Verint Systems Inc (VRNT) 2004 Q3 法說會逐字稿

Good ladies and gentlemen and welcome to your Verint Systems Inc. third quarter earnings 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 be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. Now it is my pleasure to announce your moderator for today's program, Mr. Alan Roden.

Thank you. Good afternoon and welcome to Verint's third quarter conference call. 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, projects, 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 could cause the actual results, performance or achievements of the Company to be materially different from those that maybe expressed or implied by this forward-looking information. There are a number of percentages have been rounded and maybe approximations. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Verint Systems is 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 of the December 1, 2004. We're going to take no obligation 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 third quarter results and financial guidance. We will conclude with a question and answer session. With that, I will turn the phone over to Dan Bodner.

Thank you, Alan. Hello, everyone, and thank you for joining us today for a review of our fiscal 2004 third-quarter results for the period ended October 31, 2004.

Our third quarter results represent a record quarter for Verint in terms of sales and pro forma net income. This growth was due to strong demands for our actionable intelligence solutions in both the security and business intelligence market.

In the third quarter, we had sales of $64 million, representing year-over-year growth of 31 percent and sequential growth of 6.4 percent. Pro forma net income from operations was $6.9 million, representing year-over-year growth of 43 percent and sequential growth of 11 percent. This increase was primarily driven by sales growth and improved margins. Pro forma diluted earnings-per-share was 21 cents based on 32.8 million weighted average shares outstanding.

Verint Solutions generates actionable intelligence by capturing structured and unstructured information for voice, video and IP networks, applying advanced analytics to unearth critical intelligence and delivering this intelligence to decision-makers for effective actions. Sales of our actionable intelligence solutions in the security market increased 26 percent year-over-year and 5.4 percent sequentially and represented nearly two-thirds of our total sales.

Sales of our actionable intelligence solutions in the business intelligence market increased 40 percent year-over-year and 8.1 percent sequentially and represented slightly more than one-third of our total sales. Our actionable intelligence solutions address market 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 activities and establishing evidence for the conviction of criminals. Recently, we received orders for both new and existing customers. Examples of some orders include a multi-million dollar order for a new national law enforcement customer in a new country for Verint. This new law enforcement customer is deploying our communication and (indiscernible) solution, including sophisticated multilingual analytics to better generate evidence from voice and data communications collected from Wireline and IP networks.

An order for a new international Internet service provider customer. This new ISP customer is deploying our communications interception solution to comply with mandates requiring it to assist the government in intercepting data communications across its new broadband network. A multi-million dollar expansion order for an international government agency which is deploying our communications interception solution to enhance national security by having the ability to intercept and analyze mass amounts of Internet traffic collected from networks operated by ISPs. Expansion orders for several U.S. wireless service providers. These customers are deploying our communications interception solution to help comply with the requirements established by the communications assistance for law enforcement acts for intercepting voice and second (ph) data communications.

We continue to see demand for our communication and interception solutions from new and existing customers due to the need for better intelligence, advanced analytics will analyze growing volumes of data in voice communications and the ability to intercept new protocol. Verint network video solutions enables organization to enhance the security of their facilities by networking video across multiple locations, applying advanced content analytics to extract (indiscernible) intelligence and alerting security personnel to potential security threats. Some organizations that have historically used video for security are sticking to leverage video content to generate business intelligence to help meet important operating objectives, such as enhancing customer service and profitability.

Our network to video solution addresses a broad range of security and business intelligence initiatives across a number of markets. In the government and transportation market, our network video solution is being used to enhance security of sensitive government facilities and military assets and to protect critical infrastructure, such as airports, ports, rail systems, bridges and channels. Examples of some recent orders for government and transportation customers include an order for the United Nations, which is deploying Verint's network video solutions to improve security of certain areas of the world headquarters in New York. The United Nations is deploying Verint's network video solution as part of its ongoing program to enhance security and ensure a safe environment for UN's international members from around the world.

An order for the Department of Defense Agency, which is expanding the deployment of our network video solution to protect military command facilities located in the Washington D.C. area. Verint's network video solution is helping this government agency enhance security of highly sensitive facilities by networking and analyzing video across a large parameter and secure points of entry. Orders for passenger rail systems, including the London Underground and the Montreal Metro, which are deploying Verint's network video solutions to help protect rail infrastructure and ensure as safe environment for railway passengers. The solution will enable operations and rail security personnel to improve security by monitoring passenger platforms and certain remote portions of the tracks.

Our network (indiscernible) solution is also being used to help organizations with large campuses in multiple locations protect their facilities and ensure the safety of their employees and customers. Examples of some recent orders for this type of applications include a multi-million dollar order for Charter One Bank, which is deploying Verint's network video solution to enhance security across more than 400 branch locations in nine states. Verint's network video solution will enable Charter One Bank to network and investigate video collected from multiple areas of its branch banks, including tellers, cash rooms, drive-up window and ATMS.

In order for an energy company, which is deploying Verint's network video solution to enhance security of a refinery facility in the United States, Verint's network video solution will help this energy company detect security breeches by centrally monitoring and analyzing video collected from a large perimeter several malls in length over a secure wireless network. In order for the Mayo Clinic, which is expanding the deployment of Verint's network video solution to enhance security of certain facilities and ensure a safe environment for medical professional patients and visitors. Verint's network video solution is designed to enable the Mayo Clinic to locally and remotely monitor certain medical facilities, including hospitals, clinics, research departments and data centers.

We continue to see demand for our network video solutions for a wide range of initiatives, including protecting public transportation, military facilities, enterprises, core infrastructure and government facilities. Our (indiscernible) center (indiscernible) intelligence solutions enable enterprises to capture and analyze (indiscernible) interaction data from their conference centers. Increasingly, businesses are seeking to generate actionable (ph) intelligence to help optimize business processes, develop more effective customers strategies and increase their competitive advantage.

We continue to see demand for our Altra (ph) solutions and our intelligence analytics domestically and internationally from a broad range of industries, including the financial services industry. In the highly competitive financial service industry, Altra is companies build customer loyalty by better understanding customer preferences, delivering a branded experience, often across a global customer base. Examples of recent orders from financial services companies include Wells Fargo Investment, which is deploying various Altra solutions across its four network (indiscernible) centers to support its customer service initiative nationwide. Altra is designed to generate actionable intelligence that will help Wells Fargo deliver a personalized experience to its high-value investment clients.

Delaware Investment, which is deploying Verint's Altra solution to enhance customer service and strengthen relationships with its institutional and individual customers. Altra's actionable intelligence will help deliver investment, ensure that service quality and processes are consistent across every customer experience.

First Direct, a member of the HSBC Group, which is (technical difficulty) solution across its three contact centers in the United Kingdom to support its online banking business. First Direct's online banking business model depends on high-quality customer support and Altra will enable the Company to enhance service for online banking customers.

The Bank of Brazil, which is deploying Verint's Altra solution across four network contact centers to support its credit, account management and phone banking operations. Altra's actionable intelligence will enable the Bank of Brazil to better understand their customers' unique needs and deliver a high-quality service experience to its diverse customer base that includes commercial, government and retail clients.

We continue to see demands for our contact center actionable intelligence solutions, including our advanced (indiscernible) of analytical applications across a variety of industry sectors.

Before turning it over to Igal to present our financial results I would like to summarize our third quarter. Our third quarter results were driven by strong demand for actionable intelligence solutions in both the security and business intelligence market. We continue to see demand for our actionable intelligence solutions and ended the quarter with backlog in excess of one quarter of revenue. We added new customers and many of our existing customers continue to expand their deployment, adding more size, additional capacity and new analytical capabilities. We continued to believe that the market for actionable intelligence is in its early stages. In the security market, the migration to actionable intelligence solution is being driven by the need to better detect threats to prevent criminal and terrorist activity. In the business intelligence market, the migration is being driven by the desire to improve processes and enhance profitability.

Although the drivers are different in the security and business intelligence market, the challenge of extracting intelligence from large amounts of structured and unstructured data is similar. Verint is addressing this common challenge by investing in new core analytical 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 third quarter, we had benefited from this investment in both the security and business intelligence market. Going forward, Verint remains committed to growing by understanding our customers' specific requirements and delivering new actionable intelligence solutions that leverage various core capabilities and global infrastructure. At the same time, we believe that we can augment our internal growth with strategic acquisitions and are focused on identifying companies that will help us expand the capability of our solutions, broaden our offerings and expand our geographical presence. We continue to search for companies that meet our strategic objectives and are currently reviewing a number of different acquisition opportunities. Igal Nissin will now present a review of our financial results (technical difficulty) guidance.

Thank you, Dan. The third quarter represented a record quarter for Verint and our twelfth consecutive quarter of sequential revenue growth. In the third quarter, we had sales of $64 million, representing year-over-year growth of 31 percent and sequential growth of 6.4 percent. The increase was due to (technical difficulty) both our security and business intelligence solutions. Sales to the security market increased 26 percent year-over-year and 5.4 percent sequentially and sales to the business (technical difficulty) increased 40 percent year-over-year and 8.1 percent sequentially.

Looking at the geographical breakdown of sales, in the third quarter, we generated approximately 59 percent of our sales in the Americas, approximately 33 percent in EMEA and the balance in Asia Pacific. Pro forma gross margins for the third quarter were 56 percent, compared to 55.8 percent in Q2. This quarter represented our twelfth consecutive quarter of pro forma gross margin expansion.

Net research and development expenses for the third quarter represented 13 percent of sales. SG&A expenses represented 32 percent of sales. In the third quarter, we had pro forma income from operations of $6.9 million, representing year-over-year growth of 43 percent and sequential growth of 11 percent. Interest and other income for the third quarter increased to $932,000 from $865,000 in Q2. Our pro forma effective tax rate for the third quarter was 12 percent. Pro forma net income for the quarter was $6.9 million, or 10.8 percent of sales. Pro forma diluted earnings per share was 21 cents based on a weighted average share count of 32.8 million shares. On a GAAP basis, diluted EPS was 16 cents.

Pro forma results discussed today exclude non-cash charges (technical difficulty) the amortization of intangible assets, stock-based compensation charges and onetime charges associated with the acquisition of RP Security. 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 equivalents and short-term investments increased to $226 million from $221 million at the end of the second quarter. During the quarter, we generated $12 million of cash flow from operating activities. In Q3, our DSOs were 61 days, compared to 62 days in Q2. We expect DSOs to remain at 60 to 80 days. As of October 31, 2004, we had total assets of $387 million, working capital of $188 million and shareholders equity of $275 million.

We are introducing guidance for the fourth quarter of fiscal 2004 as follows -- sales of $67 million (technical difficulty) pro forma diluted EPS of 22 cents based on 32.8 million diluted shares outstanding. We expect Q4 EPS on a GAAP basis to be 17 cents. Our fourth quarter guidance will yield in fiscal 2004 revenue of $247.8 million and diluted pro forma EPS of 81 cents and GAAP EPS of 55 cents, based on 32.6 million diluted shares outstanding.

For fiscal 2005, we are introducing guidance as follows -- sales of $290 million and pro forma EPS of $1 on 33 million diluted shares outstanding. We expect fiscal 2005 EPS on a GAAP basis of 88 cents. We believe that the markets 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 will now be happy to answer questions.

(Operator Instructions).

Operator, you can put the first call through.

Michael Hang (ph).

Good afternoon. Just real quick, your EPI (ph) business has been very strong in the past of three quarters. I am wondering if you're going to update the growth expectation for this business dividend?

Okay, let me --.

The last quarter, you said the guidance implies a low-teen goal, but it has been 40 percent the last quarter and the 30 percent in the quarter before. So.

The business intelligence (technical difficulty) improved this year. And signs of improvement included both higher revenue and increased customer activity. Activity was broad-based -- financial services, insurance, health care, energy, telecom outsourcers, retailers and so forth. So we are encouraged by the willingness of corporations to spend on analytical solutions that help drive profitability and offer an attractive ROI.

However, you have to remember our fast growth this quarter, and actually the last three quarters, is off a very low base because the two previous years were depressed due to a tough IP spending environment. So, although we see nice growth in the last three quarters, we've continued to take a cautious approach to the business intelligence market as our growth is somewhat dependent on an overall (technical difficulty) and the health of (technical difficulty). We remain comfortable with growth in the teens near-term and (technical difficulty) believe that the business intelligence market could grow at rates similar to the security market due to the growing interest by organizations for analytical tools to extract actionable intelligence.

So do you expect in the digital -- I mean DSS business -- to grow like 30 percent and the EPI business to grow at a low 10?

Let me give you some more detail of our 2005 guidance, so that will address what we expect for the DSS and business intelligence market. For 2005, we expect to $290 million in revenue and $1 pro forma EPS. And the guidance is based on continuous growth in the security and business intelligence market. We believe the market can sustain 20 (technical difficulty) to 30 percent growth in the security side. And we believe for 2005 that on the business intelligence side, it was the same growth in the teens near-term. And as I said before, higher growth longer-term.

We also expect for 2005 as part of our guidance, we expect gross margins to continue to improve modestly due to a greater percentage of our revenues coming from software. Although I have to say there's a change in gross margin. They fluctuate quarter to quarter and could even decline in a specific quarter.

We also expect some modest improvement in operating expense (technical difficulty) a percentage of revenue compared to 2004. And we expect our tax rate to increase in 2005, compared to 2004. And the increase may be significant, but our tax rate will remain well below the U.S. federal corporate tax rate.

Do you have a percentage point for the tax rate?

Our tax rate is impacted by the mix of our revenues.

(multiple speakers) so what number (multiple speakers).

We operate in a number of jurisdictions. So the overall tax rate next year will obviously be impacted by the geographical mix of our revenues. (technical difficulty) we're giving specific guidance for revenue and EPS and we're discussing trends. And as I said, the trends if (indiscernible) will go higher next year, but we're not giving specific tax guidance. However, the guidance of $1 EPS already incorporates (technical difficulty) to 2004.

Okay. And for 4Q, can we still use 12 percent?

Yes. We're not changing anything this year, no. You're right.

Okay. And can you break down the organic growth, where it this acquisition growth?

The acquisitions we made are primarily small and technology-driven. So we don't track revenue for technology that we acquire. We have integrated technologies from (indiscernible) and from RP Security (ph) and we just don't have any numbers to provide, relative to potential revenues coming from acquisitions.

Okay that's fair. And last question, I don't know if you track (technical difficulty) existing customers versus new customers. If you to do, please give me the breakdown?

We generate more than 50 percent from our existing customers.

Okay, thank you very much.

Israel Hernandez.

Hello, gentlemen. Some of my questions were just answered. With respect to -- you indicated your intent to continue to look at acquisitions to supplement your growth. In what areas, and in which specific parts of your business do you think you have some specific asset that you may need to fill? And is there any change, in terms of the size of an acquisition that you guys might do? (indiscernible) have been pretty small to date.

We are primarily looking for technology-related acquisitions. In some cases, this technology could be relevant to all of the markets we serve, as (indiscernible) analytical capabilities to analyze better unstructured data, which is what we are providing in our market. So technology-driven acquisition could be related to more than one market. We are growing in all markets. You can say the company is growing on all cylinders. And therefore, if we see it's the right opportunity, we will definitely be interested in acquiring companies in all the markets we serve today.

The technology acquisitions are typically small because these are relatively small companies that have developed some good technology, but have not effectively marketed this technology. And that is why they would be interested in joining forces with a company like Verint. Although as we said before, (technical difficulty) a good opportunity that is a bigger company, we will not walk away from a good opportunity just because of size.

Also, the acquisition we made are non-dilutive and for our strategy is to continue (technical difficulty) that are either non-dilutive from the first quarter or will be through leverage of synergies, we will be able to make those accretive over a short period of time.

Okay great. Thank you.

Paul Coster.

Yes. Just a follow-up to the first person on the line. The guidance that is issued for '05 presumably excludes the impact of any acquisitions?

That's correct.

Thank you. Second question -- what was the split between video and communications interception within the security segment?

We continue to have similar growth in video and communication interception. So the split remains, if we look at this quarter, the split remains about 50-50.

Just a technical question. We're seeing some news (technical difficulty) new video cameras and sensors which are embedding some intelligence actually inside the sensor itself so that you are not transmitting video continuously across scarce (ph) networks. Is that something you have that is a threat to your technology system, or is it complementary? And how are you responding to it?

We believe that putting more intelligence close to the sensor is the right direction for our customers. We are actually recommending to our customers to do that. If the customer does not have a smart sensor, we have a solution that provides some intelligence next to the sensor, as well as more intelligence in our sensor-like system. So we actually help the customers who have either analog cameras or have IP cameras. But without intelligence, we are helping them today to bring more of the filtering, more of the distilling closer to the sensor because, obviously, that allows them to deploy more cameras using existing infrastructure. You do not have to invest much in the network, but it can collect for more sensors.

So this trend is very much -- it is good for customers (technical difficulty). I think it will continue, but it is also very much with -- in line with our actual intelligence strategy because it allows people to bring more information (technical difficulty) somewhat distilled, but needs much further distilling, which we can do in the centralized area. And beyond distilling, there is still the challenge of distributing the actual intelligence to the right user at the right location at the right time, which is part of what we offer as an overall complete solution.

So the bottom line, Paul, is that part of the strength of our actionable intelligence total solution is that it's not just a collection platform, but it's a platform and software applications that provide a complete actionable intelligence value-added solution to our customers. And smart sensors are very much helping us to that end.

Last question on that point. Surely if more intelligence is being embedded on the sensor, that sort of disinfomediates (ph) you slightly from the value proposition. Do you have software that can be licensed to the sensor manufacturers, or am I just on the wrong track there?

We have software that runs on embedded chips basically, which as I said before, we're delivering today to our customers (technical difficulty) have analog cameras or dumb cameras. So we have that technology that run on an embedded chip that can potentially be sold to the sensor manufacturers, but it is not part of our strategy to license this technology to the (indiscernible).

Okay, got it. Thank you very much.

Alex (indiscernible).

Most of my questions have been answered, but I just had a quick one on -- a couple of quick ones. One on the RP acquisition. Are you seeing any benefits this quarter from synergies or market opportunities that have been opened up from that acquisition?

The acquisition was driven by our desire to expand our portfolio solutions for the transportation market. We are very positive on the prospects that Verint has in this market and the ability to offer solutions for the mobile and the fixed infrastructure is very attractive to this market. The acquisition, you know, it's early. During the quarter, we were mainly focused on integrating the business and introducing new products to our transportation customers globally. RP contributed in Q3 less than $1 million of revenues, which was within our expectations and we discussed that on the previous call. So it is early, however the reaction from the market has been positive and execution on our plan is going well.

Great. And my other question was can you discuss your presence in the Asian call center market? Because from what I understand, this is a large area of growth and large growth as more people offshore work to India and the like?

We are present in Asia-Pacific. We are very strong in India. We have penetrated the Indian market very early when the migration of call centers from the U.S. and Europe started, so we have a good customer base. There are industries, research reports that publish statistics on our participation in that market as well as our competitors. And that is something that people can actually look at. We are not -- our policy is not to provide any type of market share statistics, so you're going to have to rely on third-party objective research.

Okay great. Thank you very much.

Scott (indiscernible).

Good afternoon, guys. A question on DSS revenue growth rates. It seems to me you're averaging this year about 26, a little over 26 percent growth per quarter, which is down versus maybe 31 percent growth per quarter last year. It's still within your range of what you have indicated, 20 to 30 percent, the higher end of the range. But what is factoring it or what is driving the slower revenue growth in that segment this year?

I think this segment has many other metrics, fluctuates from quarter to quarter. Certainly, I cannot report that there is any slowdown in the security industry relative to what we've said before, nor do I think that overall, our participation is going down. But the numbers are where they are. And this quarter, it's 26 percent year-over-year, as you just mentioned.

Last year, you were averaging, as I say, a little under 31 percent. So there is nothing specific that you're seeing that's accounting for the slower year-over-year growth this year?

No. There's nothing specific that I can report.

Okay. Second question is -- the last couple of quarters, you have mentioned a number of international ISPs, data carriers, broadband providers, utilizing your communication interception products. Is this being driven by the extension of Colita (ph) covering IP-based networks in Europe?

Colita is a (multiple speakers) exactly. The similar standards in Europe and is driven by government mandates. And obviously, ISPs would not voluntarily install this traffic within their network. So it's all driven by government mandates. We have a system that is in compliance with those mandates and standards, and that is part of our success, is the ability to bring the right solution to the market at the right time.

And what about in the U.S. with the extension of Colita to IP networks, the data networks?

We are very active in the U.S. in the IP networks overall. I don't want to comment at this point out ISPs in the U.S. versus tech and data and IP networks off wireline and wireless networks. But the IP penetration into the U.S. telecom market is obviously much broader than just ISPs.

Okay, thank you guys.

Daniel Meron.

Hi, Daniel Meron from RBC. Can you comment a bit about competition -- is there any change within your any of your business segments?

Most of the large competitors are the same. These are divisions of large companies, like Tyco or GE, Honeywell, Simmons and so forth. And those basically are competitors. I can't report of any change in their strategy that we notice. Part of this strategy is to offer a complete security solutions. We obviously are focused on the actionable intelligence and the unstructured data analytics, which this is where we feel our expertise is, is where we bring value. And a lot of these large competitors have a much broader security solution in many technologies that are outside of voice, video and unstructured data.

We also see from smaller private companies, we definitely see an increase in the number of companies that are attracted to the homeland security type of budget. So they are offering some technology that has some overlap with ours. But none of the small companies have a complete product portfolio like we have. So I think that's our differentiator, is that we're focusing on an actionable intelligence solution, which is quite unique relative to our competitors.

To what extent do you think that a competitor can buy off-the-shelf signaling software? What is the timeframe that it will take them to buy those stacks from vendors and then try and integrate it into a communications and interception solution that could somehow compare to yours? What is the timeframe and the resources required to get to that level?

My philosophy on technology overall is that, unless it is protected by patents and (technical difficulty) are very difficult to enforce in our area of information processing. So unless the technology is totally protected, it's not difficult for any company to either develop or acquire this technology and bring it to market. However, specifically in the communications perception (ph) business, I think it takes more than just technology to win in the market. We've been in this market more than 10 years. It takes time to develop an understanding of that market, it takes time to build relationships and credibility in this market. I think we are unique in the communications perception market because we operate in many, many different countries and geographies worldwide, and that takes a lot of time to build that kind of credibility.

Nevertheless, if a company wants to be in this market, they can obviously acquire the technology and win some business; there is no doubt. The communication deception (ph) market is one that requires a lot of focus and specialty. This is not just applying an existing technology and having the same salesforce and same marketing strategy and so forth. It does require attention.

Last question for me. Actually, two last questions. Can you comment on -- it seems like the operating margin, or actually the OpEx this quarter and just deriving from going forward, it seems like it's a tad higher than what I was looking for, for sure. Can you give some color on that for the next quarter and for 2005?

On what specifically?

On operating expenses. Absolute operating expenses seem a tad higher than what I was modeling for. Can you give some color, what is driving that?

Our operating expenses are about 45 percent of revenues. And I think we have mentioned several times that we are very active in expanding our salesforce worldwide. We believe that to effectively sell, and we just discussed communications deception market, but also in any actionable intelligence market, to be effective, you need to have people in-country that speak the language, that understand the culture and can actually deliver a solution effectively to our end user. So we are investing in expanding our sales force worldwide. For 2005, what I mentioned before was that we expect a modest improvement in operating expenses as a percentage of revenue, compared to 2004.

Last one -- can you just repeat the Americas share of geographic mix?

The American share for this quarter was 59 percent. However, historically, we have more than 50 percent in America, it's about a third in EMEA, and the remainder in APAC. And, although we have higher percentages in the Americas this quarter, we still maintain that we are experiencing similar growth in all geographies. And long term, we maintain that our historical ratio will sustain.

Do you have any breakdown service versus product?

Service is about 22 percent, 21, 22 percent of revenues, and the remainder is product.

Is it the same as last quarter?

Igal, do you have the specifics?

The answer is yes. Service and product don't really fluctuate that much quarter over quarter. Around 21, 22 percent; that is the percentage.

Thank you very much, Igal, and thank you.

Shaul Eyal.

Thank you. Hi, and good afternoon, gentlemen. Just a quick question. Gross margins, obviously, up year-over-year and up sequentially. What could be the trend as we head into '05? What could be the potential range of this gross margin?

Okay, so let's first look historically. The improvement in gross margin have fluctuated quarter-to-quarter. This quarter, we had 20 basis points. Last quarter, gross margin increased by 100 basis points. And overall for the first three quarters of 2004, gross margins increased 2.2 percent in aggregate. So while we expect gross margins to continue, it's important to know that they can fluctuate quarter-to-quarter and they could even decline in a specific quarter. So long term, we expect our gross margins to continue to expand. In 2005, we characterized (ph) that expansion as improving modestly. But long-term, they will expand into the low 60s due to greater software sales.

Okay. Thank you very much and good luck.

Brian Ruttenbur.

Thank you. A couple of questions. First of all, the tax rate, I'm sorry, you said it would be at what rate in '05? Is it going to be 15 percent, 20 percent, 11 percent? What was the ballpark range that you were given?

We actually did not give a range. We said that it will go up compared to 2004. This increase, we characterize that as may being significant, but at the same time, our tax rates will remain below the US corporate tax rate.

At what point do you go to a full tax rate? A full -- a U.S. corporate tax rate? Is that '06, '07, '08? Do you any kind of timeframe? How much is left of the NOLs?

This is not about NOLs. Let me explain. Our tax rate is driven by the geographic mix of our revenue. So if you look at -- NOLs obviously are declining because we are growing and we're more profitable year-over-year. But if you look at for examples two years ago, our tax rate was 18 percent and last year, it was 9 percent. Now during both two periods, we had NOLs. But what was different was that the geographic mix of our revenues (indiscernible) our tax rate. So we believe that we can continue to maintain a relatively low tax rate compared to the U.S. federal tax for the very long term. And this is because we generate a substantial part of our income outside the U.S. and in areas of our low tax jurisdiction.

Very good. Do you happen to know how much on the NOLs, do you have left currently?

We have NOLs in different geographies, in a number of countries. But, because of this growth this year, the NOLs will be significantly reduced by the end of the year. However, the reduction will be, again, this year as well will be dependent on the geographic mix of where we're going to generate more revenue and profits. And we'll only have that clear by year-end. So we will discuss that on the next conference call.

So on the next conference call, you will give us a ballpark on total NOLs that you have left, right?

That is correct.

Okay, great. And then in '05, can you give us a percentage breakdown of revenue? Is it going to be still two-thirds, one-third, or should we expect a different mix? I think that has been asked a couple of different ways, but I just want to understand.

Yes. Okay, I will be very specific. While we maintain that the security market will grow next year at 20 to 30 percent, what we dialed into our assumptions for the $290 million is the low end of the range. And on the business intelligence side, we have dialed growth in the teens. So overall, you can think about our $290 million revenue guidance as not so different in terms of security and business intelligence growth, so that overall, the mix of two-thirds, one-third will remain quite stable.

Great. Thank you very much.

Scott (indiscernible).

Quick question. You gave the breakdown between products and services. Can you give me the breakdown of products between hardware and software?

We do provide this, but not on a quarterly basis. Again, we want to track and make sure we understand the trend and not the specific quarterly numbers. So we gave the numbers for 2003, and that was 55 percent software, 25 percent hardware. And we will update that number for 2004 on the next call.

Can you give any indication on how the split and maybe the increasing percentage of software revenues impacted the gross margin?

Clearly, clearly, during the year, we see a reduction in the hardware percentage so that the improvement in gross margin is partially a result of improved software in the mix.

Okay, thanks.

Alan Weinfeld.

Congratulations on the quarter. Could you talk about the R&D spending that was up (indiscernible)? Will that continue into the fourth quarter?

Alan, It was hard to hear you. Can you repeat?

The R&D spending -- will it continue to be up sequentially into the fourth quarter?

R&D was 30 percent, so it was as a percentage of revenue, it will be, it was similar to the previous quarter, to Q2. We're not giving any specific R&D guidance for Q4. And that's all I can say at this point.

In the mobile securities market with the new acquisition, if you've recently been on the Amtrak or Bark (ph) or some of these other big rail systems, there seems to be a real lack of security, whether it's digital or otherwise. Do you see a big opportunity there in at least the U.S.?

I can definitely see a big opportunity worldwide. I believe that the transportation market can benefit from our technology. But you would also have to remember that historically, the transportation market does not use video at all. So it's not like other markets where they use analog video for some, limited applications, and now they can, using the same camera infrastructure, can deploy our solutions and get the additional value. The transportation market is willing to buy into this, and that will take time. At the same time, one of the reasons I am excited about this is I think that the value position is not just in security. If you look at, for example, buses, I think that bus companies that have implemented video technology were able to pass their cost because of vandalism. They were able to improve security for passengers, and actually in some cases, have an increase in passengers because people felt safer to use public transportation. So there is a lot of benefit to the transportation market beyond improved security and protection of infrastructure.

Thanks.

Thank you, Sir. Ladies and gentlemen, this does conclude today's presentation of your third quarter earnings conference call. We thank you for your participation and have a great day. You may now disconnect. Good day.