Verint Systems Inc (VRNT) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Verint Systems Incorporated third quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. I would now like to turn the conference over to Mr. Alan Roden, Vice President of Corporate Development and Investor Relations. Please go ahead.

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

Before I turn the call, I would like to mention that certain statements that are not historical or forward-looking, within the meaning of the Private Securities Litigation Reform Act of 1995, the words estimate, project, intend, expect, believe, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks and some uncertainties. Any number of factors could cause the actual results, performance or achievements of the Company to be materially different from those that may be expressed or implied by such forward-looking information. Certain numbers and percentages have been rounded and may be approximations. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Verint Systems is strictly prohibited. For a discussion of the principal risk factors that may cause actual results to be different, please refer to the aforementioned press release and the Company's filings with the SEC.

By now, you all should have seen a copy of our press release, which was issued after market close this afternoon. If you have not received this release, please refer to the BusinessWire.com or our website at Verint.com. Please refer to our press release and our website for a reconciliation of our GAAP and pro forma financial results and guidance respectively. The content of this conference call is time-sensitive and reflects the Company's perspective as of December 6, 2005. We undertake no obligation to update the content of this call, including any forward-looking statements, even if events, circumstances, or expectations change after this call. Any questions regarding our guidance and our business model should be addressed during this conference call as we do not intend to address guidance and model-related inquiries following the call.

During today's call, Dan Bodner will present his perspective on our business and market trends, Nigal Nissim will present a more detailed review of our third quarter results and financial guidance. We will conclude with a question-and-answer session. With that, I will turn the 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 third quarter results for the period ended October 31, 2005. Our third quarter results represent a record quarter for Verint in terms of sales and net income. Total sales increased 22% 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 market increased 30% year-over-year and 4.3% sequentially. Sales into the business intelligence market increased 8% year-over-year, and 5.6% sequentially.

Pro forma gross margins increased 90 basis points sequentially, and we delivered our 16th consecutive quarter of pro forma gross margin expansion. Pro forma operating income increased 36% year-over-year, driven by strong revenue growth and improved pro forma operating margin. We ended the quarter with backlog in excess of one quarter of revenue, and continued to see demand for our Actionable Intelligence solution. Looking ahead to 2006, we expect another year of growth driven by demand for Actual Intelligence solutions in both the security and business intelligence market.

Today, we are introducing our preliminary fiscal 2006 guidance for revenue of 365 to $375 million, and for pro forma diluted EPS, $1.30 at the midpoint. Our outlook reflects continued strong growth in the security market, and growing demand and higher growth levels in the business intelligence market. 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 market, our network video solutions helped government and commercial organizations detect threats and improve the safety and security of their people and facilities.

During the quarter, we experienced demand for our network video solutions for new and existing customers across a broad range of markets, including mass transit and government. In the mass transit market, our network video solutions enabled transportation authorities to better detect threats, enhance emergency management, and more effectively conduct large scale investigation. We continue to see a high level of interest in our network video solutions for mass transit customers around the world, and there's deployment in various stages of implementation.

Recent mass transit orders and deployments include a multi-million dollar order for mass transit system in a major metropolitan area in the Asia-Pacific region. This mass transit customer will be deploying our network video solution across approximately 300 train stations enabling ramp operations and law enforcement personnel to enhance security by monitoring stations, passenger platforms, and certain restricted areas, and generate Actionable Intelligence. Plans on King's Cross station, which is deploying Verint network video solutions to enhance passenger security at one of London's busiest rail stations. King's Cross station is a key connection point between London suburban commuter lines and the London underground rail network, servicing more than 75 million passengers each year. Our solution is designed to deliver Actionable Intelligence to London rail security and operational personnel and help protect London's transportation infrastructure. This announcement is in addition to our activities with the London Underground Rail Network which we previously announced.

Spain's metro Valencia which is deploying Verint network video solution to enhance passenger security for the commuter rail system in Valencia, Spain, as part of an ongoing strategy to enhance passenger security to its 60 million annual passengers, metro Valencia is implementing Verint solution on certain portion of its railway infrastructure. New York and JFK, which we announced during the quarter, has deployed Verint's video solution to enhance security across the rail system that connects JFK airport to the New York City area mass transit system. The Verint solution will enable New York port authority police to enhance security of the rail system by centrally monitoring passenger platforms in certain parts of the track from a central operations center.

In the government market, our network video solution is being viewed to enhance security of sensitive government facilities, secure military facilities, and help improve public safety. Examples of recent government orders and deployments include the U.S. Department of Defense, which is expanding the deployment of our network video solutions to protect military command facilities located in the Washington, D.C. area. Verint solution is helping this government agency enhance security of highly sensitive facilities by networking and analyzing video across a large perimeter and secure point of entry. A new U.K. government customer, which has selected Verint's network video solution as part of a new law enforcement, and anti-terrorist security initiative in London, Verint solution will enable this customer to monitor selected areas of London, and centrally located command centers and generate Actionable Intelligence. A state government customer which is deploying Verint's network video solution to enhance security of certain state government facilities, including the state's legislative offices, Verint solution will help protect state government employees and legislator and secure public areas of this multi-building campus.

In the security market, our communications and interception solutions enable government and law enforcement organizations to intercept communications for a variety of purposes, including gathering intelligence to identify and prevent criminal activities and establishing evidence for the conviction of criminals. Recently we received orders for both new and existing customers. Examples of some orders include a multimillion dollar expansion order for our communications interceptions solution for an international law enforcement customer. This government customer is deploying our solutions to better generate Actionable Intelligence of intercepted communications from both wireless and wireline networks.

A multimillion dollar expansion order for our communications interceptions solutions for an international government agency customer. This government customer is deploying our solution to enhance national security by having the ability to intercept and analyze mass amounts of data, selected from packet based cable networks. An order for a new North American wireless service provider customer. This new customer is deploying Verint's communications deception solution nationwide across its 3G wireless network, to help comply with government mandates related to intercepting packet data communications. An order for a new international wireless service provider customer, which is deploying Verint's communications interceptions solution to help comply with local government mandates related to intercepted communications over wireless network.

In the business intelligence market, our Actionable Intelligence solution enable enterprises to capture and analyze customer interactions and associate data to help enhance business processes and drive revenue and profitability. During the quarter, we experienced an increased level of interest in our enterprise actionable intelligence solutions across a number of different markets. In the U.S., we received several significant orders, including a multimillion dollar expansion order for Actionable Intelligence solutions from SunTrust Banks. SunTrust will deploy Verint solution across 27 contact center and branch locations, generate Actionable Intelligence to enhance customer program, processes, and its financial offerings.

A multimillion dollar order for our Actionable Intelligence solution from a leading U.S. wireless communications company, this new wireless communications customer, will deploy Verint solutions to generate Actionable Intelligence across more than 15 contact centers to enhance the service it provides to customers across the U.S. In Europe, our enterprise Actionable Intelligence solution is being deployed for a number of large enterprise wide initiatives including Halifax, General Insurance Services which is deploying Verint's Actionable Intelligence solutions across its five contact centers in the U.K. and Ireland. Verint solutions will play an important role in Halifax' ongoing strategy to continually improve customer service by better understanding its customer preferences. Branch Provident which is employing Verint's Actionable Intelligence solutions across 14 customer service locations in the U.K. Branch Provident, one of the leading financial service groups in the U.K., considers Verint solution a vital part of the strategy for improving the quality of service it provides its customers and partners, and is a key differentiator in ensuring customer loyalty.

In Asia, we experienced demand for our enterprise Actionable Intelligence solution from new and existing customers across a number of different countries, including Australia, India, Japan, and the Philippines. For example, in India, we are expanding our relationships with a number of outsourcers which are looking to generate Actionable Intelligence to help deliver high quality customer service, and to differentiate the level of service they provide with their multi-national customer base.

Behind our recent momentum in enterprise market, is a growing recognition of the value of our Actionable Intelligence solutions. Our enterprise customer analytics offer organizations new capabilities that enable them to leverage unstructured data, capture its customer interaction in a way that was previously not available to them. We believe that we are starting to see the results of the market education we have done over the last several years, and that the adoption of our Actionable Intelligence solutions in the enterprise market will accelerate going forward.

Now, I would like to spend a few minutes looking ahead to fiscal 2006. We continue to believe that the market for Actionable Intelligence solutions is in its early stages in both the security and business intelligence market. And we expect another year of growth. In the security market, the migration to Actionable Intelligence solutions is being driven by the need to better detect threats and prevent criminal and terrorist activity. In the business intelligence market, the migration is being driven by the desire to improve business processes and enhance profitability with high ROI solutions. While the security market was initially quicker to adopt Actionable Intelligence solutions, we believe that the enterprise market is starting to better understand the value of Actionable Intelligence, and our outlook reflects continued strong growth in the security market and growing momentum in the business intelligence market.

We expect our overall margin to continue to expand as our high value-added Actionable Intelligence solutions allow us to generate higher gross margin. At the same time, we expect to expand our operating margin by leveraging our investment in SG&A and R&D. As a result, we expect our earnings to continue to grow faster than our revenue.

Verint remains committed to capitalizing on the Actionable Intelligence opportunity in both the security and business intelligence market by understanding our customers' specific requirements, and delivering innovative solutions to further stimulate the adoption of our Actionable Intelligence technology. At the same time we believe that we can augment our internal growth with specific acquisitions and our focus on identifying companies that can help us extend the capability of our solutions, broaden our offering, and expand our geographical presence. I would now like to turn the call over to Igal to discuss our third quarter financial results in more detail.

Thank you, Dan. The third quarter represented a record quarter for Verint and our 16th consecutive quarter of sequential revenue growth. In the third quarter, we had record sales of $78.2 million, representing year-over-year growth of 22%, and sequential growth of 4.7%. Sales of our Actionable Intelligence solutions in the security market increased 30% year-over-year, 4.3% sequentially, and represented 69% of our total sales. Sales of our Actionable Intelligence solutions in the business intelligence market increased 8% year-over-year, and 5.6% sequentially, and represented 31% of our total sales.

Looking at the geographic breakdown of sales, in the third quarter, we generated 48% of our sales in the Americas, 35% in EMEA, and 17% in Asia-Pacific. Our Q3 pro forma results are as follows. Gross margins increased 90 basis points to 57.6%. This quarter represented our 16th consecutive quarter of gross margin expansion. Net research and development expenses for the third quarter represented 12.8% of sales. SG&A expenses represented 32.8% of sales. In the third quarter, we had income from operations of $9.3 million, representing year-over-year growth of 36% and sequential growth of 3%. Interest and other income for the third quarter increased to $2.1 million. Our effective tax rate for the third quarter was 23.1%. Pro forma net income for the quarter was $8.8 million, or 11.2% of sales. Diluted earnings per share was $0.26, based on a weighted average share count of 33.3 million shares. On a GAAP basis, diluted EPS was $0.22.

Pro forma results and guidance discussed today exclude amortization of intangible assets related to acquisitions, one-time charges, and expenses associated with stock-based compensation. Please refer to our press release and our website for a full reconciliation of our GAAP and pro forma financial results and guidance respectively.

Turning to our balance sheet, cash, cash equivalents, bank deposits, and short-term investments increased to $267 million, from $265 million at the end of the second quarter. During the quarter, we generated $13.6 million of cash flow from operating activities. In Q3, our DSOs increased to 56 days, from 48 days in Q2. We continue to expect DSOs to range from 60 to 80 days. As of October 31, 2005, we had total assets of $451 million, working capital of $215 million, and shareholder's equity of $315 million.

Turning to guidance, we are introducing guidance for the fourth quarter of fiscal 2005 as follows. Sales of $82 million and pro forma diluted EPS of $0.28, based on 33.3 million diluted shares outstanding. We expect Q4 EPS on a GAAP basis to be $0.16, including an estimated one-time charge associated with the acquisition of MultiVision which is expected to close in January, 2006. For fiscal 2005, we expect sales of $307 million and pro forma diluted EPS of $1.03 or $1.04 and GAAP EPS of $0.79 or $0.80, based on 33.1 million diluted shares outstanding. For fiscal 2006, we are introducing preliminary guidance as follows. Sales of 365 to $375 million, and pro forma diluted EPS of $1.30 at the midpoint. Based on 33.5 million diluted shares outstanding. We expect fiscal 2006 EPS on a GAAP basis of $0.75. We believe that the market for Actionable Intelligence solutions is in its early stages and our guidance reflects continued demand for Actionable Intelligence solutions worldwide.

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

[OPERATOR INSTRUCTIONS] Your first response comes from Ed Littman with William Blair.

Hi, guys. Great quarter. Can you offer some comments around how you guys are seeing the M&A landscape right now, especially considering that two of your primary competitors are both out looking to raise some capital and shore up their balance sheets and how you might think that is going to impact the deals that you're seeing?

We maintain our view that the market is highly fragmented. And there is a lot of different opportunities for acquisitions. We are focused on augmenting our organic growth with selected acquisitions. Clearly, we've seen a lot of competition for the right companies. And we expect to continue to see the M&A landscape to be competitive.

Okay. And then on the -- you mentioned a couple of times that obviously we're still in the very early stages here of adoption of analytic solutions, obviously in both security and the enterprise segment with the security probably a little bit more ahead of the enterprise. Can you just offer a little bit more as to why you see the enterprise segment now starting to gain some strength? And along with that, how much of the -- certainly on the call center, are you seeing customers being driven by their convergence over to VoIP as an opportunity to then add some analytic solutions to their capabilities as well?

Well, we believe that adoption of Actionable Intelligence solution in the security market was earlier -- clearly that was driven by the urgency to fight crime and terror, and it was a message, Actionable Intelligence message was just more urgent in terms of customer spending. On the business intelligence side, we always maintain our view that intelligence is equally important for enterprises to differentiate and to be competitive, but it was just a longer educational cycle. We believe that the value that we generate for our customer is in the unstructured data in the content of the customer interaction, but while we are present in the contact center, and we obviously need to collect information that generates -- that generate in the contact center as a result of interactions, this could be voice interaction, but also e-mail interactions between enterprises and customers, the value in the content of this interaction is obviously not just for the call center managers but also for the enterprise overall, and the change in technology from VoIP to Voice-over-IP is more related to the infrastructure change within the contact center. It is -- I don't see that as the main driver for the -- you know, selected adoption that we recently see in our solutions. I would attribute that to just basically a long education cycle. We got now a lot of references that are more vocal and I think the buzz in the industries, that there is real value and real ROI in our solutions, and that is the main driver in my mind to what is now our improved outlook for 2006.

Okay. Great. Thank you.

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

Thank you. Good evening. Dan, I wanted to ask about the August SBC ruling regarding Voice-over-IP. Was that something you had expected? Does that create potential new sales opportunities on the communications interception side?

I think that this is an example of how the changing communications technology is creating a lot of opportunities within communications perception. Basically under the electronic surveillance laws, any type of communications can be intercepted by law enforcement and government agencies in order to generate intelligence. And clearly, the tool of communication interception is one of the most effective tools available to the government in their fight of crime and terror, so as technology changes, the need for new communication interception tools to intercept that technology presents opportunities for Verint. Specifically regarding Voice-over-IP, this is clearly the migration from PBM to Voice-over-IP is one of the drivers, but I think even a bigger driver is that -- the fact that more and more government agencies are focused on intercepting packet data so that Internet traffic and e-mail and we announced today some wins in cable operator, 3G wireless networks and so forth, there is a variety of technology, both voice and data that are behind the growth in our communications interception business.

And last quarter, we talked about London Underground, that's one of your customers, and now that some time has passed since the attacks last July, in retrospect, did you -- I'm interested in what the benefit was, if any? Did you pick up additional orders as a result of those attacks? Or accelerated orders as a result of those attacks?

I don't think I can attribute specific orders to the attack, but there is clearly growing interest in the mass transit market, in our solutions. There is a desire now to look at more comprehensive solutions that can help them in three areas, one is to potentially prevent this type of attacks, the second is to manage emergency situations more effectively, and the third is forensic related, it is to investigate these kind of attacks more effectively so they can find intelligence quicker and act on it in order to potentially capture some of the people that were involved. So we think that our solutions present benefits to these type of customers, in all three areas, and this is exciting.

Specifically, I can't give more color on London Underground. I'm very excited about the fact that we announced today the London King's Cross station, it is a is a main station, a major station in London, this is a separate order, this is not from the same customer that ordered -- that the order we announced several quarters ago. And at the same time, we have orders from transit authorities in New York, in London, in Spain, a major system in Asia Pacific, 300 rail stations. Some of those subway, and some light rail. So we active in many countries and we see that as one of the opportunities that we are very well positioned to capture.

Got it. And then on the business intelligence side, growth of 8% in the quarter, I guess that would be a little less, assuming that Opus contributed some revenue. That is the lowest growth rate in BI that we've seen for a couple of years, can you just comment on why that is decelerating. Is that related to product cycles or what is behind it?

I basically think it is related to a very strong third quarter in 2004, the year-over-year comparison is 8%, sequentially we grew 5.6%, and in terms of the year, our outlook for 2005 was in the low teens, and when I look at the nine months, and what we can achieve in 2005, I still maintain that we can achieve low teens, but even more important as part of our outlook for 2006, we now believe that our BI growth will be approaching 20%. And this is part of the true momentum and adoption cycle that we see in BI.

Okay. And just one more, how much options expense is in your '06 guidance?

We baked, from -- for 2006, right?

In the initial '06 guidance that you just provided.

In our pro forma -- in our pro forma EPS guidance, we assumed $13 million from stock-based expenses.

13 million? 1-3?

13, 1-3..

Great. Thanks very much.

Your next question comes from Charles Ayal with CIBC World Markets.

Thank you, hi, good afternoon, everybody. Good quarter. Can you guys provide any comment or any color about the continued backlog trends that you have seen this quarter heading into the fourth quarter?

We maintain a position of over one quarter in backlog, which obviously we now have an $82 million guidance for Q4 and we maintain overall, over 12-month period, we maintain back up levels north of $82 million.

Thank you. Dan, you mentioned in your comments some traction with Indian outsourcers. Have you actually seen some revenues coming out of those outsourcers in India?

Oh, yes. We are now at certainly the phase that we see substantial revenues from India, from many different customers, and we believe that we are very well positioned within that market, and I believe that one of the reasons for the Indian market to adopt our solutions so quick is the fact that they need to differentiate themselves for their multi-national customers, and our solution really are helpful to them to prove to their customers that they are providing the right level of services, and that overall, they are a good vendor for their customers. So that's probably one of the reasons that we see very good adoption rates in the Indian market.

Fair enough. And kind of recent hiring trends, is it more on the R&D side or more on the phase-in marketing, regardless of your recent acquisition?

So hiring, we are on track to increase head count by somewhat more than 10% this year. The biggest hiring area so far in this year was in sales and marketing. That's roughly 15% of -- slightly higher than our overall hiring, and this is an indication of our sales and marking expansion in all geographies, basically, as we see opportunities and we would like to be better positioned to compete.

What was the employee head count by the of October 31?

It is currently slightly more than 1300.

All right. Thank you very much. Good luck.

Your next question comes from Paul Coster with J.P. Morgan.

Good afternoon. Can you hear me?

Yes.

Okay. Good. I've got a few quick questions regarding fiscal year '06, Igal. The first is what tax rate should we be assuming?

Tax rate 20 to 23%, no major change from this year.

Okay. Does the '06 revenue guidance, and the EPS guidance for that matter include acquisitions or is that organic?

The guidance we provided today includes an assumption that we will close on the previously announced MultiVision acquisition in January. This is later than we expect when we discussed MultiVision last quarter. We expected that in mid December. But as a result of basically what we were told, high load on the Singapore exchange side, still in the process of reviewing and providing comments to MultiVision on their proxy statement, we now expect that it will likely to close in January.

So that's the only acquisition that's included in the guidance?

Yes, we did not announce any other acquisition and we are not assuming in this guidance any other acquisitions at this point.

But Igal, you have -- you mentioned 13 million of stock-based compensation. What is the -- what is related to FAS 123R specifically?

From the 13 million, approximately 13 million that is included in the GAAP numbers, about 10 million is related to the 123R and the rest is from other type of stock-based compensation like restricted stock and ESPP.

Okay. Got it. So the 10 million is in the GAAP but obviously not in the pro forma?

Correct.

Okay. Got it. Can you talk a little bit, Dan, about, I think people's focus is being attuned to this space owing to the Witness and [NICE] activities, can you talk to us a little bit about how you see your product being differentiated from those two competitors?

Yes, we see some weakness basically as a company focused on communication infrastructure, within the contact center, and they offer quality monitoring and work force management solutions, they're basically focused on the contact center agents, so they refer to this as a work force optimization offering, focusing on the work force within the contact center. We see NICE more focused on general recordings, they have different voice recording offerings for contact center, trading floor, and other voice markets. And where our focus is, is on basically analyzing unstructured data, which is captured within the contact center, because that is where the interaction between the customers and the employees of the enterprise, but the value that we can generate from intelligence that we unearthed from this contact customer interaction is applicable to the contact center employee, so we are able to identify certain trends within the work force, but also beyond that, we can bring value to the enterprise in terms of improving their processes, because some of the best office processes affect the ability of the contact center to provide customers the right level of service, and we also are able to unearth intelligence that is relative to overall customer experience, overall perception of the brand, of the product, the offering, and so forth. So the value is greater than the focus on the contact center agent.

Okay. One measure of the differentiation would be the average selling price of the solution, what are your average selling prices for a contact center, or Actionable Intelligence solution in the business intelligence area?

It is a very wide range, and it is really dependent on the level of analytics that a customer choose to implement. So it can go from as low as a very basic, could be $500 seats, and it can go to $1,500 seats, so it is a very wide range. Many of our customers prefer to start with certain capabilities, and then expand them over time, as they get more comfortable with using this technology.

Okay. My last question, of the business that you're seeing at the moment in, is it -- what percentage is to new customers versus deeper penetration of existing customers? Can you make that assessment?

Generally, we don't track that very closely, but generally speaking, this is -- more than 50% will be selling to our base, which is including expansion of the system, as well as providing more analytical capabilities, but we have a very, very healthy new business practice. Again, this is a little bit misleading because sometimes $100,000 order, initial order from a customer with a very large potential could be more exciting than $1 million order from a customer who already is well penetrated. And a lot of these customers tend to start small, and as they gain confidence in the technology, they expand over time.

Okay. Got it. Thank you very much.

Your next question comes from Tim Quillin with Stephens Incorporated.

Good afternoon. Nice quarter. Just a couple of quick questions. One, are you seeing any changes in the competitive landscape on the digital video side? And I'm thinking specifically about GE, who has made at least one acquisition to be a little more involved in the digital video transit market?

The video market is very large, and there are many players, and some of them, like GE, and other large companies, are trying to also expand their capabilities within this market. But overall, I think what we see in the market is actually a lot of players, several hundred players, and most of these companies, and this includes some of these large companies, are basically offer product, and not solutions. They are focused on DVRs, digital video recorders, and some of them are also now expanding to a DVR plus some basic analytics, but it is still a very product-focused market, and as a result, I think -- we see in this product centric market, the pressure of commoditization and price erosion. We are taking a different approach. We are a solution company. We are focused on Actionable Intelligence and value-added solutions. So that we -- obviously not looking at the entire video market, but at the smaller portion of the market, that is more adopting -- more ready to adopt these kind of solutions, and the best testimony to our success is our prestigious customer base. These are organizations that are willing to spend the -- basically early adopters are willing to spend the time and money to get the value from this technology.

So as the video market continues to grow, we actually expect more companies to come into this market and offer some sort of video offering. But at the same time, we expect customers to get more educated about network video, by analytics of the edge and overall, the power of Actionable Intelligence, and as a result, while overall there are more companies, we actually expect less companies to be able to rise to this level of sophistication that is being offered by Verint. So there are two driving forces here. Overall, more companies, but I think customers will drive less and less companies to be able to compete effectively with what Verint does.

That's fair enough. I appreciate that color. And just a couple modeling questions, and this, I'm sure, is going to be a little bit complicated until MultiVision closes but do you have some kind of help for us as far as modeling amortization of intangibles in 2006?

Okay. So first, we obviously -- it is included in our GAAP guidance, and we are going to pro forma this out, so if you look at the GAAP guidance, how much of that is from intangibles. We don't have the answer offhand.

Well, I guess maybe what you're saying is I can back into it by saying that if I take the difference between your GAAP and pro forma guidance, and then back out the $13 million for stock-based compensation, the difference is going to be the amortization of intangibles?

The amortization of intangibles and potential one time errors is a result of MultiVision.

That might carry over into the first quarter?

It might.

Okay.

Although at this point, we see that as a Q4 event.

Right. Okay. And then just lastly, you talked about the tax rate in 4Q, what tax rate assumption is in -- or excuse me, you talked about the tax rate in 2006 but what tax rate assumption should we use in the fourth quarter?

Basically, we expect similar tax rates to Q3, which will bring the overall -- overall 2005 tax rate somewhere between 20 and 23.

Okay. Fair enough. Thanks, gentlemen.

Your next question comes from Israel Hernandez, with Lehman Brothers.

Good afternoon, guys. Can you remind us what the revenue contribution or expected revenue contribution from MultiVision will be in the 2006 guidance, as well as what are expectations for margins? And second question is gross margins came in a bit better than the recent recruitments that we've seen on a sequential basis, what drove those improvements during the quarter in gross margin? Thanks.

Okay. As we said before, we -- our expectations for MultiVision is based on 4 to $5 million run rate, 4 to $5 million per quarter, and we -- as we announced, we expect it to be nondilutive from the first quarter. Regarding gross margins overall gross margin is expanding for -- the main driver is being a higher software percentage of our sales. It is hard to analyze that on a quarter by quarter basis, but we still maintain that this is the main driver of -- because basically, as I explained before, relative to our competitive landscape, a lot of our competitors come from a recording perspective, and are facing commoditization. There is a strong price erosion in the recording market. And the fact that we have now, over the last three years, have maintained higher growth margins and we also -- our guidance for 2006, we expect also to continue to improve gross margin. The main driver is because we are providing value-added solution, and the value-add comes from our software and not from hardware, and as the percentage of our revenues that comes from software increases, so does our gross margin.

Thank you.

Your next question comes from Gene Munster with Piper Jaffray.

Good afternoon. And congratulations. Maybe just, I guess start with SunTust, and what other kind of customer deals in the quarter, did you recognize in that revenue in October, or is that going to be recognized in the fourth quarter?

I don't have an answer. We typically in a multimillion dollar order, we typically have deliveries over more than one quarter. But I just don't know the data specifically regarding this particular order, if we already recognize revenues at this point.

Guess that could just flow into some of the backlog comments that you had. And then I guess -- just in terms of big picture, I know you've talked throughout the call here about Actionable Intelligence and that is kind of a consistent theme that you've had, you've also talked in the past about intelligence analysis of structured data, which I guess is consistent with a lot of the things that you're talking about here, but is there potentially some -- if you look at Verint over the next two years, some kind of new areas or new pockets -- I know we've been talking a lot about existing products on this call but some new areas that you could be kind of dipping into that would be beyond some of that so-called Actionable Intelligence?

Well, Actionable Intelligence is a broad vision. I do agree, and it does mean in certain vertical markets, it means different things to different users, but the common thread is our ability to analyze unstructured data, which is voice, video, and text, and our ability to analyze that unstructured data in combination with other events that we collect from other systems that could be structured data type system, and bring that into a decision engine that allow the user to create the rules of what kind of information is critical for their specific operation, and how do they want this information to be -- to disseminate to decision makers in order to make optimal decisions and this is very similar across our markets. So in retail for example, where our value add is in shrinkage, we're able to analyze the POS information, this is basically structure data is come from point of sale, and marry that with video in order to provide security officers within retail operation is a very effective tool to reduce shrinkage.

Of course it translate -- it will translate to the user in different way, but I think that we what we do is very similar to other markets. And as you said, Gene, there are other markets, other vertical markets that we could potentially expand to, we don't see in any of our markets saturation, so we're not -- we're not under pressure to expand into more markets. But clearly, we see opportunities to expand to new markets, and we are going to consider this opportunity over time, and we may certainly remain -- expand into new vertical markets.

And so right now, you've got enough fruit to still pick and over time, in your existing markets and not to say that you knew that a new market would be a sign that things are starting to wind down, it is just you're being opportunistic about which ones you would really pursue?

Right. We want to make sure that we're doing justice in our current market. So we certainly are considering the -- the focus that we need to bring to the markets we serve today. There is one of the risks that we are trying to mitigate is the focusing ourselves, by trying to grab more than we can, but we certainly are aware of other markets, we're analyzing opportunities in other markets, and we may decide to expand whether through investment organically, or an investment through M&A activity.

Great. Thank you.

Your next question comes from Daniel Meron with RBC.

Hi, good afternoon. I just wanted to get a sense on an apples-to-apples basis of your numbers of -- on the bottom line, with the EPS, between 2005 and 2006, considering the stock options that you mentioned.

Okay. So are you talking about GAAP numbers?

No, I'm talking about pro forma. So would the $1.30 pro forma would be exactly equivalent to the 1.03 on an apples-to-apples basis?

Yes, we provided pro forma guidance assuming that we are going to pro forma out the one to three hour affects, so all the stock-based compensation would be pro forma out of these number so the $1.30 represents a 25% of growth relative to our '05 EPS number.

Okay. And taking your guidance, we're looking at 20% year-over-year growth in revenue, and only 25% year-over-year growth in EPS, obviously it is better than the revenue growth, but why is the leverage still so muted? What was the items on the P&L that are rising when the tax rate is essentially flat, share count is essentially flat, so where is the growth? Is it the gross margin or is it a higher rise in operating expenses?

So first, maybe we should look historically so we can try to understand our thinking about the future. If we look at this year, it was about 30% EPS growth, close to 30% EPS growth relative to last year, and last year was again close to 30% growth, relative to the year before. So we have now have a history of 30% growth in EPS, close to 30%. And we have -- we feel comfortable at this early stage, based on our analysis to come with a 25% EPS growth. So that puts -- from an EPS perspective.

Relative to our top line, first we -- the quarter we just finished represents 30% growth in securities. And if you look at the nine months, for this year, we actually had 32% growth in security. So if we said before that we've believe the security market is growing 20 to 30%, we have demonstrated this year and I think also the years before that on the security market we are at the high end of the range of market growth. And the overall growth was impacted by BI, which was in -- this year, we maintained a double -- low teens. So where we see next year is actually potentially improving our outlook as we see more momentum in the BI, and BI growth approaching 20%. But the way we think about our guidance right now is going into the year, we are thinking about it as 20%-plus growth in security and approaching 20% growth in BI.

Okay. That's great. And how do you -- on the competition side, do you see -- how do you see the recent moves as far as consolidation impacting you in any way? Obviously you are the market leader, and maintain that position especially with the MultiVision acquisition, how do you see your position vis-a-vis your competitors, and also as far as channels, are there any major channels that you think are important to you to add or do you think that you're pretty much covered as far as that is concerned?

When you mention consolidation relative to?

Your -- one of your competitors recently announced an acquisition, a small scale acquisition obviously in Europe.

Oh, okay, in the video market. I -- this is definitely an M&A activity in the video market, but as I mentioned before, in the competitive landscape analysis, the video market is highly, highly fragmented with hundreds of vendors. A lot of these vendors have 5, $10 million of revenue, so I think that this market is not close to a point where it is going to consolidate into two, three major vendors. And I don't see that happening in the very near future. But clearly there is a lot of M&A activity as companies are trying to enhance their product portfolio and their presence in certain markets or geographies.

Regarding -- so consolidation, I don't see that as something that drives our strategy. I don't think we necessarily -- we are looking to acquire when there is a good opportunity in terms of technology or in terms of specific application in the market, but I don't think consolidation is the main driver. Regarding channels, you can imagine that in such a high fragmented market, the channel market is even more fragmented. Basically, everybody works with everybody, and everybody is trying to do what they need to do in order to serve better the end users. Again, I don't see alignment of vendors, and integrators that are material. Most of their relationships are not exclusive. And there is a lot of different ways -- a lot of different channels to market that a vendor can select. And basically in our strategy, we obviously work through channels, because that is necessary in this market, but in the more high profile, high value opportunities for us, we are also working directly with the end user, making sure that they understand the value that we bring with Actionable Intelligence, and we certainly do not rely on the channel to represent that, because the vast majority of the channels are not capable of delivering this kind of message.

Thank you. And then last one for me, within those security markets, either in the last nine months, or going to 2006, what is the relative growth rate between video solutions and what is the mix obviously between those two, video solutions and wire tapping or communications interception?

So the overall growth in security, as we mentioned before, is 30%. We maintain the high end of the range. And as we mentioned before, a number of opportunities, the mix between our video related securities solutions and communications perception security solutions is approximately 50/50. It can fluctuate, but over the last couple of years, it's maintained around 50/50 and also in our guidance for next year, again approximately 50/50, that win these two elements of our security, market offerings.

Thank you, Dan, and good luck going forward.

[OPERATOR INSTRUCTIONS] Your next question comes from Alan Weinfeld with Kaufman Brothers.

Hi. Nice quarter, guys. I just wanted to fully understand how the research development and the tax credits work, how you build a new product and then get reimbursed from a country when the product is out, and how that moves with your gross margin?

Are you referring to our reimbursement, R&D reimbursement for new product development?

Yes, for both Canada and Israel.

Right. So we participate in two programs, in Canada and Israel, where we have substantial R&D resources, and the more significant program that we are a part of is in Israel. And basically, the way the product -- the program works is that we submit every year applications that need to be reviewed and approved by the program office, and as they approve those applications for new product development, they will participate in a portion of the cost of developing these products and that is the reimbursement portion, and where we reflect it in our P&L, it is reflected as a reduction in our R&D, R&D expenses, so we show R&D expenses net of reimbursement. As we develop the products and commercialize them, we need to pay back royalties to the office of Chief Scientist and when we pay those royalties, they are part of our cost of goods.

So actually, this program with the Chief Scientific Israel was designed for a company in -- for early stage companies, and relative to this program, we are now considered a large company, and therefore, the OCS, the Office of Chief Scientist reimbursement amounts are declining. So as we have grown, we have received less and less money and actually sometime this year in 2005, we expect that the program will move from a plus to a negative effect on our results, so within the Chief Scientist, there are multiple programs that are available to us, and we are now evaluating other programs that may be more beneficial than the one we are currently in. We have not made any decisions at this point. But we certainly would like to understand better the other programs and the impacts. And if and when we decide to move to a different program, we obviously are going to do that if that is going to be beneficial to us, and if we at that point believe that a new program will be accretive to our results on a pro forma basis.

You are currently evaluating that, I would assume?

Yes. Those programs are available to any company that have RNV in Israel, and there are again companies that have grown similarly to us, have elected to move to different programs, but we have not made that final decision.

Thank you.

Your final question is a follow-up from David Gremmels with Thomas Weisel Partners.

Thanks. Just one quick follow-up. I was wondering if you could comment on the increase in DSO? First, I didn't actually get the exact numbers, so if you could repeat that, I would appreciate it. And what was behind the increase in receivables in the quarter?

Well, the increase is from 48 days last quarter to 56 days in Q3. And we always maintain that our DSOs should range between 60 to 80 days. We believe that providing credit terms to our customers is part of our strategy to work with customers on many levels, and one of them is credit terms. So I think 56 days is just more in line with our guidance.

Was it driven by one or two specific contracts or was it concentrated in any particular part of the business?

Not driven by one or two, and not concentrated in any part of the business. It was overall.

Okay. Thank you.

There are no further questions at this time.

Thank you. Operator. On behalf of Verint Systems, thank you very much for participating in our Q3 call. Have a great evening.

This concludes today's conference. You may disconnect at this time.