Verint Systems Inc (VRNT) 2005 Q2 法說會逐字稿

Good afternoon, my name is Renee, and I will be your conference facilitator. At this time I would like to welcome everyone to the Verint Systems, Incorporated second-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]

Thank you. Mr. Roden, you may begin your conference.

Good afternoon and welcome to Verint's second-quarter conference call. I am Alan Roden, Vice President of Corporate Development and Investor Relations for Verint Systems, with a trade 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 I start the call, I would like to mention that certain statements that are not historical are forward-looking, within the meaning of the Private Securities and 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 than those that may be expressed or implied by such forward-looking information. Current numbers and percentages have been rounded, and may be approximations. Any redistribution, retransmission or rebroadcast of this call in any form without express or written consent of Verint is strictly prohibited.

For a 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 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, Verint.com. Please refer to the press release for a reconciliation of our GAAP and pro forma net income discussed on this call.

The content of this conference call is time-sensitive and reflects the Company's perspective as of September 7, 2005. We undertake no obligation to update the content of this call including any forward-looking statements given events, circumstances or expectations change after this call. Any questions regarding our guidance and our business model should be addressed during the conference call, as we do not intend to address guidance and model-related inquiries following the call.

During today's call, Dan Bodner will present a perspective on our business and market trends, and Igal Nissim will present a more detailed review of our second-quarter results and financial guidance. We will conclude with a question-and-answer session.

With that, I would like to 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 second-quarter results for the period ended July 31, 2005. Our second-quarter results represent record quarter for Verint in terms of sales, operating profit, and net income. Total sales increased 24% year-over-year due to continued demand for excellent challenging solutions. We experienced growth in both the Security and Business Intelligence market. As we delve into the Security market increased 31% year-over-year, and 4% sequentially. Business intelligence market increased 11% year-over-year, and 2.8% sequentially. We delivered our 15th consecutive quarter of pro forma growth margin expansion.

Operating expenses as a percentage of revenue decreased by 60 basis points, and overall, we increased our pro forma operating margins sequentially by 100 basis points to a record 12.1%. Improved operating leverage combined with our revenue growth resulted in our pro forma operating income increasing 46% year-over-year, and 13% sequentially. We ended the quarter with backlog in excess of one quarter of revenue, and continue to see demand for our Actionable Intelligent solutions. Today we are increasing fiscal 2005 guidance for sales to a range of $303 million to $306 million, and pro forma diluted EPS to a range of $1.02 to $1.05.

During the quarter, our Actionable Intelligent solutions were selected and deployed by a wide range of customers, across the Security and Business Intelligence markets. In the security market, our Network Data Solutions helped government and Commercial organizations protect threats, improve the security of their facilities, and enhance public safety. During the quarter, we experienced demand for our Network Video Solutions from new and existing customers across our target markets, including government, mass transit, airports, and seaports, and critical infrastructure.

Customers we recently received orders for include, government organizations, such as United Nations, which is expanding the deployment of Verint's network video solutions to enhance the security of certain areas of its worldwide headquarters in New York City, as well as expansion orders from several federal government customers to protect highly sensitive facilities in the Washington D.C. area.

Mass Transit systems such as the PATH rail system, which is the train line that connects lower New York City to New Jersey. Verint's Network Video Solutions will be deployed across the PATH train system to help secure areas such as passenger platforms, rail yards, and other sensitive rail infrastructure, and improve public safety in the New York City area.

Seaport customers such as the Port of Houston, the largest port in the United States for handling foreign cargo, which is deploying Verint's Network Video Solution to enhance the security of certain portions of its cargo facilities, passenger terminals, and 25-mile-long sea perimeter. With the Port of Houston, Verint now has three of the top five largest ports in the United States as customers.

Critical infrastructure customers such as the new Public Order Authority customer, which is deploying Verint's Network Video Solutions to enhance security of its water distribution infrastructure, including pumping stations, storage facilities, and reservoirs. Consistent with our commitment to develop innovative solutions to address the needs of our target market, next week, Verint will be introducing our next generation Network Video Solutions for the mass transit agency at the [Aegis] security event in Orlando.

Our new Mass Transit Video Solutions will support our early success in this industry, and incorporates many features developed as a result of our extensive experience working with mass transit customers around the world. Our new Transit Solution is designed to enable transit authorities better protect threats, enhance emergency management, and more effectively conduct large-scale investigations. During the quarter, we received a high level of interest for our Network Video Solutions from the mass transit industry.

In total, we received order for mass transit customers in more than ten countries, across the Americas, EMEA, and Asia-Pacific. Verint believes that there is a significant long-term opportunity worldwide to help the Transportation industry improve security, and is committed to this market.

As far as our strategy to strengthen our presence in growth markets, and expand the capabilities of our Actionable Intelligent Solutions, today we signed a definitive agreement to acquire substantially all of the Network Video Security business of MultiVision Intelligent Surveillance Limited. Based in Hong Kong, with offices in China, the acquisition of this business will extend Verint's presence in the Asia-Pacific region, and will better position Verint to participate in the anticipated growth of this market.

Nearly half of MultiVision's 100 employees are in product development, providing Verint a local R&D group that is focused on the regional requirements of the Asia-Pacific market. The acquisition will also provide Verint an experienced management team, to support the growth of our Asia-Pacific business.

Under the agreement, Verint will acquire the Network Video Security business of MultiVision for approximately $48 million, subject to certain adjustments. The consideration will be paid to MultiVision Intelligence Surveillance Limited, which will remain a public entity while under acquisition, and continue to be listed on the Singapore Exchange. The acquisition is expected to close in approximately three months, and to be nondilutive to various pro forma EPS in fiscal 2005.

In the Security market, our Communications Interception solutions enable government and law enforcement organizations to intercept communications for a variety of purposes, including governing 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. An example of some orders include, a multimillion dollar order for our Communication Interception Solutions for a new International law enforcement customer in a new country for Verint.

This new government customer is deploying our communication Interception solution nationwide, to better generate intelligence for intercepted communication from wireless networks. An order for a new U.S. telecom provider customer. This customer is deploying our Communication 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 Communication Interception Solutions, to help comply with local government mandates related to intercepting voice communications over wireline networks. Expansion orders from existing government customers, including a multimillion dollar expansion order for our Communication Interception Solutions for an international government customer. These orders are being driven by our customers' needs for more intercept capacity, new data in voice analytical capabilities, and the ability to intercept emerging [oracles], such as packet data and voice-over-IP.

In the Business Intelligence market, our Actionable Intelligence Solutions enable enterprises to capture and analyze customer interactions, and other data to help enhance business processes, and drive revenue and profitability.

Recently, our ULTRA solution was selected by new customers across a wide range of industries. Examples of new customers include Edward Jones, which is deploying Verint's ULTRA solution to support the quality of its original bench operation. ULTRA will help Edward Jones enhance personalized service it provides to its individual investment customers. 21st Century Insurance, which is deploying Verint's ULTRA solution to support the Company's insurance operations in the Pacific Northwest and Southwest. ULTRA will enable the 21st Century to generate more accurate customer intelligence, and deliver outstanding service. Alabama Gas Corporation, which is deploying ULTRA at 45 contact center locations. ULTRA will enable Alabama Gas to provide more corrective service and faster response times for its more than 500,000 natural gas customers in the Southeast U.S.

One of the largest business process outsourcers in India, which is deploying Verint ULTRA solution to support its multinational customer base. At this outsourcer, we use ULTRA and its analytics to enhance the service it provides to its customers in the U.S., the UK, and Asia. Behind our momentum in the Business Intelligence market is the growing recognition of the value of Actionable Intelligence, in improving both enterprise processes and performance.

We recently announced that John Hancock, a leading financial services customer is experiencing significant service enhancement based on their deployment of our ULTRA solutions. ULTRA analytics has enabled John Hancock to identify and address the root cause for process breakdown, both inside and outside the contact center, that affects the quality of service for customers of this section. ULTRA analytics goes beyond traditional performance management, enabling businesses to understand not only what is happening in their operations, but to also identify the underlying causes.

As part of our strategy to address the growing interest of our Actionable Intelligence Solutions, we continue to expand and strengthen our relationship with key partners around the world. During the quarter, we announced that Verint extended its partnership with British Telecommunications. The expanded partnership adds Verint Actionable Intellegence contact center Solutions to BT's standard solution portfolio. This expanded relationship built upon our original joint success, enables BT to offer varying solutions to its entire customer base across the UK, Europe, and the Americas.

Last week, we extended the capabilities of Verint's Enterprise Actionable Intelligence portfolio through an acquisition of the Opus Group, a small privately owned U.S.-based company in Illinois. Since its formation in 2002, Opus has been providing performance analytic solutions to large enterprises for contact centers and back-office operations. Opus helped process intensive enterprises, improved performance, and reduced the cost of their operations, by analyzing data collected from across the enterprise, and identifying areas for improvement. The acquisition extends our Actionable Intelligence capabilities for enterprise markets, and is expected to be neutral to pro forma EPS in fiscal 2005.

I would now like to turn the call over to Igal to discuss our second-quarter financial results in more detail.

Thank you, Dan. The second quarter represented a record quarter for Verint, and our 15th consecutive quarter of sequential revenue growth.

In the second quarter, we had record sales of $74.7 million, representing year-over-year growth of 24%, and sequential growth of 3.7%. Sales of our Actionable Intelligence Solutions in the security market increased 31% year-over-year, 4.1% sequentially, and represented 69% of our total sales. Sales of our Actionable Intelligence Solutions in the Business Intelligence market increased 11% year-over-year and 2.8% sequentially, and represented 31% of our total sales.

Looking at the geographical breakdown of sales in the second quarter, we generated 48% of our sales in the Americas, 35% in EMEA, and 17% in Asia-Pacific. In Q2, pro forma gross margins increased to 56.7% from 56.4% in Q1. This quarter represented our 15th consecutive quarter of pro forma gross margin expansion.

Net research and development expenses for the second quarter represented 12.9% of sales. SG&A expenses represented 31.7% of sales. In the second quarter, we had pro forma income from operations of $9 million, representing year-over-year growth of 46% and sequential growth of 13%. Interest and other income for the second quarter was $1.7 million, essentially unchanged from Q1.

Our pro forma effective tax rate for the second quarter was 22.4%. Pro forma net income for the quarter was $8.4 million, or 11.2% of sales. Pro forma diluted earnings per share was $0.25, based on a weighted average share count of 33 million shares. On a GAAP basis, diluted EPS was $0.22.

Pro forma results discussed today exclude amortization of intangible assets, and one-time charges 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, bank deposits and short-term investments increased to $265 million from $250 million at the end of the first quarter. During the quarter, we generated $15 million of cash flow from operating activities. In Q2, our DSOs decreased to 48 days from 51 days in Q1. We continue to expect DSOs to range from 60 to 80 days. As of July 31, 2005, we had total assets of $429 million, working capital of $215 million, and shareholders equity of $302 million.

Turning to guidance. We are introducing guidance for the third quarter of fiscal 2005 as follows: Sales of $77 million, and pro forma diluted EPS of $0.26 based on 33 million weighted average shares outstanding. We expect Q3 diluted EPS on a GAAP basis to be $0.21.

For fiscal 2005, we are increasing guidance for sales from a range of $296 million to $300 million, to a range of $303 million to $306 million, and pro forma diluted EPS from $1.02 to a range of $1.02 to $1.05, based on 33.1 million weighted average shares outstanding. Our new guidance anticipates that the acquisition of MultiVision's Network Video Security Business will close in approximately the middle of our fourth quarter.

We expect fiscal 2005 diluted EPS on a GAAP basis to be in the range of $0.85 to $0.88 excluding Multivision acquisition related charges. We believe that the markets for Actionable Intelligence Solutions are in its early stages and our guidance reflects continued demand for Actionable Intelligence Solutions worldwide.

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

[OPERATOR INSTRUCTIONS] We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Paul Coster with JP Morgan. Mr. Coster, please go ahead.

Hello, can you hear me?

Yes, we can.

Good afternoon, Dan. Can you give me or give us more color on MultiVision please, for instance, what kind of revenues have they realized in the last 12 months? What kind of margin structure? And what is their momentum? And then I have a follow-up question, if I may.

Okay. MultiVision is a publicly, growth company obviously. A lot of public information, but just to give everyone a review, last year which ended March 31, 2005, they did approximately $21 million, U.S. dollars. And the recent quarter which ended in June, they did about $5.5 million in revenue.

The Company is based in Hong Kong. It is listed on the Singapore Exchange. We are buying substantially all the video business of the Company, but MultiVision is also engaged in some other businesses. They have a SmartCard business. They are involved in some service businesses that are related to video, but are not product-based video businesses.

Basically Multivision will survive the transaction, and will continue to be publicly traded, and will continue to preserve some of the nonvideo-related assets that we are not buying.

How does the margin structure for the proportion of the business that you have acquired compare to that of Verint?

So basically if I think about the recent quarter, five-plus million dollars in revenue, there's going to be some adjustment that which, you know, one, because we are not buying the entire company, and second, because they are not based on -- their financials are not based on U.S. GAAP. We are -- we have done preliminary analysis of these adjustments. We will provide over time more specific information, but you can think about their recent quarter, the one that was disclosed, in terms of what it means to Verint is approximately $4 million to $5 million of revenue.

In terms of margins, what we are saying at this point is that it is going to be nondilutive to Verint in 2005.

Can we infer that it will be accretive in '06?

We are three months away from closing. It certainly will be a lot of opportunities for us. We may not even close by our next conference call. So anything that is related to 2006, we will defer to the next conference call.

Okay. Got it. Last question, why are you making this acquisition? Is it the technology, or the customer sort of access that it gives you? What is the primary motive?

Well, we were searching for a company in Asia-Pacific. We have decided that we want to participate in a bigger way in this region. We believe that there is a lot of investment in infrastructure in the region, and also as a result, a need for security systems in that region. While searching for companies, there are a lot of Asian companies that have VCRs, basically they are focused on low-cost VCRs, and we were not interested in this kind of acquisition.

What struck us about MultiVision is they are technology-oriented, and they are solution-oriented. And, you know, they have 100 employees. Nearly half of these employees are in R&D. I spent a couple of weeks in the region. I met a lot of the people. I was very impressed by their R&D guys that we found there. It is technology. It is visionary. They have a couple of PhDs. They are working on analytics.

A good combination of a company who is in the region. They have customers that are in the same target markets that we have. They have airports like Beijing airports, and Hong Kong airports. They have mass transit customers, government customers, so we like the fact that they are inventing solutions, and not a commodity product. We like the fact they are investing in R&D, and the combination was very attractive for us. We think that to be a true global player, you not only have to have the best technology, but you also have to have people on the ground with technical capabilities, that can localize that product, and make sure we are delivering to the customers what they are expecting and we think we can achieve that with the combination of Verint technology, MultiVision technology, and MultiVision local R&D presence in the region.

Okay. Thank you. I will hop back on the queue.

Your next question comes from the line of David Gremmels with Thomas Weisel Partners.

Yes, thank you. One quick one on MultiVision. Just want to make sure I heard you correctly. Of the $21 million in last fiscal year's sales, was that all video, or if it wasn't, how much of that was the part that you are buying?

Well, the majority of the revenues of the Company were related to video. So I did -- what I said related to the five-plus-million dollar revenues in their recent quarter. When you back off what we didn't buy. When you do some adjustments related to different financial systems, you know, we think about it as a 4 to $5 million quarter relative to what we bought from the public listed MultiVision.

Okay. I understand. And then in the Video Security business, question on the New York MTA contract. I know there were three teams competing for this, Lockheed won it. Was Verint on a team? And if so, who were you teamed with?

Well, Verint has been involved with the MTA. I also want to say that as a New York-based company, I am very pleased that MTA is spend a lot of money on enhancing security. We obviously are very interested in the business. We have worked with Lockheed Martin before, and we have a good working relationship. At this point what I can tell that you is that we believe that there was no selection made for the video portion of the security enhancement, and we are, you know, very hopeful that MTA and Lockheed Martin will select Verint. We think we have the right product.

As I mentioned before, we won mass transit customers in ten countries last quarter. We won the PATH rail line. We have other rail lines that we won in the New York area. We have a lot of experience, and we certainly are going to give it a try to convince Lockheed Martin and MTA, that we have the best solution to the New York City area.

Do you have any idea on the timing or the potential size of the opportunity if you were to win it?

Actually, we do have an idea, but unfortunately, we have -- we have not got permission to discuss this on this call.

Okay. And then, you know, maybe you can make a comment just on the outlook for these types of opportunities in general. Are other cities pursuing similar projects? And have you been in touch with, you know, any other opportunities like this?

There is definitely a growing interest with mass transit customers worldwide, including cities in the U.S., but, again, not just in the U.S. I think it is a worldwide market that is looking to enhance security. Some projects are being contemplated in a similar approach to MTA which is to provide an integrator with a comprehensive solution -- for a project with a comprehensive solution. Other initiatives are more -- buying on a piecemeal basis, so it is a variety of ways of acquiring security solutions.

We think that with NEXTIVA Transit, which we are going to launch next week officially in the Aegis show in Orlando, that we have the most comprehensive solutions that addresses all parts of the mass transit system, including the fixed assets, as well as the mobile asset of mass transit, so we can secure the tracks, the cars, the platforms, the rail yards, reusing wireless technology, to make sure that all of these video outlets are connected into one comprehensive picture, that is available to the decision-makers when and where they most need it.

So we certainly believe in this market. We are committed to this market. And we are getting ready to get a share of this market.

Okay. Great. Last one. Just a modeling question. Your interest income has been running above our estimate for a couple of quarters. Is there anything one-time, or anything unusual in there?

I think there is nothing unusual, but interest rates went up, and our cash is going up. We generated $16 million of cash this quarter. And, again, a good chunk of cash last quarter. All of that combined is showing somewhat higher interest income.

What interest rate would be a good -- should we be using for modeling, on those cash deposits?

3.25

Okay. Thank you.

Your next question comes from the line of Daniel Meron with RBC.

Thanks, Congratulations on a good quarter. A couple of questions here. Can you elaborate more on the trends you are seeing in the business intelligence market either on competition, or on business demand out there, and what kind of solutions you see?

We certainly see enterprises are interested in better understanding the processes across the enterprise, so they can be more effective in the way to deliver services to their customers, and at the same time experience improving the bottom line. So there is certainly an interest by the business intelligence market in solutions that have a good ROI attached to them, and the way we think about our Actionable Intelligence offering, is that it's the -- it is giving the enterprises the ability to understand better the customer experience, through analyzing the interactions between agents and customers, but take this information and intelligence beyond the context and throughout the enterprise, so they can streamline processes and improve the performance of their employees, and improve the bottom line. So I think there is a growing recognition by enterprises that there are solutions out there that can provide that kind of ROI, and that's where we are focused. That is our sweet spot.

Thanks, Dan. Can you maybe tie in the recent acquisition that you announced last week, Opus, and describe how it fits into the strategy? And, you know, maybe talk a bit about the services, if you plan on increasing that portion of your business?

Okay. So -- first part is, it's also what they do. As I said, what we do with our ULTRA solution is basically analyze the unstructured information that we collect in the contact center, and we bring this benefit throughout the enterprise. What Opus does, is they have the platform that enables them to collect more information from the enterprise, so that it allows us now to look at information collected at a contact center, and additional information collected through a enterprise and makes better analysis and better recommendations, as to how to improve performance and then at some point also reduce -- improve performance by reducing manpower, which gives them the ROIs.

So the way we think about our ULTRA Analytics Solution, is you don't always want to deliver technology to customers, you want to deliver solutions that provide some ROI, and more and more we are helping our customers implement these solutions, so that throughout an engagement, they can experience the benefits, and Opus has the same very concept. They go into an engagement, and initially they connect the product, the platform to a lot of different sources.

They collect different information from different sources, and then they have the enterprise to analyze this information, and monitor performance metrics so they make sure that while the enterprise is changing processes, moving people around, performance metrics show that performance is going up so that they are achieving ROI, but not compromising in quality. So that's where we have a great fit between Verint and Opus because it is all about taking a lot of information that is Niagara Falls information, and spilling this information, in order to provide enterprise with a very specific recommendation that can help them achieve their ROI.

In terms of services, the second part of your question, while anything that has to do with analytics has a component of services, the way we approached a customer is not on a professional services basis, but it is a solution sale. So our moral for a customer is predominantly a fixed-price type of engagement where we implement the product, we help the customer with some professional services to achieve the ROI, and then we basically at the end of the engagement we are paid, and we are out of there.

So I don't think -- I don't think that we are going to increase the services portion of our offering substantially, but it is going to be somewhat an increase.

Okay. Thanks. And then, can you talk a bit more -- are you going to go after more acquisitions in the next, say, six months or so, or are you going to, you know, rest here and just -- say just the last couple of acquisitions.

We don't have specific quota for acquisitions. We are acquisitive. As we said in previous calls, we have a large pipeline of potential acquisitions.

The Actionable Intelligence market is highly fragmented, and there is a lot of potential targets. And we -- basically are taking our time to make sure that the companies that we are acquiring are the right speed for Verint, and that we will be able to integrate and leverage the assets of their company.

So in terms of timing, it happens to be that we just closed -- or we signed and closed one acquisition within one week, but you know, in terms of future timing, it is going to happen whenever it is going to happen. We are not timing it from any perspective.

Okay. And then just quick follow-up on that. You raised guidance by a few million dollars on the topline. Can you give a sense of where it is coming from? Coming from the Opus acquisition? Is it coming from the MultiVision one? Or is it just a function of the market growth?

Well, the way we think about guidance. It's from a midpoint, we raised guidance by $6.5 million for the year. Some of it will come from acquisitions. And some of it we believe is going to be coming from our organic growth. Where we think -- where we see growth is -- we certainly have a better view of our Business Intelligence market.

And we advance in the year, we have a better visibility into the year. And the growth will come from all the components that I mentioned.

Thanks Dan, and good luck going forward.

The next question comes from the line of Scott Greiper from Unterberg.

A couple of questions, first on the gross margin. Pro form a was 56.7% which was up very marginally sequentially, up less than 100 basis points year-over-year. That seems to be lower than what we have been seeing year-over-year gains Q1, for example, was up close to 200 basis points. Should we be reading anything into that, that the margin growth is slowing? Year-over-year?

The margin increase in Q2 was 30 basis points sequentially.

Sequentially, right.

Right. We are not giving guidance as to what is going to be the gross margin expansion for the year. We did say and we are saying again that gross margins will fluctuate quarter to quarter.

The improvement in gross margin is partially driven by the market, as more customers are comfortable delivering the [oracle] points themselves. We are shifting revenue into software and as a result the mix is creating a better gross margin. We believe that this trend is still there. Again, it will fluctuate, but our long-term view, is that we expect gross margins to continue to expand into the low 60s. And predominantly this will be driven by greater software sales.

What is the time horizon, when you say long-term view?

Three to five years.

On the tax rate, 23% and change, that's higher than within the range you had forecasted, but higher than Q1. What should we be forecasting going forward?

You should still look at -- you know per the guidance we gave, we continue to believe the tax rate to be as high as 23%. And this is on a pro forma basis.

Lastly, you had said that one the contracts received on the Security side during the quarter was for a U.S. service provider to comply with CALEA for voice-over-IP interception. Since this I don't believe has yet been legislated in, are you seeing more demand for packet-based networks to comply with CALEA requirements?

First, you know, we do see certain service providers acting ahead of the, it is not in the legislation, the legislation is in force, but ahead of the standard.

Right.

So that that is a correct observation. Generally I think there is a consensus among service providers that CALEA is here to stay, and as the technology continues to change with a third-generation, 2.5 generation, and a lot of different new products and so forth, that they will have to comply, and they are getting ready for that.

Okay. Thank you, guys. Congratulations on a good quarter.

Your next question comes from the line of Brian Ruttenbur with Morgan Keegan.

Yes, thank you very much. Great quarter. Just trying to understand also a little bit of guidance going forward. I know that you've already answered this a couple of times, but I am going to try it from a little bit different angle. I am trying to understand if, in fact, your -- this deal closes, let's say mid-quarter, or near the end of the quarter. Can you tell us how much your first acquisition is going to add on the Business Intellegence side, and it looks like it will be 4 or 5 million per quarter at least, this video company out of Asia is going to have, I am just trying to understand how much the first acquisition will add on a revenue basis per quarter, since you already closed that one?

Okay. First, just to --

that was a rambling question.

I am not sure I -- maybe I didn't hear correctly, but planning to close the MultiVision acquisition in mid-Q4.

Right, the MultiVision acquisition but you already closed one acquisition.

We already closed Opus on September 1st.

Right. How much is that going to add on a quarterly basis?

Opus is in a smart position and we are not actually putting the specific guidance, in terms of how much is going to come from Opus. We are -- since we closed it, we are integrating the business, and, you know, there is going to be some contribution into the five months between September and January 31st of next year, but we are not giving specific guidance on this acquired company.

We -- in terms of MultiVision, because there is uncertainty as to the time of closing, that that is one the reasons we decided to provide a range for the year. But as I said from the midpoint -- the midpoint of 298 in our previous guidance, and going up to the midpoint of 304, for you know, the new guidance. It is about $6 million, and some of it will come with Opus, some will come with MultiVision, and some will come organically. What is exactly the mix, that depends on many, many variables.

Okay. Said another way, if MultiVision does not close, you would be still comfortable with the low end of the guidance range that you have given?

I don't want to answer any hypothetical questions right now. We believe it will close in three months, and we set the guidance based on that belief.

Okay. Maybe along the macro side, since I have tried to grind down some, but on the macro side, I am just trying to understand what do you need? Do you need geographic presence? Do you need more on the surveillance side? Do you need more on the business intelligence side? What do you need if you were out there shopping with a shopping cart right now. Do you need more presence in the Middle East, Asia. Do you need it in the technology on the video side? Can you give us some idea where you are going?

Well, we certainly are interested in technology. This is an early stage market, so if we can integrate more technology in addition to our organic development, and we have, you know, 400 to 450 employees in R&D who we have investing a lot of money in organic development, but clearly technology is something we always look at, when we think about acquisition.

In the case of geographical presence, we believe that in Asia-Pacific, it is a growth market. We believe they are investing, and will invest long term in security. There is a great need for security there. We thought that to develop the presence over there, obviously we have offices in many countries in Asia-Pacific, and we are selling -- but we saw that we can quantum leap by the combination of MultiVision and Verint. So in that be replicated in other regions worldwide? It could if we identify a company that we think can help us accelerate into a specific country or region, then we will -- we will do another one similar to the MultiVision rationale.

Okay. Last question then. Competition on the mass transit video side. How are you seeing pop up directly, since you are getting into all these new markets. Who are you directly competing against?

I think that everyone will try to go after the mass transit market. I think in some cases, Mass Transit Authorities will buy [VPR]. We see that historically. Mass transit authorities bought different products for their mobile assets and fixed assets, and we think that Verint is unique, because we can actually give a comprehensive solution to mass transit authorities, because in some cases, you want to be able to monitor and control your environment, and you really need a comprehensive view of what is going on, on the train, as well as on the platform, and Verint is kind of unique in that sense, in our ability to move video-over-IP, through wireless networks.

We have some unique capabilities in that regard, but like other customers -- like other markets that are emerging, this will attract everyone. Some will offer inferior technology, but will still win deals. You know our job is to educate the market by our solutions, and we are trying to win as many deals as we can, and get a market share, but we'll see everyone.

But you don't see anybody emerging as your #1 competitor right now?

We don't know if anyone yet has announced a specific mass transit solution that is similar to ours. So we think that our announcement and the comprehensive view and management that we can provide to customers is unique, but I am sure others will follow.

Okay. Great, thank you very much.

Your next question comes from the line of Jeff Nevins with First Analysis.

Good afternoon and thanks. One more follow-up on Opus. My understanding the business model is more of a development tool with a fair amount of consulting. Is that fair? And how do you expect to -- do you expect to give some of those services over to your existing base of partners?

If you think about the way we sell our ULTRA Analytics, it is not much -- it is not dissimilar. We have an analytics tool that we are providing the customer, but we are also following with our people to ensure that the customer can maximize the benefit.

And I think that in terms of solution selling going forward, with or without Opus, it is our strategy to be able not just to throw on the customer a piece of technology, but to stay with the customer for a period of time, to ensure the customer is actually using and benefiting from the tool the way we think they can.

So Opus is really not dissimilar. Yes, it is a tool that they -- it is a software tool, that they will install within the customer network, and they use the tools to collect data from different databases across the enterprise, and once this tool is fully deployed, now the Opus people are able to work with the customer, analyze the data, and understand the performance metrics that the customer is interested in.

Because it's different enterprises will be looking for different kind of Actionable Intelligence. Intelligence cannot be actionable unless it is very specific to solve a customer's problem. With that regard, office people are staying with the customers to ensure that the right performance metrics are defined, are monitored, and throughout the period of engagement, that the customer -- when the customer takes the steps to improve and improve performance and reduce costs, the office people are helping the customer to implement the system.

Okay.

So that's a model that Verint is going to enhance and replicate through our customer base.

Okay. Thanks. And my last question is, if you look at the growth you are expecting in your Security business over the next two or three quarters, where do you see more momentum on the video side, or on the communication interception side?

Okay. We see that the market for both applications is equally strong. We indicated before, that we believe that the Security market -- and this is true for both video and communication interception is growing between 20% and 30%.

We had actually Verint had experienced a growth level of 35% last year, and in the first six months of this year, our growth in Security was 32%. But the way we maintained it, the way we think about our guidance for the year for 2005 is 20-plus percent growth in Security, and in the teens for VI. And this is the way we believe that you should think about the markets we participate in.

Thank you.

Your next question comes from the line of Scott Zeller with First Albany Capital.

Hi, good afternoon. I wanted to ask if you could give us some sense on the bookings trends of your video solutions. You didn't mention in your earlier comments if there were intense transactions, but can you give us a sense of the size of the bookings -- ?

We don't quantify bookings. So with this -- you know, we basically maintain that our backlog is in excess of one quarter of revenue, and since over the last 15 quarters, we increased revenue every quarter, our backlog is still over -- you know, in excess of one quarter of revenue.

Okay. And then can you comment on the status with the London Underground, where you are in the rollout, and comment also on the local press articles, Network Video by the Underground.

What was the last part of the question?

The article in the local paper this week about the Underground's use of network video.

Yes, we -- toward the end of last year, we were selected by the London Underground after a lengthy evaluation process, and we started deployment this year. We believe that, you know, this is still the early stage of deployment, but a lot of sensitivity about London Underground at this stage. Following the unfortunate events, and I don't like to comment specifically on what's going on there.

In terms of the press, the local press, we believe that there is no doubt that Mass Transit Authorities can benefit from Actionable Intelligence, and actually, I like to, not specifically to London Underground, I think it is relevant to explain who will receive the benefit. Obviously, we would like to help in preventing terrorist activities, and some of the analytics that we offer the market can be useful in doing that, for example, identifying a package on the tracks, or identifying some unauthorized people in the tunnel. So there are certainly benefits in our solutions for helping and preventing such events.

The second benefit is helping the Mass Transit Authorities handle emergency situations. Once there is an event, it can be very useful to use our solution, in order to better manage the deployment of first responders into the various areas that needs help.

And the third part of the benefit -- the third benefit that we provide is in the forensic area. Following an event, our tools are equipped with certain capabilities that allow the investigation to go through much faster and result in better intelligence. So there is no doubt in our mind that we provide a lot of benefits to Mass Transit Authorities, and this is why we are, you know, investing and committed to this market.

So, again, not specific to London Underground, but I think it is true for any Mass Transit Authority.

I guess more specifically, is the rollout still under way, or has it been halted in the Underground? When will it be completed?

I can't comment on specifically what the London Underground Authority is contemplating on doing.

Or if its on schedule still, or no comment?

No comment.

Okay. Thank you.

Your next question comes from the line of Israel Hernandez with Lehman Brothers.

Good afternoon, guys. You commented a couple of questions ago, your thoughts around the industry growth rate, 20% to 30% for [DSS],and teens growth for EBI. Do you guys think you can achieve those targets or those growth rates without acquisitions, or will you need acquisitions to kind of grow into that number?

Well, we -- you know if we look at the first six months, we can judge historically the first six months, there was no acquisition that was done this year, and --

on a prospective basis. On a go-forward basis.

Well, on a going-forward basis, it is very -- since we are acquisitive, it is very difficult to say what would happen if were not acquisitive.

Differently, what do you think the organic growth rate of the business is?

We gave a guidance last quarter of 296 to 300. And last quarter I mentioned if you think about that guidance, 20% plus growth in Security. So based on last quarter's comments before the acquisitions were contemplated, we also had a sense of 20-plus percent security growth.

But obviously because it's a fragmented market, and because there are opportunities for acquisition, think it will be, you know, foolish for Verint not to acquire. We want to position ourselves not only for growth this year, but we want to make sure that we have strong presence in all geographies, and we have a very broad product portfolio, where we can participate in this market for the long term, and this is the reason why we are doing the acquisitions.

Great. So we should look at acquisitions as additive to the 20% growth for the DSS business?

My comment was only relative to 2005, and we are not giving any 2006 and beyond statements, other than the statement that I believe that the growth in the Security market will continue at 20% to 30% for many years, because security is still a major issue for governments and enterprises worldwide, and because it is a very large infrastructure that needs to be upgraded, and it will take years.

Okay, thank you.

Your next question comes from the line of [Ed Littman] from William Blair.

Hi, guys. Just kind of a follow-up to the last caller's question on the business segment. Can you talk about what the business trends that you see out there that need to show up, in order to start seeing that growth kind of reaccelerate from the low teens back up into more of a consistent growth rate on the security side?

I think that the main challenge that we have in the enterprise market is educating the market. I think we got customers that have experienced the benefits of our systems and are very excited about us, and that is very encouraging, because we are not just, you know, thinking about historical benefit. We do see customers that generate benefits from our technology.

But I think that, you know, in terms of Verint growth, it is a market reach. We need to have more customers aware of this technology, and I think as we grow and as we acquire companies like Opus, it does help us to get the word out that Actionable Intelligence is not recording, it is not performance management, it is providing broader benefits to the enterprise, on not just on a contact center basis, but on an enterprise-wide basis.

Great, thanks, guys.

Your next question comes from the line of Alan Weinfeld., Kaufman Brothers.

This is actually [Brett Wallman] in for Alan. I was wondering if you broke out the Business Intelligence from your Security for this quarter.

What do you mean, in dollars, in growth rates?

In dollars. Or percentage-wise. How much percentage of your revenue --

I can look up the dollars, the percentage was 69% Security, 31% in Business Intelligence. And if you needed dollars, I can look up the dollars.

That would be great. No, that's fine. Thank you.

Your next question comes from the line of David Gremmels with Thomas Weisel Partners.

Thanks. Just another one on London. You know the attacks were a couple of months ago. Can you just talk about how that has changed demand environment if at all? Is it driving any additional inbound interest, or any -- can you trace any of the revenues in the quarter back to the urgency created by that event?

Well, you know, we had orders for mass transit customers in more than 10 countries. Can I attribute that to London? No, I can't. customers don't really specifically share the reasons why they are buying. I think generally there is a growing interest for Mass Transit in deploying security solutions.

I think we have seen a pickup also in Q2 in terms of interest. I think that, you know, that -- in terms of translating that interest to booking and revenues, that's going to take much longer, because even those customers that are buying solutions now, they are usually deploying it in small portions of their infrastructure, and they will continue to expand both in terms of reach and capabilities over time.

Because of the -- you know the magnitude of the, if you are look at the rail operator, they have got the platforms and they've got the train cars, and they've got the tracks, which, you know, is a huge area to secure. They've got tunnels. They've got rail yards. So typically when they are in the market, they will not deploy comprehensive solutions throughout, over a short period of time.

Okay. And on the Opus acquisition, I understand you not providing any revenue guidance, but maybe could you speak to the historical revenue performance of Opus?

We -- again, Opus is a young company. It is a small company. We intend to integrate. We would like to offer ULTRA Solutions and Opus Solutions to the customer base.

We actually already have, you know, a joint customer that is deploying even before the acquisition, has been deploying both solutions. So we think that breaking it out is not going to be important information going forward, because we actually would like to offer this as a solution that, you know, we can offer it to the same customers, and we would like to see it as one portfolio of Actionable Intelligence solution.

How many employees did they have?

They have under 50 employees.

Okay. Thank you.

Your final question comes from the line of Paul Coster with JP Morgan.

Mass Transit again, if I may. I think I've -- I may have been misunderstanding, Dan, exactly what you are saying when you say that you have 10 customers, have they expressed interest, or have they committed to orders? And the associated question is, are these orders for the next generation NEXTIVA transit platform, or for the current generation, and how are you managing that product transition? Three questions, I guess.

Okay. They are all related. So first, easy one is that we got orders from ten countries -- mass transit customers in ten countries in all three regions, the Americas, EMEA, and A-PAC during the quarter

So that goes to backlog?

That would be -- I don't know the details but could be that some of them were shipped, or partially shipped. So I can't say that all those orders are in backlog.

Okay.

But -- because, again, some of these have -- all kind of deployment schemes with these kind of authorities. But relative to what we actually -- what was ordered, what we are going to ship.

The NEXTIVA transit system is a solution that we are going to launch next week, and we are going to start to sell it so that from that solution, obviously we are only going to see revenues maybe starting Q4. But what NEXTIVA transit is, we took a bunch of different capabilities that we had before, and we now are bringing them together under one umbrella that is the NEXTIVA Transit.

For example, NEXTIVA Transit has components that are for the mobile assets for the train cars, and components for platforms, and others for tracks. And not every Mass Transit Authority has to buy a comprehensive solution. Obviously we think they should buy comprehensive solution, but because of historical reasons, we can get orders just for the mobile piece, or just for the fixed piece, and different kind of capabilities. So I think what's new with NEXTIVA transit is we are now making it easier for this Mass Transit Authorities to buy all these pieces in one complete system.

Okay. So it does not sound like there is a product transition risk or a risk of, you know, basically upsetting customers that bought a prior generation. Do you see an upsell opportunity associated with it, with respect to existing customers?

Yes. Absolutely we are going to go after the base. The recent evolution from all the different components we had before to the new system. We are -- as part of designing and developing the systems. Obviously we are going to -- to complete a thorough benefits with an existing customer before its generally available to the market. So obviously with every new offering, whether it is a totally new product, or an evolution of an existing product, one has to manage carefully the launch and the quality of the product, and we are going to do that. But we feel comfortable enough to launch this product next week at the Aegis show.

Okay. Thank you.

At this time, there are no further questions. Mr. Roden, are there any closing remarks.

On behalf of Verint Systems, thank you, everyone, for participating in our call tonight. Have a great evening.

This concludes today's Verint Systems , Inc. second-quarter conference call. You may now disconnect.