Verint Systems Inc (VRNT) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter earnings conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions be given at that time. If anyone should require assistance throughout the conference, please press star, then zero, and an operator will be with you momentarily.

I would now like to turn the conference over to your host, Mr. Alan Roden. Sir, you may begin.

Thank you. Good afternoon and welcome to Verint's fourth quarter conference call. I'm Alan Rodin, Vice President of Corporate Development and Investor Relations for 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 risk and some uncertainties. Any of a number of factors can 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 close this afternoon. If you have not received 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 in this call.

The content of this conference call is time sensitive and reflects the Company's perspective as of March 14, 2005. 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 a review of our fiscal 2004 fourth quarter results for the period ended January 31, 2005. Our fourth quarter results represent a record quarter for Verint in terms of sales and net income. This growth was due to continued demand for actuable intelligent solutions.

In the fourth quarter we had sales of $69 million, representing year-over-year growth of 32 percent and sequential growth of 7.9 percent. Pro forma income from operations was $7.1 million, representing year-over-year growth of 32 percent and sequential growth of 2.7 percent. Pro forma diluted earnings per share was $0.23 based on 33.1 million weighted average shares outstanding.

Verint Solutions generates 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 35 percent year-over-year, 14 percent sequentially, and represented 68.5 percent of our total sales. Sales of our Actionable Intelligence Solutions in the business intelligence market increased 26 percent year-over-year, declined 3.5 percent sequentially, and represented 31.5 percent 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 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 multimillion dollar order for a new international government agency customer in a new country for Verint. This new government customer is deploying our Communications Interception Solution to enhance national security by having the ability to intercept and analyze mass amounts of information collected from wireless networks;

An order for a new international GSM wireless service provider customer, which is deploying Verint's Communications Interception Solutions, to help comply with the local government mandate requiring it to intercept voice and tech data communications;

A multimillion dollar expansion order for an international law enforcement customer which is deploying Verint's Communications Interception Solutions to intercept and analyze a broad range of communications including voice, voice-over IP, and data transmitted over internet, wireline and wireless networks; Expansion orders for several U.S. wireless service providers. These customers are deploying our Communications Interception Solutions to help comply with requirements established by the Communications Assistance for Law Enforcement Act, for intercepting voice and tech data communications.

We continue to see demand for our Communications Interception Solution from new and existing customers, due to the need for better intelligence, advanced analytics to analyze growing volumes and date in voice communications, and the ability to intercept new protocols.

Verint's Network Video Solution enables organizations to enhance the security of their facilities by networking video across multiple locations, applying advance content analytics to extract 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 address a broad range of security and business intelligence initiatives across a number of markets. Examples of some recent orders or deployments include:

The Danish State Railroad, which is deploying Verint's Network Video Solution in train cars in certain portions of the Copenhagen railway system to help ensure a safe environment for railway passengers. The Verint Solution will enable rail operations personnel to monitor activities, to help prevent crime, and protect rail infrastructure;

Morgan Stanley, which is deploying Verint's Network Video Solution at certain offices in the U.K. and France, to enhance security and ensure a safe environment for its employees and customers. Verint's Network Video Solution is currently deployed across selected Morgan Stanley offices in more than 8 European countries and is designed to help Morgan Stanley improve security by centrally monitoring facilities and alerting security personnel to potential security breeches;

A public water utility company, which is deploying Verint's Network Video Solution, to help monitor and protect certain facilities and water distribution infrastructure in a large metropolitan city on the West Coast;

Multiple prisons, including some with maximum security facilities, which are deploying Verint's Network Video Solution to enhance perimeter and facility security;

Multiple airports, including some in major metropolitan areas, which are deploying Verint's Network Video Solution to enhance security at a number of locations throughout the airports, including check points, passenger terminals, perimeters and other sensitive areas.

We continue to see demand for our Network Video Solution for a wide range of initiatives, including protecting public transportation, core infrastructure and enterprises.

Our contact center, Actionable Intelligence Solutions, enable enterprises to capture and analyze custom interaction data from their contact centers. Increasingly, businesses are seeking to generate actionable intelligence to help optimize business processes, develop more effective customer strategies, and increase their competitive advantage.

Consistent with Verint's commitment to further help our customers generate actionable intelligence, Verint recently announced ULTRA Root Cause Analytics. This new Analytics suite combines sophisticated voice and data analysis to help enterprises identify, understand and resolve issues that impact the effectiveness of their customer-focused operations. ULTRA Analytics goes beyond traditional performance management and work force optimization tools, enabling businesses to understand not only what is happening in their operations but to also to identify root causes, in order to take appropriate action. ULTRA Analytics provides enterprises actionable intelligence on such critical issues as why agents are under-performing or why customers are dissatisfied, and enables them to take action to improve work force performance, enhance their effectiveness of up-sale and cross-sale initiative, and reduce customer defection and churn.

Verint's ULTRA Solution Analytics are being deployed across a broad range of industries, domestically and internationally. Examples of some recent orders and deployments include:

Orange, which has deployed Verint's ULTRA Solution to help enhance the quality of the service it provides to its wireless customers in 10 contact centers across France. Delivering high customer satisfaction is a key part of Orange's strategy and ULTRA will help Orange ensure that service quality and processes are consistent across every customer experience;

American Heart Association, which is deploying Verint's ULTRA Solution to enhance customer service across its contact centers' operations. ULTRA will help the American Heart Association ensure that it delivers accurate medical information to the public and meet its mission of reducing disease and improving public help through education;

Abbey Financial Services, which has deployed Verint's ULTRA Solution to enhance the quality of the service it provides to financial services customers across 9 contact centers in the U.K. and India. ULTRA's Actionable Intelligence will enable Abbey to better understand their customers' requirements and deliver enhanced service quality;

Multiple outsourcers in Asia, including in India and the Philippines, which are deploying Verint's ULTRA Solution to help ensure that they meet the service level requirements of their multinational customers. ULTRA is designed to help outsourcers deliver service levels consistent with their customers' expectations and enable them to differentiate themselves by offering their customers actionable intelligence.

We continue to see demand for our Contact Center Actionable Intelligence Solution, including our suite of advanced analytics, across a variety of industry sectors.

Now I would like to summarize 2004 and look ahead to 2005. Fiscal 2004 was a year of many achievements for Verint. We delivered our 13th quarter of sequential revenue and pro forma operating income growth and posted record annual results. We maintained a backlog in excess of one quarter of revenue in each quarter.

Our pro forma growth margins and net income margins increased every quarter throughout the year. Our operating profit combined with the management or our working capital enabled us to generate $57 million of positive cash flow from operations and at year end we had a cash balance of $240 million.

Our 2004 results were driven by strong demand for Actionable Intelligence Solutions in both the security and business intelligence markets. We delivered 30 percent sales growth, which, combined with that our expanding growth margins, enabled Verint to deliver more than 40 percent pro forma operating income growth for the second year in a row.

We achieved our positive fiscal 2004 results while continuing to invest significantly into actionable intelligence markets. We increased our global work force by 250, ending the year with approximately 1,200 employees. We strengthened our sales and marketing, research and development, and customer support operations, preparing the Company for continued growth.

During 2004, we experienced demand for Actionable Intelligence Solutions across a broad range of markets. In the government and transportation markets, we added or expanded deployment with a wide range of customers, including Copenhagen Rail, London Underground, Montreal Metro, Orlando Airport, Port Authority of New York and New Jersey, and New Jersey Turnpike Authority, the U.S. Capital and the United Nations.

In the financial service market, we added or expanded deployments with national or global financial services customers, including the Bank of. Brazil, CIBC, Charter One Bank, State Street and Wells Fargo.

In the corporate and retail market, we added or expanded deployment with a wide range of customers, including Clark American, The Home Depot, Intel, the Mayo Clinic, and Target.

And in the telecom and utilities markets, we added or expanded deployments across a variety of public and private customers, including Keyspan, Metropolitan Water District of Southern California, Orange, Reliant Energy, Sprint, and SBC Communications.

Looking ahead to fiscal 2005, we continue to believe that the market for Actionable Intelligence Solutions is in its early stages and we expect another year of growth. Although government and commercial organizations have massive amounts of structured and unstructured information available to them, many still lack the technology to leverage this information to make well-informed, timely discussions. Increasingly organizations are recognizing the value of implementing analytical solutions that enable them to generate actionable intelligence from the information that they collect.

As we enter fiscal 2005, Verint remains committed to growing by understanding our customers' market 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 are focused on identifying companies that help us expand the capabilities 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 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 13th consecutive quarter of sequential revenue growth. In the fourth quarter we had sales of $69 million, representing year-over-year growth of 32 percent and sequential growth of 7.9 percent.

Sales to the security market increased 35 percent year-over-year and 14 percent sequentially, and sales to the business intelligence market increased 26 percent year-over-year and declined 3.5 percent sequentially.

For fiscal 2004, sales were $249.8 million, representing year-over-year growth of 30 percent compared to $192.7 million in fiscal 2003.

Looking at the geographical breakdown of sales, in the fourth quarter we generated approximately 56 percent of our sales in the Americas, approximately 32 percent in EMEA, and the balance in Asia Pacific.

Pro forma gross margins for the fourth quarter were 56.2 percent compared to 56 percent in Q3. This quarter represented our 13th consecutive quarter of pro forma gross margin expansion.

Net research and development expenses for the fourth quarter represented 13 percent of sales. SG&A expenses represented 33% of sales.

In the fourth quarter we had pro forma income from operations of $7.1 million, representing year-over-year growth of 32 percent and sequential growth of 2.7 percent. For the year, we had income from operations of $26 million, representing year-over-year growth of 43 percent. Interest and other income for the fourth quarter increased to $1.2 million from $932,000 in Q3.

Our pro forma effective tax rate for the fourth quarter was 9 percent. Pro forma net income for the quarter was $7.6 million or 10.9 percent of sales. Pro forma diluted earnings per share was $0.23, based on a weighted average share count of 33.1 million shares. On a GAAP basis, diluted EPS was $0.20.

For the year, pro forma net income was $27 million, representing year-over-year growth of 41 percent. Pro forma diluted earnings per share was $0.82, based on a weighted average share count of 32.6 million shares, representing year-over-year EPS growth of 27 percent. On a GAAP basis, diluted EPS was $0.58.

Pro forma results discussed today exclude charges related to acquisitions, including amortization of intangible assets and one-time charges and stock-based compensation. 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 $240 million from $226 million at the end of the third quarter. During the quarter we generated $18 million of cash flow from operating activities. For the year, we generated $57 million from operating activities. In Q4, our DSOs were 52 days, compared to 61 days in Q3. We continue to expect DSOs to range from 60 to 80 days. As of January 31, 2005 we had total assets of $399 million, working capital of $196 million, and shareholders' equity of $283 million.

Turning to guidance: As we discussed during our Q3 conference call, we expect our effective tax rate to increase in fiscal 2005. Based on our year-end analysis, we believe that our pro forma effective tax rate will be between 17 and 23 percent for fiscal 2005.

We are introducing guidance for the first quarter of fiscal 2005 as follows: Sales of $71.5 million and pro forma diluted EPS of $0.23 based on 33.1 million weighted average shares outstanding. We expect Q1 diluted EPS on a GAAP basis to be $0.20. Our Q1 guidance assumes a pro forma effective tax rate in the range of 17 to 23 percent, or approximately double our 2004 fourth quarter tax rate. While our guidance includes a one-time step-up in our tax rate, we expect strong performance sequential operating income growth in Q1.

For fiscal 2005 we are updating guidance from sales of $290 million to $293 million and pro forma diluted EPS of $1, based on 33.1 million weighted average shares outstanding. We expect fiscal 2005 diluted EPS on a GAAP basis of $0.86. Our guidance does not include the effect of expensing stock options. We believe that the market for actionable intelligence solutions is in its early stages and our guidance reflects continued demand for actionable intelligence solutions, world-wide.

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

If there are any questions at this time, please press the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself, you may press the pound key. Our first question comes from Israel Hernandez from Lehman Brothers. Your question, sir.

Hi, guys. Can you go over the gross and operating margin assumptions for fiscal '05? What should we be looking at there? And how much leverage do you guys have in this model, given though the run rate of the business?

Okay. So, let's go through the '05 guidance. Today we increased the revenue guidance from 290 to $293 million. We expect $1 pro forma EPS. And this guidance implies more than 30 percent pro forma operating income growth in fiscal 2005.

In terms of the model, on the top line we believe the security market can sustain 20-30 percent growth and we believe that the business intelligence market can sustain growth in the teens, near-term, and longer term, could grow at a route similar to the security markets.

Gross margins, we expect them to continue to improve modestly, as the greater percent of revenue coming from software. Although the change in gross margin may fluctuate, quarter-to-quarter.

Why haven't we see any real improvements in that number over the last few quarters?

In gross margins we expanded in 2004 2 percent. We had a quarter in Q2 where it was 100 in basis points. Q3 was, I believe, close to a full percentage point and Q4 was 200 basis points. So, things can fluctuate and may even decline in a specific quarter, but overall it was a good expansion in gross margin in '04, of 2 percentage points.

Do you think you can get 200 basis points in '05 and what is it going to take to get there?

Our guidance is assuming a modest improvement in gross margin. Our gross margin, our -- our benefits from a market trend of customer providing more and more of the hardware portion for our solutions themselves. Just to remind you, we're selling a bundled Solutions hardware and software, but most of the hardware that we provide is commercially off-the-shelf available hardware and as customers choose to provide their hardware portions themselves, we sell more software which carry higher gross margins and that's one of the primary reasons for gross margin expansion. So, if that trend continues in '05, we should benefit from that in terms of expanding gross margins.

Okay. Great. And on the -- going to the business on the EBI side, did I hear you correctly, said it was down sequentially?

Yes. However, we view Q4 as a strong quarter for BI. It grew 25 percent year-over-year and the sequential decline in Q4 was mainly due to tough sequential comparison. Q3 was a very strong quarter for BI where revenue grew 40 percent, year-over-year. And overall, if we look at 2004 in the BI market, we delivered 30 percent growth in BI. So, we -- at this point, while the BI market showed strength in 2004, the 30 percent growth in BI in 2004 is off historically depressed levels and our guidance is -- in '05 -- is based on expectations for growth in the teens in the BI market in the near term.

Would you expect BI to post sequential growth this quarter, even if it's modest?

We don't guide to the security in BI split, so we'll report to that at the end of Q1.

Okay. Thanks, guys.

Our next question comes from Paul Coster from JP Morgan.

Hi. First of all, can I just check that you can hear me?

Yes.

Hi. Good afternoon, Dan and Igal. First question, on that last point. I'm just trying to understand, as you look forward can you give us any sense of how your business mix might evolve and specifically, also, the hardware/software mix, how you believe that's going to change through time. And I have a couple of follow-ups.

Okay. So, in terms of 2004, we delivered strong growth in both Security and BI. We grew 30 percent in both areas, so from that perspective, our split between Security and BI really didn't change. For our Q -- for our 2005 guidance, we are dialing into our guidance slightly higher growth in Security than BI, so the split will change somewhat, but it's pretty insignificantly. So overall, I'm still thinking about the business as two thirds Security, one-third BI. Although at this point, it's a little bit more than two thirds on the Security. On the Security market.

In terms of the hardware and software mix, again, we sell bundled solutions that are comprised from both software and hardware, and while we don't track the revenue split between hardware and software specifically, according to our internal model, during 2004 we continued to see a greater percentage of revenues attributable to software. And the numbers, you know, [inaudible] 57 percent software, which is compared to 54 percent in 2003, 22 percent in hardware compared to 25 percent, so software is up, hardware is down.

In terms of service, it's approximately 20 percent of our revenues come from service. And that has not significantly changed, as service continues to grow at the same rate as the overall business.

So not much change in '05?

In terms of '05, we're not guiding to software/hardware mix, but , again, gross margin expansion as a result of increased software could be a continued trend in the market. And long-term, we expect an increase in the amount of software we sell as a total percentage of sales to drive gross margins into the 60s.

Okay. Can I just check, you still have hundreds of active engagements? Would that be correct? And this is highly diversified business?

Hundreds of engagements, yes. I don't know if specifically, can't comment about the number of hundreds, but it's a highly diversified business. We did not have a 10 percent customer in 2004. We're operating in many different markets, geographically. Fill more than 50 countries. So, a highly diversified business, that's still the case.

Okay. Last question. You have a good deal of -- you've been incredibly successful in forecasting your business. You obviously have quite good visibility. From what does that originate? Perhaps you can just sort of give us some sense of -- I can feel that it's sort of -- part of that question is, it from demand or do you believe that the demand is out there and it's just a question of you scaling up your organization to capsulize [inaudible] opportunity.

The visibility comes from three factors. It's a backlog, it's our recurring revenues model, and it's the fact that we are highly diversified in many diffferent markets and that helps us to neutralize some of the risk with a concentrated business. So, for example, we continue to have backlog that is in excess of one quarter of revenue. And this gives us near term visibility and supports our Q1 guidance.

Obviously, as to the year, we now look at trends in the overall market and as I mentioned before, we believe the security market is sustaining the 20-30 percent growth and the BI market is also growing. And therefore, you're right in your assumption that scaling up to business, in terms of investing in infrastructure, investing in R&D, investing in sales and marketing, is supporting our belief that the market is growing and we just need the scale in order to book the orders and also deliver quality solutions to our customers.

If you look at 2004, reached $250 million of revenues and assuming an ASP, an average sale price of $250,000 is an average number, that means that we have delivered more than 1,000 projects during the year and as you know, we sell solutions. So, delivering a project requiring specking up customer needs, configuring the system to specific customer requirements, installing and helping, educating the customer how to use the system and so forth. It's pretty -- pretty evolved -- involved implementation process and we need to scale up the business in order to address the demand in the market.

Thank you.

Our next question comes from Asheese Kalim from William Blair.

Thank you. My first set of questions has to do with the new analytical platform that you guys have, ULTRA. Have you guys already started recognizing revenue from some of the contracts you've announced on that platform? And then, secondly, is I was wondering if you could give us a sense of the size of the deals that you guys are winning?

Let me first explain this Root Cause Analytics that we have announced. This is an evolution of our Actionable Intelligence Solutions that we already have in the market, so in terms of generating new revenues, while we just launched this new version and don't have any revenues already dialed into our Q4 numbers, we do have analytical solutions that we've solved throughout 2004 and contributed to our results.

The evolution in our analytics allows us now to address a very important question in businesses. A lot of businesses are looking to understand what is going on in their operations. And there are systems out there, recording systems, quality monitoring systems, performance management systems, that address the question of what is going on. But it's really the Actionable Intelligence Solution that address a more important question of why. What are the reasons, the root cause analyses, behind the trend and what action needs to be taken in order to address issues?

So, for example in contact centers, one of the important metrics is, you know, what is the average talk time? And a lot of businesses that rely on contact centers would like to know and invest in performance management solutions that tell them that, at a certain point, the average talk time is higher than what they targeted. So, let's say they wanted -- they have an average talk time of 2 minutes. A Performance Management Solution will tell that customer that now the average talk time is 2 and a half minutes.

But now this is not actionable intelligence and where our solution plays is in explaining to the customer what could be the reasons for the talk time to go up. Sometimes it's just a training for agents that needs to be more effective so the talk time can come back down to the two minutes average. But sometimes this is a business process flaw that needs to be changed because the agents are doing the best job they could but if some underlying processes in organizations that are not working effectively and as a result agent needs to spend more time with a customer in order to try to keep that customer happy, but of course with a higher talk time, that costs the company more and also it costs customer satisfaction for all the other clients of that customer that are waiting in line while the agents are servicing other customers.

So, make the long story short, the ULTRA Root Cause Analytics is providing customers a unique actionable intelligence capability that we believe differentiates Verient in the market.

So, it's clearly an extension beyond what -- beyond the analytical capabilities that are out there today. So the -- does -- is this used as a, as you said, a competitive advantage that you have that allows you to potentially win new deals? Or is it a case where you could now go back to your existing customer base and then try to up-sell them enhanced capabilities?

It's hard to address this question, because looking at 2004, we have grown in the business intelligence market 30 percent. And in our view, the recording and quality monitoring market, which grew only 12 percent last year, is really a different market opportunity. So while -- you know, we find ourselves sometimes competing on the same budget, we believe that what we have to offer to enterprises is a different capability. And that's how we are trying to basically approach the market. It's not so much, you know, going to a base and proposing an upgrade, but it's really positioning this tool as something unique that can help the customer look into the business and understand what action needs to be taken to improve the business.

Okay. A couple of questions on the financials. Can you walk through why you expect your tax rate to be so much higher next year?

Okay. Historically, our tax rate has fluctuated, due to a number of factors, including geographic mix, product mix, and the availability of NOL. And based on these 3 factors, we currently expect an effective tax rate in '05 of 17 percent to 23 percent. But the most important thing for us -- for me to emphasize here, that long-term we expect to be able to maintain this relatively low tax rate, due to the fact that we generate a substantial amount of our income in low-tax jurisdictions.

And so, long-term, what do you -- do you think that the 17 to 23 is the appropriate range? Or do you think it could be actually lower than that?

We think it could be in this similar range. We're not giving today a long-term tax guidance, but looking at what has impacted our tax in the past and what's going to impact tax in '05, we believe those are the same parameters that will continue to impact us, long-term. So that's why I -- I can say that , without specific guidance, it will be in the similar range of approximately 20 percent.

Okay. The last question I had was with your cash balance. With your -- you know, you have roughly 240 million in cash. I was wondering if you could prioritize the uses of that cash. I know you had implied that you guys are looking at acquisitions. How does acquisitions compare to potential share buybacks or a dividend from a cash usage?

We still believe that the Actionable Intelligence market is in its early stages, it's a highly fragmented market, which is typical to early stage market, and it does provide a consolidation opportunity and we believe that Verint is well positioned to become the consolidator. So we could like to think about our cash balances as giving us the flexibility to act on the right opportunity when it presents itself.

At the same time while we work with [inaudible], we are also very selective in our approach and we're taking a look at a number of different opportunities and when we think that there is a high synergy and a company can really help us to grow in the Actionable Intelligence market, we would like to be able to act quickly.

Looking at 2004, we learned that more and more deals are done in cash or sometimes a combination of cash and stock. And while we are generating positive cash flows, we still believe that having this level of cash balances provide us an advantage of competing on some acquisition opportunities as they present themselves.

Okay. Thank you.

Our next question comes from David Gremmels from Thomas Weisel.

Thank you. Understanding that options expense is not built into your guidance, have you done any sizing work on FAS 123? Do you have a guess as to what that impact will be this year and what will -- when will you start to recognize that expense?

Okay. In 2004, the value associated with employee stock option was approximately $8 million. While we're not giving a number for 2005, we expect this to increase in 2005 relative to 2004. And along with the industry we expect to start expensing options in Q3 in our GAAP statement and we do not expect to include it in our pro forma statements. As you mentioned, we did not include the fact of stock option expensing in our guidance today.

Okay. And then on another metrics-type question. You said you didn't have any 10 percent customer in '04. Did you have any 5 percent customers? I think there were 2 last year. Were there any this year? .

We had a couple 5 percent customers. Yes, I'm not sure if it's 2 or 3 but we had a few.

And then just if you can give an update on your larger roll-outs. I think IRS, Home Depot, are in there, maybe others that you think are important? .

All our customers are important. We -- you know, some of these large customers have very large infrastructure, so it's a multi-year opportunity. And we are rolling out implementations. In the case for Home Depot, I can't say much but it's a multidimensional platform with [inaudible] both security and business intelligence needs of Home Depot. We already installed in hundreds of stores and we are continuing to deploy in more locations. We also are continuing to deploy analytical solutions into Home Depot.

Similarly, IRS is a large organization with 46 contact centers and we are in deployment. Another large customer that we announced in '04 is SPC. SPC handles more than 400 million calls across 200 centers and they are going through a consolidation initiative with the objective of improving customer service levels and we are helping them in addressing this through our analytics and other products and we are in early stages of deployment there. So this is just some of the customers that we announced.

Okay. Thanks very much.

Our next question comes from Brian Ruttenbur from Morgan Keegan.

Yes, a question on, specifically, SG&A. Last quarter -- from third quarter to fourth quarter, your SG&A expense was up several million dollars. Do you expect that rate in first quarter to be at these levels or higher or was there some kind of abaration in the fourth quarter with higher payouts or something like that, in terms of bonuses? Historically, you haven't seen that, or seen a historical uptrend from quarter to quarter in SG&A. But just trying to understand the big spike in SG&A.

There was no one reason that contributed to the increase in the fourth quarter. We are, as I mentioned before, investing in the business, long-term. So leveraging expenses, while we think we can achieve that in '05, we are only dialing into our guidance modest leverage. So, just to give you a metric, in 2004, our SG&A was 45.3 percent as a percentage of sales and in our guidance we are expecting a slight improvement to that number.

We believe that, again, the market is in its early stages. I know I'm saying it again and, again. But it's important to support this belief with investment and part of our investment is creating a stronger infrastructure to sustain growth long-term and as an example we added 250 employees in 2004. That's a very large number. It was mostly in sales and marketing, customer support, and R&D, and this is laying the foundation for growth in 2005 and beyond.

So I'm not going to give any specific SG&A guidance for Q1. We are giving some guidance to '05 overall, with the intention to leverage SG&A, but we are planning to continue to expand operating income significantly and in the guidance model, you can assume more than 30 percent of operating income growth.

Okay. I just had a specific question. Your SG&A, I'm a little confused on the 45 percent, because it was on the year according to just SG&A as a percentage of total revenue was 32.7 percent. Were you combining SG&A and R&D together to come up with that 45? Is that what you were referring to?

Yes. Yes, that's correct. That's -- the combination of both.

Okay. Do you anticipate -- you don't anticipate any dips, then, in the SG&A, I guess is the question I'm really asking. That there was nothing abnormal so I shouldn't see any big falloff in the first quarter? .

Again, we're not giving specific guidance to SG&A in the first quarter. But going back to analyzing Q4, it was an increase. It -- you know, no one reason for that.

Okay. Great.

And throughout the year of '05 we believe it will come down.

Great. As a percentage, then.

As a percentage of sales. Absolutely.

Okay. Thank you very much. Appreciate that. That was my question.

Again, if there are any questions at this time, please press the number 1 key on the touch-tone telephone. Our first question comes from Alan Weinfeld from Kaufman.

Hi. Would you guys talk about some of the transportation deals that were signed in the quarter? Were they in the backlog of the acquired company, RP Security, or were you able to bolt on RP's technology and then use some of their resources to win these deals in the quarter?

Okay. We are in the transportation market for a while. The reasons for acquiring RP was that we believe that combining our fixed surveillance solutions with their mobile surveillance solutions will provide a greater opportunity for Verint and will address an important need in the market. While we are now executing on this model, we are bringing the RP product into our customer base. We also taking our historical Verint product into their customer base.

But let's put this all in perspective. RP was a very small company. It was developing this mobile product. Since we acquire it and we closed the deal in September, RP is now Verint GmbH, so you will not find it any more in the market as RP. We are integrating the organization into our [inaudible] organization. We are integrating their product into our overall suite of solutions.

We have taken their product, which they've sold to several customers in Europe on a global basis and we already have pilots in other geographies and, you know, we have the intention of building a very strong transportation solution.

The deals that we announced, some of them are deals for the Verint Legacy product and some of them are deals that came with the RP acquisition.

Also on the vertical stance, would you say that it seemed like the wireless service providers were you know, more prevalent in the customer mix than usual, do you see anything in particular happening there that's really benefiting you?

We have -- we have -- the wire service providers in a number of different markets. We obviously sell communication perception solutions to service providers and the wireless area is one of the growth areas in telecommunications as wireline obviously is not growing and as a result, obviously, we sell more to the wireless side and the [inaudible] data side.

Also, because of the consolidation in the service provider market, those large companies found themselves with a lot of different contact centers for different products and services and I think that they are now looking more into an analytical solutions to help them to understand how to improve and unify service levels to their customers. We also see some service providers more and more interested in partnering with us to deploy video solutions throughout the networks, because video obviously is helping them to fill more communication services to their customers. So we think that on all fronts service providers are a good potential market for Verint.

Great quarter, guys. Thanks.

This concludes the question-and-answer session.

As there are no further questions, on behalf of Verint, thank you very much for participating in our fourth quarter conference call and have a great evening.

Thank you, everyone, for participating in today's conference. You may now disconnect all lines and have a great day.