Verint Systems Inc (VRNT) 2006 Q4 法說會逐字稿

Good afternoon, my name is Theresa, and I will be your conference operator today. At this time I would like to welcome everyone to the Verint fiscal 2006 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 session. [Operator Instructions] Mr. Roden, you may begin your conference.

Thank you, Operator. Good afternoon and welcome to Verint's fiscal 2006 conference call. I'm Alan Roden, vice president of Corporate Development and Investor Relations for Verint Systems.

With me on the call today are Dan Bodner, our president and CEO; and Doug Robinson, our CFO.

By now you all should have seen a copy of our press release, which was issued after market close this afternoon. If you have not received this release, please refer to BusinessWire.com or our website, Verint.com.

Before starting the call, I'd like to mention that certain statements that may be made on this call that are not historical or forward-looking within the meanings 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 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. Earlier today we filed an 8-K with the SEC that included certain preliminary unaudited financial results for 2006 and 2005. For a discussion of the principal risk factors that may cause actual results to be different from the preliminary unaudited results, refer to the risk factors and other information discussed in item 7.01 of that 8-K.

As we previously announced, because of the ongoing investigation by a Special Committee of the Board of Directors of Commerce Technology the 57% stockholder of Verint, and to stock option back gain and other accounting issues, and our internal review of certain related accounting matters, the financial condition we are discussing today has not been finalized nor has it been audited or reviewed by Verint's independent registered public accounting firm.

In addition, none of this information takes into account any related tax effects, expenses, or liabilities including any possible disallowance of previous tax deductions. Currently, the preliminary financial information may change, possibly materially, based on the final results of the commerce special committee investigation or Verint's internal review or both.

The assessment of tax effects and the completion of the restatement of Verint's historical financial statements, which may be audited by an independent registered public accounting firm.

Similarly, our business and the impact of the Comverse Special Committee expanded investigation and our internal review on Verint's financial results remains subject to a number of uncertainties. We are not in a position to provide annual revenue and EPS guidance for fiscal 2007 as we normally otherwise do.

As has been our recent practice, we do not currently intend to provide quarterly revenue and EPS guidance, going forward, including for fiscal 2007 Q1.

As a result of the ongoing investigation by Comverse Special Committee and our own internal review in certain related accounting matters, Verint has not yet been able to file with the SEC a 10-K for year-end January 31, 2006. 10-Qs for the quarters ended April 30, 2006; July 31, 2006; and October 31, 2006, or its form 8-K in connection with the January 9, 2006, acquisition of MultiVision's network video security business. Verint intends to make such filings as soon as practical after it receives that information from the Comverse Special Committee and Verint's audit committee.

As previously disclosed by Verint, because Verint is not current with its SEC filings, Verint was delisted from the Nasdaq global market. While we intend to apply for relisting of our stock as soon as possible after we gain clients with our SEC filings, we cannot at this time predict if or when that will occur.

The content of this conference call is time sensitive and reflects the company's perspective as of March 22, 2007. We aren't taking obligation to update the content of this call including any forward-looking statements, even if events, circumstances, or expectations change after the call.

Certain non-GAAP financial measures will be discussed today. You will find your reconciliation of the difference between the non-GAAP financial measures and the most directly comparable GAAP financial measures at the end of our press release, a copy of which has been posted on our website.

Certain numbers and percentages have been rounded and may be approximations. And redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Verint Systems is strictly prohibited.

With that, I'll turn the microphone over to Dan Bodner. Dan?

Thank you, Alan. Hello, everyone, and thank you for joining us today to review our 2006 results. I am pleased to announce another record revenue quarter for Verint in our 21st consecutive quarter of sequential revenue growth.

In the fourth quarter, Verint's revenue reach $98.4 million resulting in total revenue for the year of $374 million representing a year-over-year increase of more than 21%.

I am also pleased to announce that in fiscal 2006, non-GAAP EPS increased 34% to a record $1.42 from $1.06 in fiscal 2005.

Our strong non-GAAP earning growth of 34% was driven by continued demand for actual intelligent solutions and gross margin expansion driven in part by our ongoing evolution to a more software-oriented business model.

In fiscal 2006, our non-GAAP gross margins increased nearly 4% to a record 61% from 57.2% in fiscal 2005. Contributing to our gross margin expansion was our strategy of delivering value-added software applications built on open platforms enabling our customers to use their own standard hardware and server.

While delivering strong earning growth, our higher margins allowed us to invest back into the business to support long-term growth. We increased our headcount from last year by more than 10% to approximately 1,670 employees with the largest increase in sales and marketing and product development.

We also rolled out a number of new verbally oriented open actionable intelligence software solutions. For example, during 2006, in the security market, we delivered our next-generation video platform, Nextiva. Nextiva is based on an open standard software platform that runs on commercial off-the-shelf server and leverages standard storage devices.

This open approach benefits Verint's financial model by reducing the amount of low-margin, third-party hardware that Verint resells with its software while providing a host of benefits to our customers including the ability to leverage their preferred hardware vendors, utilize their existing IT infrastructure, and more easily integrate with other security and business systems.

In the business intelligence market, we introduced CI Analytics, a stand-alone speech analytic solution. With CI Analytics, for the first time, Verint is making our speech analytic solution available to enterprises regardless of the recording or [quarterly] monitoring solutions they currently use.

By unbundling our speech analytics for ultra-platform, we can deliver our customer interaction analytic software on top of other vendors' solutions.

We believe that our success in fiscal 2006 is due, in large part, to our actionable intelligence strategy and our continued focus on delivering high-value software applications that are deployed easily within our customers' IT infrastructure and that generates actionable intelligence.

To help accelerate this strategy in the business intelligence market, shortly after year-end we announced the combination with Witness Systems. We are very excited about a combination with Witness, but remain equally committed, and we'll continue to seek acquisitions in the security market.

Later on in the call we will discuss how the Witness acquisition is expected to accelerate the evolution of our software business model. But I would now like to turn the call over to Doug Robinson who will provide more detail behind our revenue and earnings growth in 2006. Doug?

Thanks, Dan. After a year without full audited financial statements, we are pleased to be in a position today to provide preliminary unaudited financial metrics for the 12 months ending January 31, 2007, which is our fiscal 2006, and past periods. This information can also be found in the press release that we issued earlier today.

None of the financial information that we are discussing today has been audited or reviewed by Verint's independent accountants. As a result, this information is not final or complete and is subject to change.

As Dan mentioned, the fourth quarter was a record for Verint and was our 21st consecutive quarter of sequential revenue growth. For the year, total revenue increased 21% to $374 million from $309 million in fiscal 2005. We believe that the opportunity for actionable intelligence solutions remains in an early stage in both the security and the business intelligence markets and throughout the year we introduce new solutions to stimulate the adoption of our actionable intelligence technologies.

At the same time, we augmented our long-term growth strategy with strategic acquisitions in both the security and business intelligence markets.

During fiscal 2006, we experienced very robust growth in the business intelligence segment as the adoption of our actionable intelligence solutions accelerated. Revenue in the business intelligence segment increased 42% to $126 million.

Revenue in the security segment increased at a rate of 12% to $247 million in fiscal 2006. While our revenue growth was less than it was in prior years, we expanded our customer base and experienced a significant increase in the unit volume of our security solutions.

The reason our revenue increase was significantly lower than our unit volume was primarily due to two factors. First, the change in our business to less hardware, which has a direct impact on our top line but less of an impact on our bottom line and, second, some pricing pressure for certain elements of our solution.

Despite these trends, we were able to improve our gross margins and deliver significant earnings growth as a result of delivering increased value to our customers.

Please note that the security and business intelligence revenue figures discussed today are based on our new segment reporting. Segment reporting differs from what we had previously provided, which was based on revenue by markets.

Please see our press release and 8-K for further discussion of segments and markets.

As mentioned earlier, our non-GAAP gross margins increased by nearly 4% in fiscal 2006 to a record 61%. This improvement was due to a lower hardware mix, higher gross margins and service revenue, and the effect of our previously announced agreement with the Office of Chief Scientist.

As a reminder, our non-GAAP numbers 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 discussion of GAAP results as well as a reconciliation of our GAAP and non-GAAP financial results.

Non-GAAP operating margins increased to a record 13% of fiscal 2006 from 12% in fiscal '05, and non-GAAP operating income increased 35% for a record $50 million in 2006 from $37 million in fiscal '05.

Our GAAP net income for fiscal 2006 was $2.8 million impacted primarily by a $23 million charge for the OCS agreement and $14 million for stock-based compensation. The 2006 GAAP net income also includes a small amount, about $148,000, having to do with the Comverse stock option situation.

Most of the charges for that, as we announced previously, are for periods prior to the last three years and total a little less than $20 million in the aggregate for the stock-based compensation charges. We'll have some taxes to pay on top of that, which we're still analyzing further.

As of the end of the year, we've also incurred legal, accounting, and other expenses of approximately $2.6 million related to the Comverse investigations.

On a non-GAAP basis, net income margins increased to a record 12.6% in fiscal '06 from 11.4% in fiscal 2005, and non-GAAP net income increased by 33% to a record $47 million in fiscal 2006 from $35.2 million in fiscal 2005.

Non-GAAP EPS increased to 34% to a record $1.42 in fiscal '06 from $1.06 in fiscal 2005. Fiscal '06 represented Verint's fifth consecutive year with non-GAAP EPS growth in excess of 25%.

We ended the year with cash and marketable securities of approximately $178 million. While some of our cash will be used for the acquisition of Witness Systems, we expect to retain more than $100 million of this cash and marketable securities to support the working capital needs of the combined business after closing.

Regarding the timing of closing of the Witness Acquisition, last week we announced that we received regulatory antitrust clearance in the United States, and that we're on track to close the acquisition. The Witness merger remains subject to a number of closing conditions including Witness's shareholder approval.

While we are unable to provide guidance today, our backlog remains above one quarter of revenue, and Dan will now discuss the trends we're seeing in the market as we begin 2007. Dan?

Thank you, Doug. Contributing to our 2006 growth was an expanding base of security and business intelligence customers who are deriving significant value from our actionable intelligence solutions. Our revenue reached almost $250 million in the security segment, while many security companies take a horizontal approach to the market, Verint's scale has enabled us to develop solutions for specific markets that we believe are looking for actionable intelligence including mass transit, detailed critical infrastructure, law enforcement, intelligence, and service providers compliance.

In the critical infrastructure market, we were selected or deployed by -- for city surveillance projects, airports, and port security initiatives and other municipal security programs around the world including in New York, Atlanta, Baltimore, Chicago, Houston, Los Angeles, San Francisco in the U.S. And in the UK, Italy, Belgium, and Germany in Europe; and China, Hong Kong, Japan, Malaysia, and Australia in Asia Pacific.

In the retail market during fiscal 2006, four of the 10 largest retailers in the United States either began pilots or continued to deploy our video security solutions. While we continue to make good progress in the retail market with a highly differentiated [vertical] application approach, the retail market remains in its early stages, and we continue to see interest from new retailers and are seeking to gain better visibility into the operation in order to take a proactive approach to shrinkage, fraud prevention, customer service, and store management.

In the transportation market, our video security solution was selected or deployed by mass transit authorities around the world including customers in New York, Tampa, Los Angeles, Fort Worth, and San Francisco in the U.S.; France, Germany, Sweden, Spain, and the UK in Europe; and China, Hong Kong, and Australia in Asia.

In the law enforcement and intelligence market during fiscal 2006, our communications interception solutions were deployed into approximately 35 countries around the world including 15 new-name customers for Verint. Many of this deployment involved country-wide systems and were driven by the need to intercept and analyze a wide range of voice and data communications in order to detect and prevent threats.

In the service provider compliance market, we experienced growing interest in our communication interception solution throughout the year driven by a new government mandate. For example, Verint's broadband and voice over IP communication interception solutions were selected by multiple new customers in the United States including two of the largest wireline service providers.

We expect these new customers to deploy our solutions throughout fiscal 2007 to help them comply with the new CALEA requirements for broadband and voice over IP networks.

Overall, Verint built upon its leadership in the security market in fiscal 2006 with innovative security solutions delivered to an expanded set of customers and is well positioned for growth in fiscal 2007.

As we look ahead, we believe that opportunity for actionable intelligence solutions in the security market remains in its early stages, and we can sustain growth for many years. Based on the factors that we discussed earlier, our outlook for the security segment in fiscal 2007 is mid-teen revenue growth.

Turning to the business intelligence segment, we believe the success we experienced during fiscal 2006 was driven by our highly differentiated approach to this market and the growing recognition of the value of actionable intelligence. Reflecting on our 2006 success, our outlook for 2007 for the business intelligence segment on a stand-alone basis, is 20%-plus revenue growth.

Verint's actionable intelligence solution for the business intelligence market includes very sophisticated speech analytics based on linguistics, acoustics, and data mining technologies that allow enterprises to gain better visibility into their customer operations. Verint's actionable intelligence solutions enable enterprises to leverage their customer interactions with [surface] important trends that impact the performance of their business, which traditional contact center solutions have historically been unable to deliver.

We believe that Verint's actionable intelligence approach, which is focused on understanding the customer interactions and improving enterprise processes, is highly complementary to Witness's workforce optimization approach, which is focused on understanding and improving the performance of the agent and the contact center.

The convergence of Verint's actionable intelligence solutions and the Witness's workforce optimization solution will create a strong industry-defining company with a broad portfolio of products for the customer-centric enterprise.

The combined company will have broad product portfolio that will include solutions for calling monitoring, IP recording, multimedia interaction capture, speech and data analytics, performance management, contact center and enterprise workforce management, e-learning and e-coaching, customer feedback management and a full range of strategic professional consulting services.

The combined company is expected to have a larger direct and indirect sales force to be cross-trained to offer a broader portfolio or solutions into their respective customer bases and the market. The combined company is expected to have a strong global customer service organization with increased scale providing customers and partners with world-class and support.

We believe we will have the scale and resources to accelerate the evolution of the combined offering from the contact center across the enterprise to the back office and branches to provide enterprises with a more holistic view of their entire customer service operations.

Since announcing this business combination, we have received very positive feedback from employee, customers, and partners, and we remain firmly committed to supporting both companies' existing customers and leveraging the talent of each organization to build and deliver next-generation solutions for the customer-centric enterprise.

We've also received accolades relative to the strategic merits of the combination from leading industry analysts. For example, Frost & Sullivan said "Verint's core actionable intelligence product line will serve to increase the effectiveness of Witness's workforce optimization suite by its strength in interaction analytics and operational performance improvements. Synergies in division for market evolution and the common realization of the enterprise expansion momentum will serve the combined entity well in developing future growth strategy and drive broader enterprise utilization."

Data Monitor said -- "The combination of Verint and Witness Systems should help address many aspects of building greater customer centricity to recording and monitoring [for the] analysis, speech analytics, workforce management, e-learning, and customer-fitted management tools. Data Monitor believes that improving customer service means optimizing not only the contact center but also the back office branches and stores. Verint and Witness combined look well-placed, caters to this broader optimization trend."

As we look ahead to 2007, we believe that, together, Verint and Witness are extremely well positioned for continued growth in the business intelligence market. By the time the deal closes, our integration plans are expected to be substantially complete, and we expect to immediately begin to execute.

Our integration planning has been facilitated by the similar cultures of both companies and our shared passion for growth.

From a financial perspective, we find Witness's software model very attractive, and we believe Verint's overall margin structure should improve as a result of the combination.

Following the combination with Witness, Verint will have scale and a significant presence in two very attractive actionable intelligence markets. Assuming a Q2 close, we expect the business to shift from two-thirds security and one-third business intelligence to around 50-50 mix in fiscal 2007 providing Verint with exposure to two markets that we believe have very good long-term growth potential.

We believe growth in the security market will be driven by the global ongoing need to improve intelligence to detect threats and we believe that growth in the business intelligence market will be driven by the enterprise's growing desire to enhance the effectiveness of their customer operations.

Before ending the call, I would like to thank our investors for their patience over the last year as we worked towards being in a position to disclose additional financial detail today. I would also like to thank our employees for staying laser-focused on execution during this period and delivering 21% revenue growth and 34% non-GAAP annual earning growth in fiscal 2006. This is a great achievement, particularly under our current circumstances.

Thank you, Dan. Before starting Q&A, I'd like to remind everyone that we have not yet published our full financials, and therefore we would ask you to limit any financial questions to the information discussed during our call. With that, Operator, we'll be happy to take questions.

[Operator Instructions] Brian Ruttenbur.

Thank you very much. I appreciate the additional financial disclosure, too. Okay, on the revenue and calendar '07, I believe, Dan, you mentioned that you're looking for security to grow 20%-plus, is that right?

No, we provide an outlook for security of mid-teen in 2007 and for the business intelligence market, on a stand-alone basis, of 20%-plus.

Okay, and what percentage is business intelligence security -- is it still 50%?

Following the Witness acquisition, assuming a close in Q2, except the mix to shift [inaudible] approximately two-thirds/one-third to a mix of 50-50 in 2007.

Okay, I caught you, okay, so the business intelligence is going to grow 20%, and your traditional security size, the digital video and the surveillance stuff is mid-teens, is that correct?

That's correct, yes.

On a stand-alone basis.

Okay, on a stand-alone basis, okay. And both of those numbers are ex-acquisition or with Witness?

The security numbers are not affected by --

-- by Witness --

-- Witness. When we say stand-alone basis, 20%-plus on the business intelligence side, this is excluding the impact of the Witness acquisition.

Okay, and you don't have any idea what kind of growth you're going to have with Witness? Do you see Witness growing at that same rate internally, once you acquire them?

We're not providing today information relative to the Witness acquisition beyond what we already provided following the announcement of the Witness acquisition.

Okay, very good. My next question is just trying to reconcile GAAP versus non-GAAP. Okay, the difference -- okay, you've got $23 million from OTS, $14 million from stock-based compensation, and then $2.6 million from legal. There's still a handful of millions that are left out. What is that from -- the difference between [inaudible].

The press release that we issued a short while ago, we have a table that's a reconciliation of the GAAP net income to our non-GAAP measures.

Okay, I need to pull that, I apologize for asking the question.

No problem, but one of the things you're missing -- we had a 1996 legal dispute issue that popped this year, and that was about $3 million. So that's one piece. But you look at the press release -- that has all the items listed there.

Shaul Eyal.

Thank you very much, hi guys, good afternoon, and, again, also, thank you for the extended disclosure this quarter. Can you guys talk about -- I honestly haven't had a chance to take a look at the cash position. Did it go down this quarter?

We last announced our cash last year, so we haven't been disclosing our cash on a quarterly basis. Our cash position at the end of this fiscal year is about $178 million. That's down a little bit from where we last disclosed it, but you must keep in mind we've done an acquisition or two along the way, which we've announced, as well as the Office of Chief Scientist, you know, exiting that agreement where the numbers are shown here.

Fair enough. And just one question with respect to the business fundamentals -- any way we are witnessing a shift whereby right now you are talking about, let's say, mid-teens, about growth rate for the DSS division whereas the EBI 20%-plus even prior to the Witness closure -- I think Witness talked about 17 to 19% back on their December conference call.

I think those rates for the DSS division specifically, I think, are slightly maybe slower than what the market has been anticipating before. Is that just kind of a natural evolvement of the market? Is that just a lot of big numbers starting to kick in as it relates to the DSS?

When we look at the security market for Verint, as we mentioned before, we have expanded our volume quite significantly in 2006. Actually, we mentioned that our volume in terms of unit volume has increased much, much faster than our dollar growth rate. We say about unit volume, just to bring it to life, for example, if you look at the video solution, if you look at the number of, let's say, video cameras that were connected to Verint solutions in '06, there was a substantial increase in the number of units that we provided that are connected to more cameras.

So, overall, the business is growing, and Verint is participating in a number of vertical markets with some special solutions, and we believe that these markets are still in the early stage and in are posed for growth for many years.

So when we give an outlook now of mid-teens for '07, this is based on some of the factors that we saw in '06. One of them is that we are offering our security customers an option to provide hardware themselves, and more and more customers are taking us on this option.

For example, we announced in Q4, a $12 million order from a new retail customer, and that specific order, the $12 million, was excluding the servers and the storage. While, historically, customers may have elected moreso to ask Verint to provide the server and the storage and, obviously, the revenue number was higher. But, obviously, also, we're not making high margin on storage and servers because we're not producing them.

So if you look at the overall earning growth that we delivered in '06, we delivered 34% earning growth, and some of the impact on the top line of security is really not creating an impact on our bottom line.

We also spoke about another factor that we saw in '06, which Doug discussed this pricing pressure, and I think that's also an interesting trend in the market. While we see pricing pressures on certain elements of our solutions, which are the more traditional elements such as recording and storage management, the results of new elements in the market, which are analytics, and obviously they provide higher margin.

So, again, there is some impact on top line but not necessarily negative impact on the earnings. And, quite frankly, you may remember that over the last several years we discussed on the BI side that -- we started with actionable intelligence in BI. We had the same kind of issues, where there was more hardware and less software, and there was some pricing pressure around recording but not around the analytics, and I think the BI market has matured and has become much more oriented toward the software more, and we believe that the security market is going in that direction but perhaps kind of lagging behind the BI market.

There are no further questions at this time.

On behalf of Verint, thank you very much for participating in today's call.

This concludes today's conference. You may now disconnect.