Pared Down to Its Core Business, Israel's Nice Systems Has Gotten Nicer

Nice Systems CEO Barak Eilam, 37, has drawn attention because of his massive salary, but in two years the company’s share value has jumped 49%.

Nice Systems CEO Barak Eilam
Erik Snider

Barak Eilam would probably have preferred to mark two years in office as CEO of Nice Systems with the public’s attention drawn to his company’s performance since he took the helm at age 37, and not over his sizeable salary.

Eilam may be young, but he has been with the company for 15 years already, including a stint as CEO of the data and telephone voice recording company’s American subsidiary. But what has attracted public attention recently has been Eilam’s compensation, which cost the company 17 million shekels ($4.5 million) last year – and it was not tied to Nice System’s impressive performance over the past two years either.

Since Eilam became Nice CEO, the company’s stock has jumped by 49%, handily besting the Nasdaq tech indexes, which increased by less than 12%. In the process, Nice has generated $1.3 billion in value for its investors. In the first 16 months since Eilam’s appointment, he has led the sale of two company divisions and in so doing has cut Nice’s ties to the defense industry, which had generated limited profits as well as uncomplimentary news coverage over the regimes that were making use of its products.

Nice sold its security-related divisions to focus on its core business, which is management of customer call centers, particularly in the financial sector, as well as the tracking of suspicious capital transactions and possible money laundering. This includes fraud prevention services for banks and insurance companies.

Nice’s products help call center staff identify callers within seconds, pulling up their prior call records and enabling the employee receiving the call to provide faster service and even the chance to sell the caller additional services.

Nice’s cyber and intelligence division, which developed products geared for law enforcement agencies including armies, police and intelligence services, was sold to Elbit Systems last year for $158 million. A second division, which goes by the name of Physical Security, was sold to the Battery Ventures venture capital firm last year for $100 million. Now called Qognify, it develops monitoring technology for security agencies and other government entities as well as for airports, ports, infrastructure firms and cites, to quickly detect suspected terrorist activity.

As part of its drive to focus on its core business, in January the company spent $135 million to buy a competitor Nexidia, an American customer interaction software firm based in Atlanta.

In an interview with TheMarker, Eilam spoke about the major changes in his company, its exit from the defense sector, the acquisitions that he led and his generous 2015 compensation package. From the financial standpoint, he noted, Nice Systems has been showing stronger organic growth than in the past.

“At the same time, we managed to have the growth reflected in the bottom line. Revenues in 2015 grew by 6%, and if the effect of foreign currency fluctuations are eliminated, by 9%. The bottom line grew by almost 20% for gross, operating and net profits. The improvement wasn’t just in accounting parameters. Nice created a huge amount of cash. Investors see the improvement in the financial criteria and based on the stock increase, I assume they like what they see.”

A second factor, he said, was taking steps to better focus the company’s operations. Nice’s security business represented 15% of the company’s sales but only 6% of its net profits. And thirdly, Eilam noted an emphasis on innovation, with a doubling of the pace at which new products were created over the past 18 months, supported by its large client base.

Undergoing transformation

“I’m really a long-time veteran at Nice,” he said. “You can look at this as an advantage or a disadvantage. I grew up in the organization and went from the world of development to marketing and then to sales, and I managed the American subsidiary. On the other hand, you can argue that I’m so much a part of the system, so how can I change things? The first thing I did as CEO was to quickly develop the building of a strategic plan for the next five years.”

In the process, he explained, he saw the need to resolve the problem of the company’s identity as divisions sprouted up that had no connection with one another.

“Companies undergo transformation all the time, and over its history Nice has also undergone transformations. In the distant past, companies [could] manage transformations one at a time, sometimes carrying them out over an entire decade. Now that’s impossible. The world has changed and you can’t wait. We need to undertake a number of things at the same time and cut the process down to two or three years.”

Atlanta-based Nexidia, Eilam noted, is strong in the field of customer data analytics. Asked to explain how the acquisition of Nexidia helps Nice’s product line, Eilam replied: “Let’s take the service center of a cable company in the American market as an example. The volume of communications and interaction of such companies with their customers is only growing, by phone, chat, email, mobile, social networks, WhatsApp and who knows what else. The firms are working under endless communications pressure.

“A firm is gauged by its ability to deal with this and to resolve the customer’s problem quickly on the first interaction. It also needs to take advantage of every opportunity to sell the customer something else, and this can’t be done without introducing very sophisticated tools to help those who work with the customers and give them recommendations. The information analysis technology gathers all the data in real time, processes them and makes a comparison with existing models, and then helps the service provider to decide what his next step will be, which suggestion is better and even which words to use. In that way, it’s possible to sell [the customer] something in a more sophisticated way.”

The system, he said, also provides a comparison with prior contact between the customer and the company. “For example, if the customer calls or goes on chat and had already called a week earlier, the representatives see that immediately. The customer is therefore spared the frustration of taking several minutes to again explain the whole story. That’s very powerful.

“Another example is the issue of managing complaints. There is now increasing regulation in the United States regarding the handling of customer complaints. I think in Israel this may not be enshrined in regulation, but awareness of the importance of the subject is only growing. There is major importance in the ability to effectively handle complaints and to bring them to the attention of people in the organization before then get to the media or the social media. That is critical in maintaining the organization’s reputation. Our tools make it possible to identify this and immediately warn that there is a customer who requires more intensive handling.”

And it’s not only the potential harm to a company’s reputation that is at stake, but also the possibility of being sued. “It’s preventative care,” says Eilam. “The organization monitors improper conduct toward the customer, and before the interaction goes in the wrong direction, it decides to correctly and fairly resolve the problem.”

Eilam was asked about Nice products’ own past associations with customers of questionable repute, and media coverage of cooperation with an Italian company of hackers who sold software to regimes in Sudan and Saudi Arabia. Did Nice also get out of its defense industry operations due to the harm it caused to the reputation of the rest of the company?

“I won’t respond specifically to all kinds of things that were written. We didn’t receive comments from clients, but the worlds of the civilian and the defense industries are very different, and I don’t think it’s right to maintain them in the same company,” he replied, adding, in reference to the defense industry: “It’s also an area that we are not in, and I don’t regret it.”

Future plans

Asked what comes next for Nice Systems, Eilam replied: “We are in the process of expanding our product offerings – a lot of analytics and a transition to the world of the cloud,” a reference to data storage and computing from remote shared computers rather than from computers storing data on site.

“I need to keep some of our future plans to myself. The transformations that I have spoken about also show what the company’s next decade will look like. When we connect our future plans with Nice’s foundation of a collection of technologies, the customers, our sales entities around the world and the strong balance sheet that allows us a high degree of flexibility when it comes to allocation of capital, we are very excited about the future.”

Asked whether earnings per share will continue to grow at a double-digit pace this year too, Eilam said: “Our growth forecast for sales and earnings per share in 2016 is very close to double-digit, but we also have other goals. A company, a CEO and management always conduct themselves in the triangle of the customers, the employees and the shareholders, and nearly every decision from small ones to major ones have an impact on these three interested parties.

“There is almost not a single decision that you can balance completely between the three, but in 2015 we produced a record quantity of products, meaning that we spent a lot on research and development, which did good for the customers. We produced phenomenal value for investors in that our profitability increased by 20%, which hadn’t happened in many years.

“In addition, we are now distributing employee bonuses based on 2015 profits. For many years, the company has been allocating a certain sum to performance bonuses, which more-or-less involved the same sum. This year the grant was nearly doubled and distributed to the last of the employees. That’s a lot of money.”