Verint Systems Inc (VRNT) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verint Systems third quarter conference call. At this time all participants are in a his end 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 zero on your touch tone telephone, and as a reminder this conference is being recorded. I would now like to introduce your host for today’s conference Mr. Allen Roden. Mr. Roden, you may begin your conference.

Thank you, operator. Hello, I'm Allen road in 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 seen a copy of our press release which was issued after market close this afternoon. If you have not received this release, please refer to businesswire.com or our website at Verint.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 risk and some uncertainties. Any number of factors could cause the actual results, performance or achievement of the company to be materially different from those that may be expressed or implied by such forward-looking information. Certain 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 principal risk factors that may cause 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 December 3, 2003. We undertake no obligations to update the content of this call including any forward-looking statements, even if events, circumstances or expectations change after this call. Any questions regarding our guidance and our business model should be addressed during the 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 perspective on our business and market trend and Igal Nissim: will present a more detail review of our third quarter results and financial 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 on you fiscal 2003 third quarter results for the period ended October 31, 2003. Our third quarter results represent a record quarter for Verint in terms of sales and net profit. This growth was due to strong demand for actionable intelligence solutions in the security market as well as growing demand in the enterprise business intelligence market.

In the third quarter we had sales of $49 million representing year-over-year growth of 21% and sequential growth of 4.5%. Income from operations for the quarter was $4.5 million representing year-over-year growth of 64% and sequential growth of 8%. This increase was primarily driven by sales growth and higher gross margins. Diluted earnings per share for the quarter was 15 cents based on $31.6 million weighted average shares outstanding.

Verint solutions actionable intelligence by capturing unstructured information from voice, video and IT networks applying advanced analytics to unearth intelligence and delivering this intelligence as information for effective action.We sell our Actionable Intelligence Solutions to two markets, the digital security and surveillance market or what we call DSS and the enterprise business intelligence market or what we call EBI.

Sales of our digital security and surveillance solutions increased 27% year-over-year and 5.5% sequentially to $32.9 million. Digital security and surveillance solution sales represented approximately two-thirds of our total sales. Our digital security and surveillance solutions address two applications, digital video security and communications interception. Verint digital video security solutions enable organizations to enhance the security of their facilities by networking video across multiple locations and applying advanced analytics to instruct actionable intelligence from video in real time. By alerting security personnel to potential security threats, Verint's digital video security solutions are designed to help organizations prevent security breaches and improve response time. Our digital video security solutions are addressing a broad range of security initiatives.

Recently we have received orders from a variety of commercial and government customers. Examples of some of these include a new U.S. military customer which is deploying our digital video security solutions to enhance perimeter security at the base in the greater Washington, D.C. area. Another Department of Defense agency which is deploying our digital video security solution to protect operational and control facilities also located in the greater Washington D C area. An energy company in Newark which is deploying our digital video security solution to enhance perimeter security of its nuclear power plant. The London stock exchange, which is deploying our digital video solution to enhance the security of its trading operations and to help protect its employees. In addition to these recent orders, during the quarter we announced several deployments, including Credit Suisse First Boston, which has deployed our digital video security solution in eight locations in Asia as part of an ongoing program to centralize its security monitoring. A new airport customer which has deployed our digital video security solution for the Department of Homeland Security to help prevent unauthorized passengers from entering the country. Multiple universities around the country which have deployed our digital video solution to enhance the security of their campuses and to ensure a safe environment for both students and faculty. A growing customer base has been driven by Verint's ability to effectively and efficiently address a wide range of security initiatives with a broad sweep of digital video solutions. We continue to see demand for our digital video security solutions for a wide range of security initiatives, including protecting public transportation, military facilities, enterprises, core infrastructure and government facilities. Our communications interception solution sold under the STAR-GATE and RELIANT brand names enable government and law enforcement organizations to intercept communications from a variety -- 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 our government and law enforcement customers a broad sweep of analytical capabilities designed to help them extract, categorize and prioritize data and generate actionable intelligence from the large amounts of unstructured voice and data information that they collect. These advanced analytical capabilities include text categorization, voice analytics, and cold data mining solutions.

During the quarter we received orders from both existing and new customers and continued our geographic expansion of this business. Examples of international orders include a multimillion dollar expansion order from an existing government customer which is adding interception capacity and new information sharing capabilities that will enable more efficient collaboration on complex investigations. An order from a government customer in a new country for Verint. This government customer is deploying our communication perception solution to enhance national security by having the ability to intercept and analyze mass amounts of information. A new ISP customer, which is deploying our communication perception solution to comply with government mandates requiring it to assist the government in intercepting Internet communications. Our solution will enable this customer to intercept content from the Internet and deliver it to government and law enforcement agencies for analysis. Recently Verint held a very successful customer forum to demonstrate our latest voice and data interception capabilities, including our advanced analytical capabilities. More than 100 customers and partners attended the conference, including government and law enforcement agencies, service providers, and switch vendors from around the world. This invitation only conference provided customers confidential environment to see our latest technology and discuss their specific interception requirements. We continue to see demand for our communication perception solutions from new and existing customers, many of which are looking to add additional intercept capacity, new analytics, and new data intercept solutions to augment their existing voice capability. Sales of our enterprise business intelligence solution increased 9.2% year-over-year and 2.5% sequentially to $16.1 million.

As we discussed during our last conference call, we're starting to see signs of improvement in the EBI market. We believe that our third quarter results are indicative of an improved IT spending environment and a high level of interest in our EBI solutions. Our enterprise business intelligence solutions address two applications, contact sensor business intelligence and video business intelligence. Our contact center business intelligence solutions sold under the ULTRA brand name enable enterprises to capture and mind customer interaction data from their contact centers. Increasingly businesses are seeking intelligence recording solutions that enable them not only to record customer interaction to meet regulatory or agent performance goals but to generate business intelligence to help optimize business processes and develop more effective customer strategies. ULTRA and its sweep of analytical applications enables organizations to transform customer interactions into actionable intelligence that can be used to better understand understand customer actions, improve their competitive position, and enhance profitability. We recently received orders for ULTRA across a number of industries including the banking and financial services sector. In the highly competitive financial services industry, ULTRA is helping companies build customer loyalty by better understanding customer preferences and deliver a consistent branded customer experience often across a global customer base. Financial services companies that have recently selected or implemented ULTRA include City Street Bank, State Street Bank, Barclay's and the Halifax Bank of Scotland. Verint's latest generation of ULTRA, version 9, was recently recognized by the Yankee group for leading the market in incorporating tools for structured and unstructured contact center intelligence. In their analysis, the Yankee group highlighted Verint's ability to deliver advanced analytical solutions to help companies measure business success through actionable intelligence. The Yankee group indicated that analytical solutions such as Verint's recently-introduced IntelliFine and IntelliMinor are rapidly becoming a key buying criteria for enterprises contemplating an investment in intelligence recording.

Our video business intelligence solutions enable retailer organizations to monitor and improve their operations through the analysis of live and recorded video. Many retailers that have historically used video for security are seeking to leverage video content to enhance customer service and profitability. We believe that our Actionable Intelligence Solutions are increasingly gaining market acceptance due to their ability to help retailers address multiple important objectives, including enhancing store security, improving merchandising, and reducing shrinkage, all from one intelligence platform. We continue to see demand for our video business intelligence solutions in the retail market and are in discussions with several new major retailers.

Before turning it over to Igal to present our financial results, I would like to look ahead to fiscal 2004. We believe that the market for actionable intelligence is in the early stages, and we expect another year of growth in fiscal 2004. Although government and commercial organizations have massive amounts of unstructured information available to them, many select the technology to leverage this information to make well informed timely decisions. Increasingly, organizations are recognizing the value of implementing analytical solutions that enable them to generate actionable intelligence from the unstructured information that they collect. Today our Actionable Intelligence Solutions are being deployed across the Verint's group of markets, including the government, financial services, telecom, retail, manufacturing, and transportation. In several markets our customers are beginning to deploy our Actionable Intelligence Solutions to address more than one objective. We believe that going forward into fiscal 2004 this trend will continue as actionable intelligence enables our customers to meet multiple objectives ranging from enhancing security to improving internal processes, maximizing customer value, and increased profitability. Also looking ahead into fiscal 2004, we believe that our security solutions as well as our business intelligence solutions have the opportunity to be positively impacted by an improving economy as actionable intelligence provides our customers a compelling ROI and a cost-effective approach to enhancing security. Our positive 2004 outlook is influenced by a number of factors, including the growing recognition of the value of our Actionable Intelligence Solutions across multiple markets, and expanding customer base, and backlog which at the end of the third quarter was greater than one quarter of revenue.

will now present a review of our financial results along with guidance. Igal.

Thank you, Dan.

The third quarter represented the record quarter for Verint and our eighth consecutive quarter of sequential revenue and net income growth. In the third quarter we had sales of $49 million, representing year-over-year growth of 21% and sequential growth of 4.5%. The increase was due mainly to higher sales of our digital security and surveillance or DSS solutions which increased 5.5% sequentially to $32.9 million compared to $31.2 million in Q2 and increased 27% year-over-year compared to $26 million in the same period last year. Our sales in the third quarter to the enterprise business intelligence or EBI market increased 2.5% sequentially to $16.1 million compared to $15.7 million in Q2 and increased 9.2% year-over-year compared to $14.7 million in the same period last year. Looking at the geographical breakdown of sales, in the third quarter we generated approximately 57% of our sales in the Americas. Approximately 31% in EMEA balance in Asia-Pacific. Gross margins for the third quarter were 54% compared to 53.6 in the second quarter. This quarter represented our eighth consecutive quarter of gross margin expansion. Net research and development expenses for the third quarter represented 12.1% of sales. SG&A expenses represented 32.7% of sales. Interest and other income for the third quarter increased to $878,000 from $420,000 in Q2. In the third quarter we had income from operations of $4.5 million representing sequential growth of 8% and year-over-year growth of 64%. Our effective tax rate for the third quarter was 13%. Net income for the quarter was $4.7 million or 9.5% of sales. Diluted earnings per share were 16 cents based on a weighted average share count of 31.6 million shares. Turning to our balance sheet, cash and cash equivalents increased to $223 million at the end of Q3 from $216 million at the end of the second quarter. During the quarter we generated $8.8 million of cash flow from operating activities. In Q3 our DSOs improved to 62 days from 68 days in Q2, a level consistent with our guidance of 60 to 80 days. As of October 31, 2003, we had record total assets of $323 million, working capital of $198 million and shareholders' equity of $238 million. We are introducing guidance for the fourth quarter of fiscal 2003 as follows; Sales of $51 million and diluted EPS of 16 cents based on 31.7 million diluted shares.

Our fourth quarter guidance will yield in fiscal 2003 sales of $191.3 million and diluted EPS of 58 cents. For fiscal 2004 we are introducing guidance as follows; Sales of $215 million and diluted EPS of 74 cents based on 32 million diluted shares. We believe that the market for Actionable Intelligence Solutions is in its early stages and our guidance reflects continued demand for our Actionable Intelligence Solutions worldwide.

Thank you, Igal. Operator, we'll now be happy to answer questions.

Thank you, ladies and gentlemen. If you have a question at this time please press the 1 key. If your question is answered and you wish to remove yourself from the queue, please press the 1 key.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key. Our first question comes from Paul Coster:.

Another good quarter. Can you hear me?

Yes.

Couple of quick questions. Then the ULTRA version 9, I think it is, has this really, really compelling speech recognition capability for unstructured content interpretation, et cetera. Could you just give us some sense of what kind of stress test that's been through in terms of volume and whether it can scale up?

Okay. You're referring to the product that we call IntelliFine which is a feature of ULTRA 9 which allows key word spotting as well as topic spotting. Obviously, our technology is not providing 100% accuracy in terms of identifying specific words, but it's provided customers with a very good insight in terms of topics that are being discussed, so using this technology, what the system does, it highlights specific calls of interest amongst thousands, sometimes hundreds of thousands of calls that are being conducted between the customer organizations and their customers. And this, for example, could be topics of interest could be competitors that are being mentioned, customers indicating that they would like to close down an account in the case of a financial service organization, and overall allows the customer to get this actionable intelligence and better understand the interactions between the agent and the end users. In terms of --

When you say -- sorry.

In terms of stress test, while we are continuing to develop this technology and enhance its accuracy, we believe that based on the customer feedback, that it got to the point that it's providing customers real value.

This is in a fairly high volume environment?

Yes. This is picking up topics from thousands of calls, yes.

Second, jumping around a little bit here, the cash flow now is really quite, you know, formidable in the context of a very fragmented industry. What's the latest thinking on acquisitions? Any changes there?

Well, there is no fundamental changes in terms of our thinking. We believe that this is an early stages, growing actionable intelligence market, and the market is fragmented and presents opportunities for acquisition. Our strategy is to continue and grow organically and to selectively make acquisitions. We made a number of acquisitions to date, and we believe that we have successfully integrated these acquisitions into a business. In terms of let me just reiterate, our preference is to acquire small to mid-sized companies that we can integrate quickly and produce synergy; however, we will not exclude larger acquisitions if they represent a compelling business case. In particular we are interested in technology companies. We discussed before our IntelliFine. But this whole area of tools is in the very early stages, and while we have strong R&D effort going on in this area, we will also be happy to acquire companies that can enhance our analytical cape abilities and help us to further distribute information for more effective actionable intelligence.

Okay. So it sounds like the strategy and tactics are unchanged but a quart has gone by and we still have not seen anything. Are you seeing a lots of companies out there or are you finding it hard work?

There's a lot -- it's a fragmented market and there are a lot of companies. We are actively reviewing more than 20 companies, some in the U.S. and some internationally, and we are very selective. None of these exploratory discussions have reached the point of announcement.

Okay. Thank you. I've got one last question. So year looking somewhere in the region of 28% earnings growth or 13% top line growth, that is the way the numbers are falling out. I guess I'm a believer that DSS and EBI is going to happen. Top line still looks fairly prosaic. You know, what kind of assumptions have gone into these numbers and what would have to happen for the up side to come through?

First, let me just indicate this our net income growth is in -- in our guidance is 40%. If you do an calculation of 74 cents based on 32 million shares, it's just under $20 million, $24 million, close to $24 million in net income which represents approximately 40% net income growth over 2003. In terms of our guidance assumptions, although we see improvement in Q3 in our EBI results with 9.2% year-over-year growth, we are still very cautious about the overall improvement in active spending, and we have minimal growth in EBI in our assumptions, single digit growth in EBI in our guidance assumptions for top line for next year.

Okay. Thank you.

Our next question comes from Israel Hernández.

Can you talk a little bit about the margin, the gross margin leverage remaining in the model? What should our expectations be over the next several quarters in terms of how much improvements you guys can show? You've done a pretty good job over the last several quarters. I was wondering just how much more can we expect to see and where -- and where specifically will that opportunity come from? And also can you elaborate a little bit more in terms of your strategies within the retail market where obviously you've had some pretty good success here with Target and Home Depot. Can you talk about what types of companies you're working with and how does the pipeline look like there? Thanks.

Okay. Let me just answer the gross margin question. The quarter represents the eighth consecutive quarter of gross margin expansion and we expect this trend to continue. This trend, as we explained before, is driven by increased software in our sales mix and this migration to software is a slow one but it's driven by our customers, and we believe it's going to be -- it's going to continue for the long-term. We think there is a way to leverage gross margins further in the long-term to reach the mid 60s in terms of percentages of sales, and as we indicated before in our model, most of this expansion in gross margin we should drive to the bottom line as we expect our SG&A and our R&D to remain at a levels similar to what we experienced this years as percentage of sales. The gross margin question?

Well, the other question was with respect to retail.

Retail. Okay. Let me first discuss Home Depot? This is a recent win, and I think it's a good representative of the dynamics in the retail sector. First, Home Depot is a significant opportunity with 1600 stores. They are looking for a multidimensional platform which addresses both security as well as business intelligence applications such as shrinkage, merchandising and customer service all from one platform. And this is one of the strategies we have going after retail, is to allow them to leverage the platform that we have for actionable intelligence to address a number of different objectives and make it very cost effective for them. With Home Depot we are in the early stages of deployment. We have limited revenues from this account to date, but we look forward to a very long-term and multi-year relationship with Home Depot to help them to meet this objective. Overall in the retail sector we believe it's a significant opportunity for both security and business intelligence, and we believe that our solutions can enable retailers to address multiple objectives from one platform, which is a very important part of our strategy, but overall it's still very much an active market in terms of business intelligence.

Do you have dedicated people specifically assigned to retail? Do you have kind of a vertical market focus here?

Yes, we do. We have vertical market focus that actually we address big box companies, such as re -- such as Home Depot and Target, as well as the smaller retail organizations, stores and so forth which is obviously a large opportunity as well but has somewhat different objectives than the big box companies.

And finally, just to get back to the '04 guidance, the -- it seems to me that your tone is very positive with respect to what you're seeing in the end markets and the numbers kind of speak for themselves. You are seeing some pretty good demand. Are you guys just being cautious with respect to '04 or is there some uncertainties out there that we should be aware of? Because on the surface it looks, you know, I think the other analyst said it correctly, pretty uninspired.

Our guidance for '04 is an initial guidance and it's consistent with the guidance that we have provided over the last two years at the beginning of the year. And I think as the year, as we move through the year, we will have plenty of opportunities to update guidance if circumstances warrant.

Okay. Thank you.

Again, ladies and gentlemen, if you have a question at this time, please press the 1 key. Our next question comes from Gene Munster:.

Everybody just I guess a follow-up to Israel's question in terms of some of the markets, the university market you guys touched on is kind of a new market. How does the pipeline work in that area and other opportunities that seem reasonable that even going down to high schools and secondary schools? I mean, there are there opportunities you guys are pursuing there or do you feel like your hands are full with the university market?

Okay. Yeah, it's a very early stage market. It's still difficult for us to differentiate between universities and other type of educational facilities. Clearly today's environment, universities are increasingly seeking to enhance security, and they have multiple areas of campuses, parking lots, classrooms, dormitories, and public areas, and Verint solutions are very effective here because they are designed to help universities enhance their security cost effectively. Video is available through wireline and wireless IT networks providing the ability to monitor an entire campus and alert security personnel to safety issues. Another important feature is that is this actionable intelligence information can also be shared with law enforcement and other emergency services so ice not just restrict to the university security personnel, and this is very effective in addressing security breaches. So overall it's an early stage market. We feel that we are participating in a market. We have a number of universities and time will tell how fast this market will evolve and go down to the school level.

Okay. Just in terms of I guess the flow, the bookings number, I know you said that it was greater than one or more than one full quarter in backlog, is there any sort of color you can give us in terms of acceleration or versus last quarter, greater than 1 by a greater margin last quarter? Anything we can work with from that perspective?

Consistently what we have been telling before, I can just expand a little on that that we have a healthy pipeline, a pipeline that is driven by our install base of more than 1,000 customers, and we have 60% of recurring revenues from existing customers, and we also have new customer opportunities that we are pursuing and we have announced new customers this quarter as well, and this is across all markets. So we currently have one, you know, more than one quarter of business in our backlog which is firm purchase orders. We typically get into a quarter with 58 to 75% of the quarter already in backlog which helps make the quarter linear, typically 30, 30, 40 in terms of linearity, and our policy is to confirm whether our backlog is above or below one quarter revenue each quarter.

How about on the business intelligence? Obviously we don't talk a lot about that because it's not a growing market, but any thoughts who what could be a potential catalyst there, is there potentially a diamond in the rough there or just keep focusing on the security side in.

We maintain our position that long-term the business intelligence market will grow at the same pace as the security market. There was a big difference, business intelligence was basically flat. We attributed that to the IT spending environment. And now that we see some signs of improvement, there is definitely going to be some growth there. It's too early at this point to say what the growth will be next year, so we're taking a cautious position here and assuming a low single digit growth, but over time definitely we anticipate similar growth rates for the security market, and we will invest in our business accordingly.

Great. Thank you.

Ladies and gentlemen, once again, if you have a question, please press the 1 key on your touch tone telephone. Our next question comes from Jonathan Half:..

: Thank you and good evening. Dan, can you maybe speak about if we can expect to see seasonality in 2004? You've got to go back a couple years before we historically go back to see some seasonality in your revenues. Off your Q4 guidance, your annual guidance for 04 is about 5% growth so I'm just wondering what should we model for in terms of the quarter next year.

In terms of seasonality, the broad customer base and the fact that we are participating in many different vertical markets pretty much neutralizes any seasonality in our business. If you take, for example, our government business which is the larger segment with approximately 30% of our business, we address many different governments, domestic and foreign governments at every level, and different government agencies have different fiscal years. Some are on a calendar year, April year, July year, and so forth. So while we see pockets of seasonality, none of these pockets is big enough to impact the overall numbers for variance. So I don't expect seasonality. In terms of the quarterly growth next year, we're not providing at this point specific guidance for quarters, but historically we have been planning our resources to allow the company to grow consistently every quarter, and we certainly hope that we will be able to do that next year as well.

: Okay. Just a couple of housekeeping. Could you give us the headcount, please, at the end of the quarter?

The headcount is approximately 950 people.

: Were there any 10% customers?

No.

: Also, inventories seem to be up sequentially by more than I was looking for. If can you give us some idea what's behind that?

Well, the interest in inventory was mostly in finished goods, and this was a result of the need to address customer needs for the deployment in early Q4.

: Okay. Great. Okay. That's it for me. Best of luck.

Our next question comes from Shaul Eyal.

Thank you. Hi. Good evening, gentleman, just a couple of quick questions for me. With respect to 2004 guidance I guess it's a fair statement to say we're still expecting a similar revenue mix as we are seeing in 2003. Is that affair assumption?

We're not giving guidance in terms of our mix; however, I addressed before the question in terms of business intelligence, enterprise growth, and I did indicate that we assume, in this guidance we assume a low single digit growth.

Fair enough. On the communication interception side, you went across a couple of your new and existing clients on the international side. Can you share with us or at least provide with us some color on what region are we talking about? Is it one specific region or really across the globe here?

We are addressing this market across the globe, as we believe that security is an issue, not just domestically but it's a concern for many different countries, and we have been adding new customers, we're adding customers in new customers for Verint almost in every quarter so our strategy is to take the technology and solutions that we have and deploy them into as many countries as we can.

Okay. Just quickly on the EBI side, any addition of verticals you guys have in mind? I know you talked a lot about the retail side, but any other segments that you could be expanding into down the road?

The question is specifically about the video business intelligence.

That is correct.

Well, this is an early stage market, and we address our resources, we addressed before the question about the vertical sales force which we have to go after the retail market, and we feel that there is a tremendous opportunity in retail which we would like to focus on. Potentially there are definitely opportunities outside of this market. I can mention the gaming market, for example, where historically they're focusing on using video for security purposes. We think that our actionable intelligence technology can help casinos and other gaming companies to improve the operations and improve bottom line but it takes time and it takes resources, and while we eventually will see construction at casinos and we are well positioned to participate in that transition, from analog video to digital video in the casino market, we are focusing right now our efforts on video business intelligence in the retail market.and this can change down the road, but this is our current focus.

Okay. Thank you very much. Congratulations. Good quarter.

Did next question comes from Allen Weinfield.

My congratulations, guys. Could you talk about the research and development expense side? Do you plan to deep keep investing at about the same rate in the business? And if you can also address, you know, where you -- if sales and marketing, basically, stay flat as you go out, flat as a percent of sales, out the next few quarters.

Okay. The next research and development should remain approximately 12% of our revenues. Last year Verint invested $22.6 million in research and development. We, this year we continued to expense at the 12% level which is obviously growth in terms of R&D in absolute numbers. More than one-third of our 950 employees are in research and development, and the focus of our R&D certificate on developing new analytical solutions that enable our customers to generate actionable intelligence through analysis of voice, video and data. As I mentioned before, we also are looking selectively to acquire companies that can enhance our technology position by improving our analytical capabilities. And this is the plan for next year as well, R&D at 12%. In terms of SG&A, we're planning to keep SG&A at similar levels this year, 33% of revenue. Most of the growth in SG&A will be in expanding our presence in additional countries. And we are currently investing in additional sales and marketing people to address new geographies as well as new segments, new sectors of the market. You should expect some leverage in SG&A over time, but we believe that we are participating in a growth market and we should invest in marketing accordingly.

Can you touch on anything you've seen new out of the government on the Homeland Security efforts?

Yes. Well, we believe that we are still at the beginning of the multi-year government spending on Homeland Security initiatives, and our solutions address a broad range of applications that the government sector needs, including gathering intelligence to prevent criminal activity and enhancing security. Our solutions have been deployed to protect government facilities and sensitive infrastructure, airports, ports, and offshore military bases, so we have traction already in this area. And as I mentioned before, this is not just Homeland Security in the U.S.; this is a concern of foreign governments as well, and they have their own Homeland Security initiatives that we are participating in. It's a long-term security buildup, and we were fortunate to grow over the last two years. years with the. With the levels of government spending that was, you know, contributing to about 30% of our business, and at this point we're not assuming any higher percentages in our guidance.

Great. Good luck. Thank you.

Our final question comes from Tim Quinlan.

Nice quarter. Just a couple, few questions here. First, if you can just give me a little sense of how some of the larger contracts that you've announced over the past few months are ramping up. You talked about the Home Depot contract. Could you talk about the IRS call center contract, give us a sense where Target is in terms of deployment. And then also you had announced I think in July a multi-million dollar order from an unnamed government customer for Reliant. I'm just wondering where that is in terms of deployment. Thanks.

Okay. So I covered Home Depot. Let me address IRS. IRS is a significant opportunity they have 46 contact centers dispersed around the country. They are one of the largest customer service organizations worldwide, and a new customer for Verint. We are deploying now, we have limited revenues in Q3. This is a long-term deployment. Typically our largest customers deploy over time in their, into their infrastructure. The ULTRA 9, including some of our analytics, and their main focus is to use actionable intelligence to improve customer service. And as with Home Depot we look forward to a long-term, multi-year relationship with this customer.

Target is a different case. Target has been a customer for a number of years. They have been deploying consistently every year into additional stores as well as upgrading some capabilities in some of the stores that already have our solutions, and, again, we expect that our relationship with Target will be a long-term one and that we will continue to introduce new capabilities into the Target's retail chain.

In terms of the RELIANT customer that we announced last quarter, without providing any specific information about this customer which unfortunately we cannot, I can say that again it's a typical customer in terms of big customer with large infrastructure and typically takes more than one quarter to deploy our solutions, and typically if our deployment goes well, we expect expansion into additional sites and expansion of additional capabilities, and this is another long-term relationship that we expect to have with that customer. And overall we are generating more than 60% of our revenues from recurring revenues, from an existing base, and we expect this trend to continue as many of our customers are large government agencies and blue chip enterprises with very large infrastructure that we are addressing over time.

And given that the IRS contract is still kind of in the early stage ramping up and Home Depot is in the early stages of ramping up, why are you assuming just low single digit growth in the EBI segment?

First, with Home Depot, I mentioned before, and I think that's important to understand that they are addressing a multiple objectives, including security and business intelligence, and, you know, it's hard to predict what their priorities will be in terms of deploying the security features of our platform for the safety of customers and securing assets and so forth as opposed to the business intelligence features of merchandising and customer service and so forth. We, overall we tend to believe when we have a firm fixed price orders on hand in backlog, in the case of those two customers, while we are looking for a long-term relationship and we hope that we will get more and more orders over time, these are large organizations and their priorities can change and we feel more comfortable with a cautious outlook.

Next question is on the -- what are you seeing in terms of the wire tapping market on the service provider side? You know, I noticed that you announced a new contract with an ISP. Are you seeing some strength on the ISP side that's offsetting any slowdown that you night might be seeing as the more traditional meet government mandates?

Yes. I think I mentioned in the last call that you're right, wireline customers, we're not seeing much traction. Most of the traction leaves service provider necessary wireless, Peka-ph data and Internet. Internet specifically is pretty much a great field opportunity. It's very, very early stages. In many countries the legislation is not yet in place to allow that. Obviously, law enforcement organizations recognize the fact that the Internet is a very popular tool to communicate, and that needs to be addressed, and we have the technology to help them to do so, but overall, as you go into the more advanced technology of Peka data and Internet, there's more traction than in the traditional technology.

Okay. And just finally, you know, I guess it's good to see that the cash is not burning a hole in your pocket, but I'm just wondering at the time you completed your follow-on offer to raise that, that significant cash horde, did you think you would be able to develop accretive actions more quickly? Has something changed on the acquisition front? I guess it's a pretty big drag on your returns on equity, return on assets, and I'm just wondering how quickly you think you can put that cash to work instead of earning 1-1/2% in a money market.

Yeah, I -- definitely when we raised the money, what we had in mind is that this is a very early stages of a fragmented market that we need to be ready to make selective acquisitions if the opportunity arises. We also were aware that some of our competitors, like GE and Honeywell, have more resources than we have and have been acquisitive in the security market, and I think having that cash is very important for Verint's ability to act quickly when the opportunity is right. At the same time, we need to be very selective. There are several opportunities that look very interesting initially, but as we dig in, we find that it's going to be either difficult to leverage or that they may not present such opportunity for, good opportunity for very long-term, and we just need to take our time and make sure that when we do announce an acquisition, it's going to be the right one long-term. There is no doubt in my mind that the market will consolidate, and this there is no doubt in my mind that the company will act quickly, it's going to be the winner in the market.

Okay. Fair enough. Thanks, Dan.

This concludes our question-and-answer session. Mr. Roden in, you may continue with any closing remarks.

Thank you. As there are no additional question, on behalf of Verint thank you very much for participating in our conference call tonight. Have a great evening.

Ladies and gentlemen, this concludes our conference for today. You may now disconnect.