Nice Q3 looked good. Forecast: Slow growth

The firm cut its Q4 forecasts, which doesn't detract from its achievements
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Best of all would have been for Nice Systems (Nasdaq:NICE) (NICE) - Get Report to leave its forecasts for the fourth quarter intact. It didn't. But the general picture still looks good, even though its stock fell 2% yesterday after publication of its third-quarter results.

After announcing favorable third-quarter results, the Nice management lowered its revenue range estimates for Q4 from $38-$43 million to $35-$38 million. Also, the digital recording systems maker is still running an operating loss.

But the bright side is that in the third quarter Nice kept trekking towards balance. Revenues rose, losses decreased, costs shrank and it maintained a low cash-burn rate. Moreover, it turned operating cash-flow positive to the tune of $2 million.

Not bad, after the rapid deterioration of its results and share price and history of crises. Well aware of the cynicism with which battered investors view the company, by lowering fourth-quarter estimates president and CEO Haim Shani was signaling that the company isn't hiding its bad news any more.

Nice had nastily surprised the market with its dramatic earnings warning at the end of 2000 for the quarters to come, and by restating its results. Only in December 2000 did investors and analysts discover just how irrationally Nice had grown, and how deep the crisis at the company ran.

Two months later Nice did it again, publishing another warning that it wouldn't meet its amended guidance, and would have to fire 20% of its workforce.

When the conversation turns to past troubles and the distress Nice caused its shareholders, Shani turns uneasy. He prefers to look ahead. "We're completing our restructuring plan," he says, "which includes outsourcing some of our activities, and pushing ahead with plans. I believe our spending will continue to diminish in the fourth quarter and am optimistic for the future."

Shani was positive, but not inanely so: "You'd have to be crazy not to be cautious these days." Nonetheless, he stands by the company's forecast from the sq, that it can achieve operating balance by the fourth quarter. He estimates that Nice can do this by reaching revenues of $38 million, the upper end of its amended guidance.

Oscar Gruss analyst Rami Rosen begs to differ. He doesn't see Nice reaching balance before mid-2002.

He agrees that the company's revenues will continue to grow from the $33.8 million reported for the third quarter. The problem will be, he thinks, that its costs will too.

"Salespeople will get higher commissions as sales increase," he wrote. Meanwhile, the company will be continuing with its R&D. He estimates that Nice will achieve balance only when reaching quarterly revenue of $43 million.

He's still impressed with the company's progress, even though Nice missed his overly optimistic sales forecast for the third quarter. The company's situation is good and it has been taking steps to lower costs, he notes.

When taking over the reins at the beginning of the year, Haim Shani received a company in trouble. To his credit, he has led it to meet or at least beat most analyst forecasts for three quarters running. He's had experience rehabilitating three companies in the past, as he's said in the past.

So far he's been delivering the goods, and he looks poised to continue improving the company's results. Rosen sees the fourth quarter as a critical point. Nice is on an improving trend, he says, but if it falls short of its fourth-quarter estimates, it will really be in trouble, given its track record of disappointments. It has to show that it can turn an operating profit, not just grow revenues, he concludes.