection with an act performed by such office holder in
such office holder's capacity as an office holder of us with respect to each of the following:
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a violation of his duty of care to us or to another person,
a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his act would not prejudice our interests,
a financial obligation imposed upon him for the benefit of another person,
a payment which the office holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 5728-1968, as amended (the "Securities
Law") and Litigation Expenses (as defined below) that the office holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, and
any other event, occurrence or circumstance in respect of which we may lawfully insure an office holder.
Indemnification of Office Holders
Our articles of association provide that, subject to the provisions of the Israeli Companies Law, including the receipt of all approvals as required therein or under any applicable law we
may indemnify an office holder with respect to any liability or expense for which indemnification may be provided under the Companies Law, including the following liabilities and expenses,
provided that such liabilities or expenses were imposed upon or incurred by such office holder in such office holder's capacity as an office holder of us:
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a monetary liability imposed on or incurred by an office holder pursuant to a judgment in favor of another person, including a judgment imposed on such office holder in a
settlement or in an arbitration decision that was approved by a court of law;
reasonable Litigation Expenses, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal
proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent
(mens rea) or in connection with a financial sanction;
“conclusion of a proceeding without filing an indictment” in a matter in which a criminal investigation has been instigated and “financial liability in lieu of a criminal proceeding,”
have the meaning ascribed to them under the Israeli Companies Law. The term “Litigation Expenses” shall include, without limitation, attorneys’ fees and all other costs, expenses
and obligations paid or incurred by an office holder in connection with investigating, defending, being a witness or participating in (including on appeal), or preparing to defend, be
a witness or participate in any claim or proceeding relating to any matter for which indemnification may be provided;
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reasonable Litigation Expenses, which the office holder incurred or with which the office holder was charged by a court of law, in a proceeding brought against the office holder, by
the Company, on its behalf or by another person, or in a criminal prosecution in which the office holder was acquitted, or in a criminal prosecution in which the office holder was
convicted of an offense that does not require proof of criminal intent (mens rea);
a payment which the office holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Securities Law, and Litigation Expenses that the office holder
incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law; and
any other event, occurrence or circumstance in respect of which we may lawfully indemnify an office holder.
The foregoing indemnification may be procured by us (a) retroactively and (b) as a commitment in advance to indemnify an office holder, provided that, in respect of the first bullet
above, such commitment shall be limited to (A) such events that in the opinion of the Board of Directors are foreseeable in light of our actual operations at the time the undertaking to indemnify
is provided, and (B) to the amounts or criterion that the Board of Directors deems reasonable under the circumstances; and further provided that such events and amounts or criterion are set
forth in the undertaking to indemnify, and which shall in no event exceed, in the aggregate, the greater of: (i) 25% of our shareholder’s equity at the time of the indemnification or (ii) 25% of our
shareholder’s equity at the end of fiscal year of 2010.
We have undertaken to indemnify our directors and officers pursuant to applicable law. We have obtained directors' and officers' liability insurance for the benefit of our directors and
officers. The Company currently has a directors and officers liability insurance policy limited to $100 million (the “Policy”), at an annual premium of approximately $360,664. Our internal audit
committee, Board of Directors, and shareholders have approved the Company’s “Side A” Difference in Conditions extension of the Policy, limited to an additional $25 million, which provides the
directors and officers with personal asset protection in situations when other sources of insurance or indemnification fail or are not available (the “Extended Policy”). The Extended Policy portion
is at an additional annual premium of approximately $50,000.
Limitations on Exemption, Insurance and Indemnification
The Israeli Companies Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary
liability incurred as a result of any of the following:
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a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
a breach by the office holder of his duty of care if the breach was done intentionally or recklessly (other than if solely done in negligence);
any act or omission done with the intent to derive an illegal personal benefit; or
a fine, civil fine or ransom levied on an Office Holder, or a financial sanction imposed upon an Office Holder under Israeli Law.
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Required Approvals
In addition, under the Israeli Companies Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit
committee and our Board of Directors and, if the beneficiary is a director, by our shareholders. We have obtained such approvals for the procurement of liability insurance covering our officers
and directors and for the grant of indemnification letters to our officers and directors.
Rights of Ordinary Shares
Our ordinary shares confer upon our shareholders the right to receive notices of, and to attend, shareholder meetings, the right to one vote per ordinary share at all shareholders’
meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our Board of Directors; and upon liquidation or dissolution, the right to participate
in the distribution of any surplus assets of the Company legally available for distribution to shareholders after payment of all debts and other liabilities of the Company. All ordinary shares rank
pari passu in all respects with each other. Our Board of Directors may, from time to time, make such calls as it may think fit upon a shareholder in respect of any sum unpaid in respect of shares
held by such shareholder which is not payable at a fixed time, and each shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in
installments).
Meetings of Shareholders
An annual general meeting of our shareholders shall be held once in every calendar year at such time and at such place either within or without the State of Israel as may be determined
by our Board of Directors.
Our Board of Directors may, whenever it thinks fit, convene a special general meeting at such time and place, within or without the State of Israel, as may be determined by the Board of
Directors. Special general meetings may also be convened upon shareholder request in accordance with the Israeli Companies Law and our articles of association.
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the
outstanding voting shares, unless otherwise required by applicable rules. Although NASDAQ generally requires a quorum of 33-1/3%, we have an exception under the NASDAQ rules and
follow the generally accepted business practice for companies in Israel, which have a quorum requirement of 25%. A meeting adjourned for lack of a quorum generally is adjourned to the same
day in the following week at the same time and place or any time and place as the chairman may designate with the consent of a majority of the voting power represented at the meeting and
voting on the matter adjourned. At such reconvened meeting the required quorum consists of any two members present in person or by proxy.
Mergers and Acquisitions
A merger of the Company shall require the approval of the holders of a majority of 75% of the voting power represented at the annual or special general meeting in person or by proxy or
by written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Israeli Companies Law. Upon the request of a creditor of either party of the proposed merger,
the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of
any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each
party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
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The Israeli Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would
become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares of a public company must be made by means
of a tender offer if, as a result of the acquisition, the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company.
These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the
company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of
the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many
shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the
outstanding shares. If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred
to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, but the acquirer is entitled to stipulate
that tendering shareholders forfeit their appraisal rights. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares
that will cause his shareholding to exceed 90% of the outstanding shares. Shareholders may request an appraisal in connection with a tender offer for a period of six months following the
consummation of the tender offer, but the purchaser is entitled to stipulate as a condition of such tender offer that any tendering shareholder renounce its appraisal rights.
Material Contracts
Nexidia Acquisition Agreement
On January 11, 2016, we entered into an Agreement and Plan of Merger to acquire Nexidia, a leading provider of advanced customer analytics. We acquired Nexidia for total
consideration of approximately $135.0 million in cash. The acquisition allows us to offer a combined offering, featuring analytics capabilities with accuracy, scalability and performance, enabling
organizations to expand their analytics usage in critical business use cases. Organizations will benefit from the combined offering, which features a best-in-class, analytics-based solution.
inContact Acquisition Agreement
On May 17, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with inContact Inc. and Victory Merger Sub Inc., a wholly owned subsidiary of ours (the
“Merger Sub”). On November 14, 2016, pursuant to the terms of the Merger Agreement, Merger Sub merged with and into inContact, with inContact surviving the merger as a wholly owned
subsidiary of ours. At the effective time of the merger, each outstanding share of inContact common stock (the “inContact Shares”) (other than (i) shares owned by inContact or us, (ii) for which
inContact stockholders exercised appraisal rights under Delaware law, or (iii) outstanding restricted stock) was cancelled and converted into the right to receive $14.00, without interest. Also, at
the effective time of the merger, outstanding vested inContact RSUs and stock options were cancelled in exchange for the right to receive in cash (a) in the case of RSUs, $14.00 for each
inContact share subject to such vested RSU, less any required tax withholding, and (b) in the case of stock options, the excess, if any, of $14.00 over the applicable per share exercise price for
each inContact share underlying a vested stock option, less any required tax withholding. Additionally, outstanding unvested inContact RSUs, stock options and restricted stock at the effective
time of the merger were cancelled and converted into RSUs with ADSs to be received upon settlement, options to acquire ADSs and restricted ADSs, respectively, in each case with the number
of ADSs subject to such award (and in the case of options, the exercise price) adjusted pursuant to an exchange ratio determined based upon the average closing price of ADSs for the ten
trading days immediately preceding the closing date for the transaction. Other than the number of ADSs subject to such unvested equity awards (and in the case of options, the adjusted
exercise price), the unvested equity awards remain subject to the same terms and conditions that the cancelled equity awards were subject to, including as to vesting and settlement.
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Credit Agreement
On November 14, 2016, in connection with the consummation of the inContact acquisition, we and Nice Systems entered into a secured Credit Agreement with the lenders party thereto
and JPMorgan Chase Bank, N.A., as Administrative Agent. The Credit Agreement provides for a term loan facility of $475 million and a revolving facility of $75 million. The Credit Agreement is
guaranteed by most of our Israeli and U.S. material subsidiaries, including NICE Systems, and secured by substantially all assets of our and the guarantors assets, subject to certain customary
exceptions.
Unless terminated earlier, loans outstanding under the term loan facility mature and commitments under the revolving facility expire on November 14, 2021. The term loan amortizes in
equal quarterly installments in annual amounts (expressed as percentages of the loans made under the term loan facility on November 14, 2016 (the initial funding date of the term loan facility)) at
the repayment rate of 1.25% during the period from March 2017 to December 2019 and 2.50% during the period from March 2020 to September 2021, with the remaining balance due on the final
maturity date of the term loan facility.
We have the right to prepay borrowings under the Credit Agreement and to reduce the unutilized portion of the revolving credit facility, in each case, at any time without premium or
penalty (except for Eurodollar breakage fees, if any). In January 2017, we used the net proceeds of the Notes offering described below to repay a principal amount of $260 million, which resulted
in $5.3 million amortization of debt issuance costs. In addition, the contractual principal payments for the long term loan have changed and we will pay the entire remaining principal of $215
million on the final maturity date of the term loan facility. We are required to prepay borrowings under the term loan facility with all of the net cash proceeds of sales or dispositions of assets or
other property, subject to certain reinvestment rights and other exceptions. The interest rates under the Credit Agreement are variable based on LIBOR or an alternate base rate at the time of the
borrowing, plus a margin to be determined based on our leverage as measured by a ratio of consolidated total net indebtedness to consolidated EBITDA (the “Consolidated Total Net Leverage
Ratio”) and ranging from 1.25% to 2.00%, in the case of LIBOR rate loans, or 0.25% to 1.00%, in the case of base rate loans. A commitment fee will accrue on the average daily unused portion of
the revolving facility at the rate ranging from 0.25% to 0.50%, depending on the Consolidated Total Net Leverage Ratio, and is initially set at 0.375% per annum.
The Credit Agreement contains customary covenants, which include, among others, limitations or restrictions on the incurrence of indebtedness, the incurrence of liens and entry into
sales and leaseback transactions, mergers, transfers, leases, licenses, sublicenses or dispositions of any asset, including any Equity Interest (as defined in the Credit Agreement) owned by us or
any of our subsidiaries, transactions with affiliates and certain transactions limiting the ability of subsidiaries to pay dividends, in each case, subject to certain exceptions. The Credit Agreement
also includes a requirement, to be tested quarterly, that we maintain a Consolidated Total Net Leverage Ratio, as of the last day of any fiscal quarter ending on or after March 31, 2017 and on or
prior to December 31, 2018, that does not exceed 3.00 to 1.00 and as of the last day of any fiscal quarter ending thereafter, does not exceed 2.50 to 1.00. For these ratios, consolidated EBITDA and
consolidated interest expense are calculated in a manner defined in the Credit Agreement. The Credit Agreement also includes customary events of defaults.
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Notes and Indenture
On January 18, 2017, NICE Systems issued $287.5 million aggregate principal amount of the Notes. The Notes are the general unsecured obligations of NICE Systems, guaranteed by us.
The sale of the Notes generated net proceeds of approximately $260.1 million. The Notes were issued pursuant to an indenture (the “Indenture”) among us, NICE Systems and U. S. Bank
National Association, as trustee (the “trustee”).
The Notes bear interest at a fixed rate of 1.25% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2017. The Notes will mature on
January 15, 2024, unless earlier prepaid, redeemed or exchanged, and are not redeemable at NICE Systems’ option prior to their maturity date, except in the event of certain tax law changes.
Subject to satisfaction of certain conditions and during certain periods, at the option of the holders the Notes are exchangeable for (at our election) (i) cash, (ii) ADSs or (iii) a
combination thereof. The exchange rate was initially set at 12.0260 ADSs per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $83.15 per ADS). The
exchange rate is subject to adjustment in some events. In addition, following certain corporate events that occur prior to the maturity date or NICE Systems’ delivery of a notice of tax redemption,
in certain circumstances NICE Systems will increase the exchange rate for a holder who elects to exchange its Notes in connection with such a corporate event or tax redemption, as the case may
be.
If we or NICE Systems undergo a fundamental change (as defined in the Indenture), holders may require NICE Systems to prepay for cash all or part of their Notes at a prepayment price
equal to 100% of the principal amount of the Notes to be prepaid, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change prepayment date.
The Indenture contains customary events of default. In the case of an event of default arising from certain events of bankruptcy, insolvency or reorganization, with respect to us, NICE
Systems or any of our subsidiaries that is a significant subsidiary (as defined in the Indenture), all outstanding Notes will become due and payable immediately without further action or notice. If
any other event of default, other than for the failure to file reports described below, occurs and is continuing, then the Trustee or the holders of at least 25% in principal amount of the then
outstanding Notes may declare the Notes to be due and payable. The Indenture further provides that with respect to an event of default arising from the Company’s failure to comply with the
obligations to timely file any document or report that it is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as applicable, we may elect to pay
additional interest on the Notes as the sole remedy for such event of default during the period indicated below. Additional interest will accrue on the Notes at a rate equal to (i) 0.25% per annum
of the principal amount of the Notes outstanding for each day during the period beginning on, and including, the date on which such event of default first occurred and ending on the earlier of
(x) the date on which such event of default is cured or validly waived and (y) the 90th day immediately following, and including, the date on which such event of default first occurred and (ii) if
such event of default has not been cured or validly waived prior to the 91st day immediately following, and including, the date on which such event of default first occurred, 0.50% per annum of
the principal amount of notes outstanding for each day during the period beginning on, and including, the 91st day immediately following, and including, the date on which such event of default
first occurred and ending on the earlier of (x) the date on which the event of default is cured or validly waived and (y) the 180th day immediately following, and including, the date on which such
event of default first occurred.
Exchange Controls
Holders of ADSs are able to convert dividends and liquidation distributions into freely repatriable non-Israeli currencies at the rate of exchange prevailing at the time of repatriation,
pursuant to regulations issued under the Currency Control Law, 5738–1978, provided that Israeli income tax has been withheld by us with respect to amounts that are being repatriated to the
extent applicable or an exemption has been obtained.
Our ADSs may be freely held and traded pursuant to the General Permit and the Currency Control Law. The ownership or voting of ADSs by non-residents of Israel, except with respect
to citizens of countries that are in a state of war with Israel, are not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
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Taxation
The following is a discussion of Israeli and United States tax consequences material to our shareholders. The discussion is not intended, and should not be construed, as legal or
professional tax advice and does not exhaust all possible tax considerations.
Holders of our ADSs should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ADSs,
including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
The following is a summary of the principal tax laws applicable to companies in Israel, with special reference to their effect on us. The following also contains a discussion of the material
Israeli tax consequences to purchasers of our ordinary shares or ADSs. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his
or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. To the extent that the discussion is based on new tax legislation which has
not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts. The
discussion is not intended, and should not be construed, as a legal or professional tax advice and is not exhaustive of all possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on taxable income at the rate of 25% for the 2016 tax year, 24% for the 2017 tax year and 23% for the 2018 tax year and thereafter.
Israeli companies are generally subject to capital gains tax at the corporate tax rate. However, the effective tax rate payable by a company that generates income qualifying for benefits
under the Israeli Law for the Encouragement of Capital Investments-1959 may be considerably less.
We are permitted to measure our Israeli taxable income in U.S. dollars pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for doing so.
We believe that we meet, and will continue to meet, the necessary conditions and as such, we measure our results for tax purposes based on the U.S. dollar/NIS exchange rate on December 31 of
the relevant tax year.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959, as amended.
We have derived and expect to continue to derive significant tax benefits in Israel relating to our “Approved, Privileged, and Preferred Enterprise” programs for which we were eligible
up to and including the 2016 tax year, and relating to the newly introduced Preferred Technological Enterprise program for the 2017 and subsequent tax years, pursuant to the Law for
Encouragement of Capital Investments-1959 (the “Investments Law”), including its various amendments. To be eligible for these tax benefits, one must continue to meet certain conditions. In
the event we are considered as having failed to comply with these conditions, in whole or in part, the eligibility for the benefits may be canceled and we may be required to refund the relevant
amount, including interest and inflation adjustments. As of December 31, 2017, we believe that we are in compliance with all the conditions required by the Investments Law.
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For the 2013 through 2016 tax years, our Israeli entities were eligible for benefits under the “Preferred Enterprise” regime, which included the following benefits:
ö A reduced flat corporate tax rate for industrial enterprises, provided that more than 25% of their annual income was derived from export. In 2016 the reduced tax rate was 16% for
industrial facilities located in Israel (except for Development Area A).
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The reduced tax rates applied on “Preferred Income” were not contingent upon making a minimum qualifying investment in productive assets.
ö A reduced dividend withholding tax rate of 15% for tax year 2013, and 20% for tax year 2014 and thereafter on dividends paid from Preferred Income to both Israeli and non-Israeli
investors, with an exemption from such withholding tax applying to dividends paid to an Israeli company.
In December 2016, the Israeli Knesset passed a number of changes to the Investments Law. These changes became retroactively effective beginning January 1, 2017, following
promulgation of Regulations by the Finance Ministry in May 2017 to implement the “Nexus Principles” based on OECD guidelines published as part of the Base Erosion and Profit Shifting
(BEPS) project. The Regulations provide rules for implementation of the new tax regime that applies to us effective from the 2017 tax year and onwards.
Benefits under the new “Preferred Technology Enterprise” regime, effective for the 2017 and subsequent tax years, will include:
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A reduced 12% corporate tax rate (or 7.5% for entities located in Development Area A) on qualifying income deriving from eligible intellectual property (“Preferred Technology
Income”), subject to a number of base conditions being fulfilled, including a minimal amount or ratio of annual R&D expenditure and R&D employees, as well as having at least 25%
of annual income derived from export.
A 12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset was initially purchased from a foreign resident at an
amount of NIS 200 Million or more.
A withholding tax rate of 20% for dividends paid from Preferred Technology Income (with an exemption from such withholding tax applying to dividends paid to an Israeli
company). Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to certain conditions regarding percentage of foreign ownership of the
distributing entity.
The effective tax rate applying to our Preferred Technology Enterprise is calculated based on the Nexus Principals introduced by the OECD, taking into account eligible and ineligible
R&D expenses incurred by us, as prescribed in the Regulations.
Income from sources other than the Preferred Technology Income are taxable at regular corporate tax rates.
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Full details regarding our Preferred and Preferred Technology Enterprises may be found in Note 12(a)(1) of our Consolidated Financial Statements.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. These expenses must relate to
scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research, and the research and development must be
conducted for the promotion of the company and carried out by or on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the
sum of any funds received through government grants for the financing of such scientific research and development projects. Expenditures not so approved are deductible over a three-year
period.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies (as defined below) are entitled to the following tax benefits,
among others:
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deductions over an eight-year period for purchases of know-how and patents;
deductions over a three-year period of expenses involved with the issuance and listing of shares on a stock market;
the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies; and
accelerated depreciation rates on equipment and buildings.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an
“Industrial Company” is defined as a company which is an Israeli resident for tax purposes, which at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of
income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it.
An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity. We believe that we currently qualify as an Industrial
Company within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will
be available in the future.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel,
including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of
residence provides otherwise. The Tax Ordinance distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain equivalent to the increase
of the relevant asset’s purchase price attributable to an increase in the Israeli consumer price index, or a foreign currency exchange rate, between the date of purchase and the date of sale. The
real gain is the excess of the total capital gain over the inflationary surplus.
The following discussion refers to the sale of our ordinary shares. However, the same tax treatment would apply to the sale of our ADSs.
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Taxation of Israeli Residents
As of January 1, 2012, the tax rate generally applicable to the capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless
such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e., such shareholder holds directly or indirectly, including jointly with
others, at least 10% of any means of control in the company) in which case the tax rate will be 30%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of
listed shares. However, different tax rates may apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.
As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the CPI each year), will be subject to an additional tax,
referred to as Income Surtax, at the rate of 2% on their taxable income for such tax year which is in excess of such threshold. Under an amendment enacted in December 2016 to the Tax Ordinance,
for tax year 2017 and thereafter the rate of High Income Tax was increased to 3% and will be applicable to annual income exceeding NIS 640,000 (linked to the CPI each year). For this purpose
taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions.
Taxation of Non-Israeli Residents
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE provided such gains did not derive from
a permanent establishment of such shareholders in Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies
publicly traded on a recognized stock market outside of Israel, provided such shareholders did not acquire their shares prior to the issuer’s initial public offering (in which case a partial exemption
may be available), that the gains did not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to such exemption if Israeli
residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.
In addition, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty), and who holds ordinary shares
as a capital asset, is also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in
Israel. If the above conditions are not met, the U.S. resident would be subject to Israeli tax, to the extent applicable. However, under the U.S.-Israel Tax Treaty, the gain would be treated as
foreign source income for United States foreign tax credit purposes and such U.S. resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed
on such sale, exchange or disposition, subject to the limitations under the United States federal income tax laws applicable to foreign tax credits.
Taxation of Dividends Paid on our Ordinary Shares
The following discussion refers to dividends paid on our ordinary shares. However, the same tax treatment would apply to dividends paid on our ADSs.
113
Taxation of Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock
dividends. As of January 1, 2012, the tax rate applicable to such dividends is 25% or 30% for a shareholder that is considered a significant shareholder at any time during the 12-month period
preceding such distribution. Dividends paid out of profits sourced from ordinary income are subject to withholding tax at the rate of 25% or 30%. Dividends paid from income derived from our
Approved and Privileged Enterprises are subject to withholding tax at the rate of 15%. Dividends paid as of January 1, 2014 from income derived from our Preferred Enterprise and Preferred
Technology Enterprise will be subject to withholding tax at the rate of 20%. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce
shareholders’ tax liability.
All dividend distributions to Israeli resident corporations are not subject to a withholding tax.
For information with respect to the applicability of Income Surtax on distribution of dividends, please see "Capital Gains Tax on Sales of Our Ordinary Shares" and "Taxation of Israeli
Residents" above in this Item 10.
Taxation of Non-Israeli Residents
Non-residents of Israel, both companies and individuals, are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, at the aforementioned rates
applicable to Israeli residents, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.
Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on dividends paid by us is 25%. The U.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding tax
rate on dividends paid by an Israeli company to a U.S. corporation owning at least 10% or more of such Israeli company’s issued voting power for, in general, the part of the tax year which
precedes the date of payment of the dividend and the entire preceding tax year. The lower 12.5% rate applies only to dividends paid from regular income (and not derived from an Approved,
Privileged or Preferred Enterprise) in the applicable period and does not apply if the company has more than 25% of its gross income derived from certain types of passive income (if the
conditions mentioned above are met, dividends from income of an Approved, Privileged or Preferred Enterprise are subject to a 15% withholding tax rate under the U.S.-Israel Tax Treaty).
Residents of the United States generally will have withholding tax in Israel deducted at source. They may be entitled to a credit or deduction for United States federal income tax purposes in the
amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the duty to file tax returns in Israel
with respect to such income, provided such income was not derived from a business conducted in Israel by the taxpayer.
U.S. Federal Income Tax Considerations
The following is a summary of the material U.S. Federal income tax consequences that apply to U.S. holders (defined below) who hold ADSs as capital assets for tax purposes. This
summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing final, temporary and proposed regulations thereunder, judicial decisions and published positions
of the Internal Revenue Service and the U.S.-Israel income tax treaty in effect as of the date of this annual report, all of which are subject to change at any time (including changes in
interpretation), possibly with retroactive effect. On December 22, 2017, the United States enacted the U.S. Tax Reform which alters significantly the U.S. Federal income tax system, generally
beginning in 2018. Given the complexity of this new law, U.S. holders should consult their own tax advisors regarding its potential impact on the U.S. Federal income tax consequences to them in
light of their particular circumstances.
114
This summary is also based in part on representations by JPMorgan Chase Bank, N.A., the depositary for our ADSs, and assumes that each obligation under the Deposit Agreement
between us and JPMorgan Chase Bank, N.A. and any related agreement will be performed in accordance with its terms.
This summary does not address all U.S. Federal income tax matters that may be relevant to a particular prospective holder or all tax considerations that may be relevant with respect to an
investment in ADSs.
This summary does not address tax considerations applicable to a holder of an ADS that may be subject to special tax rules including, without limitation, the following:
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ö
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ö
ö
ö
ö
ö
ö
ö
ö
ö
dealers or traders in securities, currencies or notional principal contracts;
financial institutions;
insurance companies;
real estate investment trusts;
banks;
investors subject to the alternative minimum tax;
tax-exempt organizations;
regulated investment companies;
investors that actually or constructively own 10 percent or more of our voting shares;
investors that will hold the ADSs as part of a hedging or conversion transaction or as a position in a straddle or a part of a synthetic security or other integrated transaction for
U.S. Federal income tax purposes;
investors that are treated as partnerships or other pass through entities for U.S. Federal income tax purposes and persons who hold the ADSs through partnerships or other
pass through entities;
investors whose functional currency is not the U.S. dollar; and
expatriates or former long-term residents of the United States.
This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local
or foreign taxation or the indirect effects on the holders of equity interests in a holder of an ADS.
You are urged to consult your own tax advisor regarding the foreign and U.S. Federal, state and local and other tax consequences of an investment in ADSs.
115
For purposes of this summary, a “U.S. holder” is a beneficial owner of ADSs that is, for U.S. Federal income tax purposes:
ö
ö
ö
ö
an individual who is a citizen or a resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any political
subdivision thereof;
an estate whose income is subject to U.S. Federal income tax regardless of its source; or
a trust if:
(a)
(b)
a court within the United States is able to exercise primary supervision over administration of the trust; and
one or more United States persons have the authority to control all substantial decisions of the trust.
If an entity that is classified as a partnership for U.S. federal tax purposes holds ADSs, the U.S. federal income tax treatment of its partners will generally depend upon the status of the
partners and the activities of the partnership. Entities that are classified as partnerships for U.S. federal tax purposes and persons holding ADSs through such entities should consult their own
tax advisors.
In general, if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. Federal income tax purposes. Accordingly, no gain or loss
will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.
U.S. Taxation of ADSs
Distributions
Subject to the discussion under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of any Israeli taxes withheld from these
distributions (see “Israeli Tax Considerations”), actually or constructively received by a U.S. holder with respect to ADSs will be taxable to the U.S. holder as a dividend to the extent of our
current and accumulated earnings and profits as determined under U.S. Federal income tax principles. Distributions in excess of earnings and profits will be non-taxable to the U.S. holder to the
extent of, and will be applied against and reduce, the U.S. holder’s adjusted tax basis in the ADSs. Distributions in excess of earnings and profits and such adjusted tax basis will generally be
taxable to the U.S. holder as a capital gain from the sale or exchange of property. We do not maintain calculations of our earnings and profits under U.S. Federal income tax principles. If we do not
report to a U.S. holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as
a non-taxable return of capital or as a capital gain under the rules described above. The amount of any distribution of property other than cash will be the fair market value of that property on the
date of distribution. The U.S. holder will not, except as provided by Section 245 of the Code, be eligible for any dividends received deduction in respect of the dividend otherwise allowable to
corporations.
Under the Code, certain dividends received by non-corporate U.S. holders will be subject to a maximum income tax rate of 20%. This reduced income tax rate is only applicable to
dividends paid by a “qualified foreign corporation” that is not a “passive foreign investment company” and only with respect to shares held by a qualified U.S. holder (i.e., a non-corporate
holder) for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). We should be considered a qualified foreign corporation
because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the U.S., which includes an exchange of information program, and (ii) the ADSs are readily tradable on
an established securities market in the U.S. In addition, based on our current business plans, we do not expect to be classified as a “passive foreign investment company” (see “Passive Foreign
Investment Companies” below). Accordingly, dividends paid by us to individual U.S. holders on shares held for the minimum holding period should be eligible for the reduced income tax rate. In
addition to the income tax on dividends discussed above, certain non-corporate U.S. holders will also be subject to the 3.8% Medicare tax on dividends as discussed below under “Medicare Tax
on Unearned Income”.
116
The amount of any distribution paid in a currency other than U.S. dollars (a “foreign currency”) including the amount of any withholding tax thereon, will be included in the gross
income of a U.S. holder in an amount equal to the U.S. dollar value of the foreign currencies calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the
foreign currencies are converted into U.S. dollars. If the foreign currencies are converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize
foreign currency gain or loss in respect of the dividend. If the foreign currencies received in the distribution are not converted into U.S. dollars on the date of receipt, a U.S. holder will have a
basis in the foreign currencies equal to its U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the foreign currencies will be treated as
ordinary income or loss.
Generally, dividends received by a U.S. holder with respect to ADSs will be treated as foreign source income for the purposes of calculating that holder’s foreign tax credit limitation.
Subject to certain conditions and limitations, any Israeli taxes withheld on dividends at the rate provided by the U.S.-Israel tax treaty may be deducted from taxable income or credited against a
U.S. holder’s U.S. Federal income tax liability. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to “passive” income and “general” income.
The rules relating to foreign tax credits and the timing thereof are complex. U.S. holders should consult their own tax advisors regarding the availability of a foreign tax credit under their particular
situation.
Sale or Other Disposition of ADSs
If a U.S. holder sells or otherwise disposes of its ADSs, gain or loss will be recognized for U.S. Federal income tax purposes in an amount equal to the difference between the amount
realized on the sale or other disposition and such holder’s adjusted tax basis in the ADSs. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such
gain or loss generally will be a capital gain or loss, and will be long-term a capital gain or loss if the holder had held the ADSs for more than one year at the time of the sale or other disposition.
Long-term capital gains realized by individual U.S. holders generally are subject to a lower marginal U.S. Federal income tax rate (currently up to 20%) than the marginal tax rate on ordinary
income. In addition to the income tax on gains discussed above, certain non-corporate U.S. holders will also be subject to the 3.8% Medicare tax on net gains as discussed below under
“Medicare Tax on Unearned Income”. Under most circumstances, any gain that a holder recognizes on the sale or other disposition of ADSs will be U.S. sourced for purposes of the foreign tax
credit limitation and any recognized losses will be allocated against U.S. source income.
If a U.S. holder receives foreign currency upon a sale or exchange of ADSs, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such foreign currency
will be ordinary income or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. However, if such foreign currency is
converted into U.S. dollars on the date received by the U.S. holder, the U.S. holder generally should not be required to recognize any gain or loss on such conversion.
A U.S. holder who holds shares through an Israeli stockbroker or other Israeli intermediary may be subject to Israeli withholding tax on any capital gain recognized if the U.S. holder
does not obtain approval of an exemption from the Israeli Tax Authorities or claim any allowable refunds or reductions. U.S. holders are advised that any Israeli tax paid under circumstances in
which an exemption from (or a refund of or a reduction in) such tax was available will not give rise to a deduction or credit for foreign taxes paid for U.S. federal income tax purposes. If applicable,
U.S. holders are advised to consult their Israeli stockbroker or intermediary regarding the procedures for obtaining an exemption or reduction.
117
Medicare Tax on Unearned Income
Certain U.S. holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on all or a portion of their “net investment income,” which includes dividends and
net gains from the sale or other dispositions of ADSs (other than ADSs held in a trade or business).
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either 75% or more of our gross income is
passive income, or at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes
dividend, interest, royalty, rent, annuity and the excess of gain over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal
income tax purposes, highly complex rules would apply to U.S. holders owning ADSs.
Based on our estimated gross income, the average value of our gross assets and the nature of our business, we do not believe that we will be classified as a PFIC in the current taxable
year. Our status in any taxable year will depend on our assets and activities in each year and because this is a factual determination made annually at the end of each taxable year, there can be no
assurance that we will not be considered a PFIC for any future taxable year. If we were treated as a PFIC in any year during which a U.S. holder owns ADSs, certain adverse tax consequences
could apply. Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.
You are urged to consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising from the ownership and disposition
(directly or indirectly) of an interest in a PFIC.
Backup Withholding and Information Reporting
Payments of dividends with respect to ADSs and the proceeds from the sale, retirement, or other disposition of ADSs made by a U.S. paying agent or other U.S. intermediary will be
reported to the IRS and to the U.S. holder as may be required under applicable U.S. Treasury regulations. We, or an agent, a broker, or any paying agent, as the case may be, may be required to
withhold tax (backup withholding), currently at the rate of 28%, if a non-corporate U.S. holder that is not otherwise exempt fails to provide an accurate taxpayer identification number and comply
with other IRS requirements concerning information reporting. Certain U.S. holders (including, among others, corporations and tax-exempt organizations) are not subject to backup withholding.
Any amount of backup withholding withheld may be used as a credit against your U.S. Federal income tax liability provided that the required information is timely furnished to the IRS. U.S.
holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.
Foreign Asset Reporting
Certain U.S. Holders who are individuals are required to report information relating to an interest in our ADSs on IRS Form 8938, subject to certain exceptions (including an exception for
shares held in accounts maintained by financial institutions). U.S. Holders are encouraged to consult their tax advisors regarding their information reporting obligations, if any, with respect to
their ownership and disposition of our ADSs.
118
Documents on Display
We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended. As a “foreign private issuer” we are exempt from the rules
and regulations under the Securities Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting
and “short-swing” profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file
reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. NASDAQ rules generally require
that companies send an annual report to shareholders prior to the annual general meeting, however we rely upon an exception under the NASDAQ rules and follow the generally accepted
business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the
SEC and post a copy on our website. We also furnish to the SEC quarterly reports on Form 6-K containing unaudited financial information after the end of each of the first three quarters.
You may read and copy any document we file with the SEC at its public reference facilities at, 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices at 500 West
Madison Street, Suite 1400, Chicago, IL 60661-2511. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the
SEC. The address of this web site is http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. In addition, our ADSs are
quoted on the NASDAQ Global Select Market, so our reports and other information can be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
Item 11.
Quantitative and Qualitative Disclosures About Market Risk.
General
Market risks relating to our operations result primarily from weak economic conditions in the markets in which we sell our products and changes in interest and exchange rates. To
manage the volatility related to the latter exposure, we may enter into various derivative transactions. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings
and cash flows associated with changes in currency exchange rates. It is our policy and practice to use derivative financial instruments only to manage such exposures. We do not use financial
instruments for trading purposes and we are not a party to any leveraged derivative.
Foreign Currency Risk
We conduct our business primarily in U.S. dollars but also in the currencies of Israel, United Kingdom, the European Union and India as well as other currencies. Thus, we are exposed
to foreign exchange fluctuations, primarily in NIS, GBP, EUR and INR. We monitor foreign currency exposure and from time to time we may use various instruments to preserve the value of sale
transactions and commitments, however, this cannot assure us protection against risks of currency fluctuations. For more information regarding foreign currency related risks, please refer to Item
3, “Key Information—General Risks Relating to Our Business” of this annual report. We use currency forward contracts and option contracts in order to protect against the increase in value of
forecasted non-dollar currency cash flows and to hedge future anticipated payments.
119
As of December 31, 2017, we had outstanding currency option and forward contracts to hedge payroll and facilities expenses, denominated in NIS and INR, in the total amount of
approximately $54.0 million. The fair value of those contracts was approximately $1.25 million. These transactions were for a period of up to one year.
The following table details the balance sheet exposure (i.e., the difference between assets and liabilities) in our main foreign currencies, as of December 31, 2017, against the relevant
functional currency.
Foreign
currencies
USD
GBP
EUR
CAD
AUD
MXN
CHF
JPY
INR
SGD
HKD
ILS
Other currencies
USD
GBP
EUR
CAD
MXN
AUD
BRL
SGD
Functional currencies
(In U.S. dollars in millions)
-
10.7
6.8
2.4
3.3
2.7
(0.1)
1.3
(6.3)
(4.2)
(3.3)
(3.0)
0.1
12.1
-
20.9
0.3
(0.0)
0.0
0.4
(0.0)
-
0.1
-
-
0.0
(0.8)
(0.0)
-
-
-
-
-
-
-
-
-
-
-
(2.9)
-
-
-
-
-
-
-
-
-
-
-
-
1.9
-
-
-
-
-
-
-
-
-
-
-
-
1.2
-
-
-
-
-
-
-
-
0.0
-
-
-
(2.4)
-
-
-
-
-
-
-
-
-
-
-
-
Other
currencies
-
-
-
-
-
-
-
-
-
-
-
-
) (0.0)
(1.3)
(0.0)
(0.0)
-
(0.0)
-
-
-
-
-
(0.0)
-
(0.4)
The table below presents the fair value of firmly committed transactions for lease obligations denominated in currencies other than the functional currency:
Less than 1 year
1-3 years
3-5 years
Over 5 years
Total
Interest Rate Risk
New Israeli
Shekel
(In U.S. dollars in millions)
Other
currencies
Total
5.70
10.74
10.74
-
27.18
0.88
1.55
1.37
2.75
6.55
6.58
12.29
12.11
2.75
33.73
We are subject to interest rate risk on our investments and on our borrowings.
In November 2016 we completed the acquisition of inContact and utilized $475 million in debt financing with a variable interest rate toward payment of the consideration in the
transaction.
As of December 31, 2017 the outstanding principal amount of the term debt was $215 million.
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The floating rate term loan is exposed to a market risk due to fluctuations in interest rates which may affect our interest expense.
On January 18, 2017 we issued $287.5 million aggregate principal amount of the Notes. The Notes bear interest at a fixed rate of 1.25% per year.
Our outstanding debt obligations, the corresponding interest rates, currency and repayment schedules as of December 31, 2017 are set forth in the table below in U.S. dollar equivalent
terms:
Currency
Fixed Rate:
Floating Rate:
USD
USD
Total:
Debt issuance costs, net of
amortization
Unamortized discount
Total:
Total
amount
Interest
rate
2018
2019
2020
(U.S. dollars in millions)
2021
2022
2023 &
thereafter
$
287,500
1.25%
$
287,500
3.30%
215,000
$
215,000
$
287,500
215,000
502,500
(8,668)
(46,190)
447,642
$
Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interest income, interest expense and the fair market value of our marketable
securities portfolio.
Our marketable securities portfolio consists of investment-grade corporate debentures, U.S. Government agencies and U.S. treasuries. As of December 31, 2017, 48.4% of our portfolio
was in such securities.
We invest in dollar deposits with U.S. banks, European banks, Israeli banks and money market funds. As of December 31, 2017, 51.6% of our portfolio was in such deposits. Since these
investments are for short periods, interest income is sensitive to changes in interest rates.
The weighted average duration of the securities portfolio, as of December 31, 2017, is 1.6 years. The securities in our marketable securities portfolio are rated generally as A- according to
Standard and Poor’s rating or A3, according to Moody’s rating. Securities representing 3% of the marketable securities portfolio are rated as AAA; securities representing 37% of the marketable
securities portfolio are rated as AA; securities representing 59% of the marketable securities portfolio are rated as A; and securities representing 1% of the marketable securities portfolio are
rated below A- after being downgraded during the last two years .
121
The table below presents the fair value of marketable securities which are subject to risk of changes in interest rate, segregated by maturity dates:
Corporate debentures
U.S. treasuries
U.S. government agencies
Total
Amortized Cost
Up to 1 year
63.0
-
1.0
64.0
1-3 years
122.5
-
-
122.5
4-5 years
4.3
7.0
-
11.3
Total
189.8
1.0
197.8
Up to 1 year
63.0
-
1.0
64.0
Estimated fair value
1-3 years
121.8
-
-
121.8
4-5 years
4.2
6.8
-
11.0
Total
189.0
6.8
1.0
196.8
Other risks and uncertainties that could affect actual results and outcomes are described in Item 3, “Key Information—Risk Factors” in this annual report.
Item 12.
Description of Securities Other than Equity Securities.
American Depositary Shares and Receipts
Set forth below is a summary of certain provisions in relation to charges and other payments under the Deposit Agreement, as amended, among NICE, JPMorgan Chase Bank, N.A. as
depositary (the "Depositary"), and the owners and holders from time to time of ADRs issued thereunder (the “Deposit Agreement”). This summary is not complete and is qualified in its entirety
by the Deposit Agreement, a form of which has been filed as Exhibit 1 to the Registration Statement on Form F-6 (Registration No. 333-203623) filed with the SEC on April 24, 2015.
Charges of the Depositary
The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights
and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting
the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, $0.05 for each ADS
issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share
distribution, rights or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued
(including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADSs or the deposited securities or a distribution of
ADSs), whichever is applicable:
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a fee of $1.50 per ADR for transfers of certificated or direct registration ADRs;
a fee of up to $0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
a fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis
during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in
the manner described in the next succeeding provision);
a fee for the reimbursement of such fees, charges and expenses as are incurred by the depositary or any of its agents (including, without limitation, the custodian and expenses incurred
on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of
the shares or other deposited securities, the sale of securities (including, without limitation, deposited securities), the delivery of deposited securities or otherwise in connection with the
depositary's or its custodian's compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate basis against holders as of the record date
or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other
cash distributions);
122
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ö
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stock transfer or other taxes and other governmental charges;
cable, telex and facsimile transmission and delivery charges incurred at the request of an ADR holder in connection with the deposit or delivery of shares;
transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities;
in connection with the conversion of foreign currency into U.S. dollars, the fees, expenses and other charges charged by JPMorgan Chase Bank, N.A. or its agent (which may be a
division, branch or affiliate) so appointed in connection with such conversion; and
fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage or execute any public or private sale of securities under the deposit agreement.
The depositary may generally refuse to provide services until it is reimbursed applicable amounts, including stock transfer or other taxes and other governmental charges, and is paid its
fees for applicable services.
The fees and charges an ADR holder may be required to pay may vary over time and may be changed by us and by the depositary. Our ADR holders will receive prior notice of the
increase in any such fees and charges.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the
depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Fees paid by the Depositary
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program upon such terms and conditions as we
and the depositary may agree from time to time. The depositary may make available to us a set amount or a portion of the depositary fees charged in respect of the ADR program or otherwise
upon such terms and conditions as we and the depositary may agree from time to time.
From January 1, 2017 to December 31, 2017, NICE received from the depositary $123,509 as reimbursement for its expenses incurred in relation to the maintenance and administration of
the ADR program.
123
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
PART II
None.
Item 15. Controls and Procedures.
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of NICE’s management, including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of NICE’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NICE’s disclosure controls and procedures were effective as of such date.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 15d-15(f) under the Securities
Exchange Act. Our internal control over our financial reporting system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective can only provide
reasonable assurance with respect to financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. Our management based its assessment on criteria established in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management has
concluded that, as of December 31, 2017, our internal control over financial reporting is effective.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer, a member of EY Global independently assessed the effectiveness of our internal control over
financial reporting and has issued an attestation report, which is included under Item 18 on page F-3 of this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably
likely to materially affect, our internal control over financial reporting.
124
Item 16A. Audit Committee Financial Expert.
Our Board of Directors has determined that each of Dan Falk and Yocheved Dvir meets the definition of an audit committee financial expert, as defined in Item 407 of Regulation S-K, and
is independent under the applicable regulations.
Item 16B. Code of Ethics.
We have adopted a Code of Ethics that applies to our principal executive and financial officers, and that also applies to all of our employees. The Code of Ethics is publicly available on
our website at www.nice.com. Written copies are available upon request without charge. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of
this code to our chief executive officer, principal financial officer or corporate controller, we will either disclose the nature of such amendment or waiver on our website or in our annual report on
Form 20-F.
Item 16C. Principal Accountant Fees and Services.
Fees Paid to Independent Auditors
Fees billed or expected to be billed by Kost, Forer, Gabbay & Kasierer, a member of EY Global, and other members of EY Global for professional services for each of the last two fiscal
years were as follows:
Services Rendered
Audit (1)
Audit-related (2)
Tax (3)
Total
2016 Fees
2017 Fees
$
$
$
$
799,489
560,123
190,761
1,550,373
$
$
$
$
953,414
197,097
650,119
1,800,630
(1)
(2)
(3)
Audit fees refer to audit services for each of the years shown in this table which include fees associated with the annual audit for each of 2016 and 2017 (including an audit in each such
year in accordance with section 404 of the Sarbanes-Oxley Act), certain procedures regarding our quarterly financial results submitted on Form 6-K, consultations concerning financial
accounting and various accounting issues and performance of local statutory audits.
Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, which include due diligence investigations and audit services
related to other statutory or regulatory filings, mainly those related to mergers and acquisitions.
Tax fees refer to professional services rendered by our auditors, which include tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with transfer
pricing and global mobility of employees.
Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our external auditors, Kost, Forer, Gabbay & Kasierer, a
member of EY Global. The policy, which is designed to ensure that such services do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual
basis for the various audit and non-audit services that may be performed by our auditors. If a type of service, that is to be provided by our auditors, has not received such general pre-approval, it
will require specific pre-approval by our audit committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by our audit
committee. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the
SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
125
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
During 2017, we repurchased our ordinary shares as described in the table below.
Period
(a) Total number of
shares purchased
(c) Total number of
shares purchased
as part of publicly
announced plans
or programs
(b) Average price
paid per share
(In U.S. dollars, except share amounts)
2,226
9,900
127,723
96,922
-
-
-
56,181
-
-
48,825
-
341,777
66.54
68.89
67.65
67.80
75.94
84.24
71.45
2,226
9,900
127,723
96,922
-
-
-
56,181
-
-
48,825
-
341,777
(d) Maximum
number (or
approximately
dollar value) of
shares that may
yet be purchased
under the plans or
programs
161,438,536
160,756,528
152,115,637
145,544,524
145,544,524
145,544,524
145,544,524
141,277,914
141,277,914
141,277,914
137,165,086
137,165,086
January 1 – January 31
February 1 - February 28
March 1 - March 31
April 1 - April 30
May 1 - May 31
June 1 - June 30
July 1 - July 31
August 1 - August 31
September 1 - September 30
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
On May 6, 2015 our Board of Directors authorized a program to repurchase up to $100,000 of the Company's issued and outstanding ordinary shares and ADRs. On January 10, 2017, we
announced that our Board of Directors authorized a program to repurchase up to $150 million of the Company's issued and outstanding ordinary shares and ADRs. This share repurchase
program commenced on April 7, 2017 following completion of the prior program. Repurchases may be made from time to time in the open market or in privately negotiated transactions in
accordance with applicable securities laws and regulations. The timing and amount of the repurchase transactions will be determined by management and may depend on a variety of factors
including market conditions, alternative investment opportunities and other considerations.
These programs do not obligate us to acquire any particular amount of ordinary shares and ADRs and each program may be modified or discontinued at any time without prior notice.
Item 16F. Change in Registrant’s Certifying Accountant.
None.
Item 16G. Corporate Governance.
We follow the Israeli Companies Law, the relevant provisions of which are summarized in this annual report, rather than comply with the NASDAQ requirements relating to: (i) the
quorum for shareholder meetings (see Item 10, “Additional Information – Memorandum and Articles of Association – Meetings of Shareholders” in this annual report); (ii) shareholder approval
with respect to issuance of securities under equity based compensation plans (see Item 10, “Additional Information – Memorandum and Articles of Association – Approval of Certain
Transactions” and “Approval of Office Holder Compensation” in this annual report); and (iii) sending annual reports to shareholders (see Item 10, “Additional Information – Documents on
Display” in this annual report).
Item 16H. Mine Safety Disclosure.
Not Applicable.
126
Item 17. Financial Statements.
Not Applicable.
Item 18. Financial Statements.
See pages F-1 through F-64 of this annual report attached hereto.
PART III
127
Item 19. Exhibits.
Exhibit No.
Description
1.1
1.2
2.1
2.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
8.1
12.1
12.2
13.1
13.2
15.1
101
Amended and Restated Memorandum of Association, as approved on December 21, 2006 (English translation) (filed as Exhibit 1.1 to NICE Ltd.’s Annual Report on Form
20-F filed with the SEC on June 13, 2007, and incorporated herein by reference).
Amended and Restated Articles of Association, as amended on December 21, 2016 (filed as Exhibit 1.2 to NICE Ltd.’s Annual Report on Form 20-F filed with the SEC on
April 21, 2017, and incorporated herein by reference).
Form of Share Certificate (filed as Exhibit 4.1 to Amendment No. 1 to NICE Ltd.’s Registration Statement on Form F-1 (Registration No. 333-99640) filed with the SEC on
December 29, 1995, and incorporated herein by reference).
Form of Deposit Agreement including Form of ADR Certificate (filed as Exhibit 1 to NICE Ltd.’s Registration Statement on Form F-6 (Registration No. 333-203623) filed
with the SEC on April 24, 2015, and incorporated herein by reference).
NICE Ltd. 2016 Share Incentive Plan (filed as Exhibit 4.3 to NICE’s Annual Report on Form 20-F filed with the SEC on March 23, 2016, and incorporated herein by
reference).
NICE Ltd. 2008 Share Incentive Plan, as amended (filed as Exhibit 99.1 to NICE’s Immediate Report on Form 6-K filed with the SEC on May 28, 2015, and incorporated
herein by reference).
e-Glue Software Technologies, Inc. 2004 Stock Option Plan, as amended (filed as Exhibit 4.4 to NICE Ltd.’s Registration Statement on Form S-8 (Registration No. 333-
168100) filed with the SEC on July 14, 2010, and incorporated herein by reference).
Fizzback Group (Holdings) Limited Employee Share Option Scheme (filed as Exhibit 4.4 to NICE Ltd.’s Registration Statement on Form S-8 (Registration No. 333-177510)
filed with the SEC on October 26, 2011, and incorporated herein by reference).
Merced Systems, Inc. 2001 Stock Plan (filed as Exhibit 4.4 to NICE Ltd.’s Registration Statement on Form S-8 (Registration No. 333-179408) filed with the SEC on
February 7, 2012, and incorporated herein by reference).
Merced Systems, Inc. 2011 Stock Plan (filed as Exhibit 4.5 to NICE Ltd.’s Registration Statement on Form S-8 (Registration No. 333-179408) filed with the SEC on
February 7, 2012, and incorporated herein by reference).
Causata Inc. 2010 Stock Plan (filed as Exhibit 4.5 to NICE Ltd.’s Registration Statement on Form S-8 (Registration No. 333-191176) filed with the SEC on September 16,
2013, and incorporated herein by reference).
NICE Ltd.’s Executives & Directors Compensation Policy (filed as Annex A in Exhibit 99.1 of NICE’s Immediate Report on Form 6-K filed with the SEC on June 1, 2015
and incorporated herein by reference).
inContact, Inc. 2008 Equity Incentive Plan (filed as Exhibit 4.4 to NICE Ltd.’s Registration Statement on Form S-8 (Registration No. 333-191176) filed with the SEC on
November 15, 2016, and incorporated herein by reference).
Nexidia Inc. 2005 Stock Incentive Plan (filed as Exhibit 4.4 to NICE-Systems Ltd.’s Registration Statement on Form S-8 (Registration No. 333-191176) filed with the SEC on
March 23, 2016, and incorporated herein by reference).
Nexidia Agreement and Plan of Merger, dated January 10, 2016 (filed as Exhibit 4.14 to NICE Ltd.’s Annual Report on Form 20-F filed with the SEC on April 21, 2017, and
incorporated herein by reference).
Credit Agreement, dated November 14, 2016 (filed as Exhibit 4.15 to NICE Ltd.’s Annual Report on Form 20-F filed with the SEC on April 21, 2017, and incorporated
herein by reference).
Indenture, dated January 18, 2017 (filed as Exhibit 4.16 to NICE Ltd.’s Annual Report on Form 20-F filed with the SEC on April 21, 2017, and incorporated herein by
reference).
inContact Agreement and Plan of Merger, dated May 17, 2016 (filed as Exhibit 4.17 to NICE Ltd.’s Annual Report on Form 20-F filed with the SEC on April 21, 2017, and
incorporated herein by reference).
List of significant subsidiaries.
Certification by the Chief Executive Officer of NICE Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act 2002.
Certification by the Chief Financial Officer of NICE Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Executive Officer of NICE Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Financial Officer of NICE Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Consent of Kost, Forer, Gabbay & Kasierer, a member of EY Global.
The following financial information from NICE Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2017, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Balance Sheets at December 31, 2017 and 2016; (ii) Consolidated Statements of Income for the years ended December 31, 2017,
2016 and 2015; (iii) Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated
Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements.
128
NICE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017
IN U.S. DOLLARS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2 - F-4
F-5 - F-6
F-7
F-8
F-9 - F-10
F-11 - F-12
F-13 - F-64
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
NICE LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NICE Ltd. and its subsidiaries (the “Company") as of December 31, 2017 and 2016, the related consolidated statements
of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes (collectively referred to
as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016
and the consolidated result of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated March 30, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Kost, Forer, Gabbay and Kasierer
KOST FORER GABBAY & KASIERER
A Member of EY Global
We have served as the Company‘s auditor since 1995.
Tel-Aviv, Israel
March 30, 2018
F - 2
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
NICE LTD.
Opinion on Internal Control over Financial Reporting
We have audited NICE Ltd.'s and its subsidiaries (the “Company") internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control–
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria"). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company
as of December 31, 2017 and 2016 and the related consolidated statement of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2017 and the related notes and our report dated March 30, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
F - 3
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Kost, Forer, Gabbay and Kasierer
KOST FORER GABBAY & KASIERER
A Member of EY Global
Tel-Aviv, Israel
March 30, 2018
F - 4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term investments
Trade receivables (net of allowance for doubtful accounts of $ 9,554 and $ 7,499 at December 31, 2017 and 2016, respectively)
Prepaid expenses and other current assets
Total current assets
LONG-TERM ASSETS:
Long-term investments
Other long-term assets
Property and equipment, net
Deferred tax assets
Other intangible assets, net
Goodwill
Total long-term assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
NICE LTD. AND ITS SUBSIDIARIES
December 31,
2017
2016
$
$
328,302
63,951
230,729
70,074
693,056
132,820
19,496
118,275
11,850
551,347
1,318,242
2,152,030
157,026
30,287
260,220
61,700
509,233
98,726
18,701
87,678
14,093
618,735
1,284,710
2,122,643
$
2,845,086
$
2,631,876
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term loan
Trade payables
Deferred revenues and advances from customers
Accrued expenses and other liabilities
Total current liabilities
LONG-TERM LIABILITIES:
Deferred revenues and advances from customers
Accrued severance pay
Deferred tax liabilities
Long-term loan
Other long-term liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital-
Ordinary shares of NIS 1 par value:
Authorized: 125,000,000 shares at December 31, 2017 and 2016; Issued: 73,455,167 and 72,323,566 shares at December 31, 2017 and 2016,
respectively; Outstanding: 60,925,954 and 59,988,783 shares at December 31, 2017 and 2016, respectively
Additional paid-in capital
Treasury shares at cost – 12,529,213 and 12,334,783 Ordinary shares at December 31, 2017 and 2016, respectively
Accumulated other comprehensive loss
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
NICE LTD. AND ITS SUBSIDIARIES
$
December 31,
2017
2016
$
-
29,438
184,564
309,350
523,352
37,550
17,250
57,796
447,642
11,935
572,173
21,164
25,634
149,801
276,211
472,810
22,710
16,885
146,952
444,016
17,171
647,734
18,595
1,420,813
(507,705)
(32,914)
850,772
18,280
1,317,539
(488,573)
(46,824)
710,910
1,749,561
1,511,332
$
2,845,086
$
2,631,876
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except share and per share data)
Revenues:
Products
Services
Cloud
Total revenues
Cost of revenues:
Products
Services
Cloud
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Amortization of acquired intangibles
Total operating expenses
Operating income
Financial income (expenses) and other, net
Income before taxes on income
Taxes on income (tax benefit)
Net income from continuing operations
Discontinued operations:
Gain on disposal and income (loss) from operations
Taxes on income (tax benefit)
Net income (loss) on discontinued operations
Net income
Basic earnings per share from continuing operations
Basic earnings per share from discontinued operations
Basic earnings per share
Diluted earnings per share from continuing operations
Diluted earnings per share from discontinued operations
Diluted earnings per share
Weighted average number of shares used in computing:
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
NICE LTD. AND ITS SUBSIDIARIES
2017
Year ended December 31,
2016
2015
$
$
318,946
652,040
361,166
$
306,252
623,783
85,507
1,332,152
1,015,542
51,065
225,020
192,588
468,673
863,479
181,107
361,328
129,071
41,902
713,408
150,071
(20,411)
129,660
(13,631)
143,291
-
-
-
53,032
250,022
34,679
337,733
677,809
141,528
268,349
116,569
17,187
543,633
134,176
10,305
144,481
21,412
123,069
(8,235)
(2,086)
(6,149)
317,900
573,033
35,934
926,867
66,363
222,784
14,435
303,582
623,285
128,485
225,817
90,349
12,528
457,179
166,106
5,304
171,410
30,832
140,578
152,459
34,206
118,253
$
$
$
$
$
$
$
143,291
$
116,920
$
258,831
2.37
$
-
$
2.37
$
2.31
$
-
$
2.31
$
2.06
$
(0.10) $
1.96
$
2.02
$
(0.10) $
1.92
$
60,444
62,119
59,667
61,035
2.36
1.99
4.35
2.29
1.93
4.22
59,552
61,281
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
Net income
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustment
Available-for-sale investments:
Change in net unrealized gains (losses)
Less - reclassification adjustment for net gains realized and included in net income
Net change (net of tax effect of $(113), $113 and ($338))
Cash flow hedges:
Change in unrealized gains (losses)
Less - reclassification adjustment for net gains (losses) realized and included in net income
Net change
Total other comprehensive income (loss)
Comprehensive income
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
NICE LTD. AND ITS SUBSIDIARIES
2017
Year ended December 31,
2016
2015
$
143,291
$
116,920
$
258,831
13,529
(24,801)
(14,602)
(854)
-
(854)
6,821
(5,586)
1,235
13,910
5,102
(3,388)
1,714
600
(132)
468
(2,081)
(32)
(2,113)
(954)
4,010
3,056
(22,619)
(13,659)
$
157,201
$
94,301
$
245,172
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands
NICE LTD. AND ITS SUBSIDIARIES
Share
capital
Additional
paid-in
capital
Treasury shares
Accumulated other
comprehensive
loss
Retained earnings
Total
shareholders'
equity
Balance as of January 1, 2017
$
18,280
$
1,317,539
$
(488,573) $
(46,824) $
710,910
$
1,511,332
Exercise of share options
Stock-based compensation
Issuance of treasury shares under stock purchase
plans, upon exercise of options and vesting of
restricted stock units (147,347 ordinary shares)
Equity components of exchangeable note
Treasury shares purchased
Other comprehensive income
Dividends paid ($ 0.16 per share)
Effect of adopting ASU 2016-09: Improvements to
Employee Share-Based Payment Accounting (see
note 2aa)
Net income
315
-
-
-
-
-
-
-
-
17,133
56,980
(3,642)
30,895
-
-
-
1,908
-
-
-
5,296
-
(24,428)
-
-
-
-
-
-
-
-
-
13,910
-
-
-
-
-
-
-
-
-
(9,637)
6,208
143,291
17,448
56,980
1,654
30,895
(24,428)
13,910
(9,637)
8,116
143,291
Balance as of December 31, 2017
$
18,595
$
1,420,813
$
(507,705) $
(32,914) $
850,772
$
1,749,561
Share
capital
Additional
paid-in
capital
Treasury shares
Accumulated other
comprehensive
loss
Retained earnings
Total
shareholders'
equity
Balance as of January 1, 2016
$
17,977
$
1,234,206
$
(445,021) $
(24,205) $
632,192
$
1,415,149
Exercise of share options
Equity awards assumed for acquisitions
Stock-based compensation
Excess tax benefit from share-based payment
arrangements
Issuance of treasury shares under stock purchase
plans, upon exercise of options and vesting of
restricted stock units (2,290 ordinary shares)
Treasury shares purchased
Other comprehensive loss
Dividends paid ($ 0.64 per share)
Net income
303
-
-
-
-
-
-
-
-
23,321
11,675
40,547
7,868
(78)
-
-
-
-
-
-
-
-
78
(43,630)
-
-
-
-
-
-
-
-
-
(22,619)
-
-
-
-
-
-
-
-
-
(38,202)
116,920
23,624
11,675
40,547
7,868
-
(43,630)
(22,619)
(38,202)
116,920
Balance as of December 31, 2016
$
18,280
$
1,317,539
$
(488,573) $
(46,824) $
710,910
$
1,511,332
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
NICE LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands
Share
capital
Additional
paid-in
capital
Treasury shares
Accumulated other
comprehensive
loss
Retained earnings
Total
shareholders'
equity
Balance as of January 1, 2015
$
17,615
$
1,171,424
$
(376,637) $
(10,546) $
411,600
$
1,213,456
Exercise of share options
Stock-based compensation
Excess tax benefit from share-based payment
arrangements
Treasury shares purchased
Other comprehensive loss
Dividends paid ($ 0.64 per share)
Net income
362
-
-
-
-
-
-
26,736
28,451
7,595
-
-
-
-
-
-
-
(68,384)
-
-
-
-
-
-
-
(13,659)
-
-
-
-
-
-
-
(38,239)
258,831
27,098
28,451
7,595
(68,384)
(13,659)
(38,239)
258,831
Balance as of December 31, 2015
$
17,977
$
1,234,206
$
(445,021) $
(24,205) $
632,192
$
1,415,149
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
NICE LTD. AND ITS SUBSIDIARIES
2017
Year ended December 31,
2016
2015
Net income
Adjustments required to reconcile net income to net cash provided by operating activities:
$
143,291
$
116,920
$
258,831
Depreciation and amortization
Stock-based compensation
Equity in losses of affiliated company
Accrued severance pay, net
Amortization of premium and discount and accrued interest on marketable securities
Deferred taxes, net
Changes in operating assets and liabilities:
Trade receivables, net
Prepaid expenses and other current assets
Trade payables
Accrued expenses and other liabilities
Deferred revenues
Long term liabilities
Loss (gain) on disposal of discontinued operations
Realized gain on marketable securities
Amortization of discount on long-term debt
Other
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of investments
Proceeds from investments
Payments for business acquisitions, net of cash acquired
Investments in affiliates and other purchases
Capitalization of internal use software costs
Proceeds (repayment) from sale of discontinued operations
156,301
56,980
-
(788)
646
(70,805)
37,735
(6,839)
2,665
25,541
41,624
(5,169)
-
-
13,547
(67)
77,801
40,547
-
3
2,441
(25,905)
(31,784)
2,078
4,392
17,994
9,379
7,529
9,148
(3,388)
379
678
394,662
228,212
(39,889)
(133,423)
64,295
(76,027)
-
(27,936)
-
(27,278)
(47,221)
449,880
(1,156,249)
(1,500)
(8,502)
(9,148)
57,964
28,451
537
104
2,799
10,576
(56,363)
(1,482)
2,166
38,488
54,914
2,453
(147,334)
(32)
-
256
252,328
(16,596)
(287,593)
92,542
-
(1,500)
(1,380)
186,134
Net cash used in investing activities
(212,980)
(800,018)
(28,393)
The accompanying notes are an integral part of the consolidated financial statements.
F - 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Proceeds from issuance of shares upon exercise of options
Purchase of treasury shares
Dividends paid
Capital lease payments
Proceeds from issuance of debt, net of costs
Proceeds from issuance of exchangeable senior notes, net
Repayment of long-term debt
Earn out payments related to acquisitions
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
NICE LTD. AND ITS SUBSIDIARIES
2017
Year ended December 31,
2016
2015
19,240
(24,428)
(9,637)
(137)
-
260,135
(260,000)
-
(14,827)
4,421
171,276
157,026
23,525
(43,630)
(38,202)
(1,087)
464,841
-
-
-
405,447
(2,546)
(168,905)
325,931
27,532
(68,384)
(38,239)
-
-
-
-
(297)
(79,388)
(6,113)
138,434
187,497
Cash and cash equivalents at the end of the year
$
328,302
$
157,026
$
325,931
Supplemental disclosure of cash flows activities:
Cash paid during the year for:
Income taxes
Interest
Non-cash activities:
Net change in other receivables with respect to exercise of share options
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
$
$
$
33,029
$
28,396
$
53,646
7,910
$
2,201
$
107
138
$
(99) $
434
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL
a. General:
NICE LTD. AND ITS SUBSIDIARIES
NICE Ltd. and its subsidiaries (the "Company") is a global enterprise software leader providing solutions for the Customer Engagement and Financial Crime & Compliance
markets. The Company’s solutions use advanced omnichannel analytics and automation based on an open cloud platform to improve customer experience as well as prevent
financial crime.
The Company’s core mission is to empower organizations to act smarter and respond faster both to provide superior customer service and to prevent financial crime. The
Company’s software is used by customer service organizations of enterprises of all sizes and verticals and by compliance and fraud prevention groups in financial
institutions.
With an integrated cloud platform and advanced analytics solutions, the Company helps organizations understand their customers, engage their employees and improve
their processes. Additionally, the Company helps them predict needs and identify risks to create an exceptional customer experience, prevent fraud and ensure compliance.
These capabilities are enhanced through the utilization of advanced automation and artificial intelligence capabilities.
b.
Acquisitions:
1.
Acquisition of inContact:
On November 14, 2016, the Company completed the acquisition of all of the outstanding shares of inContact, Inc. ("inContact"), a leading provider of cloud contact
center software and agent optimization tools, for a total consideration of $1,050,054. The acquisition enables the Company to offer a fully integrated and complete
cloud contact center where companies can interact with customers.
Upon acquisition, inContact became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a business combination. This method
requires, among other things, that assets acquired and liabilities assumed in the business combination be recognized at their fair values as of the acquisition date.
The following table summarizes the components of the purchase consideration transferred:
Cash (*)
Assumed options and restricted shares (**)
Total purchase consideration
F - 13
$
1,039,028
11,026
$
1,050,054
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
(*)
(**)
Includes cash consideration for the redemption of inContact's convertible bonds in an amount of $139,438 and for inContact's outstanding vested options and
restricted shares as of acquisition date which were cancelled and converted into an amount of $25,366 in cash.
Pursuant to the merger agreement, the Company assumed or replaced all outstanding unvested options, Restricted Stock Awards ("RSAs") and Restricted
Stock Units (“RSUs”) and converted them or replaced them with the Company’s options, RSAs and RSUs, as applicable, based on an agreed exchange ratio.
Each assumed or replaced option, RSA and RSU is subject to the same terms and conditions, including vesting, exercisability and expiration, as originally
applied to any such option, RSA and RSU immediately prior to the acquisition of inContact.
Out of the total estimated fair value of the replacement award, a portion was allocated to the purchase consideration and the remainder was allocated to future
services and will be expensed over the remaining service period on an accelerated basis as share-based compensation. The fair value of replacement award
was determined using a Black-Scholes-Merton valuation model with the following assumptions: expected life of 12-74 months, risk-free interest rate of 0.58%-
1.22%, expected volatility of 21.05%-25.92% and no dividend yield.
The following table summarizes the fair values of the assets acquired and liabilities assumed:
Cash
Short term investments
Trade receivables
Other receivables and prepaid expenses
Property and equipment
Identified intangibles
Goodwill
Total assets acquired
Trade payables
Accrued expenses and other liabilities
Deferred revenue
Deferred tax liabilities, net
Total liabilities assumed
Net assets acquired
F - 14
$
37,136
26,714
40,667
10,235
28,554
538,000
559,372
1,240,678
(16,337)
(22,802)
(3,967)
(147,518)
(190,624)
$
1,050,054
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
The following table presents details of the identified intangible assets acquired as of the date of the acquisition:
Trademarks
Core technology
Customer relationships
Total
NICE LTD. AND ITS SUBSIDIARIES
Fair
value
Estimated
useful life
(in years)
$
36,400
353,700
147,900
2-8
4-8
5-7
$
538,000
Goodwill generated from this business combination is primarily attributable to synergies between the Company's and inContact's respective products and services.
The goodwill is not deductible for income tax purposes.
inContact Inc. constituted approximately 4.2% of the Company's consolidated total assets as of December 31, 2016, and 1.2% attributed to the period from the date of
acquisition of the Company's consolidated net income (excluding amortization of related acquired intangible assets) for the year then ended.
The following table presents the unaudited pro forma financial information for the years ended December 31, 2016 and 2015, as if the acquisition occurred on
January 1, 2015:
Revenue
Net income
Year ended December 31
2015
2016
$
$
1,237,329
31,195
$
$
1,142,018
139,123
The unaudited pro forma financial information for the years ended December 31, 2016 and 2015 has been calculated after adjusting the Company's results and those
of inContact to reflect the business combination accounting effects resulting from this acquisition as if the acquisition occurred as of January 1, 2015, including: (i)
acquisition related transaction costs; (ii) amortization expense from acquired intangible assets; (iii) post acquisition share-based compensation expense; (iv) debt
financing costs incurred for the issuance of a loan received as part of the acquisition financing; and (v) the associated tax effect of these unaudited pro forma
adjustments. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if
the acquisition had taken place at the beginning of 2015.
F - 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
The fair value of assets acquired and liabilities assumed from the acquisition of inContact was based on a preliminary valuation which has been finalized during 2017
as part of the measurement period (please refer also to note 8). In accordance with ASU 2015-16, measurement period adjustments determined to be material will be
recognized in the period in which the Company determines the amounts, including the effect on earnings of any amounts it would have recorded in previous periods
if the accounting had been completed at the acquisition date.
2. Acquisition of Nexidia:
On March 22, 2016, the Company completed the acquisition of Nexidia Inc. ("Nexidia"), a provider of advanced customer analytics. The Company acquired Nexidia for
a total consideration of $135,150. The acquisition of Nexidia allows the Company to offer a combined offering, featuring analytics capabilities with accuracy,
scalability and performance, enabling organizations to expand their analytics usage in critical business use cases.
Upon acquisition, Nexidia became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a business combination. This method requires,
among other things, that assets acquired and liabilities assumed in the business combination be recognized at their fair values as of the acquisition date.
The following table summarizes the components of the purchase consideration transferred:
Cash
Assumed options
Total purchase consideration
F - 16
$
134,501
649
$
135,150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
The following table summarizes the fair values of the assets acquired and liabilities assumed:
Cash (net of loan payoff amount)
Trade receivables
Other receivables and prepaid expenses
Property and equipment
Identified intangibles
Goodwill
Total assets acquired
Trade payables
Accrued expenses and other liabilities
Deferred revenue
Deferred tax liabilities, net
Total liabilities assumed
Net assets acquired
The following table presents details of the identified intangible assets acquired as of the date of the acquisition:
Trademarks
Technology
Customer backlog
Customer relationships
Total intangible assets
NICE LTD. AND ITS SUBSIDIARIES
$
1,879
8,300
4,892
2,774
63,400
75,647
156,892
(1,556)
(6,371)
(9,341)
(4,474)
(21,742)
$
135,150
Fair
value
Estimated
useful life
(in years)
$
7,500
17,400
10,900
27,600
12
5
1
6
$
63,400
Goodwill generated from this business combination is primarily attributable to synergies between the Company's and Nexidia's respective products and services. The
goodwill is not deductible for income tax purposes.
The results of Nexidia operations have been included in the consolidated statements of income since March 22, 2016. Pro forma results of operations related to this
acquisition have not been prepared because they are not material to the Company's consolidated statements of income.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
3. Acquisition of VPI:
NICE LTD. AND ITS SUBSIDIARIES
On March 11, 2016, the Company completed the acquisition of Voiceprint International, Inc. ("VPI"), a provider of workforce optimization software and services for
enterprises, contact centers, first responders and trading floors. The Company acquired VPI for total consideration of $21,720 in cash.
Upon acquisition, VPI became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a business combination. This method requires,
among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The Company
recorded customer relationships and goodwill in amount of $8,500 and $16,873, respectively. The estimated useful life of the customer relationships is 6 years.
Goodwill generated from this business combination is attributed to synergies between the Company's and VPI's respective products and services. The goodwill is
not deductible for income tax purposes.
The results of VPI operations have been included in the consolidated financial statements since March 11, 2016. Pro forma results of operations related to this
acquisition have not been prepared because they are not material to the Company's consolidated statement of income.
4. Acquisitions in 2017:
During 2017 the Company acquired certain companies. These acquisitions were not individually or in aggregate significant. The financial results of the acquired
companies are included in the Company’s consolidated financial statements from their respective acquisition dates, and the results from each of these companies
were not individually material to the Company’s consolidated financial statements. In the aggregate, the total preliminary purchase price for these acquisitions was
approximately $76,870 in cash. The Company preliminarily recorded $2,291 of net tangible liabilities and $51,015 of identifiable intangible assets, based on their
estimated fair values, and $28,145 of residual goodwill. The preliminary fair value estimates for the assets acquired and liabilities assumed for these acquisitions
completed during 2017 were based upon preliminary calculations and valuations, and the estimates and assumptions for these acquisitions are subject to change as
the Company obtains additional information during the respective measurement periods (up to one year from the respective acquisition dates).
5. Acquisitions related costs:
During 2017 and 2016 acquisition related costs amounted to $970 and $9,348 respectively, and were included in general and administrative expenses. During 2015, the
Company did not record any acquisition related costs.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
c.
Discontinued operations:
NICE LTD. AND ITS SUBSIDIARIES
During 2015, the Company divested its Physical Security as well as its Cyber and Intelligence operations, which were a major part of the Security Solutions segment, to allow
it to focus on its core markets as part of the execution of its long-term strategy.
In July 2015 the Company completed the sale of the Cyber and Intelligence operation to Elbit Systems for a total consideration of $151,583, comprised of $111,583 in cash and
$40,000 earn out based on future business performance conditions, which were not met.
The Cyber and Intelligence operation offers solutions which provide law enforcement agencies, intelligence organizations and signal intelligence agencies with tools for
generating intelligence from communications. The sale resulted in a capital gain of $101,847, which was presented as part of the net income on discontinued operations in
the consolidated statements of income for the year ended December 31, 2015.
On September 18, 2015, the Company completed the sale of the Physical Security operation to Battery Ventures for a total consideration of $92,475, comprised of $74,551 in
cash, note receivable of $2,924 and up to $15,000 earn out based on future business performance. The Physical Security operation provides video surveillance technologies
and capabilities to security-aware organizations.
The sale resulted in a gain of $45,487, which was presented as part of the net income on discontinued operations in the consolidated statements of income for the year
ended December 31, 2015. The carrying amount used in determining the gain on disposal of the operations included goodwill in the amount of $35,554. The amount of
goodwill that was included in that carrying amount was based on the relative fair values of the disposed operations and the portion of the operation that was retained within
the segment.
Following the divestiture of one of the discontinued operations, the buyer made certain claims in relation to the transaction in accordance with the procedures set in the
acquisition agreement between the parties. During 2016, the parties reached a settlement agreement which resulted in a reduction of the gain on disposal of discontinued
operations recorded in discontinued operations. Refer to Note 11c for further details.
Following the sale, Physical Security's and Intelligence's results of operations and statement of financial position balances are disclosed as a discontinued operation,
including the resulting gain from sales. All prior periods' comparable results of operation, assets and liabilities have been retroactively included in discontinued operations.
F - 19
NICE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL (Cont.)
The results of the discontinued operations including prior periods' comparable results, assets and liabilities which have been retroactively included in discontinued
operations as separate line items in the statements of income and balance sheets are presented below:
Revenue
Cost of sales
Operating expenses
Operating income (loss)
Other income (expenses), net
Gain (loss) on disposal of the discontinued operations
Income (loss) before taxes on income
Taxes on income (tax benefit)
$
Year ended December 31,
2016
2017
(*)2015
$
-
-
-
-
-
-
-
-
$
-
-
850
(850)
1,763
(9,148)
(8,235)
(2,086)
68,672
26,956
36,307
5,409
(284)
147,334
152,459
34,206
Net income (loss) on discontinued operations
$
-
$
(6,149) $
118,253
(*) Represent the results of the discontinued operations until their disposal.
Depreciation expense totaled $0, $0 and $724 for the years 2017, 2016 and 2015, respectively.
Amortization expense totaled $0, $0 and $4,362 for the years 2017, 2016 and 2015, respectively.
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP").
a.
Use of estimates:
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The
Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These
estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
b.
Financial statements in United States dollars:
The currency of the primary economic environment in which the operations of NICE Ltd. and certain subsidiaries are conducted is the U.S. dollar ("dollar"); thus, the dollar
is the functional currency of NICE Ltd. and certain subsidiaries.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
NICE Ltd. and certain subsidiaries' transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have
been remeasured to dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses from remeasurement of monetary balance sheet items
denominated in non-dollar currencies are reflected in the statements of income as financial income or expenses, as appropriate.
For those subsidiaries whose functional currency has been determined to be a non-dollar currency, assets and liabilities are translated at year-end exchange rates and
statement of income items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of
accumulated other comprehensive income (loss) in shareholders' equity.
c.
Principles of consolidation:
Intercompany transactions and balances have been eliminated upon consolidation.
d.
Cash equivalents:
Cash equivalents are short-term unrestricted highly liquid investments that are readily convertible into cash, with original maturities of three months or less at acquisition.
e.
Marketable securities:
The Company accounts 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 shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific identification basis, in
the Company's consolidated statements of income.
The Company's securities are reviewed for impairment in accordance with ASC 320-10-35. 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 the Company's intent to sell, including whether it is
more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that the Company intends
to sell, or it is more likely than not that the Company 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 accumulated other comprehensive income (loss).
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f.
Property and equipment, net:
NICE LTD. AND ITS SUBSIDIARIES
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
Internal use software
%
20 - 33
7 - 20
33
Leasehold improvements are amortized by the straight-line method over the term of the lease or the estimated useful life of the improvements, whichever is shorter.
g.
Internal use software costs:
The Company capitalizes development costs incurred during the application development stage which are related to internal use technology that supports its cloud
services. Under ASC350-40, Internal-Use Software is included in property and equipment, net in the consolidated balance sheets. Capitalization of such costs begins when
the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Costs incurred in the
process of software production are charged to expenses as incurred.
h.
Other intangible assets, net:
Intangible assets are amortized over their estimated useful lives using the straight-line method, at the following annual rates ranges:
Core technology
Customer relationships
Trademarks
Customer backlog
F - 22
%
12.5 - 50
14.7 - 33.3
12.5 - 50
50 - 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i.
Impairment of long-lived assets:
NICE LTD. AND ITS SUBSIDIARIES
The Company's long-lived assets and identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant, and
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 the Company's 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. In 2017, 2016 and 2015, no impairment charge was
recognized.
j.
Goodwill:
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 - Goodwill and Other," ("ASC 350") goodwill is not amortized, but rather is subject to an annual impairment test.
ASC 350 requires goodwill to be tested for impairment at the reporting unit level at least annually or between annual tests in certain circumstances, and written down when
impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.
ASC 350 allows an entity 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 an entity to bypass the qualitative assessment for any reporting unit and
proceed directly to performing the first step of the goodwill impairment test.
During the fourth quarter of each of the years presented, the Company performed a qualitative assessment for its reporting units and concluded that the qualitative
assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required. Accordingly, during the years 2017,
2016 and 2015, no impairment charge was recognized.
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k.
Exchangeable senior notes:
NICE LTD. AND ITS SUBSIDIARIES
The Company applies ASC 815 “Derivative and Hedging” (“ASC 815”) and ASC 470 “Debt (“ASC 470”). Under these standards, the Company separately accounts for the
liability and equity components of convertible debt instruments that may be settled in cash in a manner that reflects the Company’s nonconvertible debt borrowing rate. The
liability component at issuance is recognized at fair value, based on the fair value of a similar instrument that does not have a conversion feature. The equity component is
based on the excess of the principal amount of the debentures over the fair value of the liability component, after adjusting for an allocation of debt issuance costs, and is
recorded as capital in excess of par. Debt discounts are amortized as additional non-cash interest expense over the expected life of the debt.
l.
Revenue recognition:
The Company generates revenues from sales of software products, services and cloud, which include software license, SaaS and network connectivity, hosting, support and
maintenance, implementation, configuration, project management, consulting, training, as well as hardware sales. The Company sells its products directly through its 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 the Company's software revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, "Software-Revenue
Recognition". Revenues from sales of software products 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. Revenues from maintenance and professional services are recognized ratably over the contractual period and as services
are performed, respectively. 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, the Company defers revenue for the fair value of its undelivered elements and recognizes 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
elements.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
For arrangements that contain both software and non-software components that function together to deliver the products' essential functionality, the Company allocates
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"), if VSOE is not available, or best
estimated selling price ("BESP"), if neither VSOE nor TPE are available.
The Company establishes VSOE of fair value using the price charged for a deliverable when sold separately. When VSOE cannot be established, the Company attempts to
establish fair value of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company's go-
to-market strategy differs from that of its peers and the Company's offerings contain a significant level of differentiation such that the comparable pricing of products with
similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products' selling prices are on a standalone basis.
Therefore, the Company is 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 the Company offers its products. The determination of the BESP is subject to discretion.
The Company's 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 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.
The Company's SaaS offerings provide customers access to certain of its software within a cloud-based IT environment on a subscription basis, and may also include
network connectivity services over Company's 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, the Company considers these arrangements to be service contracts which are not within the scope of ASC 985-605.
In addition, the Company also derives revenue from professional services included in implementing or improving a customer's cloud software solutions experience.
F - 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
Revenues for SaaS offerings are recognized ratably over the contract term or based on actual usage, commencing with the date the 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, the Company has 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 statements information, credit
insurance data and payment performance.
The Company maintains a provision for product returns and other contractual rights which are estimated based on the Company's past experience and are deducted from
revenues.
Deferred revenues and advances from customers include payments received from customers, for which revenue has not yet been recognized.
m.
Research and development costs:
Research and development costs (net of grants and capitalized expenses) incurred in the process of software production are charged to expenses as incurred.
n.
Income taxes:
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This topic prescribes the use of the liability method whereby deferred tax asset and
liability account balances are determined based on differences 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 reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to
the amount that is more likely than not to be realized. Deferred tax assets and deferred tax liabilities are presented under long-term assets and long-term liabilities,
respectively.
The Company implements 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% (cumulative basis) likely to be realized upon ultimate settlement.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
The Company classifies interest and penalties on income taxes (which includes uncertain tax positions) as taxes on income.
o.
Non-royalty grants:
Non-royalty bearing grants from the Government of Israel and the European Union for funding research and development projects are recognized at the time the Company is
entitled to such grants on the basis of the related costs incurred and recorded as a deduction from research and development expenses.
p.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables, marketable
securities and foreign currency derivative contracts.
The Company's cash and cash equivalents are invested in deposits mainly in dollars with major international banks. Deposits in the U.S. may be in excess of insured limits
and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.
The Company's trade receivables are derived from sales to customers located primarily in North America, and in EMEA and APAC. The Company performs ongoing credit
evaluations of its customers and insures certain of its receivables with a credit insurance company. A general allowance for doubtful accounts is provided, based on the
length of time the receivables are past due.
The Company's marketable securities include investment in corporate debentures and U.S. Treasuries. The Company's investment policy limits the amount that the Company
may invest in any one type of investment or issuer, thereby reducing credit risk concentrations.
The Company entered into foreign currency forward and option contracts intended to protect cash flows resulting from payroll and facilities related expenses against the
volatility in value of forecasted non-dollar currency. The derivative instruments hedge a portion of the Company's non-dollar currency exposure. See Note 10.
q.
Severance pay:
Israeli Severance Pay Law-1963 generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain circumstances.
The Company makes ongoing deposits into Israeli employees’ pension plans to fund their severance liabilities. According to Section 14 of the Severance Pay Law, the
Company deposits for employees employed by the Company since May 1, 2009 are made in lieu of the Company’s severance liability; therefore no obligation is provided for
in the financial statements. Severance pay liabilities for employees employed by the Company prior to May 1, 2009, as well as employees with special contractual
arrangements, are provided for in the financial statements based upon the latest monthly salary multiplied by the number of years of employment.
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
Severance pay expense for 2017, 2016 and 2015 amounted to $9,862, $9,970 and $8,936, respectively.
The Company also has other liabilities for severance pay in other jurisdictions.
The Company provides 401(K) defined contribution plan for the benefit of certain employees in the U.S. Under this plan, contributions are based on specified percentages of
pay. In the years 2017, 2016 and 2015, the Company recorded an expense for matching contributions in the amount of $7,044, $3,930 and $4,310, respectively.
r.
Basic and diluted net earnings per share:
Basic net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted net earnings per share are
computed based on the weighted average number of ordinary shares outstanding during each year plus dilutive potential equivalent ordinary shares considered
outstanding during the year, in accordance with ASC 260, "Earnings per Share".
As the Company’s intention and ability is to settle the convertible debt in cash, the potential issuance of shares related to the convertible debt does not affect diluted
shares.
As further described in Note 14, the Company entered into an exchangeable note hedge transaction and warrants transaction. The exchangeable note hedge transaction and
the warrants transaction are anti-dilutive and as such are not included in the computation of diluted earnings per share. The number of shares related to outstanding
exchangeable note hedge transaction and warrants transaction are 3,457,475 and 3,457,475, respectively.
The weighted average number of shares related to outstanding anti-dilutive options excluded from the calculations of diluted net earnings per share was 249,274, 398,544
and 561,621 for the years 2017, 2016 and 2015, respectively.
s.
Accounting for stock-based compensation:
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" ("ASC 718"), which requires the measurement
and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. ASC 718 requires companies
to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting, based on the accelerated attribution method over the requisite
service period of each of the awards.
F - 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
The Company estimates 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 represents 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 Company's Board of Directors. For information on the
Company's dividend payments, see Note 13d.
The Company measures the fair value of restricted stock based on the market value of the underlying shares at the date of grant.
t.
Fair value of financial instruments:
The Company applies ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"). Under this standard, fair value is defined as the price 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 at the measurement date. The Company measures its
investments in money market funds classified as cash equivalents, marketable securities and its foreign currency derivative contracts at fair value.
In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances.
The hierarchy is broken down into three levels based on the inputs as follows:
ö
ö
ö
Level 1 - Valuations based on quoted prices in active markets for identical assets that the Company has 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 inputs that are unobservable and significant to the overall fair value measurement.
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type 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
in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3.
The Company's marketable securities and foreign currency derivative contracts are classified within Level 2 (see Notes 3 and 10).
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.
u.
Legal contingencies:
The Company is currently involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If
the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated
loss.
v.
Advertising expenses:
Advertising expenses are charged to expense as incurred. Advertising expenses for the years 2017, 2016 and 2015 were $13,543, $9,693 and $7,986, respectively.
w.
Treasury shares:
The Company repurchases its ordinary shares from time to time on the open market or in other transactions and holds such shares as treasury shares. The Company
presents the cost to repurchase treasury stock as a reduction of shareholders' equity. The Company reissues treasury shares under the stock purchase plan, upon exercise
of options and upon vesting of RSUs. Reissuance of treasury shares is accounted for in accordance with ASC 505-30 whereby gains are credited to additional paid-in capital
and losses are charged to additional paid-in capital to the extent that previous net gains are included therein; otherwise to retained earnings.
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
x.
Business combination:
NICE LTD. AND ITS SUBSIDIARIES
The Company applies the provisions of ASC 805, "Business Combination" and allocates the fair value of purchase consideration to the tangible assets acquired, liabilities
assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and
assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to future expected cash flows
from customer relationships, acquired technology and acquired trademarks from a market participant perspective, useful lives and discount rates. Management's estimates of
fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates.
y.
Comprehensive income:
The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". Comprehensive income generally represents all changes in
shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its items of other
comprehensive income relate to gains and losses on hedging derivative instruments and unrealized gains and losses on available for sale marketable securities and changes
in foreign currency translation adjustments.
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following tables show the components of accumulated other comprehensive income, net of taxes, as of December 31, 2017 and 2016:
NICE LTD. AND ITS SUBSIDIARIES
Year ended December 31, 2017
Unrealized
losses on
marketable
securities
Unrealized gains
(losses) on cash
flow hedges
Foreign
currency
translation
adjustment
Total
Beginning balance
$
(216) $
(101) $
(46,507) $
(46,824)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income (loss)
(854)
-
(854)
6,821
(5,586)
1,235
13,529
-
13,529
19,496
(5,586)
13,910
Ending balance
$
(1,070) $
1,134
$
(32,978) $
(32,914)
Year ended December 31, 2016
Unrealized gains
(losses) on
marketable
securities
Unrealized gains
(losses) on cash
flow hedges
Foreign
currency
translation
adjustment
Total
Beginning balance
$
(1,930) $
(569) $
(21,706) $
(24,205)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income (loss)
5,102
(3,388)
1,714
600
(132)
468
(24,801)
-
(19,099)
(3,520)
(24,801)
(22,619)
Ending balance
$
(216) $
(101) $
(46,507) $
(46,824)
F - 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
z.
Recently adopted accounting standards:
NICE LTD. AND ITS SUBSIDIARIES
In March 2016, the FASB issued ASU 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 became effective for the Company beginning the first quarter of 2017, at which time it changed its accounting policy to account for
forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings of $6,208 as of January 1, 2017.
In addition, historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its consolidated balance sheets
and were classified as a financing activity in its consolidated statements of cash flows. As a result of the adoption, the Company will prospectively record any excess tax
benefits or deficiencies from its equity awards as part of its provision for income taxes in its consolidated statements of operations in the reporting periods in which equity
vesting occurs. Excess tax benefits for share-based payments are now presented as an operating activity in the statements of cash flows rather than financing activity. The
Company elected to apply the cash flow classification requirements related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to
cash generated by operating activities and in a decrease to cash generated by financing activities in the consolidated statements of Cash Flows of $7,868 and $7,595 for the
years ended December 31, 2016 and December 31, 2015, respectively.
aa.
Recently issued accounting standards, not yet adopted:
In May 2014, the FASB issued Accounting Standards Update 2014-09 ("ASU 2014-09") "Revenue from Contracts with Customers (Topic 606)". 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 amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequently, the FASB issued
several additional ASUs related to ASU. 2014-09, collectively they are referred to as the “new revenue standards,” which become effective for the Company beginning
January 1, 2018. The Company has adopted the new revenue standards using the modified retrospective transition method.
The Company estimated its analysis of all potential impacts of the new revenue standards. The impacts mainly 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. Based on work performed to date, on January 1, 2018 the Company expects to record a cumulative-effect of approximately $39 million attributed to Deferred
Revenues and approximately $45 million attributed to costs related to obtaining customer contracts. These amounts will be recorded as adjustment to retained earnings. The
impact derives from arrangements that based on "Revenue Recognition (Topic 605)" were to be recognized in future years during 2018 to 2022.
F - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
In January 2016, the FASB issued ASU 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 the Company for interim and annual periods beginning on or after January 1, 2018. The Company expects no material impact on its 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. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
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. The Company expects no material impact on its statement of cash
flows upon adoption.
In October 2016, the FASB issued Accounting Standards Update 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 the Company for
interim and annual periods beginning after December 15, 2017. The Company expects no material impact on its 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 2 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. The Company is currently evaluating the effect that this guidance will have on its
consolidated financial statements.
F - 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which provides guidance to
evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets
acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. ASU 2017-01 is
effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those periods. The Company expects no material impact on its
consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"). The amendments in this update require a financial asset
(or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that
an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates
more timely information in the estimate of expected credit loss, which will be of greater use to users of the financial statements. ASU 2016-13 is effective for the Company for
fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial
statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The objectives of
this ASU are to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial
statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for fiscal
years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the effect that this guidance will have on its
consolidated financial statements.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
SHORT-TERM AND LONG-TERM INVESTMENTS
NICE LTD. AND ITS SUBSIDIARIES
Short-term and long-term investments include marketable securities in the amount of $196,771 and $129,013 as of December 31, 2017 and 2016, respectively.
The following table summarizes amortized costs, gross unrealized gains and losses and estimated fair values of available-for-sale marketable securities as of December 31, 2017 and
2016:
Amortized cost
December 31,
Gross unrealized gains
December 31,
Gross unrealized losses
December 31,
Estimated fair value (Level 2
within the fair value hierarchy)
December 31,
2017
2016
2017
2016
2017
2016
2017
2016
Corporate debentures
U.S. Treasuries
U.S. Government Agencies
$
$
189,836
7,007
998
$
122,335
7,008
-
$
9
-
-
$
91
-
-
$
908
170
1
$
225
196
-
$
188,937
6,837
997
122,201
6,812
-
$
197,841
$
129,343
$
9
$
91
$
1,079
$
421
$
196,771
$
129,013
The scheduled maturities of available-for-sale marketable securities as of December 31, 2017 were as follows:
Due within one year
Due after one year through five years
Amortized
cost
Estimated
fair value
$
$
64,055
133,786
63,951
132,820
$
197,841
$
196,771
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values as of December 31, 2017 and 2016 were as indicated in
the following tables:
Investments with continuous
unrealized losses for less than 12
months
December 31, 2017
Investments with continuous
unrealized losses for 12 months or
greater
Total Investments with continuous
unrealized losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Corporate debentures
U.S. treasuries
U.S. Government agencies
$
$
135,252
-
997
(711) $
-
-
$
49,076
6,837
-
(198) $
(170)
-
$
184,328
6,837
997
(909)
(170)
-
$
136,249
$
(711) $
55,913
$
(368) $
192,162
$
(1,079)
F - 36
NICE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
SHORT-TERM AND LONG-TERM INVESTMENTS (Cont.)
Investments with continuous
unrealized losses for less than 12
months
December 31, 2016
Investments with continuous
unrealized losses for 12 months or
greater
Total Investments with continuous
unrealized losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Corporate debentures
U.S. treasuries
$
$
$
19,444
-
(137) $
-
$
56,799
6,812
(88) $
(196)
$
76,243
6,812
19,444
$
(137) $
63,611
$
(284) $
83,055
$
(225)
(196)
(421)
NOTE 4:-
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Government authorities
Interest receivable
Prepaid expenses
Inventories
Prepaid expenses and other current assets of discontinued operations
Other
NOTE 5:-
OTHER LONG-TERM ASSETS
Severance pay fund
Long-term deposits
Investments in affiliate
$
$
$
F - 37
$
19,496
$
December 31,
2017
2016
26,275
2,042
26,688
9,013
2,042
4,014
70,074
$
$
23,312
804
24,863
4,716
3,734
4,271
61,700
December 31,
2017
2016
$
14,859
3,637
1,000
14,701
3,000
1,000
18,701
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 6:-
PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment
Internal use software
Office furniture and equipment
Leasehold improvements
Accumulated depreciation:
Computers and peripheral equipment
Internal use software
Office furniture and equipment
Leasehold improvements
NICE LTD. AND ITS SUBSIDIARIES
$
December 31,
2017
2016
$
212,449
37,948
12,030
53,266
315,693
163,162
2,924
6,614
24,718
197,418
181,738
9,882
13,982
48,573
254,175
139,066
-
7,847
19,584
166,497
Depreciated cost
$
118,275
$
87,678
Depreciation expense totaled $37,924, $18,422 and $15,575 for the years 2017, 2016 and 2015, respectively.
The Company recorded a reduction of $6,790 and $10,941 to the cost and accumulated depreciation of fully depreciated equipment and leasehold improvements no longer in use for
the years ended December 31, 2017 and 2016, respectively.
F - 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 7:-
OTHER INTANGIBLE ASSETS, NET
a. Definite-lived other intangible assets:
Original amounts:
Core technology
Customer relationships, backlog and distribution network
Trademarks
Accumulated amortization:
Core technology
Customer relationships and distribution network
Trademarks
NICE LTD. AND ITS SUBSIDIARIES
December 31,
2017
2016
$
$
673,291
382,031
56,196
623,274
372,438
55,745
1,111,518
1,051,457
315,665
225,951
18,555
560,171
238,898
181,123
12,701
432,722
b.
c.
d.
Other intangible assets, net
$
551,347
$
618,735
Amortization expense amounted to $118,377, $58,968 and $40,055 for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company recorded a reduction $9,677 amounts and accumulated amortization of fully amortized other intangible assets for the years ended December 31, 2016. In 2017
there was no such reduction.
Estimated amortization expense:
For the year ended December 31,
2018
2019
2020
2021
2022 and thereafter
F - 39
$
102,561
99,091
93,837
85,822
170,036
$
551,347
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 8:-
GOODWILL
Following the Company's acquisitions in 2017, as described in Note 1b, the changes in the carrying amount of goodwill allocated to reportable segments for the years ended
December 31, 2017 and 2016 are as follows:
NICE LTD. AND ITS SUBSIDIARIES
As of January 1, 2017
Acquisitions (*)
Functional currency translation adjustments
As of December 31, 2017
As of January 1, 2016
Acquisitions (**)
Functional currency translation adjustments
As of December 31, 2016
Customer
Engagement
Year ended December 31, 2017
Financial Crime
and Compliance
Total
$
1,022,198
$
262,512
$
1,284,710
24,346
7,378
-
1,808
24,346
9,186
$
1,053,922
$
264,320
$
1,318,242
Customer
Engagement
Year ended December 31, 2016
Financial Crime
and Compliance
Total
$
384,808
$
266,304
$
651,112
651,892
(14,502)
-
(3,792)
651,892
(18,294)
$
1,022,198
$
262,512
$
1,284,710
(*)
Includes a reduction of $3,799 of goodwill in respect of 2016 acquisition resulted from a finalization of purchase price allocation.
(**)
Including a goodwill balance of $559,372 related to the acquisition of inContact.
F - 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 9:-
ACCRUED EXPENSES AND OTHER LIABILITIES
Employees and payroll accruals
Accrued expenses
Government authorities
Accrued expenses and other liabilities of discontinued operations
Other
NOTE 10:- DERIVATIVE INSTRUMENTS
NICE LTD. AND ITS SUBSIDIARIES
December 31,
2017
2016
$
$
142,182
80,893
79,515
189
6,571
118,599
86,236
67,218
3,077
1,081
$
309,350
$
276,211
The Company's risk management strategy includes the use of derivative financial instruments to reduce the volatility of earnings and cash flows associated with changes in foreign
currency exchange rates.
ASC 815, "Derivatives and Hedging" ("ASC 815"), requires the Company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate
the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified
into earnings in the line item associated with the hedged transaction in the period or periods during which the hedged transaction affects earnings. The remaining gain or loss on
the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item representing the ineffective portion of the derivative, if
any, is recognized in financial income (expense) in the period of change.
The Company entered into option and forward contracts to hedge a portion of anticipated New Israeli Shekel ("NIS") and Indian Rupee (INR) payroll and benefit payments as well
as facilities related payments. These derivative instruments are designated as cash flow hedges, as defined by ASC 815 and accordingly are measured in fair value. These
transactions are effective and, as a result, gain or loss on the derivative instruments are reported as a component of accumulated other comprehensive income (loss) and
reclassified as payroll expenses, facility expenses or finance expenses, respectively, at the time that the hedged income/expense is recorded.
F - 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 10:- DERIVATIVE INSTRUMENTS (Cont.)
Option contracts to hedge payroll
expenses ILS
expenses INR
Option contracts to hedge facility expenses INR
Forward contracts to hedge payroll
expenses ILS
expenses INR
Forward contracts to hedge facility expenses ILS
NICE LTD. AND ITS SUBSIDIARIES
Notional amount
December 31,
Fair value
(Level 2 within the fair value
hierarchy)
December 31,
2017
2016
2017
2016
$
$
4,000
17,800
1,846
30,000
400
-
43,600
12,000
-
52,000
-
2,549
$
46
232
19
947
6
-
$
54,046
$
110,149
$
1,250
$
107
4
-
(212)
-
10
(91)
The Company currently hedges its exposure to the variability in future cash flows for a maximum period of one year. As of December 31, 2017, the Company expects to reclassify all
of its unrealized gains and losses from accumulated other comprehensive income to earnings during the next twelve months.
The fair value of the Company's outstanding derivative instruments at December 31, 2017 and 2016 is summarized below:
Derivative assets:
Foreign exchange option contracts
Foreign exchange forward contracts
Derivative liabilities:
Foreign exchange option contracts
Foreign exchange forward contracts
Balance sheet line item
Prepaid expenses and other current assets
Prepaid expenses and other current assets
Accrued expenses and other liabilities
Accrued expenses and other liabilities
F - 42
Fair value of derivative instruments
December 31,
2017
2016
$
$
$
$
297
$
953
$
-
-
$
$
111
10
-
(212)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 10:- DERIVATIVE INSTRUMENTS (Cont.)
The effect of derivative instruments in cash flow hedging relationship on income and other comprehensive income for the years ended December 31, 2017, 2016 and 2015 is
summarized below:
NICE LTD. AND ITS SUBSIDIARIES
Amount of gain (loss) recognized in
other comprehensive income
on derivative (effective portion)
Year ended December 31,
2016
2017
2015
Derivatives in foreign exchange cash flow hedging relationships:
Forward contracts
Option contracts
Derivatives in foreign exchange cash flow hedging relationships:
$
$
$
160
1,075
$
202
(802)
1,235
$
(600) $
-
954
954
Amount of gain (loss) reclassified from other
comprehensive income into income (expenses)
(effective portion)
Year ended December 31,
2016
2015
2017
$
$
(2,429) $
(3,157)
(5,586) $
(132) $
(132) $
4,010
-
4,010
Option contracts
Forward contracts to hedge payroll expenses
Statements of income lime item
Cost of revenues, operating expenses and discontinued
operations
Cost of revenues and operating expenses
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
The Company leases office space, office equipment and various motor vehicles under operating leases.
1.
The Company's office space and office equipment are rented under several operating leases.
F - 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
Future minimum lease commitments under non-cancelable operating leases for the years ended December 31, were as follows:
NICE LTD. AND ITS SUBSIDIARIES
2018
2019
2020
2021
2022
2023 and thereafter
$
18,150
17,060
14,879
13,207
14,379
19,392
$
97,067
Rent expenses for the years 2017, 2016 and 2015 were approximately $14,103, $23,669 and $15,880, respectively.
On October 30, 2015, the Company entered into an agreement to rent new office space in Hoboken NJ, USA. Consequently, in November 2016, the Company ceased
using its offices in Paramus, NJ and Manhattan, NY, USA prior to their original contractual termination date, and the Company set to sub-lease its two former
facilities in New Jersey and New York for the remainder of their respective lease terms. As a result, the Company recorded an exit activity liability as of December 31,
2016 and recognized rent expenses in the amount of $6,457. In 2017, the Company managed to sub-lease additional space of its former facilities, and as a result, the
Company recognized rent income in the amount of $3,067.
2.
The Company leases its motor vehicles under cancelable operating lease agreements.
The minimum payment under these operating leases, upon cancellation of these lease agreements was $ 671 as of December 31, 2017.
Lease expenses for motor vehicles for the years 2017, 2016 and 2015 were $2,656, $2,747 and $5,103, respectively.
b.
Other commitments:
The Company is obligated under certain agreements with its suppliers to purchase licenses and hosting services. These non-cancelable obligations as of December 31, 2017
and 2016 were $30,831 and $22,207, respectively.
F - 44
NICE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
c. Legal proceedings:
1.
In May 2009, inContact was served a lawsuit titled California College, Inc., et al., v. UCN, Inc., et al. in connection with the sale of services with those
Insidesales.com, Inc. California College originally sought damages in excess of $20,000. Insidesales.com and inContact filed cross-claims against one another, which
they subsequently agreed to dismiss with prejudice. In October 2011, California College reached a settlement with Insidesales.com, the terms of which have not been
disclosed and remain confidential. In June of 2013, California College amended its damages claim to $14,400, of which approximately $5,000 was alleged to be pre-
judgment interest. On September 10, 2013, the court issued an order on inContact's Motion for Partial Summary Judgment. The court determined that factual disputes
exist as to several of the claims, but dismissed California College's cause of action for intentional interference with prospective economic relations and the claim for
prejudgment interest. Dismissing the claim for prejudgment interest effectively reduced the claim for damages to approximately $9,200. The trial court granted
inContact’s motion to stay the trial without date pending an interlocutory appeal to the Utah Supreme Court of the trial court’s ruling with respect to allowing
California College’s experts to testify at trial. The briefs were filed in the matter and oral arguments were made in August 2017. The Utah Court of Appeals has yet to
rule on the matter. At this stage we are unable to evaluate the probability of a favorable or unfavorable outcome in this litigation.
2.
From time to time the Company or its subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of business. While the
outcome of these matters cannot be predicted with certainty, the Company does not believe it will have a material effect on its consolidated financial position, results
of operations, or cash flows.
NOTE 12:-
TAXES ON INCOME
a.
Israeli taxation:
1.
Corporate tax:
Commencing 2012, NICE Ltd. and its Israeli subsidiary elected the Preferred Enterprise regime to apply under the Law for the Encouragement of Capital Investments (the
“Investment Law”). The election is irrevocable. Under the Preferred Enterprise Regime, from 2015 through 2016, NICE Ltd. and its Israeli subsidiary's entire preferred income
was subject to the tax rate of 16%.
F - 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
In December 2016, the Israeli Knesset passed a number of changes to the Investments Law regimes. These changes came into law in May 2017, retroactively effective
beginning January 1, 2017, upon the passing into law of Regulations promulgated by the Finance Ministry to implement the “Nexus Principles” based on OECD guidelines
published as part of the Base Erosion and Profit Shifting (BEPS) project. Such Regulations provide rules for implementation of the new beneficial Preferred Technology
Enterprise tax regime.
The Company believes it qualifies in tax year 2017 as a Preferred Technology Enterprise and accordingly be eligible for a tax rate of 12% on its preferred technology income,
as defined in such regulations, beginning from tax year 2017 and onwards. The Company expects that it will qualify as a Preferred Technology Enterprise in 2018 and
subsequent tax years.
Income not eligible for Preferred Enterprise or Preferred Technology Enterprise benefits is taxed at the regular corporate tax rate, which is 24% in 2017, was 25% in 2016 and
26.5% in 2015. This rate is further scheduled to be reduced to 23% in 2018 and thereafter.
Prior to 2012, most of NICE Ltd. and its Israeli subsidiary's income was exempt from tax or subject to reduced tax rates under the Investment Law. Upon distribution of
exempt income, the distributing company was subject to reduced corporate tax rates ordinarily applicable to such income under the Investment Law. Currently, income
subjected to a reduced tax rate under the Preferred Enterprise and Preferred Technology Enterprise Regime will be freely distributable as dividends, subject to a 20%
withholding tax (or lower, under an applicable tax treaty). However, upon the distribution of a dividend from such Preferred Income to an Israeli company, no withholding tax
will be imposed.
Pursuant to a temporary tax relief initiated by the Israeli government, a company that elected by November 11, 2013 to pay a reduced corporate tax rate as set forth in the
temporary tax relief with respect to undistributed exempt income generated under the Investment Law accumulated by the company until December 31, 2011 is entitled to
distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make
certain qualified investments in Israel over a five-year period. A company that has elected to apply the temporary tax relief cannot withdraw from its election. The election
did not require the actual distribution of these previously tax-exempted earnings.
In September 2013, the Company made the election and duly released all of NICE and its Israeli subsidiary’s tax-exempted income through 2011 related to their various pre
2012 programs under the Investment Law. As a result of the election and the related settlement of a routine multi-year tax audit, the Company recorded an expense of $19,200
and paid an amount of approximately $32,000. The Company believes that it has fulfilled its commitment to make certain investments in "industrial projects" (as defined in
the Law), as was required to be completed by December 31, 2017. Additionally, the Company believes that this commitment has already been fulfilled during 2013 as part of
its existing investment plans. Further to the election, NICE no longer has a tax liability upon future distributions of its tax-exempted earnings, while the Israeli subsidiary may
have a tax liability upon future distributions only with respect to its 2012 tax-exempted earnings.
F - 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
2.
Foreign Exchange Regulations:
NICE LTD. AND ITS SUBSIDIARIES
Under the Foreign Exchange Regulations, NICE and its Israeli subsidiary calculate their tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated
in U.S. Dollars is translated into New Israeli Shekels according to the exchange rate as of December 31st of each year.
3.
Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969:
NICE and its Israeli subsidiary believe they currently qualify as an "Industrial Company" as defined by the above law and, as such, is entitled to certain tax benefits
including accelerated depreciation, deduction of public offering expenses in three equal annual installments and amortization of cost of purchased know-how and patents for
tax purposes over 8 years.
b.
Income taxes on non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. The Company's consolidated tax rate depends on the geographical mix of
where its profits are earned. Primarily, in 2017, the Company's U.S. subsidiaries are subject to combined federal and state income taxes of approximately 39% and its
subsidiaries in the U.K. are subject to corporation tax at a rate of approximately 19%. Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were
provided in relation to undistributed earnings of the Company's foreign subsidiaries. This is because the Company has the intent and ability to reinvest these earnings
indefinitely in the foreign subsidiaries and therefore those earnings are continually redeployed in those jurisdictions. As of December 31, 2017, the amount of undistributed
earnings of non-Israeli subsidiaries, which is considered indefinitely reinvested, was $ 349,888 with a corresponding unrecognized deferred tax liability of $ 64,144. If these
earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for
foreign tax credits) and foreign withholding taxes.
c.
U.S. Tax Reform:
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “U.S. Tax Reform”); a comprehensive tax legislation that includes significant changes to
the taxation of business entities. These changes include several key tax provisions that might impact the Company, among others: (i) a permanent reduction to the statutory
federal corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017; (ii) a partial limitation on the tax deductibility of business
interest expense; (iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to
prevent erosion of the U.S. income tax base) and (iv) a one-time deemed repatriation tax on accumulated offshore earnings held in cash and illiquid assets, with the latter
taxed at a lower rate.
F - 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
Due to the timing of the enactment and the complexity involved in applying the provisions of the U.S. Tax Reform, the Company has made reasonable estimates of the
effects and recorded provisional amounts in the financial statements as of December 31, 2017. As the Company collects and prepares necessary data, and interprets the U.S.
Tax Reform and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the
provisional amounts. Those adjustments may impact the Company's provision for income taxes and effective tax rate in the period in which the adjustments are made. The
accounting for the tax effects of the U.S. Tax Reform will be completed in 2018 with accordance with SAB 118.
Provisional amounts for the following income tax effects of the U.S. Tax Reform have been recorded as of December 31, 2017 and are subject to change during 2018.
Deferred tax effects
As a result of the U.S. Tax Reform and the reduced U.S. corporate income tax rate, the Company has remeasured its deferred taxes as of December 31, 2017 to reflect the
reduced rate that will apply in future periods, when these deferred taxes are settled or realized. The remeasurement resulted in the Company’s recognition of a deferred tax
benefit of $31,000.
As the Company completes its analysis of the U.S. Tax Reform and incorporates additional guidance that may be issued by the U.S. Treasury Department, the IRS or other
standard-setting bodies, the Company may identify additional effects not reflected as of December 31, 2017.
d.
Net operating loss carryforward:
As of December 31, 2017, the Company and certain of its subsidiaries had tax loss carry-forwards totaling in aggregate approximately $335,360 which can be carried forward
and offset against taxable income. Approximately $69,053 of these carry-forward tax losses have no expiration date, with the balance expiring between 2018 and 2037.
Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration of net operating losses increasing taxes before utilization.
e.
Deferred tax assets and liabilities:
Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
recorded for tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
F - 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
Deferred tax assets:
Net operating losses carryforward and tax credits
Share based payments
Research and development costs
Reserves, allowances and other
Deferred tax assets before valuation allowance
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Acquired intangibles
Acquired deferred revenue
Deferred tax liabilities
Deferred tax liabilities, net
Deferred tax assets
Deferred tax liabilities
Deferred tax liabilities, net
NICE LTD. AND ITS SUBSIDIARIES
$
December 31,
2017
2016
$
79,196
16,142
3,606
8,915
107,859
(8,853)
82,243
17,299
4,246
8,507
112,295
(8,839)
99,006
103,456
(142,352)
(2,600)
(231,645)
(4,670)
(144,952)
(236,315)
$
(45,946) $
(132,859)
December 31,
2017
2016
$
$
11,850
(57,796)
14,093
(146,952)
$
(45,946) $
(132,859)
The Company has provided valuation allowances in respect of certain deferred tax assets resulting from tax loss carry forwards and other reserves and allowances due to
uncertainty concerning their realization.
F - 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
f.
A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:
NICE LTD. AND ITS SUBSIDIARIES
Income before taxes on income, as reported in the consolidated statements of income
$
129,660
$
144,481
$
171,410
Year ended December 31,
2016
2015
2017
Statutory tax rate in Israel
Preferred Enterprise benefits (*)
Changes in valuation allowance
Earnings taxed under foreign law
Tax settlements and other adjustments
U.S. Tax Reform one-time adjustment
Other
Effective tax rate
24.0%
(16.8%)
0.0%
(4.6%)
14.3%
(23.9%)
(3.5%)
25.0%
(8.9%)
1.0%
(7.7%)
5.8%
-
(0.4%)
(10.5%)
14.8%
26.5%
(6.1%)
(0.4%)
(4.0%)
1.1%
-
0.9%
18.0%
(*)
The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows:
Basic
Diluted
g.
Income before taxes on income is comprised as follows:
Domestic
Foreign
F - 50
Year ended December 31,
2016
2017
2015
$
$
0.36
$
0.22
$
0.35
$
0.21
$
0.18
0.17
Year ended December 31,
2016
2017
2015
$
$
188,070
(58,410)
$
131,111
13,370
122,952
48,458
$
129,660
$
144,481
$
171,410
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
h. Taxes on income (tax benefit) are comprised as follows:
Current
Deferred
Domestic
Foreign
Of which:
Domestic taxes:
Current
Deferred
Foreign taxes:
Current
Deferred
NICE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2016
2017
2015
$
$
$
$
57,174
(70,805)
$
47,318
(25,906)
$
23,978
6,854
(13,631)
$
21,412
$
30,832
27,673
(41,304)
$
28,097
(6,685)
$
24,812
6,020
(13,631)
$
21,412
$
30,832
Year ended December 31,
2016
2017
2015
$
$
22,808
4,865
$
27,932
165
27,673
28,097
34,366
(75,670)
19,386
(26,071)
(41,304)
(6,685)
14,860
9,952
24,812
9,118
(3,098)
6,020
Taxes on income (tax benefit)
$
(13,631) $
21,412
$
30,832
F - 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:-
TAXES ON INCOME (Cont.)
i. Uncertain tax positions:
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
Uncertain tax positions, beginning of year
Increases in tax positions for prior years
Increases in tax positions for current year
Settlements
Expiry of the statute of limitations
Uncertain tax positions, end of year
NICE LTD. AND ITS SUBSIDIARIES
December 31,
2017
2016
$
$
26,659
5,105
15,140
-
(2,920)
18,236
2,147
9,926
(1,331)
(2,319)
$
43,984
$
26,659
All the Company's unrecognized tax benefits would, if recognized, reduce the Company's annual effective tax rate. The Company has further accrued $1,262 and $206 due to
interest and penalties related to uncertain tax positions as of December 31, 2017 and 2016 respectively.
During 2017, prior tax years in the US and the United Kingdom were closed by way of the expiration of the statute of limitations. The Company is currently in the process of
routine Israeli income tax audits for the tax years 2013 through 2015. The U.S. subsidiaries are currently in the process of a routine Internal Revenue Service audit of the tax
year 2014 consolidated U.S. Federal tax return. As of December 31, 2017, the Company or its subsidiaries are still subject to U.S. federal income tax audits for the tax years of
2014 through 2016 and to other income tax audits for the tax years of 2012 through 2016.
NOTE 13:-
SHAREHOLDERS' EQUITY
a.
The Ordinary shares of the Company are traded on the Tel-Aviv Stock Exchange and its American Depositary Shares (“ADSs”), each representing one fully paid ordinary
share, par value NIS 1.00 per share of the Company are traded on NASDAQ.
b. Share option plans:
2008 and 2016 Share Incentive Plan
In June 2008 the Company adopted the 2008 Share Incentive Plan (the “2008 Plan”) and in February 2016, the Company adopted the 2016 Share Incentive Plan (the “2016
Plan” and together with the 2008 Plan the “Plans”). The Company adopted the Plans to provide incentives to employees, directors, consultants and/or contractors by
rewarding performance and encouraging behavior that will improve the Company’s profitability.
F - 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
Under each of the Plans, the Company's employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to
acquire the Company ordinary shares; share appreciation right; share and/or restricted share award (“RSA”); restricted stock unit (“RSU”) and/or other share unit; and/or
other share-based award and/or other right or benefit under the Plans, including any such equity-related award that is a performance based award (each an "Award").
Generally, under the terms of the 2016 Plan, and unless determined otherwise by the Board of Directors, 25% of the restricted share units and par value options granted
become vested on each of the four consecutive annual anniversaries following the date of grant. Specifically with respect to options (other than options granted at an
exercise price equal to their nominal value), unless determined otherwise by the administrator of the 2016 Plan, 25% of an Award granted becomes exercisable on the first
anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Certain executive officers are entitled to acceleration
of vesting of awards in the event of a change of control, subject to certain conditions. Awards with a vesting period expire six years after the date of grant. Options that are
performance-based shall expire seven years following the date of grant. The 2016 Plan provides that the number of shares that may be subject to Awards granted under the
2016 Plan shall be an amount per calendar year, equal to 3.5% of the Company issued and outstanding share capital as of December 31 of the preceding calendar year. Such
amount is reset for each calendar year. Awards are non-transferable except by will or the laws of descent and distribution.
Options would be granted at an exercise price equal to the average of the closing prices of one ADR, as quoted on the NASDAQ market, during the 30 consecutive calendar
days preceding the date of grant, unless determined otherwise by the administrator of the 2016 Plan (including in some cases options granted with an exercise price equal to
the nominal value of an ordinary share).
The Company Board of Directors also adopted an addendum to the 2016 Plan for Awards granted to grantees who are residents of Israel (the "Addendum") and resolved to
elect the "Capital Gains Route" (as defined in Section 102(b)(2)) of the Tax Ordinance for the grant of Awards to Israeli grantees. The U.S. addendum of the 2016 Plan
provides only for non-qualified stock options for purposes of U.S. tax laws. The 2016 Plan is generally administered by our Board of Directors and compensation committee.
During 2017, we granted 1,099,141 options and restricted share units under the 2016 Plan (which constituted 1.83% of the Company issued and outstanding share capital as
of December 31, 2016).
F - 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
Pursuant to the terms of the acquisitions of Actimize Ltd., e-Glue Software Technologies Inc., Fizzback, Merced Causata, Nexidia and inContact, the Company assumed or
replaced unvested options, RSAs and RSUs and converted them or replaced them with NICE options, RSAs and RSUs, as applicable, based on an agreed exchange ratio.
Each assumed or replaced option, RSA and RSU is subject to the same terms and conditions, including vesting, exercisability and expiration, as originally applied to any
such option, RSA and RSU immediately prior to the acquisition.
The fair value of the Company's stock options granted to employees and directors for the years ended December 31, 2017, 2016 and 2015 was estimated using the following
assumptions:
Expected volatility
Risk free interest rate
Expected dividend
Expected term (in years)
2017
2016
2015
21.69%-22.90%
1.53%-2.00%
0%
3.5
21.05%-25.92%
0.58%-2.04%
0%-1.00%
3.5
23.02%-27.55%
0.76%-1.18%
0%-1.29%
3.5
A summary of the Company's stock options activity and related information for the year ended December 31, 2017, is as follows:
Outstanding at January 1, 2017
Granted
Exercised
Forfeited
Cancelled
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Number of
options
Weighted-
average exercise
price
2,273,664
444,826
(813,787)
(224,289)
(4,284)
1,676,130
598,843
23.61
20.75
23.35
22.85
15.00
23.07
33.38
Weighted-
average
remaining
contractual term
(in years)
Aggregate
intrinsic
value
4.46
102,652
4.45
3.45
115,390
35,049
The weighted-average grant-date fair value of options granted during the years 2017, 2016 and 2015 was $61.54, $46.24 and $32.58, respectively.
F - 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
The total intrinsic value of options exercised during the years 2017, 2016 and 2015 was $42,592, $35,664 and $40,519, respectively.
The options outstanding under the Company's stock option plans as of December 31, 2017 have been separated into ranges of exercise price as follows:
Ranges of
exercise price
$
$
$
$
$
$
$
$
0.29
0.69
6.72-9.89
11.40-15.16
17.72
28.64-42.92
43.01-64.06
64.61-85.14
Options
outstanding
as of
December 31,
2017
Weighted
average
remaining
contractual
term
(Years)
Weighted
average
exercise
price
$
Options
exercisable
as of
December 31,
2017
922,427
1,888
8,861
3,301
934
339,873
211,186
187,660
1,676,130
4.46
1.90
6.66
2.73
3.20
4.12
4.52
4.83
4.45
0.29
0.69
7.03
14.09
17.72
39.15
52.79
73.63
23.07
197,933
1,888
6,655
3,301
934
200,777
90,409
96,946
598,843
A summary of the Company's RSU and the Company's RSA activities and related information for the year ended December 31, 2017, is as follows:
Weighted
average
exercise
price of
options
exercisable
$
0.29
0.69
7.12
14.09
17.72
38.61
59.11
69.36
33.38
Outstanding at January 1, 2017
Granted
Vested
Cancelled
Forfeited
Outstanding at December 31, 2017
(*)
NIS 1 par value which represents approximately $0.29
Number of
RSU and
RSA (*)
1,498,643
654,315
(456,807)
(250)
(170,889)
1,525,012
As of December 31, 2017, there was approximately $92,650 of unrecognized compensation expense related to non-vested stock options, RSUs and RSAs, expected to be
recognized over a period of up to four years.
F - 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
NICE LTD. AND ITS SUBSIDIARIES
The total equity-based compensation expense related to all of the Company's equity-based awards, recognized for the years ended December 31, 2017, 2016 and 2015, was
comprised as follows:
Cost of revenues
Research and development, net
Selling and marketing
General and administrative
Year ended December 31,
2016
2017
2015
$
$
11,337
9,038
23,107
13,498
$
7,878
5,676
16,403
10,590
3,712
2,161
11,266
10,521
Total stock-based compensation expenses
$
56,980
$
40,547
$
27,660
c.
Treasury shares:
On May 6, 2015 the Company's Board of Directors authorized a program to repurchase up to $100,000 of the Company's issued and outstanding Ordinary shares and ADRs.
On January 10, 2017 the Company announced that the Board of Directors authorized a program to repurchase up to an additional $150,000 of the Company's issued and
outstanding ordinary shares and ADRs. This share repurchase program commenced on April 7, 2017 following completion of the prior program. Repurchases may be made
from time to time in the open market or in privately negotiated transactions and will be in accordance with applicable securities laws and regulations. The timing and amount
of the repurchase transactions will be determined by management and may depend on a variety of factors, including market conditions, alternative investment opportunities
and other considerations. The programs do not obligate the Company to acquire any particular amount of ordinary shares and ADRs and the program may be modified or
discontinued at any time without prior notice.
d. Dividends:
On February 13, 2013, the Company announced that the Board of Directors had approved a dividend policy under which the Company intended to pay quarterly cash
dividends to holders of its ordinary shares and ADRs subject to declaration by the Board from non-taxable approved enterprise earning. Under Israeli law, dividends may be
paid only out of total accumulated retained profits and other surplus (as defined in the law) as of the most recent financial statements or as accrued over a period of the last
two years, whichever is higher, provided that there is no reasonable concern that the dividend distribution will prevent the Company from meeting its existing and
foreseeable obligations as they come due. Dividends are generally declared and paid in U.S. dollars, although the Company may pay such dividends in Israeli currency.
On January 10, 2017 the Company announced its capital return strategy to optimize the Company’s long term growth profile. In connection with adopting this strategy, the
Board of Directors eliminated the dividend policy effective in the first quarter of 2017.
The total amount of annual dividend declared and paid in 2017 and 2016 was $0.16, $0.64 per share.
F - 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:-
LONG TERM DEBT
NICE LTD. AND ITS SUBSIDIARIES
In connection with financing the acquisition of inContact (refer to Note 1b) which closed on November 14, 2016, the Company entered into a Credit Agreement with certain lenders,
according to which the following credit facilities were issued: 1) a long term loan of $475,000, and 2) a revolving credit loan of up to $75,000.
The Credit Agreement contains a number of covenants and restrictions that among other things, and subject to certain agreed upon exceptions, require the Company and its
subsidiaries to satisfy certain financial covenants and restricts the ability of the Company and its subsidiaries to incur liens, incur additional indebtedness, make loans and
investments, engage in mergers and acquisitions, engage in asset sales, declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase subordinated debt
and amend or otherwise alter debt agreements, in each case, subject to certain agreed upon exceptions. A failure to comply with these covenants could permit the lenders under the
Credit Agreement to declare all amounts borrowed under the Credit Agreement, together with accrued interest and fees, to be immediately due and payable. As of December 31,
2017, the Company was in compliance with all covenants and requirements outlined in the Credit Agreement.
Long term loan
In January 2017, the Company prepaid a principal amount of $260,000 of the amount outstanding under the long term loan. As a result, the remaining principal of $215,000 are due
on the final maturity date of the term loan facility.
As of December 31, 2017, the contractual principal payments for the long term loan are $215,000 which are due at December 31, 2021.
The long term loan bears interest through maturity at a variable rate based upon, at the Company's option every interest period, either (a) the LIBOR rate for Eurocurrency
borrowing or (b) an Alternate Base Rate ("ABR"), which is the highest of (i) the administrative agent's prime rate, (ii) one-half of 1.00% in excess of the overnight U.S. Federal
Funds rate, and (iii) 1.00% in excess of the one-month LIBOR), plus in each case, an applicable margin. The applicable margin for Eurocurrency loans ranges, based on the
applicable total net leverage ratio, from 1.25% to 2.00% per annum and the applicable margin for ABR loans ranges, based on the applicable total net leverage ratio, from 0.25% to
1.00% per annum.
Debt issuance costs of $10,158 attributable to the long term loan are amortized as interest expense over the contractual term of the loan using the effective interest rate. Upon pre-
payment of the principal $260,000 as mentioned above, the Company amortized $5,300 of debt issuance costs in addition to $1,034 amortization expenses related to debt issuance
costs recorded in 2017.
F - 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:-
LONG TERM DEBT (Cont.)
The carrying values of the liability's components are reflected in the Company's accompanying consolidated balance sheets as follows:
Principal
Less: Debt issuance costs, net of amortization
Net liability carrying amount
NICE LTD. AND ITS SUBSIDIARIES
December 31,
2017
2016
$
215,000
$
(3,486)
475,000
(9,820)
$
211,514
$
465,180
Interest expense related to the liability is reflected on the accompanying consolidated statements of operations for the years ended December 31:
Amortization of debt issuance costs
Interest expense
Total interest expense recognized
Effective interest rate
Revolving credit loan
December 31,
2017
2016
$
$
$
6,334
5,558
11,892
$
3.30%
338
1,266
1,604
2.84%
Pursuant to the Credit Agreement, the Company has also been granted a revolving credit facility that entitles the Company to borrow up to $75,000 through December 2021 with
interest payable on the borrowed amount set at the same terms as the term loan, as well as a quarterly commitment fee on unfunded amounts ranging from 0.25% to 0.5%, subject to
the achievement of certain leverage levels. As of December 31, 2017, no amounts had been funded.
Debt issuance costs of $1,667 attributable to the revolving credit loan are capitalized and amortized as interest expense over the contractual term of the agreement on a straight line
basis.
F - 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:-
LONG TERM DEBT (Cont.)
Exchangeable Senior Notes and Hedging Transactions
Exchangeable Senior Notes
NICE LTD. AND ITS SUBSIDIARIES
In January 2017, the Company issued $287,500 aggregate principal amount of Exchangeable Senior Notes (the “Notes”) due 2024. The following table summarizes some key facts
and terms regarding the outstanding exchangeable senior notes:
Issuance date
Maturity date
Principal amount
Cash coupon rate (per annum)
Conversion rate effective September 15, 2023 (per $1000 principal amount)
Effective conversion price effective September 15, 2023 (per ADS)
Due 2024
January 18, 2017
January 15, 2024
287,500
1.25%
12.026
83.15
$
$
Subject to satisfaction of certain conditions and during certain periods, as defined in the indenture governing the notes, the holders will have the option to exchange the notes for
(i) cash, (ii) ADSs or (iii) a combination thereof, at the Company’s election.
NICE may provide additional ADSs upon conversion if there is a "Make-Whole Fundamental Change" in the business as defined in the indenture governing the notes.
The Notes are not redeemable by the Company prior to the maturity date apart from certain cases as defined in the indenture governing the Notes.
Debt issuance costs of $5,791 attributable to the long term loan are amortized as interest expense over the contractual term of the loan using the effective interest rate.
The carrying values of the liability and equity components of the exchangeable senior notes are reflected in the Company's accompanying consolidated balance sheets as follows:
Principal
Less:
Debt issuance costs, net of amortization
Unamortized discount
Net liability carrying amount
Equity component - net carrying value
December 31,
2017
$
287,500
(5,182)
(46,190)
236,128
51,176
$
$
Interest is payable on the debentures semi-annually at the cash coupon rate; however, the remaining debt discount is being amortized as additional non-cash interest expense
using an effective annual interest rate equal to the Company's estimated nonconvertible debt borrowing rate at the time of issuance.
F - 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:-
LONG TERM DEBT (Cont.)
Interest expense related to the notes is reflected on the accompanying consolidated statements of operations for the year ended December 31:
NICE LTD. AND ITS SUBSIDIARIES
Amortization of debt issuance costs
Non-cash amortization of debt discount
Interest expense
Net liability carrying amount
Equity component - net carrying value
Exchangeable notes hedge transactions
Year Ended
December 31,
2017
$
$
609
6,278
3,414
10,301
4.68%
In connection with the pricing of the Notes, the Company has entered into privately negotiated exchangeable note hedge transactions with some of the initial purchasers and/or
their respective affiliates (the “option counterparties”).
Subject to customary anti-dilution adjustments substantially similar to those applicable to the Notes, the exchangeable note hedge transactions cover the same number of ADSs
that initially underlined the Notes.
The note hedge transactions are expected generally to reduce potential dilution to the ADSs and/or offset potential cash payments the Company is required to make in excess of
the principal amount, in each case, upon any exchange of the Exchangeable Notes.
A portion of the call-options can be settled upon a surrender of the same amount of Exchangeable Senior Notes by a Holder. Settlement can be done in cash, ADSs or a
combination of both, at NICE’s election.
Concurrently with the Company’s entry into the exchangeable note hedge transactions, the Company has entered into warrant transactions with the option counterparties relating
to the same number of ADSs (3,457,475), with a strike price of $101.82 per ADS, subject to customary anti-dilution adjustments.
The warrants are exercisable for a period of 3 months as of the notes maturity date.
The Company has recorded a net decrease of $20,281 in additional paid in capital, due to its equity components.
F - 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 15:- REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION
a.
Reportable segments:
NICE LTD. AND ITS SUBSIDIARIES
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is its Chief Executive Officer.
During 2015, the Company divested its Physical Security as well as its Cyber and Intelligence operations, which were a major part of the Security Solutions segment, to allow
it to focus on its core markets as part of the execution of its long-term strategy. Following this divestiture, the Company operates in the following operation-based segments:
Customer Engagement provide data driven insights that enable businesses to deliver consistent and personalized experience to customers, and Financial Crime and
Compliance provide real time and cross-channel fraud prevention, anti-money laundering, brokerage compliance and enterprise-wide case management.
Revenues
Operating income
Revenues
Operating income
Revenues
Operating income
Year ended December 31, 2017
Customer
Engagement
(1) (2)
Financial Crime
and Compliance
Not
allocated
Total
1,051,350
$
280,802
$
-
$
1,332,152
175,247
$
101,774
$
(126,951) $
150,071
Year ended December 31, 2016
Customer
Engagement
(1) (2)
Financial Crime
and Compliance
Not
allocated
Total
754,398
$
261,144
$
-
$
1,015,542
202,893
$
89,990
$
(158,707) $
134,176
Year ended December 31, 2015
Customer
Engagement
(1) (2)
Financial Crime
and Compliance
Not
allocated
Total
688,060
$
238,807
$
-
$
926,867
206,994
$
73,131
$
(114,019) $
166,106
$
$
$
$
$
$
(1)
Includes the results of a certain operation (formerly part of the Security Solutions segment), which was retained following the above mentioned divestiture and
integrated within the Customer Engagement operating segment.
(2)
Includes the results of companies which were acquired in 2017 and 2016 and are being integrated within the Customer Engagement segment.
F - 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 15:- REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Cont.)
The following presents property and equipment as of December 31, 2017 and 2016, based on operational segments:
Customer Engagement
Financial Crime and Compliance
Non-allocated
b.
Geographical information:
Total revenues from external customers on the basis of the Company's geographical areas are as follows:
Americas, principally the US
EMEA (*)
Israel
Asia Pacific
NICE LTD. AND ITS SUBSIDIARIES
December 31,
2017
2016
$
$
104,981
9,636
3,658
68,935
13,192
5,551
$
118,275
$
87,678
Year ended December 31,
2016
2017
2015
$
$
1,035,871
186,268
3,693
106,320
$
720,520
189,223
4,295
101,504
630,096
192,640
4,231
99,900
$
1,332,152
$
1,015,542
$
926,867
The following presents property and equipment as of December 31, 2017 and 2016, based on geographical areas:
Americas, principally the US
EMEA (*)
Israel
Asia Pacific
(*)
Includes Europe, the Middle East (excluding Israel) and Africa.
F - 62
December 31,
2017
2016
$
$
70,404
3,557
37,571
6,743
49,175
3,398
28,237
6,868
$
118,275
$
87,678
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 16:-
SELECTED STATEMENTS OF INCOME DATA
a.
Research and development, net:
Total costs
Less - grants and participations
Less - capitalization of software development costs
b.
Financial income (expenses) and other, net:
NICE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2016
2017
2015
$
211,406
$
151,698
$
(2,363)
(27,936)
(1,668)
(8,502)
132,039
(2,174)
(1,380)
$
181,107
$
141,528
$
128,485
Financial income:
Interest and amortization/accretion of premium/discount on marketable securities, net
Exchange rates differences
Realized gain on marketable securities
Interest
$
Financial expenses:
Interest
Debt issuance costs amortization
Exchangeable Senior Notes amortization of discount
Exchange rates differences
Other
Other expenses, net
Year ended December 31,
2016
2017
2015
$
2,537
241
-
1,149
3,927
(9,580)
(6,943)
(6,278)
-
(1,518)
(24,319)
(19)
$
5,607
3,961
3,388
953
13,909
(1,861)
(338)
-
-
(925)
(3,124)
(480)
6,844
-
32
430
7,306
(66)
-
-
(731)
(780)
(1,577)
(425)
$
(20,411) $
10,305
$
5,304
F - 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 16:-
SELECTED STATEMENTS OF INCOME DATA (Cont.)
c.
Net earnings per share:
NICE LTD. AND ITS SUBSIDIARIES
The following table sets forth the computation of basic and diluted net earnings per share:
1.
Numerator:
Net income from continuing operations available to ordinary shareholders
Net income from discontinued operations available to ordinary shareholders
$
$
143,291
-
123,069
$
(6,149)
140,578
118,253
Net income to Ordinary shareholders
$
143,291
$
116,920
$
258,831
2.
Denominator (in thousands):
Year ended December 31,
2016
2017
2015
Denominator for basic net earnings per share:
Weighted average number of shares
Effect of dilutive securities:
Add - employee stock options and RSU
Denominator for diluted net earnings per share - adjusted weighted average shares
F - 64
Year ended December 31,
2016
2017
2015
60,444
1,675
62,119
59,667
1,368
61,035
59,552
1,729
61,281
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its
SIGNATURES
behalf.
Date: March 30, 2018
NICE LTD.
By: /s/ Barak Eilam
Barak Eilam
Chief Executive Officer
129
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.
Significant Subsidiaries
Exhibit 8.1
Name of Subsidiary
Nice Systems Australia PTY Ltd.
NICE Systems Technologies Brasil LTDA
NICE Systems Canada Ltd.
Nice Systems China Ltd.
Nice France S.A.R.L.
NICE Systems GmbH
NICE APAC Ltd.
NICE Systems Kft
Nice Interactive Solutions India Private Ltd.
Nice Technologies Ltd.
Actimize Ltd.
Nice Japan Ltd.
NICE Technologies Mexico S.R.L.
NICE Netherlands B.V.
Nice Systems (Singapore) Pte. Ltd.
Nice Switzerland AG
Actimize UK Limited
NICE Systems Technologies UK Limited
NICE Systems UK Ltd.
Actimize Inc.
Nice Systems Inc.
Nice Systems Latin America, Inc.
Nice Systems Technologies Inc.
Nexidia Inc.
inContact Inc.
inContact Bolivia S.R.L.
inContact Philippines Inc.
Country of Incorporation or Residence
Australia
Brazil
Canada
China
France
Germany
Hong Kong
Hungary
India
Ireland
Israel
Japan
Mexico
Netherlands
Singapore
Switzerland
United Kingdom
United Kingdom
United Kingdom
United States
United States
United States
United States
United States
United States
Bolivia
Philippines
Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a),
as adopted pursuant to §302 of the Sarbanes-Oxley Act
Exhibit 12.1
I, Barak Eilam, certify that:
1.
I have reviewed this annual report on Form 20-F of NICE Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d – 15(f)) for the company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit
committee of the company's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
company's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date: March 30, 2018
By: /s/ Barak Eilam
Barak Eilam
Chief Executive Officer
Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a),
as adopted pursuant to §302 of the Sarbanes-Oxley Act
Exhibit 12.2
I, Beth Gaspich, certify that:
1.
I have reviewed this annual report on Form 20-F of NICE Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d – 15(f)) for the company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit
committee of the company's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
company's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date: March 30, 2018
By: /s/ Beth Gaspich
Beth Gaspich
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report on Form 20-F of NICE Ltd. (the "Company") for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), the undersigned, Barak Eilam, President and Chief Executive Officer of the Company, certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 30, 2018
By: /s/ Barak Eilam
Barak Eilam
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report on Form 20-F of NICE Ltd. (the "Company") for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), the undersigned, Beth Gaspich, Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 30, 2018
By: /s/ Beth Gaspich
Beth Gaspich
Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.1
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-166364, 333-168100, 333-171165, 333-162795, 333-162110, 333-06784, 333-08146,
333-11842, 333-09350, 333-11154, 333-111112, 333-111113, 333-134355, 333-144589, 333-145981, 333-153230, 333-177510, 333-179408, 333-181375, 333-191176, 333-199904, 333-210341, 333-210343, 333-
210344, 333-214584, 333-210341, 333-210343, 333-210344 and 333-214584) of our reports dated March [30], 2018, with respect to the consolidated financial statements of NICE Ltd. and its
subsidiaries and the effectiveness of internal control over financial reporting of NICE Ltd. included in this Annual Report on Form 20-F for the year ended December 31, 2017.
Tel Aviv, Israel
March 30, 2018
/s/ KOST, FORER, GABBAY & KASIERER
KOST, FORER, GABBAY & KASIERER
A Member of EY Global