Verint Systems Inc (VRNT) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verint second quarter results 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 touchtone telephone. And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Alan Roden. Mr. Roden, you may begin.

Thank you. Good afternoon and welcome to Verint's second quarter conference call. I'm Alan Roden, Vice President of Corporate Development and Investor Relations for Verint Systems. We trade on NASDAQ ticker symbol VRNT. With me on the call are Dan Bodner, our President and CEO, and Igal Nissim, our Chief Financial Officer.

Before we start on the call, I would 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. 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 a 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.

By now you all should have seen a copy of our press release which was issued after market closed this afternoon. If you did not receive this release, please refer to businesswire.com or our website at verint.com. Please refer to our press release for a reconciliation of our GAAP and pro forma net income discussed on this call. The content of this conference call is time sensitive and reflects the Company's perspective as of September 8, 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 a perspective on our business and market trends and Igal Nissim will present a more detailed review of our second quarter results and financial guidance. We will conclude with a question-and-answer session. With that, I will turn the microphone over to Dan Bodner. Dan?

Thank you, Alan. Hello, everyone, and thank you for joining us today for a review of our fiscal 2004 second quarter results for the period ended July 31, 2004. Our second quarter results represent a record quarter for Verint in terms of sales and pro forma net income. This growth was due to strong demand for actionable intelligence solutions in both the security and business intelligence markets.

In the second quarter we had sales of $60.2 million, representing year-over-year growth of 28%, and sequential growth of 6.2%. Pro forma income from operations was $6.2 million, representing year-over-year growth of 38% and sequential growth of 4.6%. This increase was primarily driven by sales growth and improved gross margins. Pro forma diluted earnings per share was 20 cents based on 32.5 million weighted-average shares outstanding. Current solutions generate actionable intelligence by capturing structured and unstructured information from voice, video and IP networks, applying advanced analytics to unearth critical intelligence and delivering this intelligence to decision makers for effective action.

Sales of our actionable intelligence solutions in the security markets increased 26% year-over-year and 6.3% sequentially, and represented nearly 2/3 of our total sales. Sales for actionable intelligence solutions in the business intelligence market increased 33% year-over-year and 6.1% sequentially, and represented slightly more than 1/3 of our total sales. 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 intelligence to identify and prevent criminal activity and establishing evidence for a conviction of criminals. Recently we received orders from both new and existing customers, examples of some orders include: An order for a new international law enforcement customer, which is deploying our communications interception solution in cooperation with a wireless service provider to improve its ability to generate evidence from voice and data communications collected from 3G wireless networks.

An order for a new U.S. wireline and wireless service provider customer. This new customer is deploying our voice-over IP communications interception solution as part of its new second base voice offering to help comply with requirements subject by the communications assistance for law enforcement X for intercepting voice communications.

A multi-million dollar expansion order for a new financial government customer, which is expanding our communications interception solution to help improve its ability to gather intelligence from voice and data communications transmitted over wireless networks.

A multi-million dollar expansion order from an international government customer which is expanding our communication interception solution to enhanced national security by gaining the ability to intercept and analyze voice-over IP communications carried by Internet service providers. We continue to see demand for our communications interception solutions from new and existing customers due to the need for better intelligence, advanced analytics to analyze growing volumes of data and voice communications and the ability to it intercept new protocols. Verint's network video solutions enable organizations to enhance the security of their facilities by networking video across multiple locations, applying advanced content analytics to instruct actionable intelligence and alerting security personnel to potential security threats.

Some organizations that have historically used video for security are seeking to leverage video content to generate business intelligence to help make important operating objectives, such as enhancing customer service and profitability. Our network video solution addresses a broad range of security and business intelligence initiatives across a number of markets. In the government market, our network video solution is being used to enhance security of specific government facilities and military outfits and protect national borders at points of entry. Examples of some written orders from government customers include, an order for the U.S. military which is deploying our network video solution to enhance perimeter security of certain domestic bases to help protect military assets and personnel. Various network video solutions will enable military security personnel to centrally monitor the base's large perimeters and better protect bridges and potential threats through integration of thermal imaging cameras.

An order for the Library of Congress, which is deploying our video solution to enhance security of its facilities and to help protect historical contents from theft and vandalism. Verint's network video solutions is designed to enable the Library of Congress police to enhance security by monitoring secure entrances and exits, reading areas and other public areas of this multi-building complex.

In the utility market, our network video solution is being used to protect critical infrastructure, such as power stations, water treatment facilities and pipelines. Examples of some recent orders from utility customers include: Orders for KeySpan Energy and Dominion Power, which are deploying various video solutions to enhance security of their power distribution infrastructure. These energy companies are networking video across multiple locations, including substations and electrical distribution points, enabling them to centrally monitor and protect critical elements of their extensive infrastructure.

In the transportation market, our network video solution is being used to protect critical infrastructure such as airports, ports, rail systems, bridges and tunnels. Examples of some recent orders from transportation include: An order for the New Jersey Turnpike Authority, which is deploying various network video security solutions, to help protect public transportation infrastructure and ensure a safe environment for commuters. The Turnpike Authority is deploying various network video solutions along the 148-mile length of the turnpike at Toll Plazas refueling and maintenance facilities.

An order for the Port of Galveston which is deploying various network video solutions to enhance security of its container facilities, passenger terminals and perimeter. The various solutions will enable the Port of Galveston to enhance the security of its facilities and extensive perimeter by centrally managing and analyzing video transmitted over wireless and wireline networks.

Yesterday we extended the capability of our network video solutions for the transportation market by announcing the closing of our acquisition of RP Security, a private company based in Flensburg, Germany, with approximately 50 employees. Since its formation in 1999, RP Security has been developing technology specifically for the mobile transportation security market, including DSP-based mobile devices, video processing and fleet video management software. The acquisition extends the capabilities of various network video solutions to further address the growing needs for better security of transportation infrastructure, such as railway, buses and other mass transit systems, as well as emergency vehicles. The acquisition also strengthens Verint's presence in Europe. RP Security reinforces our strategy of acquiring companies with complementary technologies to broaden our portfolio of solutions. The acquisition is expected to be nondilutive to pro forma EPS in fiscal 2004.

We continue to see demand for our network video solutions for a wide range of security initiatives including protecting public transportation, military facilities, enterprises, full infrastructure and government facilities. Our contact center actionable intelligence solutions enable enterprises to capture and analyze customer interaction data from their contact centers. Increasingly, businesses are seeking to generate actionable intelligence to help optimize business processes and develop more effective customer strategies.

Recently we received orders for our ULTRA solution in our intelligent content analytics from both new and existing customers across a broad range of industries. Examples of some new customers include: The InterContinental Hotel Group which is deploying various ULTRA solutions to support reservations and guest relations initiatives across its contact centers in the United States and Europe. Ultra is designed to enable the InterContinental Hotel Group to better understand the preferences of their VIP customers and use this intelligence to create programs that drive additional loyalty and revenue. Wal-Mart; which is deploying various ULTRA solutions its North American contact center operations to support this e-commerce initiative. ULTRA is designed to help Wal-Mart grow its online business by enhancing the service it provides its customers and enabling quick and efficient response to product inquiries.

Metris, which is deploying various ULTRA solutions across 6 contact centers to support its customer service initiative nationwide. ULTRA is designed to help Metris enhance the service it provides to its 4 million credit card customers in the United States. UPS [ph] which is deploying various ULTRA solutions to support its nationwide funds services initiatives. ULTRA will enable UPS to deliver personalized and value-added service to this important segment of their customer base. We continue to see growing demand for our contact center actionable intelligence solutions, including our advanced suite of analytic applications across a variety of industry sectors.

Before turning it over to Igal to present our financial results I would like to summarize our second quarter. Our second quarter results were driven by strong demand for actionable intelligence solutions in both the security and business intelligence markets. 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 deployments, adding more sites, additional capacity and new analytical capabilities. We continue to believe that the market for actionable intelligence is in its early stages. In the security markets the migration to actionable intelligence solutions is being driven by the need to better detect threat, to prevent criminal and terrorist activity.

In the business intelligence market, the migration is being driven by the desire to improve business processes and enhance profitability. Although the drivers are different in the security and business intelligence market, the challenge of obstructing intelligence with large amounts of structured and unstructured data is similar. Verint is addressing this common challenge by investing in new analytic capabilities applicable to both markets, growing our sales and marketing activities, developing new relationships with key system integrators worldwide and expanding our geographic presence. In the second quarter we benefited from these investments in both the security and business intelligence markets.

Going forward Verint remains committed to growing by understanding our customers' specific requirements and delivering new actionable intelligence solutions that leverage Verint's core capabilities and global infrastructure. At the same time, we believe that we can augment our internal growth with strategic acquisitions and our focus on identifying companies that help us expand the capability of our solutions, broaden our offering 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 second quarter represented a record quarter for Verint and our 11th consecutive quarter of sequential revenue growth. In the second quarter we had sales of $60.2 million, representing year-over-year growth of 28% and sequential growth of 6.2%. The increase was due to higher sales of both our security and business intelligence solutions. Sales to the security market increased 26% year-over-year and 6.3% sequentially. And sales to the business intelligence market increased 33% year-over-year and 6.1% sequentially.

Looking at the geographical breakdown of sales in the second quarter, we generated approximately 56% of our sales in the Americas, approximately 33% in EMEA, and the balance in Asia Pacific. Pro forma gross margins for the second quarter were 55.8%, compared to 54.8% in Q1. This quarter represented our 11th consecutive quarter of gross margin expansion. Net research and development expenses for the second quarter represented 13% of sales. SG&A expenses represented 32% of sales. In the second quarter, we had pro forma income from operations of $6.2 million, representing year-over-year growth of 38% and sequential growth of 4.6%.

Interest and other income for the second quarter increased to $865,000 from $582,000 in Q1. Our pro forma effective tax rate for the second quarter was 9%. Pro forma net income for the quarter was $6.4 million, or 10.7% of sales. Pro forma diluted earnings per share was 20 cents based on an average share count of 32.5 million shares. On a GAAP basis, diluted EPS was 17 cents. Pro forma results discussed today exclude non-cash charges consisting of the amortization of intangible assets and stock-based compensation charges. Please refer to our press release for a full reconciliation of our GAAP and pro forma financial results.

Turning to our balance sheet. Cash, cash equivalent and short term investments increased to $221 million at the end of Q2, from $209 million at the end of the first quarter. During the quarter we generated $13 million of cash flow from operating activities. In Q2 our DSOs were 62 days, compared to 54 days in Q1. Our guidance for DSOs remain at 60 to 80 days. As of July 31, 2004, we had total assets of $362 million, working capital of $186 million, and shareholders equity of $261 million.

We are introducing guidance for the third quarter of fiscal 2004 as follows: Sales of $63 million and pro forma diluted EPS of 21 cents based on 32.6 million diluted shares outstanding. We expect Q3 EPS on a GAAP basis to be 15 cents. For fiscal 2004 we are raising guidance from sales of $236 million, to $245 million. And pro forma diluted EPS from 79 cents to 81 cents on 32.5 million diluted shares outstanding. We expect fiscal 2004 EPS on a GAAP basis of 55 cents. We believe that the market for actionable intelligence solutions is in its early stages and our guidance reflects continued demands for actionable intelligence solutions worldwide.

Operator, we will now been happy to answer questions.

[Operator instructions]. Our first question comes from Paul Coster of J.P. Morgan. Your question, please.

Yes, first of all, good afternoon, gentlemen. Hi, can you hear me?

Yes.

Yes. Okay. A couple of quick questions, Igal. I wonder if you would be kind enough to share with us whether there was any currency impacts this quarter, first of all?

Nothing significant that I think I should report.

Okay. Customer concentration, any numbers you can share with us there?

No, there is no concentration that needs to be reported.

So it remains highly diversified. Of the sales that you reported this quarter, can you hazard a guess as to what percentage came from existing customers in aggregate versus that which was new customers?

Our guess would be more than 50% from existing customers.

And then on the same lines really, Dan, I wonder if you could give us a sense of what percentage of revenues comes from products that have been introduced, let's say, within the last year?

The vast majority comes from our existing products. However, we do introduce all our products in new versions at least once a year. So some of the revenues come from existing customers that have older versions, but they recognize that with the new versions come new capabilities, analytic capabilities and so forth so they will out wait for the next version for that reason. So rather than introducing completely new products our policy is to try and expand the capability of our products while creating a very smooth integration path for our customers.

Okay. When you said that you saw the benefits of investments that have been made recently, were you referring to in-house developments of these new functional -- functions and features or were you referring to the acquisitions that you've made?

We certainly are beckoning for both, but one of the comments I made before is that some investments we make into analytical capabilities, analyze unstructured data and create actionable intelligence we were able to benefit from those, both in the securities actionable market, and basically from a technology standpoint it's very similar technology that we use in order to analyze and screen data and assist through data and get actual intelligence to the end users for optimal decision making. Obviously, applications within security and business intelligence is quite different, but the underlying technology where we make investments is very similar.

Okay. Our last question, actually last 2 questions, it looks like the operating income increased at a lower rate than the revenues on a sequential basis. Have I got that right? And how do you account for that?

You have it right on a sequential basis. However, if you analyze our guidance you will see that operating income for the year based on our 81 cents is going to increase in the area of 40% year-over-year. So I think that -- and that's faster than our top-line revenues which will increase based on guidance 27% year-over-year. So I think we, according to our plan, we will achieve an ultimate income increase which is faster than top-line increase and I think that on a quarter-by-quarter basis it may fluctuate.

I hate to hold you down to a specific quarter because I know that you are looking at the longer term, but is there anything about this particular quarter that would account for that sort of slight divergence?

We -- specifically one thing to point out would be an increase sequentially that we had in R&D expenses. And as you said, and it's very accurate that we always try to balance short-term and long-term initiatives and while we are able to increase our bottom line sequentially we also are very careful to invest in long-term R&D initiatives that will create exciting opportunities within the early stages of the actionable intelligence market and we have increased somewhat our R&D expenses in Q2.

Okay. Thank you very much.

Our next question comes from Brian Ruttenbur of Morgan Keegan.

Congratulations, great quarter. A couple questions about your acquisition. Can you talk a little bit more about what they are going to bring to the table? I understand that it's primarily on the video side that it's bringing this type of technology in. Can you give us some examples of some of the deployments they already have and where you expect to put them in? Is it going to be a cross-selling situation where you are going to be putting them into the New Jersey transit system or things like that? Can you give us some examples?

We believe that the transportation market represents a very good opportunity for Verint and we want to be positioned to address all of the various applications within the transportation market. We currently have success in airports, ports, bridges, tunnels, rail systems and so forth, but mostly our products are addressing the fixed infrastructure. And RP Security would enable Verint to better address the mobile portion of the transportation market including railway systems, buses and emergency vehicles. There are hundreds of thousands of buses and light and heavy rail cars and police cars and the majority of this market is very little penetration in terms of digital video technology. When we were looking to expand our portfolio of products for the transportation market, we looked at many companies that are developing mobile technology in this area and we concluded that RP was the best fit because they have proven technology. They are a small company, but since they were founded in 1999, 50 employees but it's a very focused on this mobile segment. Their success to date was mainly in Europe, again, because of their size they focused in Germany, they focused around Europe, obviously part of their interest to join Verint was that our plan is to take this product worldwide and do it as quickly as possible. And we believe and according to our research there is, as I said before, hundreds of thousands of vehicles that can benefit from this technology.

Let me just explain some of the drivers in this mobile market. For example, the mass transit area, buses and rails and so forth, the drivers are public safety but also protecting assets, preventing vandalism, counting on insurance claims and also ensuring that operators and employees of those mass transit are following procedure. On the law enforcement side, with police cars the drivers are the safety of the officers and also ensuring the officers are following proper procedures when they handle arrests. So they are good drivers and I think that the technology that RP Security has when its integrated with our existing technology is going to be even more appealing for this segment of the market.

Now, in terms of go to market, we are going to address opportunities that are within our customer base but also outside our customer base. We are going to address opportunities that are for stand-alone mobile products, but also opportunities that require the integration of the fixed infrastructure and the mobile infrastructure. And I believe that over time we will see more and more that the transportation authorities, that they recognize the capabilities of this new technology will be interested in one complete solution that addresses all parts of their transportation infrastructure.

Great. Thank you very much.

Our next question comes from Israel Hernandez from Lehman Brothers. Your question, please.

Hi, guys. With respect to the RP acquisition, can you give us a little bit more detail as to what type of assumptions we should be carrying in our model in terms of revenue contribution as well as expense overhead? Thanks.

Okay. For RP, it's a private company, their latest 12 months they did approximately $7 million in revenue. In terms of assumptions for this quarter, Q3, which we already are a month into the quarter, we are baking into our guidance approximately $1 million of contribution from RP. And as I mentioned before, this will be nondilutive to our performance. In terms of GAAP guidance, you should expect a small charge associated with acquisitions that will be a one-time charge in Q3 of about 3 cents. And also it will add approximately 1 cent to our GAAP guidance, 1 cent of [inaudible] a few tangibles third quarter.

Thanks. Can you also on the video surveillance part of your business, it seems like it's pretty well diversified across a number of verticals. Are there any verticals where you are starting to see more momentum, whether it's transportation or infrastructure? Can you provide us a little color as to what you are seeing from your customer base?

Yes. You are absolutely -- I agree that there are a number of verticals that are emerging with their need for video. It's -- things change from quarter to quarter, but I would say at this point we are pretty excited about opportunities within the government sector, especially infrastructure protection. Some of this flow into other sectors, like utilities where it's also by infrastructure, it's very much influenced by government requirements, but the end user may not be a government customer but promotional activity and so forth. Transportation overall is a segment with very low penetration, one that we think can greatly benefit from our technology. We feel very high on retail, very vast infrastructure and a lot of benefits when using actionable intelligence to not only improve security but also improve customer service and the bottom line. And there's many other segments that there's activity but the penetration is so small so in terms of volume it's been not a significant contributor to our current performance.

Great. Thank you.

Our next question comes from Scott Griper of Enterberg.

Good afternoon, guys. Congratulations on another strong quarter. My question was regarding a number of the projects, new customers that you talked about on the communication interception business that dealt with voice-over IP solutions and 3G solutions and generally data IP network based interception solutions and I'm wondering, is this being fueled legislatively by the push by the FCC to extend CALEA to IP or is it just on the part of the industry to get it up to compliance? Can you give some flavor on that since it seems to be driving some of the new contract announcements?

Well, first, we do have the solutions today. We have 3G solutions, we have voice-over IP solutions, wireline networks and packet data solutions and GPLS and so fourth. The reason we developed these solutions are that in certain countries the legislative environment was already ready for awhile and there was real demands which we were able to address. Recently there is a push here in the U.S. to expand the CALEA Act with specific efficacy standards for the data technology and obviously that will start to fuel the U.S. market here. We already announced today a new customer in this area and we hope that as this legislative environment now is in place this will continue to be the case for us where we can expand our proven solutions into the U.S. And typically with technology product you will see that the U.S. leading and other countries following. But I guess in this case because of the legislative environment, we developed this product first for other countries which are now migrating into the U.S.

Do you have any feel, Dan, for, I think voice-over IP has been passed on in terms of communications interception. When and will it move to cover IP networks generally speaking?

The technology is so diverse and there's so many different implementations and different service providers that this is a very difficult task to just put one to fit it all. I don't think the technology represents a challenge for Verint, but I think in terms of the operators it does represent all kind of challenges in terms of cost, in terms of interrupting their services and so it really varies from operator to operator and we need to work through the issues with each one of them and that's why it's kind of impossible for me to try and predict what pace this is going to be implemented.

Sure. Have you gotten feelers from the domestic carriers or have you done business with them for IP solutions?

Yes. We have announced today an IP solution with a U.S. carrier. There's more than one that has -- that has already implemented our solutions in this area. I think overall there is a tendency within the telecom community to address the need and to be cooperative with the government. But it's not -- it's not a matter of them fighting it, it's just a matter of finding the right way to implement it across their vast infrastructure.

Okay. Well, thanks, guys, congratulations again.

Our next question comes from Jonathan Halls at UBS. Your question, please.

Yes. Thank you. Can you comment on your backlog at the end of the quarter, please?

The comment is that we have backlog in excess of 1/4 of revenue. And basically this is our policy to discuss backlog in those terms.

I'm aware of that. I just wanted to hear it from you. Operating cash-flow, please. I don't know if you mentioned it or not. If you did I missed it.

It's $13 million cash flow from operations.

13 million. And depreciation and amortization, what was it?

Two, 3 million.

Two, 3 million.

Yes.

Okay. Also I notice here in the press release that you are giving pro forma also for Q2 last year. I don't think last year in Q2 you supplied the pro forma. Can you walk us through what the impact -- I mean, why you are now supplying it for last year's quarter? Is that some kind of regulation? And also can you walk us through what you expect on the pro forma lines in Q3 in terms of the magnitude as far as cost of sales and operating expenses specifically?

Okay. You're right. Last year there was no difference in our GAAP -- there was no pro forma because we just reported GAAP, but because this year in Q2 we had to report pro forma for comparison purposes. We had to compare it to last year's performance. So that's the rules and we just follow the rules in terms of presentation. In terms of Q3, we guided for GAAP of 15 cents and the depreciation is consisting of 3 cents of one-time charge associated with the RP Security deal, and the rest is primarily amortization of [inaudible]

Split similarly between cost of sales and operating expenses like it was in this quarter?

Yes.

Okay.

Except for the one timers that we are going to have to see where they fit in.

Right. Okay.

They are on a separate line.

Okay. That was clear. And in terms of your operating expenses this quarter when you include the acquisition, I understand you're saying it's nondilutive for the year. Can you give us guidance for what we should be modeling for R&D and SG&A as the impact from this acquisition, please?

There is no -- there is no material from this acquisition, it is very small. I don't think you should change the model because of the acquisition.

Okay, great. Finally, for me could you give us an update on your 2 contracts that you previously discussed, one with the IRS [ph] and one SBC [ph], how those are progressing? Are you still supplying systems to them?

Yes, both contracts we are in good standing. We are delivering on an implementation plan. Both contracts have a fairly long-term implementation plan. These are pretty sizeable organizations that are implementing in a phased approach. So nothing specific to report other than I believe we are progressing according to plan.

Great. Thank you and good luck going forward.

Our next question comes from Alan Weinfeld of Fulcrum Global Partners. Your question, please.

Thanks, great quarter, guys. I was just wondering if you could possibly provide a break out of what was the organic revenue growth in the quarter? Obviously, it was the vast majority but do you have a number?

Okay. Let me try to address the question. First in Q2 the only contributor potentially will be coming from our Q1 acquisition of ECtel and the way we discussed the acquisition of ECtel we have integrated the operations of ECtel into our operations immediately following the closing. So basically we had the R&D folks come over from ECtel joining our R&D group into the sales group and so forth. And ECtel has ceased to exist as a separate entity. We also had integrated the product portfolio into our product portfolio and start to offer a complete solution to our customer base. You may recall that our products were integrated with ECtel products from before the acquisition because we had several contracts that we have jointly were supplying products. So there was no period of time, a length of period necessary to get this product integrated. So bottom line is that ECtel cease to exist as a separate entity, we are not tracking any potential contribution that is associated with ECtel or is another -- another type of operation. It's basically all part of Verint. But I can also take this opportunity and address going forward, we have not increased our guidance today for the year, by $9 million. We are a little slow in response before to a question, I said that part of this guidance in Q3 we baked $1 million related to the RP Security deal. And if you take the $7 million of RP Security of the last 12 months you will see that the majority of our guidance increase of $9 million guidance increase is attributed to organic growth. So while we are continuing to show very healthy growth organically, we are able to augment that with some growth coming from acquisitions. And I think more importantly is that because our policy is to integrate acquisitions into our infrastructure that we are hopeful that in the future we will be able to grow those operations that we acquire at the same rate that we anticipate Verint to grow.

That could be one of the reasons we saw a little bit more R&D in sales and marketing than maybe some of us were expecting because of that integration of ECtel?

I think it's something that we are doing by design.

Right.

And it's I think proven that we invest in the long-term and not just continue to deliver a good quarter short term, but without keeping an eye on developing the next generation of technology.

Keeping an eye on the long-term as well as what just happened here, did it surprise you honestly that the enterprise business intelligence unit grew 33% year-over-year? I mean that is an absolutely fantastic number. What is a realistic 2, 3 year growth for that business? Is it just in the teens or can it grow faster?

I think that if you recall what we have guided over the last 3 years basically, is that there's a lot of interest for our analytical solutions because the enterprise side as they feel the competitive pressures they are looking for analytics to help them to become more responsive to their customers and more profitable. Potentially what we are seeing now is a lot of customers that were evaluating our products at the time that IT spending were not available now that they have the money are reacting by jumping on the opportunity and buying our solutions. That's not necessarily what's going on in the overall market. Again we are cautious here and we are trying to build some more data points before we get to where we think the a steady state is which is a healthy 20 to 30% growth in enterprise market, similar to our belief of 20 to 30% growth in the security market. For now we have guidance the way we build our guidance for today's call is based on an assumption of 30% growth in the security market and high teens for the business intelligence market.

One more quick one. A lot of banter about the government sector. Obviously it's important to you. As you see it today the Federal vertical in the U.S. looks like there's a slight budget flush or certainly healthy enough to make your numbers or what's your opinion today?

We obviously are benefitting from government spending, but we also made 2 points in the past which is still true today. One is that there is no concentration of government agencies in our portfolio. We have a lot of different agencies on the Federal, state and local level and international government. So we are not very dependent on one large program from one agency that can be sometimes delayed because of funding issues. The second point is that a lot of the deals that we get are influenced by the government but are not necessarily directly with government users. This could be, we discussed before, response to Scott's question, this whole area of the telecom industry is related to government legislation which is the CALEA, the Communications Assistance for Law Enforcement Act, but it's not necessarily directly funded by the government. There are other areas in transportation where transportation authorities are responding to Homeland Security requirements, but funding is not necessarily directly from government. So overall I think the environment is still one of enhancing Homeland Security and it's more and more about shifting from enhancing Homeland Security through the use of personnel to the use of technology so that we can be more effective in delivering the security but still keep the cost to a reasonable level. So in a way government spending doesn't necessarily need to go up for us to sell more technology because still the majority of the spending is on people. And you can't really judge by the overall spending. You really need to drill down to the particular project where there is already a decision to deploy technology. And my gut feel, although I don't have a complete study here is that more and more the projects that are moving toward technology and away from just personnel.

Thank you.

Our next question comes from Michael Zang of Stephens Incorporated.

Hi, good afternoon. Quick question. Can you address a little more on the strong growth in the EBI business? Are there any industries, factors or customer or projects contributing more than others?

No. I think in the exploring sector we are in many verticals. We are in the financial vertical, there's a lot of financial organizations that are seeking actionable intelligence in order to create customer loyalty. In utilities. In the service build industry and retail which was announced today the InterContinental Hotel, and Wal-Mart are new customers. So enterprise is really across many verticals. And the reason being is that in any sector that companies are doing business through contact centers, whether it's voice or e-mail or web services, they are inclined to use unstructured data as a tool. If they can apply analytics to this data, this is an excellent tool for them to get a firsthand insight into the dealing between agents and customers. And this could be very powerful in providing management with actionable intelligence so that they can streamline processes and kick off new initiatives that increase customer loyalty and improve the bottom line.

Okay. Thank you. Then can you talk about the future acquisition strategies that may use your 200 million cash more effectively?

Yeah. Well, we believe that we are in the early stages of growing actionable intelligence markets. And the market is highly fragmented and presents opportunities for acquisitions. Our strategy is to continue to grow organically and to selectively make acquisitions. And for now, you know, you can assess that we already made a number of acquisitions. We believe that we have integrated those acquisitions into the business and it's part of our strategy not to become specifically a holding company, but to leverage the technology and people that we get from acquired companies. Our preference is to acquire small to mid-size companies that we can integrate quickly and produce the appropriate synergies. However, we will not exclude large acquisitions presenting the compelling business case.

Okay. Then a few quick questions on financials. You mentioned that the R&D expense increased because the increased spending in the new technologies. In which area are you investing right now? And how do you see the trend going forward? I mean it is above the normal 12% right now.

What we are most excited about is, obviously, within the actionable intelligence is the ability not just to collect information but to distill this information and drill down to the important business pieces that can help people to optimize their decision making. So most of our focus right now is not just on improving the collection platform but on providing analytics, improving the decision engine, the rule-based engine and the way we distribute the actionable intelligence to our end-user customers. And that's across all the different markets that we address. That's across voice, video and data. There is obviously destructive technology today in terms of voice-over IP and video over IP which we are in this industry. We have the technology, but it's a moving target. And there's a lot of different things that you can do to enhance this technology to better provide actionable intelligence to our users. It's a broad range of initiatives. But at the same time we are very much focused on delivering our bottom line and this quarter we are able to beat our guidance while increasing our R&D investment and I think that's what you should expect from Verint. It's a balance act of making sure that we are focused on the bottom line, but also that we can deliver results over the long-term because the actionable intelligence market is in early stages and we need to be well-positioned to capture market share over the long haul.

Yes. But your guidance is still 12% or 13% going forward?

Our guidance was 12 to 13%.

Okay. Okay.

So I don't see --?

Okay. Then do you see 12% tax rate for the year?

Yeah, our guidance for the year is 12 to 13% on the tax rate.

Okay. Then last one, the DSO increased 8 days. Of course, the revenue also increased. Is there any other reason for the DSO spike in the current quarter?

Our guidance for DSO was 60 to 80 days and when we achieved the 54 days we didn't think that this is necessarily the appropriate level that we can sustain. It's still 62 days is a very competitive level relative to our industry. And while, obviously, we would like to bring our guidance as low as possible we also have to keep in mind that we are not alone in this market and we have to give our customers the terms, the credit terms that they expect to get and we still are guiding for 60 to 80 days DSO going forward.

Okay. Thank you very much.

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