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September 01, 2020 1:43pm
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Fat Margins are NICE (NICE) in Troubled Times

This market requires flexibility both from investors and from the companies you invest in. When looking for companies that have the ability to be agile as higher interest rates and geopolitical tensions roil markets, keep a close eye on a company’s margins. Companies like NICE (NICE), that continue to grow and sport fat gross margins, have the ability to be nimble in the crosscurrents investors are facing today.

As companies adjust to higher interest rates…no, I don’t think 0% rates are in the cards again for a long time, if ever…it’s good to have flexibility. As management consultants say, after you pay them a lot of money, “the more levers you have the better”. Levers being anything you can adjust or negotiate, such as supplier contracts, employee contracts, prices, marketing budgets, and the list goes on and on, the bigger the list the better. 

And as an investor, how can you tell if a company has a lot of levers available to pull? One way is by looking at gross margins. Gross margins tell you how efficiently a company is operating, and the higher the efficiency rate, the better likelihood the company can weather an economic storm. Software providers are a great place to find high gross margins, and NICE Ltd (NICE) is a good place to start. 

NICE provides software for three different product lines, Customer Engagement, Financial Crime & Compliance, and Public Safety. The company has been investing in AI and digitizing its software offerings (for example having client customers use “self service” interactions to resolve issues) for several years, and those investments are hitting the bottom line now. 

You only have to look as far as the latest quarter to see double digit growth in revenue, operating income and EPS. NICE grew revenue 10% YoY, in large part due to its cloud offerings, which is hitting on all cylinders. Cloud revenue was up 23% YoY. 

Commenting on the quarter, NICE CEO Barak Eilam said, “The market is characterized by a fast-moving transition to the cloud by large enterprises coupled with strong demand to incorporate AI into their customer service organizations. Supported by a robust capital structure and industry-best profitability, our investments continue to deliver results highlighted by 70% growth in digital bookings and a record bookings quarter for Enlighten, our AI foundation, that underlies the entire CXone (cloud) platform.”

And how about the gross margins…close to 69%. So, NICE has a number of levers it can turn to in those large margins should its enterprise clients need to pull back spending. 

Speaking of those clients though, we’re not talking startups that may fall by the wayside in a high interest rate environment. NICE counts among its clients the top 10 U.S. health insurance companies, 9 of the 10 largest global financial companies, and 6 of the Fortune Top 10 companies. These include names like 3M (MMM), Morgan Stanley (MS) and Marriott (MAR)

NICE isn’t only growing its commercial offerings, but it also operates in areas that have a growing need and, unfortunately, aren’t going away anytime soon…financial crime and public safety. NICE helps companies identify, prevent, and track financial crime incursions into their systems. 

NICE platforms give first responders tools to reconstruct accident and crime scenes, the ability to track evidence, both digital and physical, and a case management system that streamlines workflow, and meets the security standards necessary to share evidence between interested parties. 

Again, a growing area that is seeing funding increasing, and that is in need of efficiency and digitization due to a lack of resources.  

Not surprisingly NICE is an A rated stock in our POWR Rating system, outshining over 95% of the companies we track. Its highest rating is on the Quality component. 

Despite its recent growth, the stock is trading at the low end of a 3 year range at just over $150. But, if it continues to meet and beat earnings estimates it could see a rebound back to the $200 level. 

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NICE shares were trading at $152.22 per share on Thursday morning, down $4.26 (-2.72%). Year-to-date, NICE has declined -20.84%, versus a 9.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.


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