Verint Systems Inc (VRNT) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verint Systems second quarter conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then 0 on your touch tone telephone. I would now like to introduce your host for today's conference Mr. Allen Rodin (ph).

Thank you, operator. Hello, I'm Allen Rodin vice-president of corporate development and investor relations of Verint systems. We trade on NASDAQ ticker symbol VRNT. With me on the call today are Dan Bodner our President and CEO and Igal Nissim our Chief Financial Officer.

By now you all should have seen a copy of our press release which was issued after market close this afternoon. If you did not receive this release, please refer to businesswire.com or our website at Verintsystems.com.

Before starting the call I'd like to mention that certain statements that are not historical are forward-looking within the meaning of the private securities litigation reform act of 1995. The words estimate, project, intend, expect, believe, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks and some uncertainties. Any number of factors could cause the actual results, performance or achievements of the company to be materially different from those that may be expressed or implied by such forward-looking information. Numbers and percentages have been rounded and may be approximations. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Verint Systems is strictly prohibited.

For discussion of the principle risk factors that may cause the actual results to be different, please refer to the aforementioned press release and the company's filings with the Securities and Exchange Commission. The content of this conference call is time sensitive and reflects the company's perspective as of September 8, 2003. We undertake no obligation to update the content of this call, including any forward-looking statements, events, circumstances or expectations change after this call. Any questions regarding our guidance and our business model should be addressed during this conference call as we do not intend to address guidance and model related inquiries following the call. During today's call Dan Bodner will present a prospective on business and market trend and Igal Nissim will present a more detailed review of our second quarter results and guidance. We will conclude with a question and answer session. With that I'll turn the microphone over to Dan Bodner. Dan.

Thank you, Allen. Hello, everyone, and thank you for joining us today for a review of our fiscal 2003 second quarter results for the period ended July 31, 2003. Our second quarter results represent a record quarter for Verint in terms of sales and net profit. This growth was mainly due to strong demand for actionable intelligence solutions in the security market. In the second quarter we had sales of $46.9m representing year-over-year growth of 22% and sequential growth of 5.6%. Income from operations for the quarter was $4.1m,representing year-over-year growth of 85% and sequential growth of 18%. This increase was primarily driven by sales growth and higher growth margins. Diluted earnings per share for the quarter was $0.14 based on 29m weighted average shares outstanding.

Verint solutions [inaudible] actionable intelligence by capturing information from voice, video and IP networks, applying advanced analytics to unearth critical intelligence and delivering this intelligence and information for effective action. We sell our actionable intelligence solutions to two markets, the digital security and surveillance market, what we call the DSS market and the enterprise business intelligence market or what we call the EBI market. In the DSS market our solutions generate actionable intelligence that empower Government and commercial organizations to prevent terrorism and crime and protect people in office. Indeed, the market provide actionable intelligence to help improve business processes and enhance profitability.

Sales of our digital security and surveillance solutions increased 7.5% sequentially and 35% year-over-year to $31.2m. As a percentage of total sales digital security and surveillance solution sales now represent approximately two-thirds of our total sales. Our digital security and surveillance solutions address two applications, digital video security and communications interception. Our digital video security solutions enable organizations to network video from cameras located throughout an individual facility or across marketable sites. Video can be viewed locally or remotely and selectively pushed to security personnel based on user define criteria and our advanced video analytics. Our digital video solutions are addressing a broad range of security initiatives. Recently we received orders from a variety of commercial and government customers, example of some of these include port authority, such as the port of Oakland which are deploying our digital video security solutions to enhance perimeter security of maritime ports. We believe that these deployments are consistent with the department of homeland securities objective of enhancing the security of our nation's sea ports. Utility companies, including a major energy company that is deploying our digital video security solutions to enhance the security of its oil and natural gas pipeline. This energy company is networking video from pumping stations across its pipeline which is enabling it to centrally monitor and protect critical elements of its extensive infrastructure. Airport authorities, including some in major metropolitan areas such as Seattle and Atlanta which are employing our digital security solutions to enhance security at a number of locations throughout the airport, including checkpoints, passenger terminals, perimeter, and other sensitive areas. Government agencies, including the United States general services administration or GSA, which are deploying our digital video security solutions to protect government facilities, personnel, and office. Retail customers, including a new major retailer customer announced last quarter. This retailer is currently deploying our solution for both security and business intelligence in multiple locations. We expect to announce more details regarding this customer in the upcoming August international conference later next week. We continue to see demand for our digital video security solutions for a broad range of security initiatives, including protecting product transportation, military facilities, enterprises, core infrastructure and government facilities.

Our communications interception solutions sold under the Stargate and Reliant brand names enable government and law enforcement organizations to intercept communications for a variety of purposes, including gathering intelligence in order to identify and prevent criminal activity and establishing evidence for the conviction of criminals. We offer a government and law enforcement customers a broad sweep of analytical capabilities designed to help them instruct, categorize and prioritize data and generate actionable intelligence from a large amount of unstructured voice and data information that they collect. These exact analytical capabilities include techs categorization, voice analytics and data mining solutions. We continue to see demands for our communications interception solutions in advanced analytical capabilities from existing and new customers. Many of our existing customers are adding additional intercept capacity and new data intercept solutions to augment their existing voice capabilities.

During the quarter we received orders from multiple new customers and continued our geographic expansion of this business. For example, we recently announced a multimillion dollar order from a new government agency customer in the United States, and also recently received an order from government agencies in two new countries for Verint.

Sales of our enterprise business intelligence solutions increased 2% sequentially and 2.6% year-over-year to $15.7m. Our enterprise business intelligence solutions address two applications, context central business intelligence and video business intelligence. Our context center business intelligence solutions sold under the ULTRA brand name enabled enterprises to capture and mind customer interaction data from their context. center. Earlier this year we introduced our newest generation of ULTRA, version 9, which included two new [inaudible] intelligence applications, Intel Fine (ph) and Intel Minor. These analytic solutions enable businesses to instruct intelligence from customer interactions and use it to optimize performance and enhance overall profitability. ULTRA 9 and its two new analytical applications have been well received by our existing and new customers who are seeking to optimize enterprise performance, improve business processes, and develop more effective customer strategies. Intel Fine, one of our two new analytical applications, recently won technology marketing company's 2003 award for innovation. This award honors solutions that demonstrates growing innovation, unique capabilities, and that make a significant contribution to the industry.

We recently received orders for ULTRA 9 from a number of new customers, including a multimillion dollar order from the Internal Revenue Service. The IRS operates one of the world's largest customer service organizations with 46 contact centers and 18,000 agents. Direct will deploy various ULTRA solutions in contact centers is part of its ongoing strategy to provide world class customer service to the nation's more than 100m tax filers. ULTRA will enable the IRS to deliver actual intelligence to key managers enabling them to better understand and to respond to taxpayer issues.

Our video business intelligence solutions enable enterprises to monitor and improve their operations from the analysis of live and recorded video. Many businesses that have historically used video for security are seeking to leverage video content to enhance customer service and profitability. By using video to extract intelligence from customer and employee activities, our solutions are designed to help businesses improve business processes and enhance profitability. We continue to see demand for our video business intelligence solutions in the retail market from customers who are seeking to enhance the security of their stores and generate business intelligence we believe that our video business intelligence are increasingly gaining market acceptance due to the ability to generate actual intelligence and provide an opportunity for a quick return on investment.

Before turning it over to Igal to present our financial results, I would like to summarize our second quarter. Consistent with our results over the last year, our second quarter results were primarily driven by strong demand for actionable intelligence solutions in the security market. We believe that Verint has been an early beneficiary of the heightened software security worldwide and an increased need for actionable intelligence to prevent terrorist and criminal activity. At the same time, we experienced strong interest for our solutions in the EBI market driven by the need for actionable intelligence by enterprises to remain competitive and increase profitability. We continue to see demand for actionable intelligence solutions and ended the quarter with backlog in excess of one quarter of revenue. We added new customers, and many of our existing customers continue to expand their deployment, adding more sites, additional capacity, and new analytical capabilities. We continued to invest in new technologies and analytical capabilities across all our solutions and have expanded our sales and marketing activities in anticipation of growing demand for our solutions. We also regularly considering strategic acquisition that can expand the capabilities of our solutions or expand our geographic presence and customer base.

During the quarter we completed the following equity offering raising $122m net to help fund our continued growth. We believe that the process from the offering will enable us to continue to invest in the actionable intelligence market and provide us flexibility to selectively make strategic acquisitions. Igal Nissim will now present a review of our financial results along with guidance. Igal.

Thank you, Dan. The second quarter represented a record quarter for Verint and our seventh consecutive quarter of sequential revenue and net income growth. In the second quarter we had sales of $46.9m representing year-over-year growth of 22%. and sequential growth of 5.6%. The increase was due mainly to higher sales of our digital security and surveillance or DSS solutions which increased 7.5% sequentially to $31.2m compared to $29min Q1 and increased 35% year-over-year compared to $23.2m in the same period last year. Our sales in the second quarter to the enterprise business intelligence or EBI market increased 2% sequentially to $15.7m compared to $15.4m in Q1 and increased 2.6% year-over-year compared to $15.3m in the same period last year.

Looking at the geographical breakdown of sales, in the second quarter we generated approximately one-half of our sales in the Americas, approximately one-third in EMEA (ph) and the balance in Asia Pacific. Gross margins for the second quarter were 53.6% compared to 52.9% in the first quarter. This quarter represented our seventh consecutive quarter of gross margin expansion.

Net research and development expenses for the second quarter represented 12.1% of sales. SG&A expenses represented 32.6% of sales. Interest and other income for the second quarter decreased to $420,000 from $515,000 in Q1. Our effective tax rate for the second quarter was 13%.

Going forward, we expect our effective tax rate to be at a similar level or lower. In the second quarter we had income from operations of $4.1m, representing sequential growth of 18% and year-over-year growth of 85%. Net income for the quarter was $4m or 8.5% of sales. Diluted earnings per share was $0.14 based on a weighted average share count of 29m shares.

Turning to our balance sheet, cashing and cash and cash equivalents increased to $216m at the end of Q2 from $94m at the end of the first quarter. The large increase was primarily due to the completion of the follow-on equity offering which provided the company with $122m in net proceeds. During the quarter we also generated $6.7m of cash flow from operating activities. In Q2 our DSOs were 67 days, a level consistent with our guidance of 60 to 80 days.

As of July 31, 2003, we had record total assets of $309m, working capital of $193m, and shareholder equity of $231m.

We are introducing guidance for the third quarter of fiscal 2003 as follows; Sales of approximately $48.5m and diluted EPS of $0.14. During the third quarter our diluted shares are expected to increase by approximately 2.6m to 31.6m diluted shares. The higher share count in Q3 is due to the 5.75m shares that were issued in our second quarter being outstanding for a full quarter. For fiscal 2003 we are increasing revenue guidance from a range of $185m to $189m to a range of $189m to $191m. At the $190m, the midpoint of our new revenue guidance, we expect to generate diluted EPS of approximately $0.58 based on approximately 29.3m diluted shares outstanding for fiscal 2003. We believe that Verint has been an early beneficiary of the heightened focus on security, and our guidance reflects continued demand for actionable intelligence solutions worldwide.

Operator, we would now be happy to answer questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch tone telephone. If your question has been answered or you wish to remove your self from the queue, please press the pound key. Again, if you have a question, please press the 1 key on your touch tone telephone. One moment, please, for our first question. Our first question comes from Paul Costa (ph).

Congratulations on an excellent quarter. Couple of quick questions. One is Igal, did you see any [inaudible] in customers this quarter?

No, not really.

Okay. Second question, perhaps to Dan relating to that is Lockheed Martin, is the Lockheed relationship contributing yet or is that still very early?

It's contributing, yes. It's not at a 10% level. And we believe this is a long-term partnership, as we successfully deploy solutions together that we hope we can see expansion of contribution through Lockheed Martin.

Okay. Well, this begs the question but it seems like lots of good things are happening for you at the moment. Revenue growth is there but it's not a hockey stick type growth, and I guess I've asked this before, but why is it that we're not seeing a sort of accelerating growth right here? Is it still very early? Is the selling cycle very long? Perhaps you could sort of give us a sense of why so much opportunity and yet growth is sort of linear, not that I'm complaining.

Yeah. Well, it's pretty consistent with our projections. We believe that we are at the beginning of a multi-year government spending on homeland security initiative. We also believe that this homeland security initiative will include both communications perception solutions and business security solutions like the ones we offer. However, the infrastructure is very large and even customers that we have landed typically start small and they would expand into their infrastructure over time, so we did not project an exponential growth, and I think that what we have seen so far, which was 35% year-over-year growth on the security side is very much within our expectation, and actually going forward, we think that this multi-year expansion will continue at the rate of 25%, 30% growth a year.

Okay. Last question. Can you comment specifically on the rumors of the EC-Tel acquisition and in addressing that can you also talk about your philosophy regarding accretion and dilution in making an acquisition?

Okay. First, regarding the rumor, we are aware of these rumors, including recent articles in various media outlets. Our policy is not to comment on any rumor, but let me address the boarder question of our acquisition strategy. First, we believe that we are in the early stages of the market, as I said before, and the market is very [inaudible], and therefore presents an opportunity for acquisitions, and our strategy is to continue to grow organically and to selectively make acquisitions. We have made a number of acquisitions to date and we've successfully integrated these acquisitions into our business. Our preference is to acquire small to mid-sides companies that we can integrate quickly [inaudible]. However, we will not exclude larger acquisitions presenting a compelling business case. In particular, our interest is around technology companies that will enhance our analytical capabilities and help further distribute information to make our actionable intelligence more effective as well as companies that would expand our geographic presence in the customer base. Regarding [inaudible] acquisitions, our goal to make acquisitions that are near-term accretive and presents further strategic synergies long-term.

Thank you very much indeed. Appreciate the answer.

Our next question comes from Brian Rutenberg (ph).

Great quarter. Congratulations. Question on internal operating cash generating in the quarter, you had a very strong cash generation quarter of $6.7m yet your DSOs were up slightly from quarter to quarter. I mean, a day. It's not a big deal. But how did you generate such strong cash from operations?

Well, as we guided before, we expect to continue to generate positive cash flow from operations that will be consistent with our net income, which was $4m, so we have slightly more cash flow than income, and if you analyze the balance sheet, you will see that we, although we had slightly higher receivables, we also had slightly higher payables, and the overall impact was positive cash flow slightly above our net income.

Should we anticipate this going forward that you can generate north of your net income in free cash on a quarter to quarter basis?

I would say that long-term this will -- should be more consistent with net income, but in the short term we have generated, historically we've generated cash flows that are much higher than the income because we were able to leverage the business more, but there is obviously a limit to how much leverage we can get from the business, so over time it will be more consistent with net income.

Okay. And then just a housekeeping question, on your cash that you're sitting on right now, what kind of rate are you getting? And are you doing anything creative with the cash in order to get a higher rate?

We have obviously a conservative approach to investing this cash. We would like to invest this cash in the business. But meanwhile, while we investing this cash, it's mostly bearing interest at around 1.25% rate.

1.25%.

1.25% rate.

So are you hedging any foreign currency or anything like that with this?

Regarding hedging overall, our policy is to from time to time enter into contracts where we have specific large contracts or large aggregate exposure to a particular currency. As you know, given that we have operations in multiple countries, the sources of our expenses and revenues create some sort of a natural hedge.

Right. Great. Thank you very much.

Our next question comes from Tim Qulin (ph).

Yes, good afternoon. First question is that gross margins continued to go up. I'm wondering if you could talk about the drivers of the gross margin improvement and where you expect them to go and what your mix in general terms is between hardware and software right now.

Okay. We currently sell bundled solutions, including the software and the hardware components. The hardware components are primarily passed through hardware servers and storage systems that we buy and pass there for our customers, and the trend in the market is that more and more of our customers are inclined to provide the hardware themselves. We don't control this trend, but obviously we are responding to our customers' requests. As a result, we see higher software sales and higher gross margins. Last year our mix was 55% software, 30% hardware, and 15% service.

And where is that mix now?

It's improving consistently every quarter as is reflected in our expansion of growth margin. Long-term we believe that we will be able to maintain our services, which is predominantly maintenance revenues, at around 15%; our hardware sales will come down to around 15%; and the rest, 70%, will come from software. This is our long-term model. And we are consistently improving our results toward that goal.

Okay. I was very interested in the ULTRA sales to the IRS. With that sale and any other activity are you getting more excited about the potential for revenue growth in the UBI segment?

Yes, I would say that we are starting to see early signs for a recovery in IT spending. I believe that we will -- we had 2% growth in the first half of the year, as we reported. I believe that the second half of the year would have a slightly higher growth in our EBI sales. We -- you know, it's too early to say whether we have a full recovery here in IT spending. Obviously, when monitoring the market very carefully, although we believe that even if there is a recovery, this will be a slow recovery and we will improve gradually our EBI results. The IRS sale I think is very significant for us. IRS is obviously an important customer. They are probably the largest service organization worldwide with 46 contact centers dispersed around the United States. This was a competitive bid. And the IRS selected our ULTRA version 9. We believe because of our capabilities and the ability to provide actionable intelligence, and the overall impact on Verint is very positive in terms of having this customer as a reference as well as the ability to provide them with a leading edge solution to test the market with some of the concepts that we've been discussing for a number of quarters now.

Would you be able to in any more specific terms give us a sense of the timing and magnitude of the revenue from the IRS contract?

IRS deal is very typical to many deals we have with large customers. We have received an initial order, which we categorize as a multimillion dollar order. This is initial orders to deploy into a number of their contact centers, and we believe that based on what we are told, that the selection of our product is for their entire base of contact centers and that there will be over time additional orders to deploy into more and more contact centers; however, at this point, until we get those additional orders, we don't feel comfortable to discuss what the overall impact of this deal. The initial impact that is in backlog is on the order of multi million dollars.

And on the backlog, and I know it's greater than one quarter's revenue which is what you've said over the past couple of quarters, can you just gives a sense versus the type of back log and type of visibility that you've seen over the past, you know, two or three-quarters. Do you have better visibility now or about the same?

First, regarding the backlog, we have maintained the backlog in excess of one quarter while increasing the revenues every quarter, so obviously the absolute numbers in our backlog has been growing. In terms of visibility. We have relatively good visibility because of a number of factors, including our backlog but also recurring revenue model and growth customer specification. As we mentioned before, there is no 10% customer and there is no 10% partner. We believe there that our visibility should improve over time as the market increasingly understands the value of actionable intelligence solutions in both security and enterprise intelligence markets.

And with regards to 2004, I know it's too early to really quantify that, but, you know, presumably getting increasing visibility there, what type of growth rate on the top line or maybe it's a better way to look at it is gross profit dollars, what kind of growth are you looking for or think you can get in '04?

Okay at this point in the year we're not providing guidance to 2004 but let me analyze our guidance for 2003, and I think this will help you to understand our model. We have now increased guidance for 2003 to $189m to $191m and $0.58 EPS and this is based on a number of factors. DSS revenue growth of 25% to 30% year-over-year, and this is due to increased spending on security solutions such as ours that we believe will be maintained over a number of years. EBI, we believe will experience modest growth in the second half. Gross margins will continue to improve due to the greater percentage of our sales being generated from the sale of software. SG&A as a percentage of sales will remain relatively constant at approximately 33%. R&D as a percentage of sales will remain relatively constant at approximately 12%. And tax rate of 30% or below. So I think this model has been very consistent over the last six, seven quarters. And we were able to execute per this model, and I don't see any reason why next year will be different, but by no means we introduce guidance now for next year.

That's helpful. And then just finally on the tax rate, it almost sounds like you think it can go lower from where it was at 12.7% this last quarter. What's driving that? And how should we think of that long-term? I'd kind of always thought 15% might be a more sustainable rate. You know, how should we think about the tax rate going forward?

Okay. The driving factor is that we operate in a number of tax jurisdictions, some of which have been offering very favorable tax rates to us. So that's, I think, the driving factor behind our relatively low tax rate. In terms of our guidance for taxes, every quarter we review our obligations and actively pursue effective tax strategies, and accordingly, we guide you on our current thoughts, and our new guidance reflects our best views currently. It's very hard to predict these tax rates long-term, although it will continue to be relatively low because of the driving factor of operating in a number of jurisdictions.

Okay. Fair enough. Nice quarter. Thanks, guys.

Again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch tone telephone. Our next question comes from Jonathan Howe (ph).

Thank you. Can you give us a sense of the percent of your revenues to the government sector, please?

It's about a third of our business on average.

Okay. And in terms of your backlog, what percent of backlog is recognizable over the current quarter?

We typically enter into a quarter with 50% to 75% of that quarter revenues already in backlog. This has been our experience over the last few quarters and this is still correct for the current quarter.

50% to 75%?

50% to 75% of that quarter's revenue is already in backlog at the beginning of the quarter.

Okay. You seem to have spent quite an amount of time of your comments on the video business. Is that business accelerating faster than the other, the communication interception business or is it pretty much still in a growth rate? Can you comment a little bit more on the video business as a percent of your revenues of DSS?

The latter is correct. We have experienced overall 35% year-over-year growth in our DSS market in both the video business, video security business as well as the communications interception business. I've experienced similar growth rates. If there was an impression that I spent more time on the video business, it's probably only because we are able to secure approval from our customers to discuss their identity and their applications on the video security side more than on the communication side. I have to say that it is also somewhat challenging to secure customer approval on the video side as overall the security business is very sensitive and many of our customers do not want to disclose their identity or their capabilities while using our equipment to fight terrorism and crime.

Okay. And just a couple of housekeeping. What was the head count, please, at the end of the quarter?

It's around 930 employees.

930. And you had an item on your balance sheet, it was a convertible note. I don't believe it was there the previous quarter. What was that in.

It was there. It's just moved from long-term to short-term. This was originally a result of an acquisition we did roughly 18 months ago, and it matures in February 2004.

Okay. That's it for me. Thank you very much and good luck.

Operator, we'll take the next call.

Our next question comes from Israel Hernandez (ph).

Good afternoon, gentlemen, congratulations. Good quarter. Following up on that last question, you talked a lot about video surveillance. Can you give us some high level color around what you're seeing in lawful interception? Where are we in terms of compliance? Are you seeing uptake or renewed momentum or new momentum out of the service providers and are they, you know, do they have adequate funding on a go-forward basis? Thanks.

The communication perception business there's a lot of activity. As I mentioned before in the call, this is activity from new customers as well as existing customers upgrading their capabilities or customers that have capabilities on the voice arena and are expanding into data. Specifically, you mentioned the carriers. As you know, there are many carriers that are not expanding their peca (ph) data networks, and obviously this is propelling a lot of activities in the peca data arena. Overall I think it is accepted in the market as a fact. In terms of deployment, there is an ongoing deployment. We have not seen any may major acceleration but we are seeing consistent activities including RSPs that are issued by operators that need to get compliance. These are very, very large infrastructures and it's very costly and obviously it's going to take time. So we believe that this is a multi-year deployment that operators are going to have to do into their networks. Just to give you a little bit more color, I would say that overall there's more activity in data. There's a growing number of RSPs and project in data and maybe less so on the voice side.

Okay. Most of my other questions have been answered. Thank you.

I'm showing no further questions at this time.

If there are no further questions, on behalf of Verint thank you very much for taking part in the conference call today. Have a great evening.

Ladies and gentlemen, thank you for your participation in today' conference call. This does conclude the program. You may now disconnect.