Verint Systems Inc (VRNT) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verint Systems Incorporated fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question and answer session. Instructions will follow at that time. If anyone should require assistance during the conference please press star than zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Alan Roden. Mr Roden, you may begin. Thank you, operator.

Hello, I'm Alan Roden, Vice President of Corporate Development and Investor Relations of Verint Systems, which is traded 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. 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 of a number of factors can 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 the call in any form without the express written consent of Verint System's is strictly prohibited.

For discussion of the principal risk factors that may cause actual results to be different please refer to the afore mentioned press release and the company's filings with the Security and Exchange Commission. 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 verint.com. Please refer to our website for a reconciliation of our GAAP and pro forma net income discussed on the call.

The content of this conference call is time sensitive and reflects the company's perspective as of March 10, 2004. We undertake no obligation 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 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 his perspective on our business and market trends and Igal Nissim will present a more detailed review of our fourth 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, Alan. Hello, everyone and thank you for joining us today for review of our fiscal 2003 fourth quarter results for the period ended January 31, 2004. Our fourth quarter results represents a record quarter for Verint in terms of sales and net profit. This growth was used strong demands for actionable intelligence solutions in both the security and business intelligence market.

In the fourth quarter, we excelled to $52.4 million representing year-over-year growth of 24% and sequential growth of 7%. Income from operations for the quarter was $5.1 million representing year-over-year growth of 69% and sequential growth of 14%. This increase was primarily driven by sales growth and improved operating margins. Diluted earnings per share for the quarter was 18 cents based on 31.7 million weighted average shares outstanding. Verint Solutions Power Actionable intelligence by capturing unstructured information from voice, video and IT network, applying advanced analytics to unearth critical intelligence and delivering this intelligence to decision makers for effective action.

During the quarter we experienced strong growth in both the security and business intelligence markets. Sales of our securities solutions increased 28% year-over-year and 6.6% sequentially. Sales to the security market represented approximately two-thirds of our total sales. Sales of our business intelligence solutions increased 16% year-over-year and 7.7% sequentially. Sales to the business intelligence market represented approximately one-third of our total sales. As we discussed during our last conference call, we are starting to see signs of improvement in the business intelligence market.

We believe that our fourth quarter results are indicative of an improving IT spending environment and a high level of interest in our business intelligence solution. Our actionable intelligence solutions address multiple applications including communications interception, network video and contact center actionable intelligence. Our communications interception solutions enable government and law enforcement organizations to intercept communications for a variety of purposes, including gathering intellegence in order to identify and prevent criminal activities and establishing evidence for the conviction of criminals. During the quarter we received orders from both existing and new customers and continued our geographic expansion of this business.

Examples of some orders include an order from a new international wireless service provider customer which is deploying our communications interception solution to comply with government mandates requiring it to assist the government in intercepting internet communications. Our solution will enable this customer to intercept voice and data communications across it's new multi-country third generation deca-data network. An order from a new wireless GSM service provider customer which is deploying our communication interception solution to comply with European SC mandates.

Expansion order from existing government customers including a recent multimillion dollar order, these orders are being driven by our customer's needs for more capacity, new data and voice analytical capabilities and the ability to intercept new protocols such as voice over IP. It's part of our strategy to expand the capabilities of our actionable intelligence solutions, we recently announced the signing of a definitive agreement to acquire ECtel's communication interceptions business. ECtel's communication interception business is expected to provide Verint with additional communications interception capabilities for the mass collection and analysis of voice and data communication. The acquisition was driven by a high level of interest from law enforcement and government customers for solutions that enable them to better generate actionable intelligence from the large amount of information that they collect.

We intend to integrate these new technologies into Verint's portfolio of communications interception solutions and offer them to Verint's global customer base of government and law enforcement agencies. We have been working with ECtel as a partner for a number of years and our knowledge of their product and familiarity with their employees is expected to better enable us to integrate ECtel's communication interception business with Verint operations. In addition to gaining new collection and analytical technology, some of ECtel's existing customers are new customers and in some cases are in new countries for Verint, in the Asia Pacific and Latin American region. Verint intends to support any growth plan these customers may have and to offer them Verint's full range of communication interception solutions.

The acquisition is expected to close within the next 30 days and we expect to consolidate close to 10 months of results from the acquisition in fiscal 2004. Last year ECtel's communication interception business reported approximately $12 million in revenue and was not profitable. The acquisition will enable us to generate synergies and we anticipate that the acquisition will be non dilutive to various performer results in fiscal 2004. We continue to see demands for our communication interception solutions from new and existing customers many of which are looking to add additional intercept capacity, new analytic and new data intercept solutions to augment their existing voice capability.

Verint's network video solutions enable organizations to enhance security of their facilities by networking video across multiple locations, applying advanced contact analytics to instruct actionable intelligence and alerting security personnel to potential security threats. Some organizations that have historically used video security are seeking to leverage video content to generate business intelligence to help make important operating objectives such as entrancing customer service and profitability. Our network video solutions are addressing a broad range of security and business intelligence initiatives.

Recently we have received orders from a variety of commercial and government customers. Examples of some of these include orders from the Port of San Diego and the Port of Long Beach which are deploying our video security solution to enhance perimeter security of maritime ports. We believe that these deployments are consistent with the Department of Homeland Security's objective of enhancing the security of our nation's sea ports. Orders from airports, including some in major metropolitan areas such as New York, which are deploying our video security solutions to enhance security at a number of locations throughout the airports including passenger terminal perimeters and other sensitive operational areas.

An order from the Metropolitan Water District in Southern California which is deploying Verint video security solutions to enhance perimeter security of it's water district distribution infrastructure. Verint's video security solution will enable this agency to enhance the security of it's extensive perimeter and remote facilities by centrally managing and analyzing video transmitted over both wireless and wire line networks. Multimillion dollar in orders from a new customer in the gaming industry. This new customer operates multiple gaming facilities and will be able to use Verint's video solutions to enhance security and force gaming policies and reduce fraud and theft.

An order from the Minnesota Department of Correction, which is deploying our video security solution to enhance perimeter and facility security at multiple prisons throughout the state including several maximum security facilities. It's part of our strategy to address the growing interest in our network video solutions internationally. We continue to expand our relationship with key distributors and system integrators around the world. Recently we announced a new partnership with CTC, the leading system integrator in Japan. As part of this new relationship and expansion into the Japanese market, Verint will introduce a new localized version of the video security solution based on Japanese characters.

We believe that CTC provides Verint a strong local partner to deliver our network video solutions in Japan. The fourth quarter was a record quarter for Verint in China in terms of orders for our network video solutions. We have been building relationship in China over the last several years and these local relationships are giving Verint the opportunity to participate in the demands for network video solutions in both the commercial and government areas in this growing market. We continue to see demands for our network video solutions for a wide range of security initiatives including protecting public transportation, military facilities enterprises, core infrastructure and government facilities and new business intelligence initiatives mainly in the retail market. Our contact center actionable intelligence solutions enable enterprises to capture and analyze 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 actionable intelligence to help optimize business processes and develop more effective customer strategies. During the quarter we received orders for our Ultra intelligence recording solutions and our intelligence content analytics from a variety of new customers. Today we are announcing a multimillion dollar order from SBC Communications. SBC has selected Verint's Ultra solution for it's call center information projects and major initiatives designed to enhance customer service across the company's consumer business and network division. Ultra is designed to enable SBC to unify the company's customer service offering for it's 58 million customers across 13 states.

Verint's experience working with large-scale deployment and broad sweep of advanced contact analytics were the key differentiator in being chosen by SBC. Other new customers we recently announced include Ocwen Financial, which is deploying Verint's Ultra intelligence recording solution for it's voice over the internet protocol based for contact centers in the United States and India. Clock American, which partnered with Verint to fuel enterprise quality initiative across the company's five network contact centers, which handles 15 million contacts per year. Verint's Ultra solution and suite of intelligence contact analytics continue to gain market acceptance and have been recognized by the industry for their innovation and new business value.

Recently Verint announced Asha was awarded product of the year by CMP's Call Center magazine and it's IntelliFind application was awarded product of the year by TMC's Customer Interaction Solution magazine. These awards highlight the growing market recognition for Ultra and its suite of analytical tools that are designed to empower enterprises to uncover the valuable information hidden in every customer contact. We continue to see growing demands for our contact center actionable intelligence solutions including our advance suite of analytic applications across a number of different markets. Before turning it over to Igal to present our financial results, I would like to summarize 2003 and look ahead to 2004. Fiscal 2003 was a year of many achievements for Verint. We delivered four record quarters with sequential revenue and earning growth and posted record annual results.

We've maintained a backlog in excess of one quarter of revenue each of the last four quarters. Our gross margins and operating margins increased every quarter throughout the year. Our operating profit, combined with the management of our working capital, enabled us to generate $27 million of positive cash flow from operations and at year end we had a cash balance of $229 million. We achieved our positive fiscal 2003 results while continuing to invest significantly in research and development of new actionable intelligence solutions. Looking ahead to fiscal 2004, we believe that the market for actionable intelligence solutions is in it's early stages and we expect another year of growth.

Although government and commercial organizations, as massive amounts of unstructured information available to them, many still lack the technology to leverage this information to make well informed timely decisions. Increasingly organizations are recognizing the value implementing analytical solutions that enable them to generate actionable intelligence from the unstructured information that they collect. Today we are seeing demands for actual intelligence solutions across multiple market segments including government such as law enforcement and transportation, financial services, retail and telecom and utilities. In the government market the need for better intelligence and security remains a high priority.

Government agencies worldwide continue to seek solutions that better enable them to generate actionable intelligence to prevent criminal and terrorist activity and to protect critical infrastructure. In the financial services market companies are seeking actionable intelligence solutions to help them affectively secure their disbursing operations including regional cash centers, branch banks and ATM machines. At the same time companies are seeking actionable intelligence to better understand their customer's preferences in order to build customer loyalty and to successfully compete in the highly competitive financial services industry. In the retail market organizations are starting to recognize the value of deploying actionable intelligence solutions to generate business intelligence to meet important operating objectives such as reducing shrinkage, enhancing customer service and growing stability in addition to improving security of their distributed operations.

In the telecom and utility market organizations are seeking actionable intelligent solutions to address a wide range of objectives from enhancing security of their sensitive infrastructure to meeting government mandates and to improving customer service in the face of deregulating, increasingly competitive environments. As we enter fiscal 2004, Verint remains committed to growing by understanding our customer's market specific requirements and delivering new actionable intelligent solutions. At the same time we believe that we can augment our internal growth with strategic acquisitions that are focused on identifying companies that help us extend the capability of our solutions, broaden our offerings and expand our geographical presence. We continue to search for companies that meet our strategic objective and are currently reviewing a number of different acquisition opportunities. Igal Nissim will now present a review of our financial results along with guidance. Igal.

Thank you, Dan. The fourth quarter represented a record quarter for Verint and our ninth consecutive quarter of sequential revenue and net income growth. In the fourth quarter we had sales of $52.4 million, representing year-over-year growth of 24% and sequential growth of 7%. The increase was due to higher sales of both our security solutions and our business intelligence solutions. Sales to the security market increased 28% year-over-year and 6.6% sequentially. And sales to the business intelligence market increased 16% year-over-year and 7.7% sequentially.

For the 12 months ended January 31, 2004, sales were $192.7 million representing year-over-year growth of 22.2% compared to $157.7 million in fiscal 2002. Looking at the geographical breakdown of sales, in the fourth quarter we generated approximately 61% of our sales in the Americas, approximately 31% in EMEA, and the balance in Asia Pacific. Gross margin for the fourth quarter were 54.1% compared to 54% in Q3 and 51.9% in the fourth quarter of the previous year. This quarter represented our ninth consecutive quarter of gross margin expansion. Net research and development expenses for the fourth quarter represented 11.9% of sales. SG&A expenses represented 32.4% of sales.

In the fourth quarter we had income from operations of $5.1 million representing year-over-year growth of 69% and sequential growth of 14%. For the year, we had income from operations of $17.2 million representing year-over-year growth of 71%. Interest and other income for the fourth quarter decreased to $857,000 from $878,000 in Q3. Our effective tax rate for fiscal 2003 was 10%. Our fourth quarter effective tax rate was 3% as a result of certain adjustments. Net income for the quarter was $5.8 million or 11% of sales.

Diluted earnings per share was 18 cents based on an average share count of 31.7 million shares. Fourth quarter EPS was positively impacted by lower than expected tax rates assuming our annual tax rate of 10%, fourth quarter 2003 EPS would have been 17 cents. For the year, net income was $17.9 million representing year-over-year growth of 77%. Diluted earnings per share was 61 cents based on an average share count of 29.4 million shares representing year-over-year EPS growth of 42%. Turning to our balance sheet, cash, cash equivalents and short-term investments increased to $229 million at the end of Q4 from $224 million at the end of the third quarter. During the quarter, we generated $7 million of cash flow from operating activities.

In Q4 our DSOs improved to 58 days from 62 days in Q3, a level slightly better than our guidance of 60-80 days. As of January 31, 2004, we had total assets of $329 million, working capital of $205 million and shareholders equity of $245 million, all of which represents record levels. We are introducing guidance for the first quarter of fiscal 2004 as follows: Sales of $55 million and diluted EPS of 1 cent on a GAAP basis which includes non-cash charges and based on 31.8 million diluted shares outstanding. On a pro forma basis, we are guiding to EPS of 18 cents for Q1. For fiscal 2004 we are raising guidance from sales of $250 million to $230 million and guiding to diluted EPS of 50 cents on a GAAP basis which includes non-cash charges and based on 32 million diluted shares outstanding.

On a pro forma basis we are guiding to EPS of 77 cents for fiscal 2004. Our guidance for fiscal 2004 includes ten months of anticipated contribution from the acquisition of the communication interception business of ECtel which is expected to close within the next 30 days. ECtel's communication interception business reported approximately $12 million in revenues in 2003. Pro forma EPS excludes non cash charges consisting of one-time charges associated with the acquisition of ECtel, the amortization of intangible assets and stock based compensation charges. We believe that the market for actionable intelligence solutions is in it's early stages and our guidance reflects continued demand for actionable intelligence solutions worldwide.

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

Ladies and gentlemen, if you have a question at this time press the 1 key. If your question has been answered and you wish to remove yourself from the queue, please press the pound key . Our first question comes from Brian Whitenberg from Morgan Keegan.

Great quarter. A couple quick questions. First of all on the tax rate going forward, can you address that? We were modeling a higher tax rate but if you could talk about that then I have another followup question.

Okay. In terms of our guidance going forward for next year, we guiding for a tax rate of 12%. Let me just give the other guidance components now. Based on the $230 million in revenue and 77 cents pro forma, this is based on SG&A of 32 - 33%, R&D of 12 - 13% and our guidance supplies basically 40% pro forma net income growth to more than $24 million net income.

Great. I was going to ask those questions. On your interest, the one thing you didn't talk about is your interest income. Kind of where do you see that going? What kind of rate are you getting right now and what are you doing to manage that?

We are getting right now approximately 1.2%. Most of the cash is short-term. We're getting market rate. That's what we should expect based on where the interest rates will be next year.

Okay. And when we're talking about cash generation next year, what are your plans with the cash just to put it to work in interest income in the near term and can we look for cash generation at similar levels with DSOs dropping and things like that? Or at least maintaining stable DSS?

We guided before that long-term our cash generation will be closer to our net income. We still have the previous year. In 2003 we generated $10 million more than our net income. So we are guiding for next year that we'll narrow the gap somewhat. In terms of DSO, we continue to guide for 60-80 days. We believe that the DSO, relatively low DSO, is as a result of the quality of our products and the quality of our customers and our ability to execute but at the same time we need to give customers flexible terms and we intend to do so, so 60-80 days is our guidance for next year.

And then last question just on your backlog, you said you have more than a quarter's worth of backlog. Can you elaborate a little bit more on that? It seems like you have had that kind of backlog for a while now. You seem more positive on the backlog. It seems like it's bigger at least from the conversations that you have on these conference calls. Can you give us some kind of perspective, is it up year-over-over? Something along those lines?

It's definitely up year-over-year because every quarter we have higher revenues and we're still able to maintain backlog which is exceeding 1 quarter of revenue. So backlog is now higher year-over-year. To give you some more color in terms of service backlog is about 25% of the backlog and product is 75% which is slightly higher than the mix we expect in revenue which is more like 20% service, 80% product.

Good. Thank you very much.

Our next question comes from Paul Coster.

Congratulations, too, on the quarter. I've got a few quick questions. The guidance that you issued, Igal, what revenues in that guidance would be coming from ECtel? You mentioned 12 million in revenue last year, is that the kind of number that we should be projecting in 2005 fiscal?

Paul, this is Dan. Let me first give some more color in terms of our integration plans. As I mentioned before, EC reported $12 million last year and the6y also reported losses. ECtel had 300 employees last year. We, as part of the (inaudible) agreement, have agreed to take approximately 80 employees that we'll move over to Verint. Our intention is to integrate these employees immediately with the Verint organization so the R&D spokesman,(inaudible) and the R&D organization was Verint and the support people go to support organization and sales and so forth. So that's going to happen immediately and therefore, as we integrate the workforce and we integrate a product portfolio, there is really not going to be a ECtel P&L unit going forward after closing. And therefore, it's kind of difficult to view projection as to what exactly is going to come from the ECtel communications (inaudible) business versus Verint. We just gave these as some sort of indication because this is a public disclosure available from ECtel and we want to explain what was the level of revenues that ECtel reported and why we think that while they were losing money, we can make this more dilutive based on the fact that we are only taking part of the employees. You also asked to remember based on what we said that was an anticipated closing date within 30 days, we will consolidate only 10 months of whatever will come from the ECtel product portfolio into our fiscal 2004.

And when you made the acquisition announcement, you depicted this as an asset acquisition but it does sound like there are, it is something of a going concern. There are some revenues from customers and ongoing business, is that correct?

It is a deal. We primarily we required the IP asset property and products and employees and we also acquired the business in terms of the fact that ECtel will cease any activities they have currently or had before in this market. So practically we're buying the business. In terms of customer contracts, we are buying some, but basically we're not buying all the history of ECtel's relationship with these contracts. We are buying the relationship going forward.

Okay, great. Could you just give me a little sort of color around the size of the contracts that you are typically closing in both the business and the security segment?

Our ASP as we reported before has not changed. It's $250,000. And that's an average number, but we do have multimillion dollar contracts and we also have smaller contracts. I think typically what we see in this business is that even large customers over time have an accumulative value of many million dollars of contract, typically they will give orders on a piece meal basis and the way we look at the ASP is on pay order basis not necessarily in per customer basis. I would assume that we have a higher number than $250,000 per customer but we're not tracking that.

Last question, if I may. Customer concentration this quarter, and as we proceed with the ECtel acquisition, will there be any change to it particularly relating to the Asia Pacific and Latin American customers that they used to have?

We still have a very diversified customer base. I could say first, for 2003, we had two customers that were slightly over 5%. Definitely less than 10% customers. In Q4, I don't think we had any concentration and I don't expect in this quarter, in Q1, to have any concentration. The ECtel impact, I don't see right now any major impact. There are some customers with ECtel that are also our customers, so clearly there's potentially more business coming from this joint customers. There're also other customers that we don't have so as I mentioned, when they mention of the ECtel opportunity was to get new customers and in some cases new countries for Verint but I don't see major impact because even without being specific in terms of ECtel's component in our guidance, you can see from the order of magnitude that it's relatively small of the $230 million guidance that we gave for the year.

Excellent. Thank you very much.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key. Our next question comes from Jonathan Half.

Thank you. Congratulations on a solid quarter. Dan, can you comment, it's been a while since your EBI business is actually growing sequentially faster than your security business. Can you maybe comment on that going forward? Do you think that's a trend that we should see continuing especially given the fact that you seem like you're announcing quite sizable deals, especially today in that space? Thanks.

Yes. First we were very proud to be able to announce IRS last quarter and SBC today. Obviously sizable accounts and obviously their interest in investing in actionable intelligence is a very, very positive sign. Nevertheless, as you know, I've been very cautious about the markets rebounding. There's definitely good signs, but we only dialing single digit growth into our '04 guidance for the business intelligence market. I believe that long-term, the actionable intelligence solution represents high value for enterprise customers and I expect that market to grow at similar rates to the security markets, clearly 20 - 30% growth is what we would call a healthy, long-term growth. How fast we can get there and have we turned a corner in terms of the IT spending recessions? At this point we are still cautious.

So for Q1 we should expect a similar mix between the two businesses or security to pick up once again. Grow faster than EBI.

It's hard to predict quarter to quarter but looking at the year, now we have year results. We had 28% year-over-year growth in security, which is very much in the range of 20 - 30% as we anticipate long-term. I would say that for '04 we still see healthy growth in security. There's no change in the fundamental driver of government as well as enterprises willing to invest in enhancing security and interest in buying actionable intelligence solutions that can make their security logistics more proactive. So on the security side it's still very positive. Whether Q1 is going to be improvement in EPI or not, I think it's too early for me to comment.

And a followup to the question regarding backlog. Can you maybe comment on whether your backlog at the end of Q4 was higher as a proportion of mixed quarterly revenues than it was at the end of Q3?

No, I can't really give this specific statistics. We are comfortable that the backlog is higher than our Q1 guided number, so it's $55 million. How is it in relation to Q3, I don't know off hand.

Fair enough. And last question for me, please. Can you discuss whether you get any leverage from your parent company when you sell into the wireless market. You mentioned a contract in 3G, can you comment whether that's any help.

There's no joint activities. We have our own sales force calling on this customers that we delivered through our own operations and so forth. I can't discount the fact that Comverse has - the Brenwick(ph) Munition was in this marketplace can be helpful but this is not tangible. We are not counting on Comverse in any way in our sales efforts in this market.

Thank you very much and good luck.

Our next question comes from Shaul Eyal.

Thank you. Congratulations on a strong quarter, good guidance. A couple of quick questions. With respect to your gross margins, should we expect a continued sequential upwards trend in the margins heading into 2004?

Yes. This is our ninth consecutive quarter of expansion in gross margin so there's clearly a trend here and we believe this trend is as a result of higher (inaudible) component in our sales which carry higher gross margins And this is a trend driven by customers as customers are more and more comfortable to provide the hardware themselves, our sales are more of the value add sales which is our software and the impact to overall gross margin positively. So I would say that absolutely we expect this trend to continue over time. Whether we can guarantee expansion sequentially every quarter, that's always the tough because this is customer driven and it could change from quarter to quarter with one big order that a customer opts not to provide the hardware that they requested, we provide the hardware and this could change numbers for that specific quarter. But the trend definitely is for gross margin expansion and profitability to improve the bottom line. We in '03 had 70% growth in our op income. We had 40% growth in EPS. Part of our ability to generate bottom line growth that is faster then topline growth is the fact that our gross margins are expanding.

Even in light of the ECtel acquisition, of the government acquisition?

I don't see that the ECtel acquisition will have any impact on our model because at the end of the day the value of the communications interception solutions is in the software. And the trend of customers pushing more and more for buying software separate from hardware is a market trend, it has nothing to do with the vendors whether it's ECtel or Verint. So I think that the ECtel model will be very much similar to our model.

Fair enough. You mentioned previously a multimillion dollar contract in the gaming industry. Is that kind of a replacement contract? Can you provide us with some more color about this specific contract?

As much as I can. Right now because for various reasons, we didn't get permission to identify the customer here. This is a new opportunity so we're not replacing any other system similar to ours as far as we know. This is an operator that operates multiple gaming facilities at this point. We got a few of those to represent for us multimillion dollar order, we hope that we execute well. We'll get more properties of the same operator. And what our systems can do for the gaming industry is in addition to including security and addressing the compliance of the regulatory issues that casinos face as part of the license to operate casino, we can also help them to generate business intelligence about the casino floor that can help them to improve the processes customer inspection and profitability.

Fair enough. On the SBC contract you just announced, any time frame you can attach to the contract?

Typically to, again, to large customers like SBC, we got a contract for a portion of the operation which we going to have to deploy over several quarters. We hope that if we execute well, as we deliver on the orders we got, we're going to get more orders and this will become a multi-year relationship with SBC to deliver into more and more of their locations but also over time to go back to locations that we delivered and upgrade with more analytical tools and expanding capacity and so forth. So that's our model. We've executed this model with other large customers and we hope that we'll be able to satisfy it and have a longtime relationship here as well.

Would you characterize the contract as being, let's say, one of the five largest contracts ever signed by Verint in that respect?

In terms of the size of the contract that was signed, no. Potentially this could be one of, SBC is in terms of number of agents, they are one of the largest organizations worldwide. Obviously there is some correlation between number of agents and the size of the contract. But again, it depends on many factors and what will be eventually the size of the contract and also over how many years we would be able to deploy the solutions. And that's more up to the customer than to Verint and we will be happy to deploy as fast as they would like us to.

Fair enough. Just one final question, what was the head count by the end of the quarter assuming the integration of ECtel employees?

By the end of next quarter, we finished the year with slightly over 950 employees. We're adding 80 employees. In Q1 we're going to add 80 employees, approximately, from ECtel, we're going to add some more employees through hiring, so I estimate there to be slightly below 1050.

Okay. Thank you very much. Again, congratulations.

Our next question comes from Alan Weinfeld.

Congratulations on a great quarter. I know the telecom financial service verticals have been perking up around from our channel checks. And I heard a lot of telecom wireless names. What about the financial services industry, one of the biggest spenders usually on software? What have you seen in the last quarter?

Financial services is one of the largest segments. What we see is in a number of areas. First in the contact center, we see a number of trends. Consolidation in the financial services is one trend, distribution of operations overseas to India and other locations, and we got a number of opportunities where we implemented, since our actionable turn solutions work very well in the network, we are a good solution for financial services organizations that have contact centers around the world in our ability to consolidate information, customer contact information, from these centers and analyzing it to help them to better understand the trends in the business. We announced a number of new financial services accounts, like Ocwen and Clark America. We still have some good relationships with accounts like HSBC and Barkleys which we announced in previous quarters. Another areas in the financial services is security. There is in the U.S., more so than internationally, there is a growing need for security in banks, the branch locations for the branch and ATM machines. And we believe that we are one of the leading suppliers of security solutions to banks. And then the results of the security for cash distribution centers and the headquarters of this organization so we are operating with financial services on many different levels.

Great. Igal, a financial question. If you put in 55 million as pre-revenues in the first quarter and if you grow sequentially throughout the year only 4%, which would be lower than any of your quarters sequential growth in 2003, you come up with a number closer to 235 million for 2004. Are we going to have only 3% sequential growth throughout '04 starting off in the 65 million or is that 230 just a very conservative figure?

The math you are doing is fine, but I'd like then to comment on that further.

I can add that we just started our fiscal year a month ago, so I think we'll have plenty of opportunity to update our guidance if warrant.

So the backlog is strong entering the quarter and you see the opportunity.

We typically have 50 - 75% of the quarter already in backlog when we start the quarter. Q1 was no different than that. We are 40 days now into Q1. We think we have relatively good visibility but clearly we don't have a backlog that covers the full year so we would like to comment on our annual guidance as we progress through the year.

Thank you very much.

Our next question comes from Michael Chang.

Good evening. Most of my questions have been answered. Just a quick one. First is I didn't get the GAAP guidance for 1Q in 2004. Could you repeat that one?

Yes. For which one you didn't get?

The GAAP for first quarter and for 2004.

Okay. The GAAP guidance for Q1 was 1 cent.

Okay.

This is including the non-cash charges and based on 31.8 million shares.

Okay. And for '04?

And for the year the guidance was 50 cents on a GAAP basis and based on 32 million.

Okay. I got you.

I'd like to repeat again that the guidance on a pro forma basis for Q1 was 18 cents and for the year, 77 cents.

Yes. Will you give out any financial update after the deal is closed in terms of amortization and the transaction costs?

Yes. After the deal closed, we will be able to put more color there. There's going to be some one-time charge in Q1 which is primarily inprocess R&D and then there's going to be some amortization of identifiable intangible in Q2, 3 and 4.

Yes. In terms of the inprocess R&D, do you have a size of how big it will be?

We only have an estimate right now. We have hired Ernst and Young to do evaluation reports. They are in the process of doing that. We have some indications and we based our GAAP guidance based on this indications that we got, but the process is not over, and we need to close, and I think with this GAAP indication we provided, I think this could be sufficient.

Okay. Great. Also, could you please provide any progress on your IRS and Home Depot projects? Have you contributed any meaningful revenue in last quarter and what is our expectation in the next few quarters?

Okay, on Home Depot, we started to generate meaningful revenues in Q4. We will continue to deploy in this quarter, in Q1, and we look forward there to a long-term multi-year relationship. This will take time to fully satisfy all the requirements of Home Depot. On the IRS, we are engaged with the IRS in a number of centers. I just met with the IRS team last week and can report they are a very satisfied customer at this point, very satisfied with the progress and relationship and with the product. So there we are in early stages of deployment as we need to make sure that before we go to the cookie cutter phase where we replicate the system, that we took care of all the specific issues of the IRS and that's where we are right now.

Okay. Last question, if I may. You announced the multimillion contract with SBC. I'm wondering at what time, at what point this contract value can go into the backlog? How do you define backlog?

We define backlog as firm orders that have firm delivery schedule and in most cases we also requiring the customers to have terms of payment that are agreed upon and include some advance payment.

Okay.

Or (inaudible) some payments. At that point we put it in backlog. You're right. Backlog definition is tough and that's why one of the reasons that we kind of want to report back to you carefully, but I can assure you that what we don't do is we don't put in backlog numbers based on customers saying that they are going to expand and deploy and order in the future, it's all firm fixed by orders.

Basically there's nothing from SBC in current backlog and is there anything in there from Home Depot and IRS? I mean, meaningful portion from those two projects?

There are, yes. These projects are partially recognized, partially in backlog and there is partially when we give guidance was based on our expectation that some additional orders will be received from these customers during the year.

Okay. Thanks a lot.

Once again, ladies and gentlemen, if you have a question please press the 1 key. I'm sorry, no further questions.

No further questions. As there's no further questions, on behalf of Verint, thank you very much for taking part in this conference call and have a great evening.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Have a great day.