Verint Systems Inc (VRNT) 2005 Q1 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the first quarter conference call. [OPERATOR INSTRUCTIONS] And now, I would like to turn the conference call over to Mr. Alan Roden, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Good afternoon. And welcome to Verint's first quarter conference call. I'm Alan Roden, Vice President Corporate Development and Investor Relations for Verint Systems, which is traded on NASDAQ ticker symbol VRNT. With me today are Dan Bodner, our President and CEO, and Igal Nissim, our Chief Financial Officer. Before I start on the call, I'd like to mention that certain statements that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words estimate, project, intend, expect, believe, and similar expressions are intended to identify forward-looking statements.

These forward-looking statements involve known and unknown risks and some uncertainties. Any of a number of factors 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 discussion of the principle risk factors that may cause actual results to be different, please refer to the aforementioned press release and the Company's filings with the SEC.

By now you all should have seen a copy our press release 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 or a reconciliation of our GAAP and pro forma net income discussed on this call. The content of this call is time sensitive and reflects the Company's perspective as of June 1, 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 increase 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 first 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 2005 first quarter results for the period ended April 30, 2005. Our first quarter results represent a record quarter for Verint. Total sales increased 27% year-over-year, due to continued demand for actionable intelligence solutions. We experienced growth in both the security and business intelligence markets. Sales into the security markets increased 34% year-over-year, and sales into the business intelligence market increased 14% year-over-year. We delivered our fourteenth consecutive quarter of pro forma gross margin expansion.

We increased our pro forma operating margin sequentially by 90 points, to 11.1%. Improved operating leverage combined with our revenue growth resulted in our pro forma operating income increasing 36% year-over-year, and 13% sequentially. We ended the quarter with backlog in excess of one quarter of revenue, and continued to see demands for our actionable intelligence solutions. As a result of our Q1 performance, our backlog and improved outlook in both the security and business intelligence markets, we're increasing fiscal 2005 guidance for sales to a range of $296 to $300 million, and pro forma diluted EPS to $1.02.

During the quarter, our actionable intelligence solutions were selected and deployed by a wide range of customers across the security and business intelligence markets. In the security markets, our actionable intelligence solutions enabled government and commercial organizations to detect threats, help prevent criminal and terrorist activity, and improve the security for facilities, infrastructure, and people. Examples of recent orders in deployments in the security market include: Unisys, which selected Verint's NEXTIVA video solutions for the TSA, for advanced airport security and to help ensure a safe environment for passengers. Verint NEXTIVA video solution is designed to help airport security personnel monitor, capture and analyze video across secure areas of airports. And is currently being tested by the TSA at certain U.S. commercial airports as part of a pilot program. The city of Porto, Portugal's second largest city, which is employing various type of video solutions, to enhance security to certain portions of the product transportation system. The Verint solution will enable operations and security personnel to centrally monitor activities to help prevent crime and create a safe environment for passengers and employees.

A leading financial services company, which is expanding the deployment of Verint network video solution to enhance security across an additional 400 branch bank locations. Verint's network video solutions will enable this financial services customer to network and investigate video collected from multiple areas of its branch banks, including tellers, drive-up windows, and ATM's. A multimillion dollar order for our communications and interception solution for a new international government agency customer in a new country for Verint. This new government customer is deploying our communications and interception solutions to enhance national security by having the ability to intercept and analyze mass amounts of information. An order for a new U.S. telecom and Internet and service provider customer. This customer is deploying our communications and interception solution to help comply with requirements established by the Communications Assistance for Law Enforcement Act, for intercepting voice-over-IP communications.

An order for a new international wireline service provider customer, which is deploying Verint's communications interception solution to help comply with local government mandates related to intercepting voice communications. A multimillion dollar expansion order for an international government customer, which is deploying Verint's communications interception solution to intercept and analyze data and voice over IP communications. In the business intelligence market, our actionable intelligence solutions enable enterprises to capture and analyze customer interaction and other data to help enhance business profits and drive revenue and profitability.

Examples of recent orders in deployment in the business intelligence market include: One of the largest capable companies in the U.S., which have selected Verint's ULTRA solution to help drive sales of its cable, online and digital telephone services to new and existing subscribers. This new sure for Verint is deploying ULTRA across four contact centers that support the company's sales organizations. A leading U.S. benefits and HR outsourcer, which is expanding its deployment of various ULTRA solutions to a total of seven contact centers based in the U.S., the U.K. and India. ULTRA is helping this large multinational customer migrate its customer facing operations to an IP-based environment. The Bank of Montreal, which has deployed Verint's ULTRA solution across four network contact centers is supports the Bank's credit card and direct banking operations in North America. ULTRA, in its speech analytics will enable the Bank of Montreal to generate intelligence to better understand their needs and drive customer satisfaction.

A new outsourcer customer in India, which is deploying Verint's ULTRA solution to support its multinational customers. This outsourcer will use ULTRA and its analytics to enhance service it provides to its customers in Asia and the U.S. Our RI driven actionable intelligence solution provide enterprises with a new and powerful capability to construct meaningful data from the large amount of unstructured information collected from their customer interactions. Verint was recently recognized by DMG Consulting Group as the as the leading vendor in its industry This recognition as the leader was contributed to our ULTRA solution and various execution, vision, customer satisfaction, and understanding of customer needs. Verint's market leadership is driven by commitment to deliver ROI based solutions. We believe that customers in the business intelligence market are increasingly seeing the value of actionable intelligence to help drive revenue and profitability.

Now, I would like to summarize our Q1 results. Our first quarter results were driven by growth in both the security and business intelligence markets. We added new customers and many of our existing customers continued to expand their deployment, adding more size, additional capacity and new analytical capabilities. We continue to believe that the market for Actionable Intelligence is in its early stages. Verint's growth strategy is to develop innovative IRI solutions to help customers in the security and business intelligence markets. Verint's innovative solutions, including Verint's recently announced NEXTIVA, network video solution and ULTRA route cause analytics, are highly scalable, intelligent, RI driven enterprise platform, which offer customers the ability to generate actionable intelligence.

Verint remains committed to delivering new solutions and at the same time, we believe that we can augment our internal growth with strategic acquisitions that 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 Nissim will now present a review of our financial results. Igal?

Thank you, Dan. The first quarter represented a record quarter for Verint and our fourteenth consecutive quarter of sequential revenue growth. In the first quarter, we had sales of $72 million representing year-over-year growth of 27% and sequential growth of 4.4%. Sales of our actionable intelligence solutions in the security market increased 34% year-over-year, 4.9% sequentially, and represented 69% of our total sales. Sales of our actionable intelligence solutions in the business intelligence market increased 14% year-over-year and 3.1% sequentially, and represented 31% of our total sales. Looking at the geographical breakdown of sales, in the first quarter we generated 46% of our sales in the Americas, 35% in AMEA, and 19% in Asia-Pacific.

In Q1, pro forma gross margins increased to 56.4% from 56.2% in Q4. This quarter represented our fourteenth consecutive quarter of pro forma gross margin expansion. Net research and development expenses for the first quarter represented 13% of sales. SG&A expenses represented 32.3% of sales. In the first quarter, we had pro forma income from operations of $8 million representing year-over-year growth of 36% and sequential growth of 13%. Interest and other income for the first quarter increased to $1.7 million from $1.2 million in Q4. Our pro forma effective tax rate for the first quarter was 20.6% in line with our guidance. Pro forma net income for the quarter was $7.7 million or 10.7% 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. Pro forma results discussed today exclude amortization of intangible assets related to acquisitions 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 $250 million from $240 million at the end of the fourth quarter. During the quarter, we generated $11.5 million of cash flow from operating activities. In Q1, our DSO's were unchanged from Q4 at 51 days. We continue to expect DSO's to range from 60 to 80 days. As of April 30, 2005, we had total assets of $415 million, working capital of $204 million, and shareholders' equity of $292 million.

Turning to guidance. We are introducing guidance for the second quarter of fiscal 2005 as follows: Sales of $74 million and pro forma diluted EPS of $0.25 based on 33.1 million weighted average shares outstanding. We expect Q2 diluted EPS on a GAAP basis to be $0.21. For fiscal 2005, we are increasing guidance from sales of $293 million to a range of $296 to $300 million, and pro forma diluted EPS from $1, to $1.02 based on 33.1 million weighted average shares outstanding. We expect fiscal 2005 diluted EPS on a GAAP basis of $0.87. We believe that the market for actionable intelligence solutions is in its early stages and our guidance reflects continued demand for our Actionable Intelligence solutions worldwide.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Paul Coster.

Gentlemen, congratulations yet again. 14 quarters. Just some quick thoughts on the Federal Government business year-to-date here in the U.S. It seems like it's a very diverse array of projects that you have underway still, but can you just comment upon that business specifically the CALEA component of that business in North America first? Hello?

Yes. Paul, first, we continue, as you mentioned, to participate in many government programs and we continue to invest in the government market. We are investing in new products and we are hiring people specifically for the U.S. Government. In terms of CALEA , we continue to see interest and demand for our solutions. We are going to launch this summer a new product for the law enforcement community. This product was previously deployed in the international market with great success. We're now adapting it for the U.S. market by addressing U.S. specific requirements relative to evidence analytics. Overall, the communications interception business is a global business for us. And a driver for the communications interception market continue to be one) greater need for intelligence. Two) introduction of new protocols like data and voice over packets. And three) positive legislation.

Regarding voice-based communications interception just for a second. Are - - the wireline and wireless operators in New Yorker, this is a discretionary investment on their part or is it mandatory? And what is the process by which they're going about the acquiring is it - - the technology, is it a function of refreshing their networks or is it only when they're requested to make these upgrades, to introduce the technology?

The CALEA start up continues to evolve. And addressing the need for gathering intelligence relative to new protocol, new standards, new networks. So there's a number of different factors that drive the expansion. One is just additional capacity, as some of these networks were initially installed with small capacity and they faced the need to expand. Secondly, it's the need to address new protocols, especially in the area of voice-over-IP, which it's relating to wireline, and all sort of packet data for voice and tax and Internet traffic and so forth. So the drivers still exist. And this is a multi-year deployment for many of these networks as they start with a certain area of the network and then continue to deploy throughout the network. And we see that business, we announced earlier today, a new customer in the U.S. for - - a new service provider customer that is deploying for the first time for communications interception, and we also continue to have expansion orders from existing customers that continue to expand throughout the network. So it's a combination of all the above.

Okay. Can you comment very quickly on border security and the America Shield Initiative and whether or not you're seeing any business from that? And then last question would be: Regarding the TSA initiative, obviously you've been doing business with the airports on a stand-alone basis previously. What is new and different about this relationship with Unisys? Has it led to incremental sales? Thank you.

Let me start with TSA. Yes, we were doing business with airports individually, and we continue to do business with airports individually as airports' authorities continue to have responsibility for a certain portion of the airport. What's new about TSA, TSA is now a single agency responsible for certain areas in the airport for all 450 commercial airports in the U.S. So I'm very pleased to have been selected for the TSA program. This was a competitive and long evaluation process. We are currently at the very early stages, as we have reported this is still a pilot program for TSA. We are deployed in multiple airports, helping TSA not only look at the technology, but also look at the operational aspects of deploying the technology in airports. But this is early stages. And this, at this point, there's not much we can add in terms of how this is going to fall out. I think this is similar situation with the border security. Very, very large undertaking. The government, we believe that since 9/11, the government has been spending on Homeland Security but predominantly on people, on spending on manpower. There was relatively a small investment in technology, as it takes the government time to evaluate the different technologies that are available to them, and start the deployment. So we think that this large initiative will be multi-year initiative, and will just roll out over a significant period of time.

Okay. Thanks.

Your next question comes from David Gremmels.

Thanks. Good evening, gentlemen. I'm just wondering, are there any - - are you seeing any changes in the competitive landscape? We've seen one of your competitors win a couple of video intelligence wins recently. Are you seeing any changes there?

In video, we see changes not so much in terms of the competitive landscape, it's pretty much the same players. But I think that we see overall a positive change in terms of adopting actionable intelligence solutions. If you look at the video market, overall, people are now more comfortable with video cameras. We see a greater deployment of cameras everywhere and people comfortable with having cameras everywhere. Once organizations are deploying the cameras, they're starting to realize that having video monitoring realtime is really not the answer. So they're looking at recording and they are deploying recording either by VCR or DVR, digital video recording. But this is also not a sufficient, effective solution. So we see a greater need or a greater awareness of the need to not only have the video from cameras and the video recorded, but also the video networked across large areas. And even more important, the video analyzed and formed into actionable intelligence.

Now, many of our competitors are bringing recording solutions to the market, they bring DVR's and they bring analytics, but just combining DVR's and analytics is not yet creating an actionable intelligence solutions. If you look at our NEXTIVA solution which we launched during the previous quarter, this is a true network enterprise class platform that actually - - not just combined recording and analytics, but combines all the elements that's required to collect video from the edge to analyze it at the edge as well as sequentially. And to make the decisions related to what parts of the video are really important, critical, in order to enhance the operation. And from that perspective, I think Verint is very unique in our approach and in the value-add that we can bring to our customers.

And since you brought up the NEXTIVA platform, that's been out for a couple months now. Can you give us an update there? What kind of level of interest are you experiencing? Are there any initial sales to report?

The NEXTIVA was introduced back in April in the ISC West show in Las Vegas and following that, it was introduced in IFAC in the UK. The response was very good and very pleased with the way it was received by the market. This is a true enterprise class platform that combines the needs of the security people as well as the IT people and business people. And this was a product that was very much needed in the market. In terms of the way we roll it out, NEXTIVA consists of many components. Some of the components were already rolled out and we've deployed and we are generating revenues. Other components will be phased in over the year.

Okay. And then last one: Just wondering what kind of tax rate is assumed in the new guidance? Previously you talked about a 17% to 23% range. Are you able to refine that at all?

Our Q1 performance tax rate was 20.6%, so it's right there in the middle of our annual guidance of 17% to 23%. And at this point, we continue to expect 17% to 23% for the year.

Very good. Thank you.

Your next question comes from Shaul Eyal.

Thank you. Good evening, good quarter, good guidance, congratulations. A couple of quick questions. What was the headcount by the end of the quarter?

Let me address this, Shaul . We ended the year with 1200 employees. We are expecting to increase headcount this year during the year by 10%. We're not going to give the headcount every quarter. But we've continued to hire in Q1, and the biggest growth in our hiring was in the sales area and the customer support area.

Okay. Fair enough. Just, Dan, reflecting back on the prior quarter, seasonally from the EBI standpoint, seasonally supposed to be the strongest quarter, was sequentially down, and this quarter you're coming back again and the EBI is up 3% or so on a sequential basis. What has happened last quarter? Was it just a couple contracts that were signed a couple days after the quarter was ended or was it just a confluence of events? What drove the relative weakness last quarter?

First, we don't see seasonality in our EBI business, so, if there is, maybe this is the first year, we'll continue to monitor that. But I think that also you should not think about our business as, back-end loaded. So this is not about few contracts that we missed in terms of bookings. This was, last quarter, was a following of Q3 last year, which was a very strong quarter. So sequentially we had a decline. We still believe that we have a great ROI. We're getting customers' feedback, it's very good in terms of the value-add. So we think about this business as a very healthy business.

For this year, the guidance that we have given today, we still think about the BI business in the low teens, and about the security market as a sustaining the 20% to 30% growth. And in order for the BI performance to accelerate, what we are going to need is, one, an improved IT spending environment. And maybe in Q1 there was somewhat of a hesitation in terms of IT spending. And I think what we also need is we need more customers to get past the early adoption phase. Not every customer - - not every enterprise customer is ready for actionable intelligence. We see that as one of the reasons or the major contributors to our current performance. We still believe that our BI business can sustain long term 20% to 30% growth similar to the actionable intelligence solutions that we sell in the security market.

Okay. Thank you very much. And good luck again.

Your next question comes from [John Muntsler].

I will add my congratulations. If we look at some of the different verticals, I know there's a platform you guys are really moving beyond just a security Company and business intelligence Company. But can you talk about maybe other verticals? I know this is a big picture question, but potentially other verticals you could see Verint go into in the next couple of years? Because you've obviously been pretty extremely consistent in your current markets. Should we think about Verint over the next two years as playing in the existing markets or do you think there are new verticals that you're going to basically take your actionable intelligence into?

We will take our actionable intelligence solutions to new verticals, for competitive reasons, I would refrain from being specific in terms of the verticals that we are targeting. I - - to a little bit expand on the verticals that we have expressed our, strong belief that they will be a growth engine for Verint, this is the transportation market. And we've made investments in airports, in ports, in rail and so forth. We believe in the retail market, we believe that not only that we have customers that are enjoying good ROI for our solutions. We believe that there's more technologies that available for these customers and other retail customers that we will be able to continue and deliver and they will benefit from. There's definitely the government and law enforcement areas were a clear target for actionable intelligence solutions. Overall, you can think about it as any large organization. Government is obviously a very large organization that have a lot of information, a lot of - - mass amounts of information, of unstructured data is a good target for our technology. As this type of customers are struggling, we try to make sense of this information, and we can certainly help them.

Is it safe to say that your last sentence there, is any organization that has mass amounts of unstructured data, do you see kind of your, I guess, positioning to customers slowly migrating to that theme over the next - - I know you've hit on a number of different verticals, but should we hear more about that I guess specifically in terms of potential new verticals within the next year from Verint?

I'm not committing to announcing anything in the next year. There could be some efforts that we launch. But one of the things that we have to be careful about with new verticals and new applications is the rate of introduction of new solutions. And until we are ready to think about it publicly, as we secure some of the leading customers in this area, and we feel comfortable that we have a leading position, I will be happy then to talk about it publicly and strong competitors. We've seen it before, we are considered by competitors as the leading Company in this industry, and we've seen our competitors basically emulating our messages and our strategy. And I think it will be on the prudent to be careful about helping them to achieve this - - their strategy.

Okay. Just as a follow-up to some of the previous questions, can you just sum up, I guess, in terms of what were your strongest verticals outside of the government in the quarter?

It's pretty much the same verticals. It's - - other than the government, it will be retail and finance and telecom utilities, transportation, those are the leading verticals.

Great. Thank you.

Your next question comes from Israel Hernandez.

Good afternoon and congratulations, gentlemen. With respect to your geographic distribution, if my numbers are correct, it seems like the U.S. was down pretty sharply quarter over quarter whereas Europe and the rest of the world more than compensated for that. Can you talk about some of the trends that you're seeing across each of your geographic regions? Thanks.

Sure. Historically, our sales mix has fluctuated geographically quarter-to-quarter. Our long-term view remains that approximately half of the business will come from the Americas and half internationally. And this quarter was relatively consistent with that view. In Q1, I'm particularly pleased with the results in Asia-Pacific. In Asia, we're active in both security and business intelligence initiative and we're active in many countries. Last year we invested in Asia-Pacific in many areas, including a new India office, and we are starting to see the benefits from this investments.

Your next question comes from Daniel Meron.

Hi, good afternoon, gentlemen. And congrats on the continued execution on your - - of your business. A couple of questions. First one on - - you mentioned that you have some M&A - - your eyes set on a few M&As. If you could elaborate on what areas you're looking into?

Okay. We're basically looking at technology companies, companies that can help our geographic expansion, and companies that can potentially, relative to the question before, about vertical markets, also companies that can help us launch into new verticals. We are active in this area. We've been talking to a lot of different companies. We are taking somewhat a conservative approach to acquisitions. When we identify an opportunity, we will certainly have the means in terms of the financial means as well as the internal management team and capability to integrate. And then we will move forward and close that acquisition.

Is there a certain range of - - for those deals?

We're not putting on ourselves any constraints. But obviously very important for Verint is our ability to integrate the acquired company into our infrastructure. We're not a holding company, so in order to leverage synergies, we need to be able to quickly integrate. So obviously, the larger the potential acquisition, the more diligence and consideration we have to take relative to integration. But for us at this point, it's more about opportunity and less about specific size. Historically, we have done small technology acquisitions. And we feel that that was giving to our part - - the contribution to our success.

Great. And also, if you can - - are you looking more into the business intelligence market or more to the security side, or both?

Both. We really, in terms of our pipeline of potential acquisitions, we're not particularly preferring one market to another. We see consistent growth in the security market. We see more overlapping growth in the business intelligence market. But we continue to believe that analytic solution is what enterprises need in order to gain competitive advantage. And we believe that long-term BI has similar growth potential, so we will be more than happy if the right opportunity comes up in the BI market.

Okay. And also, can you talk about - - a bit about the recent moves by some of your competitors on the M&A field, specifically with NICE acquiring Dictaphone and a few other moves, and Autonomy acquired Etalk.

Dictaphone is a log-in company, they're focused on the public safety markets. We don't deem this as part of the actionable intelligence market, and Verint is not active in this market. So this is not relevant to us. Etalk is a quality monitoring company, we see Etalk in the BI market. We don't really think the change of ownership of Etalk will change the company much in the near term.

If I may just move, in the government business, just looking at your filings, your 10-K, it seems like for the last three years, overall the government business was flat around the $55 million mark. Can you maybe shed some light, where was the growth in the business coming from aside from the government business? Which was flat, as I mentioned.

Right. In the question. If you look at our security business overall, it's been growing more than 30%, and the government represents a significant portion of our security business. Now, some of the business within security is directly with the government, but some is only influenced by government mandate. So when you look at the 10-K, we would only quantify the business that we do directly was the government. If you look, for example, at the CALEA business, a lot of the CALEA business, similar to the CALEA business, there are businesses all over the globe, the end customer for us is a service provider, but it would only buy the solutions because of government influence or government mandate. But the way to think about the influence of the government; clearly the government has a great influence on our security business. And the government, we believe, will continue to spend money on Homeland Security, whether it's directly or indirectly through influencing other organizations to spend money on security. The way I think about the business, the security business, is not necessarily in terms of the direct business of the government, but the overall driving factors that are part of the ongoing growth in security.

Okay. And just following up on that. Can you give us - - are there major government budgets that you see within the wire-tapping business or within the video business that can increase that portion in the out years? Or are we going to see similar levels of the government business going forward as well?

Government tends not to disclose this portion of their budgets and intentions, so if the response will be based on their own view of the market. We continue to believe that the government market will expand again not necessarily directly. But overall governments tend to believe that, the safety of their - - of the people is the most important charter of the government. There is an expectation by the public, again, I'm not just referring to the U.S. We see that in many countries. It is also positive legislation that's helped in terms of people are accepting the fact that the government needs to have this kind of technology to enhance security and this is at the expense of some civil liberties. To all that it's continued to be positive in our mind. And positively influencing the ability of the government to deploy directly and indirectly to deploy technology to address security needs.

Okay. And last one for me: You mentioned that you're going to increase your customer support portion of the headcount. Can you give a sense on what portion of your revenue you're expecting to come from that business? Right now, I think the mix is 80 to 20 product versus services.

We expect the service revenues to grow in line with the overall growth in the top line. So approximately the same, it's been sort of mixed going forward. Okay. Thank you very much, Dan, and congrats on the execution and good luck going forward.

You're next question comes from Pat Wiper.

I have one question, my others were answered. You - - and it's regarding transportation security, specifically surface, rail and bus. You announced a city in Portugal during the quarter, and in the last call at four months, you announced the London metro net, Montreal, Denmark. Where is the action in U.S. transportation security considering the $150 million in grants that was passed, I guess, about six weeks ago now? I know you announced Oregon back in January, but what is the perspective on the transportation security market in the U.S. for this year?

Well, I think the U.S. is beyond Europe. And this is clearly demonstrated by our wins. We are making an effort to educate the market here in terms of what can be done. The issue is availability of budgets, but as you mentioned, some budget is being now focused in this area. But beyond budgets, there is also the need for the market to really get educated. I think one of the, great benefits that Verint has is we cannot only discuss with customers what can be done, but we can actually point them to successful implementations in other places around the globe, and that, I think, will help to accelerate the adoption of new technology in the U.S. But at this point, I can only say that we believe the U.S. market is behind and we believe that they will catch up.

So what is the negating factor now? The money is there, as you said earlier, there's a more general acceptance of video, surveillance, I met last week with Digital Recorders, and I guess you have some kind of a relationship or agreement with them in deploying video on buses where they have their electronic signage. But what will break the market open now that you have the money, you have the recognition that the systems are valuable and viable? What does it take to get the operators to actually deploy?

I think they'll deploy something. The question is, whether they go all the way and deploy the latest technology and what we think is the right technology to provide an actionable intelligence. I think it's going to be a combination of factors that we need to educate them that this is not just enhanced security, this is also going to help them to improve operations, and improve customer service. I think those are very important points. I think these, what find in Europe, you mentioned buses, we find in Europe that bus customers actually not only enhance security but they increase their revenues because the perception of the public was post-implementation that it's more - - that it's safer to use the public transportation and as a result more people were using buses than before.

We also helped them to reduce vandalism which is a big cost for bus operators. There were a number of factors that they realized are, presenting a good ROI case in addition to improving security, and when they get to that point, they're obviously excited about deploying our solutions. We need the make this education. It's a process, it takes investment, it takes time. We are doing it. We hopefully - - the rate of success that we'll have will determine of growth in the U.S. transportation market.

Are you in pilots, albeit unannounced pilots, with metropolitan transportation systems, rail and bus, throughout the U.S.? Other than what's been announced?

If it's unannounced, then let's keep it unannounced at this point.

Okay. All right, guys, congratulations. Keep up the good work.

Your next question comes from Scott Zeller.

Good afternoon. I'm wondering if you can tell us on the sales hires that you've been doing, do any of the new hires have an affinity more towards the business intelligence side of the business?

We tend to hire along the growth perspective of the businesses. So, it may not be exactly proportional, but more than two-thirds, actually 69% of our business is security and 31% of our business is in business intelligence. So naturally we are hiring more in security than in BI. But we certainly have expanded our BI group, both in sales and customer support. And we think there is, as I've said before, there is two factors that could contribute to acceleration growth areas. It's improved IT spending environments, and it's the early adopters that we need to get past that phase. I think when we recognize that those two factors are being improved, then obviously we will have the motivation to accelerate our hiring of sales people for the BI market.

Okay, thanks. And also, could you give us an update on the vertical, the retail vertical, tell us what you think the opportunities are? We've heard about a couple large wins and projects that you've had ongoing, could you just give us an update on the retail vertical?

Well, we believe there's as I mentioned a significant opportunities in the retail industry. The two large accounts that we announced, Home Depot, and Target we continue to deploy into this account for new stores, as well as for new analytics. And in terms of our focus, we certainly are focused on the big box retail. We think that we've got the right solution. They have the need and we are making efforts to win new accounts and time will tell how successful we'll be.

Okay, thanks very much.

Your next question comes from Paul Coster.

Yes, just a quick question on gross margins, then. Can you give us some sense of what is the bouying gross margins up and do you still expect them to get to 60% and if so when?

Yes, we do. So let's look at historically, we increased gross margin by 2% in aggregate each year over the last two years. We started this quarter in Q1, we expanded gross margins by 20 basis points. And although gross margin expansion can fluctuate from quarter to quarter, and will continue to fluctuate, there is a continuing driving factor, which is the shift from hardware to software. And we believe that our customers, as we continue to provide them with IT friendly solutions, will be more in favor of supplying the hardware themselves, which will continue to improve the gross margin for us, as the sportswear carries higher gross margin than hardware. So we expect gross margins long term to grow into the 60's. I think that if you look at our guidance for this year, we are basically the $1.02 guidance, if you build a model, implies 35% pro forma operating income expansion. In Q1 we had a 36% pro forma operating income expansion, and we, along with our guidance, we expect to continue with this 35% expansion rate. And we believe that this expansion in operating income is going to be a combination of factors. It will be a gross margin expansion, but also improved leverage in our operating expenses. We have improved by 90 basis points our operating expenses in Q1, and this was leveraging things that we made in 2004.

Is there a marked difference in the gross margins between the segments and/or your customers or geographic segments?

No, very similar gross margins. Very similar hardware, software, service mix. So there's no major differences.

Great. Thanks.

Your next question comes from Alan Weinfeld.

Congratulations guys. Looking at the cash balances continuing to build as you generate cash from operations, and I know your acquisition criteria are extremely stringent and accretive when you do them. Have you ever looked at a possible small share buyback of the stock between 30 and 35 or is that just out of bounds?

We continue to believe that there is very, very large actionable intelligence market opportunity. I mentioned before that we are operating in certain verticals, that we may expand into new verticals. We all have different opportunities for Verint in expanding its actionable intelligence space. So regardless of the share price, obviously there could be a share price that our Board will think differently, but I still advocate that Verint's tremendous growth opportunities and potential - - potentially we can consolidate what will be - - what is building to be a very large market. And I think that's the best usage for our cash.

Thanks, looking forward to it.

At this time, there are no further questions. Are there any closing remarks?

Operator, thank you. Thank you, everyone for participating in our call tonight. Have a great evening.

This concludes this evening's conference call. You may now disconnect.