Verint Systems Inc (VRNT) 2007 Q1 法說會逐字稿

Good day everyone, and welcome to the first quarter conference call hosted by Verint Systems Incorporated. At this time, all lines are in a listen-only mode. You will have the opportunity to ask questions at -- questions at the end of today's presentation. Instructions on how to ask a question will be given at that time. For opening remarks and introductions, I would like to turn the call over to Mr. Alan Roden. Please go ahead.

Thank you. Good afternoon, and welcome to Verint's fiscal 2007 first quarter conference call. I'm Alan Roden, Senior 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 Chief Financial Officer. By now you all should have seen a copy of our press release which was issued after the markets closed this afternoon. If you have not received this release, please refer to businesswire.com or our website at www.verint.com. Before starting the call, I'd like to mention that certain statements that may be made on the call that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words estimate, project, intend, expect, believe and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties.

Any number of factors could cause the actual results, performance and achievements of the company to materially differ from those may express or imply such forward-looking information. Earlier today we filed an 8K with the Securities and Exchange Commission that included certain preliminary unaudited financial results for the first quarter of fiscal 2007. For discussion of the principal risk factors that may cause actual results to be different from forward-looking statements made in this call from the preliminary unaudited results released today, we refer you to the risk factors and other information discussed in item 741 of that 8K. As we previously announced, because of the ongoing investigation by a special committee of the Board of Directors of Comverse Technology, regarding stockholder bearings, into stock options backdating and other accounting issues, in our internal review of certain related accounting matters and the fact that our accounting period is so open and subject to further adjustments, the financial information we are discussing today has not been finalized, nor has 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, expansions or liabilities, including any possibility of disallowance of previous tax deductions.

Accordingly, this preliminary financial information may change, possibly materially, based on the final results of the Comverse special committee investigation or Verint's internal review or both. The assessment of the tax effects -- the closing of the open accounting periods and a completion of the restatement of Verint's historical financial statements. Similarly, because of business and the impact of the Comverse special committee expanded investigation, our internal review remains subject to a number of uncertainties, we're not in a position to provide annual EPS guidance for fiscal 2007, as we normally otherwise would do. Also we are in the process of quantifying integration and amortization expenses associated with our recent acquisition of WITNESS. We will however be providing annual revenue guidance. Further, as has been our recent practices, we do not currently intend to provide quarter revenue and EPS guidance going forward, including for fiscal 2007 Q2.

As a result of the ongoing investigation by Comverse special committee and our internal review into certain related accounting matters, Verint has not yet been able to file with the SEC a 10K for the years ended January 31st, 2006, and 2007, and 10Qs for the quarters ended April 30th, 2006, July 31st, 2006, October 31st, 2006, and April 30th, 2007, or it's form 8K in connection with the January 9th, 2006, acquisition of multivision network security business. Verint intends to make this filing as soon as possible at the completion of this investigation. 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 practical, after we file our past due SEC reports, 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 June 11th, 2007. Verint takes no obligation to update the content of the call including any forward-looking statements, even if events, circumstances, or expectations change after this call.

Certain nonGAAP financial measures will also be discussed today. You'll find the reconciliation of the differences between the nonGAAP financial measures and the most comparable GAAP 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. Any 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 fiscal 2007 first-quarter results. The first quarter was a record revenue quarter for Verint. And a period during which we achieved two very important milestones. First, Verint surpassed $100 million of quarterly revenue for the first time with record revenue of $101.3 million and year-over-year growth of 15%. Our first-quarter results which represent our 22nd consecutive quarter of sequential revenue growth reflect continued demand for our Actionable Intelligence solutions in the enterprise and security markets. Second, we announced our highly strategic acquisition of WITNESS systems making Verint an industry leading global provider of workforce and enterprise optimization solutions. The acquisition of WITNESS significantly increases our scale and provides Verint with a very strong structure support to support our long-term growth. Following the closing of the WITNESS acquisition two weeks ago, we now expect Verint's revenue to approach $600 million for fiscal 2007, reflecting approximately eight months consolidation of WITNESS.

Later in the call, Doug Robinson will provide additional financial details, but for now I would like to focus on our business in Q1. Helping drive our record first quarter revenue was demand for Actionable Intelligence solutions which enable enterprise and security customers across a wide variety of markets to leverage unstructured information for better decision making. For example, in the government markets, government and law enforcement organizations around the world continue to seek ways to improve their intelligence and evidence-collection capabilities. During the first quarter, we received multiple million-dollar orders from new government customers including an order in excess of $3 million for a new international law enforcement customer. These large orders are being driven by the need to collect and analyze increasing volumes of voice and data communications and the resulting need to transform this unstructured information into Actionable Intelligence. In the telecom market, wireline, wireless and Internet service providers around the world are seeking solutions to help them effectively meet government mandates related to lawful interception of voice and data communications.

During the quarter, we received orders from new and existing telecom solutions for our communication interception solution, including an expansion order in excess of $2 million from a U.S. broadband service provider looking to comply with new career requirements for [paca] data networks. We also received orders from eight customers for our recently introduced light CALEA solution designed to help smaller broadband and voice IP service providers effectively comply with CALEA lawful interception regulations. In the next transit market, transportation authorities around the world continue to explore new initiative to enhance the security of their assets and infrastructure and to ensure safe travel environment. During the quarter, we received multiple orders in excess of $1 million from new mass transit customers for our Nextiva transit video solution, including an order in excess of $3 million for San Antonio transit. San Antonio transit will deploy Verint's Nextiva solution across its entire 89 bus line transit networks to deter vandalism and theft and accelerate emergency response.

In the retail markets we continue to see an opportunity for Actionable Intelligence video solutions and during the quarter we received an order in excess of $1 million for Wal-Mart, a previously undisclosed retail customer. We continue to see high level of interest from potential new specialty and big box retail customers. For example, we recently announced a Verint Nextiva specialty retrovideo solution for selectively and deployed by Domino's Pizza to enhance the security of certain corporate facilities, including the (inaudible) and corporate-owned stores. Additionally, Domino's has recommended Nextiva through its global network of franchise-owned locations. In the enterprise market our sources around the world are seeking Actionable Intelligence solution to ensure that they deliver a high-level of customer service on behalf of their clients. During the quarter, we received multiple orders from domestic and international outsourcers for our Ultra solution including nearly $3 million expansion order from an existing domestic outsourcing customer. This outsourcing is deploying Ultra across a total of 17 corporate centers in the United States and Canada in order to obtain an enterprised view of their (inaudible) operations. We also received orders from financial services and telecom service providers including an order in excess of $2 million from a North American service who is deploying Ultra to help analyze customer reaction to marketing capabilities and for actively identify customers at risk of churn.

Our Ultra solution is designed to deliver strong value to large telecommunication companies that need to better understand why their customers are calling in order to optimize service processes and enhance customer loyalty. We believe that our strong first quarter revenue reflects continued demand for Actionable Intelligence solutions in both the enterprise and security markets. The acquisition of WITNESS positions Verint to further capitalize on the growing opportunity for Actionable Intelligence solutions in the enterprise market while providing increased scale that will help us maintain a leadership position in the security markets. Verint has now more than 2,500 employees across 18 offices around the world. We now have a broad set of Actionable Intelligence solutions for both the security and enterprise markets. Our solutions for the enterprise market now includes a very broad suite of application, quality monitoring, IP recording, multimedia interaction capture, speech and data analytics, performance management, contact center and enterprise workforce management, e-learning and e-coaching, customer (inaudible) management and a full range of strategic, professional and consulting services. We now have more than 5,000 customers across more than 100 countries, providing significant upscale and cross sale opportunities, and more than 70 Fortune 100 companies are Verint customers. The combination with WITNESS has received very positive feedback from customers and partners and Verint has been recognized as a market leader by industry research firm -- research firms such as Data Monitor, Frost & Sullivan and Gartner.

We believe that Verint has become the company that's best positioned to help enterprises manage their customer service operations efficiently and profitably from contact centers to back office and branch operations. When announcing a closing acquisition, we have more than three months to carefully plan the integration and as of today our enterprise business is operating with one unified very experienced management team with a new vision for the industry. Immediately at closing, we launched a new name for our enterprise business WITNESS Actionable Solutions symbolizing the complementary nature of the combination and the unified management team. Later on, I will provide an update on the integration, but now I would like to turn the call over to Doug Robinson, who'll provide more detail behind our Q1 results and our financials going forward. Doug.

Thanks, Dan. Just like to preface my comments as we have previously have that the financial information we're discussion today is preliminary and has not been audited or reviewed by Verint's independent accountants. As a result because our accounting periods are still open this information is not final or complete and subject to change. The first quarter was another record revenue for Verint and was 22 consecutive quarter of sequential revenue growth. Total revenue increased 15% to $101.3 million from the $87.7 million we recorded in the first quarter of fiscal 2006. We again ended the quarter with backlog in excess of a quarter's worth of revenue. We continued to experience very robust growth in the enterprise segment which was previously referred to is a business intelligence segments with revenues increasing 30% year-over-year. Revenue in the securities segment increased 8% year-over-year. On a GAAP basis we had a net loss of $1.3 million and an EPS loss of $0.04 impacted primarily by $2.7 million for stock-based compensation, $3.9 million for our special retention bonus program, and approximately $4 million for legal, accounting and other expenses related to the Converse and internal investigations.

On a nonGAAP basis, our gross margins were 61.5% and our operating margin was about 10%. Our nonGAAP income was $9.4 million and our nonGAAP EPS was a profit of $0.28. Following the announcement to acquire WITNESS early in the first quarter, we immediately began to make investments to prepare for the integration to support the increased scale of the combined entity. These investments, ahead of the actual closing acquisition and the realization of expected synergies from the combined business contributed to what we believe to be a temporary reduction in our nonGAAP operating and net income margins. Our nonGAAP numbers exclude certain items including amortization of intangible assets related to acquisitions, stock-based compensation and other one-time charges. Please refer to our press release and our website for a discussion of GAAP results as well as full reconciliation of our GAAP and nonGAAP financial results. Before turning to our outlook I'd now like to take this opportunity to provide you with an update to our fiscal 2006 results.

When we previewed our fiscal 2006 results in March, we indicated, as we've done today reporting the Q1 results that there were preliminary and unaudited and as such until we actually report and file these results remain open and subject to adjustments. Since our announcement we've made a few adjustments including bonus, commission and audit fee accruals which net to additional after-tax operation expense of approximately $500,000. As a result of these adjustments, fiscal 2006 nonGAAP EPS moves from $1.42 to $1.40, representing 32% growth year-over-year. I'd would also like to point out that our fiscal 2006 results as with our first-quarter results exclude any potential adjustments related to FIN 48, a recent FAS B interpretation regarding accounting for uncertainty in income taxes which we're still implementing. As a result of FIN 48 and other tax work, we may find that there are tax expense adjustments that may have to be made. Looking forward now, we believe the market for Actual Intelligence solutions continues to be in its early stages and reflecting this we'd like to provide initial guidance for the combined company. We expect nonGAAP revenue for fiscal 2007 of between $570 million and $600 million. A revenue guidance reflects eight months of contribution for the WITNESS acquisition. Our revenue guidance also includes approximately $40 million of deferred revenue which will not be recognizable for accounting purposes as a result of how deferred maintenance and service revenue on the balance sheet is treated and purchase accounting.

Behind our revenue guidance for fiscal 2007 is an expectation that we'll see approximately 150% growth in the enterprise segment with the added benefit of WITNESS and low double digit growth in security segment. We believe the acquisition to yield synergies over four quarters gradually improving our results each quarter with the full impact of synergies achieved by the end of Q1 of 2008. At such time our nonGAAP operating margins should approach 20%, but we're not providing earnings guidance today. We believe the acquisition will negatively impact our fiscal 2007 earnings as we do not expect to achieve sufficient benefits soon enough to offset the cost of the financing this year. Although not providing earnings guidance we did want to provide our current view on how we see our integration and synergies progressing during the four quarters following the acquisition.

In the fiscal second quarter we do not expect our results to reef the true run rate combined business as our Q2 businesses will be negatively impacted by a partial quarter of consolidation, our integration and restructuring activities around certainly will not be reflective of the full benefit of the expected acquisition synergies. In Q3 and Q4, we expect to begin benefiting from our Q2 actions related to operating efficiencies and expect our operating margins and EPS to gradually improve. Our current view is to enter fiscal 2008 with first quarter nonGAAP gross margins in the mid 60% and nonGAAP operating margins approaching 20% as we benefit from increased scale. We also expect our effective tax rate in 2008 to move towards the high 20% to 30% due to the WITNESS acquisition. At this time we're unable to provide an outlook for GAAP margins as we're still quantifying integration amortization expenses associated with the acquisition.

Turning to our balance sheet now, following the acquisition of WITNESS and related integration expenses, we will have approximately $110 million of cash and cash equivalents, $650 million of bank debt and $293 million of convertible preferred stock. The bank debt carries an initial rate of 2.75% over LIBOR and a convertible prevent -- excuse me, the convertible preferred carries an initial dividend rate of 4.125%. Finally we expected our fully diluted share count to be approximately 33.3 million shares. In all, the acquisition of WITNESS takes Verint to new level and provides us with a strong platform and scale to deliver ultimately a very attractive financial model. It's an exciting time at Verint. And we continue to optimistic about the opportunities for our Actionable Intelligence solutions in the enterprise and security markets. Now I'd like to turn the call back to Dan to provide an update on integration.

Thanks, Doug. I think Doug said it well. It's a very exciting time at Verint as we take the company to a new level. On May 29, we announced the close of acquisition and the formation WITNESS Actionable Solutions, an organization focused on the workforce and integration market with a name that symbolizes the combination of WITNESS and the Actionable Intelligence vision from Verint Although we just closed acquisition on May 29th, we have been preparing for the combination for three months since announcing the acquisition on February 12th. I'd now like to review some of the major milestones we've already achieved in this short period in our product strategy.

Shortly after announcing the combination, we assembled a core integration management team to run the integration planning process. Both Verint and WITNESS have been very successful on their own and behind the success were two incredibly strong and highly experienced teams. The core integration team has been working together for almost three months and has become the new unified management team on the day of closing. This team is comprised of key talent from both companies and comes together with a high level of energy fueled by our leadership in the industry. In order to maximize benefits to our global customers and partners, we have a metrics organization designed for blending regional customer focus with global strategy and coordination.

The new organizational structure granted some duplications and on the first day of integration we announced a new organization and informed all the WITNESS people of any job eliminations including those on transition plans. Transition plans range from several weeks in some cases to several months or in -- or more in other cases. We believe a quick comprehensive integration is essential to our success and it positions us well to maximize synergies while offering significant opportunities to our employees and our partners and customers. The new organization structure for the WITNESS Actionable Solutions organization is now in place and we have integrated all functions including sales, service, product and G&A as (inaudible). In sales, we have married the sales organizations in the Americas, India and Asian Pacific including free sales, direct sales and channel sales, creating one of the industry's largest salesforce, focused on workforce and enterprise optimization.

The combined sales organization is drawing on a full suite of obligations creating immediate revenue synergy opportunities. For example, Verint highly innovative speach analytics applications are now available to the WITNESS broad customer base. Speech analytics is a [license] area and we believe that over time we will see a lot of interest from both new and existing customers for this capability. Just as WITNESS' customers can benefit from Verint's strength in speech and data analytics, Verint customers can immediately benefit from WITNESS' workforce management and customer [field X] solutions. Our product synergy provides our sales force the ability to offer the customer base continued support to their existing products to protect their investments. At the same time, existing customers as well as new customers can benefit from the complementary offerings from both companies and ongoing product innovation of a large-scale dedicated product group. In addition to having a very strong direct and channel sales force, Verint is uniquely positioned as the only workforce optimization vendor with both OEM and restart up relationships with the key infrastructure providers Avia, (inaudible) telecom and Nortel. These strong indirect channels complements Verint's direct salesforce and provides Verint opportunity to reach a broader customer base with a suite of workforce optimization applications.

To support our growing customer base we have combined our support and services groups and today have one global customer service organization with resources in all regions. Increased scale of our supported service organizations provide our collective customers many benefits including more resources and best practices leveraged from the legacy organizations. To further advanced Verint's workforce optimization product leadership, we've already combined the two companies product development organization under one unified product development management team. The combined product development organization will continue to support both companies existing workforce optimization solutions while the leveraging the strength of each company to bring to market additional analytical obligations. Increased scale of the product organization will also allow us to accelerate our enterprise organization strategy, both Verint and WITNESS independently recognize the opportunity to take its workforce solutions outside the contact center. Together we will have the scale and resources to accelerate the revolution of the combined offering from the contact center across the enterprise to the back office and branches to provide enterprises with the more realistic view of their entire customer operation. This is a very early opportunity that we're very well-positioned to capitalize on and expect to talk more about in the future.

Our back office operations including HR, finance, IT, have been combined as well, and we're in the process of integrating our back office systems in phased phase. For example, in the IT area we achieved our objective of having network connectivity and certain bills applications in place at closing. And we'll continue integrating our full IT systems over the coming quarters.

Turning to product strategy, our core strategy is to provide a customer base with investment protection combined with added benefits of being able to add new and exciting capabilities at their own pace. Both Verint and WITNESS have strong product offerings and it is not necessary to eliminate any of the products as a result of the combination. Over time, we will make our product performer even stronger by blending the best technology available from both companies we need to managed benefits to our customers. Because we spend the last three months planning our integration and product strategy, we were in a position to deliver a very clear, well-received message to our customers and partners day one as follows.

First, we are committed to supporting their existing investments, customers should expect the same great service they received previously from a much larger organization. Second, they can extend their existing investment with additional applications for a market leader with a broader sweep in the industry. Because of the open approach, our customers can easily add additional applications, such as: speech analytics, performance management, workforce management and customer solutions regardless if they were previously a WITNESS or Verint customers. Third, they can look forward to Verint introducing new highly innovative, market leading analytical applications that will benefit them in the future. Our decision to quickly integrate the two businesses will greatly benefit customers as it will enable to accelerate the delivery of new analytic applications that leverage the strong capabilities of both companies. Customers should be very comfortable that they're buying from today's market leader and that Verint is the safe choice. Verint now has 2,500 employees including approximately 600 in sales, 800 in services and operations, and 750 in R&D. We continue to hire in key areas in anticipation of taking advantage of the market opportunity for Actionable Intelligence solutions and to drive the business forward. We believe that foreign acquisition, Verint has the necessary scale to maintain it's leadership in both the enterprise and security markets, two markets we believe have very good long-term growth potential. We will now be happy to take questions.

Thank you. (OPERATOR INSTRUCTIONS) And we'll pause for just one moment to assemble the queue. We'll hear first from Joseph [Borey] with Deutsche Bank.

Hi. Good evening, guys. First of all, congratulations on the closure of the acquisition. First question we have here, if we may, is how long do you estimate it'll take for you to technically integrate both code bases?

So we basically as we stated before, we committed to completely integrate the two companies, we have announced from day one to the organization, the formation of WITNESS Actionable Solutions which is one organization under one management team. And we took actions day one related to combining all functions and also to introduce the new product strategy to the market. And the concept we have behind this integration is that we eliminate some duplications that we have in the organization, obviously as a result of this combination is some duplications in management, in some administrative functions, marketing activities and so forth. And we basically announced to the WITNESS company that we are eliminating more than 100 positions. But our plan basically going forward is to start to grow the business and while we're creating the synergies of the integrated company and more efficiencies, we basically have now the core structure to support a much larger revenue that we anticipate as part of the future growth. So this is our philosophy relative to integration and relative to the product, as I mentioned before, we have very strong product offering from both companies.

So basically our customers have the choice to continue and benefit from the products and just staying on support plans or they have the choice if they wish, now they have access to more business applications, various customers, for example, did not have access for us to work with management for Verint and now they do and WITNESS customers did not have access to speech analytics and now they do. So we expect some of the customer will choose to move forward and expand their solutions, and obviously over time now that we have a very large-scale R&D organization with 750 people focused on Actionable Intelligence, we'll be introducing new products and new capabilities into the market.

Thanks. Fair enough. That helps. And if I may, I'll ask just a second question and then I'll let other people ask. At this point already any anecdotes of changes in the competitive landscapes, for instance, different win rates since you announced the acquisitions, or in particularly since you closed acquisition?

I think it's too early to talk about the trends. I believe that the market generally is looking at this combination as very favorable. As we're contemplating this acquisition, we basically were responding to what we heard from the markets for long time that customers are looking to have a broader suite of solutions from a vendor. If they prefer one-stop shops, so they can have a more realistic solution implemented in their operations. And responding to this, we believe we created a very broad and strong offering for the contact center and also as I mentioned we're exciting about the fact that we're starting to offer similar solutions to customers outside the contact centers in the back offices and branches which are other parts of customer operations. So we see tremendous opportunities with the contact center customers now as we're in a better position to address them. And we also see opportunities for Verint to move into the overall customer centric enterprise into back office and branches.

Okay, great. Thanks a lot.

We'll take our next question from Daniel Meron with RBC Capital Markets.

Congrats again on the move with WITNESS. Couple of questions for you guys. First of all, you mentioned some pick up in the wiretapping business. Can you just how sustainable that is, is that just something that has to do with the enforcement of some CALEA-related regulations or something that should reinvigorate the growth in the security business that was kinds of slow in 2006, hitting 2007, maybe even into 2008? And then I have a follow-up question.

Alright. I think when we look at the communication conception market globally, it's obviously affected by the need for better security and many governments and law enforcement agencies worldwide recognize that need. And also it benefits from different telecommunications protocols that as they are introduced into the networks, obviously our customers need to be able to buy equipment and software to be in a position to intercept new protocol. So what I specifically mentioned is that we -- earlier in the year, we introduced a product in this area called STAR-GATE. And we introduced STAR-GATE light version, which is specifically addressing the small service providers that are offering voice-over IP and broadband solutions, and while we are also announced the win and in previous quarters we announced wins selling CALEA solutions to the larger service providers, there was a recent SEC clarification in the U.S. that following that smaller IP service providers accelerated -- to some extent accelerated their purchases.

And we announced that in the first quarter we had eight orders from eight different service providers which was a pickup. But again, for us, the communication interception business as global business. I think it's driven by the need for better security, so it certainly has been affected by -- since 9/11, the growing recognition for better security and it's driven by the constant changes in the telecom world.

Okay. Thank you, Dan. And just a follow up. Looking to 2008, did you provide some notion about guidance, but generally speaking what kind of growth rates should we expect on an organic level for both the enterprise once Verint and WITNESS are combined, and also what kinds of growth should we expect in the security business?

Okay. So if you look at the enterprise business, first, we can certainly analyze what happened in Q1. Q1 was a quarter where we announced the deal, but we certainly didn't close the deal. But in our numbers in Q1 we stated 30% growth in our enterprise business. And so with WITNESS, if you look at WITNESS Q1, which obviously they were a separate company and they announced the Q1 results, they grew almost 20%. So I think in Q1 we saw that the customer basically voted and confidence in the combination and the business of WITNESS was on target and the business of Verint was a 30% growth. We have indicated before in our last quarterly conference call that we see for the enterprise business approximately 20% growth in '07, and our guidance today for 150% growth overall including eight months of WITNESS is also consistent with our previous view of 20% growth on the legacy Verint. On the securities side, our guidance is based on low double-digit growth.

And heading into 2008, would you quantify, or put some color around that?

So I think that we know that why we certainly not providing guidance for 2008, we did discuss the fact that Q1, as we enter 2008, Q1 where we expect to benefit from all the synergies of the integration, we expect to be at mid 60% in terms of gross margins, and approaching 20% in operating margin -- nonGAAP operating margins. But we didn't provide any specific revenue guidance for '08. But I think that for as far as we see trends, we believe that the markets should be over time and especially with our growing scale, should be at low double digit to mid-teens long-term model.

Okay. Thanks so much. Good luck going forward.

Thank you,.

And we'll take our next question from Brian Ruttenbur with Morgan Keegan.

Thank you very much. The next question I have is on GAAP revenue You talked about revenue of $570 million to $600 million and then you made a statement of X $40 million of deferred revenue. So that the revenue that you're going to be reporting on the year including WITNESS will be $530 million to $560 million or will it be $570 million to $600 million. I'm a little confused.

Yes. This is Doug. So what the $40 million represents is the deferred revenue that WITNESS has from maintenance and professional services. So they've done that business, but they haven't earned it through the either performing the services or having the maintenance period go on. We -- with the purchasing accounting entries we lose that and can only book kind of a cost provide instead of actually being able to get that revenue. WITNESS had that same situation when they have done acquisitions. They adjusted for that and had nonGAAP revenue or as they call it core revenue amounts. So what we did in our guidance of the [$576,000] that's as if we're proforming that back in, if you will. But from a pure GAAP standpoint going from the purchase accounting exercise, the revenue would be lower by $40 million.

Okay. So when you report on your quarterly basis next quarter you're going to be giving us GAAP and nonGAAP revenue.

That's correct.

Okay, very good, and you'll be also giving us GAAP and nonGAAP earnings as normal, right?

Correct.

Okay. And when do you expect to see GAAP profitability again? Obviously next quarter with charges and everything else and given that you had a loss this quarter, I would imagine it's not next quarter. Do you expect to see GAAP profitable on a quarterly basis any time this year?

Yes. Certainly not next quarter. You're right. We have a number of charges -- one-time charges with the acquisition potential, noncash in-process R&D write down that we'd have as well. As you saw from this quarter, we do have continued Comverse and investigation charges that are impacting our GAAP results although we do take them out for nonGAAP. And we do have a special bonus program in place for this year, this quarter. It was about $4 million for that as well as the Comverse was another $4 million. So that certainly impacts the GAAP -- the GAAP earnings that we'll have this year. And then the stock-based compensation is the other big one. And then with the WITNESS acquisition we're still doing the evaluation analysis, but that's going to result in some intangible charges. Right. Charlie, so I don't think it's fair for me to comment on that at this point. We've got to get WITNESS valued, determine what the accounting entries look like around that, get a better feel for the investigation of and the fees associated with that and then determine when we might turn that corner in terms of GAAP profitability.

Okay. So I would anticipate then and our next quarterly call when you report that you'll have some sizable charges. Is that fair to say?

Yes, yes. We would expect to have one-time integration expenses associated with the WITNESS transaction. Potential, as I mentioned a moment ago in process R&D, right down --

How big are we talking about? Are we talking $10 million, $20 million, I mean, what kind of number? In the range?

Yes. We were -- we originally budgeted about $30 million as a integration expense associated with the integration and other restructuring expenses.

And that would all take place in July or would some of it stretch over to the October period?

We'd expect the majority of it to take place in the July quarter.

Okay. And then just a couple other follow-up questions real quick on this. Gross margins, it sounds like because of everything that's going on, gross margins are going to be weak in the July period and then kind of improve in the October and January period. Is that correct?

Yes.

Okay. And then -- I'm sorry, go ahead.

Yes, no. From a gross margin standpoint with WITNESS the gross margin should improve. I just from you got -- WITNESS has a more software model compared to Verint as a whole aggregated together, so we'd the combination with WITNESS to have a higher gross margin.

Okay. Even on this first quarter out?

Yes, we aren't giving guidance on the quarter. You just do the math on the combined entities you can see that by having WITNESS in place will add to a gross margin.

Okay. And then just doing simple math because unfortunately that's what we have to do is kind of throw something against the wall sell side. On the R&D and SG&A, if we looked at WITNESS last quarter what they reported, we should say see similar numbers except there should be some cuts in the R&D or SG&A line from quarter-to-quarter. Is that the right way, just some minor cuts. You got rid of 100 positions from WITNESS.

This is Dan. Well, yes. We cut -- we only cut the first day of the closing we only cut 100 positions in WITNESS. As I said before, we are not planning to do more cuts. Our plan from now on is to grow the business. We believe we have the core structure to support more revenues, so we'll be more profitable over time because we don't have to increase as much cost structure. And also some of the people that we have cut, we also kept them transition plans so they'll continue to for quarter or two or three, we'll continue to burn up P&L, but post positions, they'll be no longer employees. But in terms of the plan, the plan has already been communicated, the plan has been executed, actually, the first day or two, and we expect the actions we took right away after closing to benefit the company over several quarters.

Okay. And then last question, I'll let somebody else jump in there. You mentioned that this was going to be dilutive, can you give us some kind of parameters on the dilution? I guess ex the charges, it's going to be dilutive this year, but you anticipate to be accretive by as much as it was dilutive in the following year. Is that fair to say, or can you make some kinds of broad-based brush assumptions like that for us?

What we said is the second quarter with the charges that we just talked about clearly that's going to be a bit problematic from a profitability standpoint. We're not providing quarterly guidance we're not providing earnings guidance for this year. But as Dan just talked about as we get those benefits from the synergies from WITNESS going forward we expect to get into next year with 20% or so operating margins.

Okay. Thank you very much, appreciate it.

Sure.

(OPERATOR INSTRUCTIONS) We'd hear next from Daniel Ives with Friedman, Billings and Ramsey.

Thank you. Just a few questions on the margins because you're not giving EPS guidance. So for Q1 next year, would you expect to be at 20%, because approaching 20% is kind of fuzzy, I just want to be clear what we're talking about for Q1 next year in gross operating margins.

Well, Q1 is a little ways away so it's a little fuzzy for us, too. But when we say approaching 20%, 18% to 20%, somewhere in that range is what we expect to achieve.

Perfect, that's just what I wanted. In regards to this year in margins, obviously you're constrained in what you can talk about. I want to understand where margins -- operating margins should start to be in October -- in 3Q and 4Q, because I think that's the real question. I understand next quarter is a wild card because of the debt and the dilution, but when you still look at October and January quarters, should operating margins be back in kind of those mid-teen levels?

It depends on what we work through and get the benefits from the synergies.

With all that said.

We know where we want to end up by the time we get out of this fiscal year and set the stage for a nice fiscal '08. Clearly, Q3 we expect to get back to some decent margins and build on that in Q4 and build again to Q1, so if you take Q1, it's kind of 18% to 20% and kind of stair step it up to that from that from a model perspective, you'll probably be in the zone.

And let me add here, it's Dan, and maybe it'll help clarify. Because I think the key is our integration model. As we, as we -- as I said before, we took the actions right after the closing. And we expect to get the benefits over time which means we expect gradual improvement from quarter-to-quarter. It's not going to be like in Q1 next year, it's going to be a step function in our operating margins. So short of giving specific guidance for Q3 and Q4 which we're not, we basically are explaining what, we do and how it's going to benefit and as we grow the top line from quarter-to-quarter to achieve our $570 million to $600 million revenue target, we also going to improve margins from quarter-to-quarter.

Okay. So would you expect margins in '07 to be in line or above where they were in '06? For the year.

No, I think the fact that we've done WITNESS this year makes '07 a bit of an anomaly.

Okay. And I guess just lastly, I mean, Comverse said and I guess ultimately to the date back to be compliant with their filings by the year end fiscal '07. Can you speak to Verint's position there, given that Comverse and [Ultracom] said they expect to be compliant by fiscal '07.

Yes, we similarly expect to be on a similar path and that's our goal that we have to get ourselves current by the end of the year.

Okay, that's it. Thanks.

Sure.

We'll take our next question from Dom LaCava with Canaccord Adams.

Congratulations on closing the acquisition. Just a few questions. Just to be clear, this has been kind of hammered home a little bit, but the mid 60% gross margin and the 20% -- or approaching 20% operating margin is not for '07. That's where you expect to be exiting '07? In other words, that doesn't go along with the $570 million to $600 million, is that correct?

That's correct. We are not putting earnings guidance out there for 2007, but we didn't to provide some color as we kind of work through the synergies from WITNESS and where we thought we'd end up by the time we did work through '07. So what we said is going into '08, by the time we get into the ends of '08, we'd have operate image margins approaching 20%.

Okay. Got it, just wanted to be clear. The Comverse expenses that you had in the quarter were just about $4 million and that compares to $2.6 million all of last year. Are those expenses on a quarterly basis going to be similar to what we saw this quarter or how can we think about those?

Yes. They did, as you point out, ramp up in Q1. And we certainly, I think we'd expect perhaps a similar amount in Q2, but as we just talked about we hoped to be worked through this by the end-of-the-year and then get this behind us.

Okay. And then you mentioned -- you mentioned on the security front, is low double-digit growth, that compares to your prior guidance of mid-teens. Is there something -- is that kind of more modest expectations now?

Yes, I would say low double digit is somewhat modest relative to mid-teens. We have Q1 behind us, and obviously that is affecting our view.

Okay. But there's nothing fundamentally going on there that we should be concerned about since it appears that directionally you're bringing in your expectations for security.

I don't think there's any macrochange, but the reality that is we had a very strong enterprise growth of 30% in Q1 and we had a security growth of 8% in Q1 and just building this 8% into our outlook, we decided that it's more prudent to look at the plan and provide guidance for low double digits.

Okay. Okay. And then on the Wal-Mart contract now, how many big box retailers does this mean that you have right now contributing revenue? That would be Wal-Mart, Target, Home Depot. What does that look like now?

Yes, so we recently announced that our customers they are in different stages of deployment, obviously, and they're very large organizations, so we don't have any insight into what would be the future revenue stream from these customers, but we certainly are investing quite a bit in Wal-Mart. We're investing in new initiatives. We're investing in demonstrating to Wal-Mart also new capabilities we have not deployed but we think that may be of interest to them to deploy down the road. So there are other big box retailers that we're working with, and we're not to the point that we can announce them. But we certainly are active in doing pilots with other big box retailers. And as we discussed today also once we prove to ourselves and the market that we can really add value to retailers, we took our big box solution down to specialty retailers, and very excited about Domino's endorsing our solution. And obviously we are committed to the big box market, but we're now offering investing in expanding into the specialty retail market.

Okay. Okay, that's helpful. And then I guess one question on WITNESS clients. Are you seeing any pushback whatsoever from previous WITNESS clients on the combined platform? And also I know it's kind of recent here, but are there any new business opportunities you can share that were closed based on the combined platform?

Yes, so I don't think that customers with us have any reasons to push back because there's no drama here. We did not announce any end of life. We actually announced quite opposite that we're supporting their platforms and they are on support platforms and they continue to get support now from a large -- larger organization with more resources and we are cross-training people from Verint and WITNESS platform and so on. Because the products are good products and customers are happy with the products, there's really no reasons for us to announce any negative implications for them and no reasons for them to push back. Where we do get excitement is there's a lot of interest in the WITNESS base in the Verint speech analytics. Actually we're offering this capability right away, so right out of the gate. We're able to provide the WITNESS customer with the Verint CI analytics product, which is the speech analytics product. And there's a lot of interest. Quite frankly, in order to really benefit from all this interest, our biggest challenge is to get people on the WITNESS side trained on the speech analytics products so they can bring this product into their customers base. And that's where we're focusing now. Obviously, over time, we'll add more and more applications, but right out of the gate, the WITNESS base is very excited about the speech analytics, and is also as I mentioned before for the Verint base, there's some business applications from WITNESS that we're now able to offer from the base. So yes there's a lot of cross selling and upselling opportunities right now.

Okay. Okay. Great. And final question is when you pull report next quarter is it safe to say we will be able to -- we'll get visibility into the profitability. I know it'll only be 67% of a quarter, but is it going to be broken out as far as what the WITNESS piece is relating to profitability on a nonGAAP basis? Obviously, once you take the charges away, are we going to get some visibility into that?

So, as we just outlined today, we've moved very quickly to integrate the business, so to the extent that folks would like to see things split out with different sets of numbers that's going to be increasingly difficult because they're operating at one cohesive unit going forward.

Okay. Okay, thank you.

Sure.

(OPERATOR INSTRUCTIONS) We'll hear next from Craig Nankervis with First Analysis.

Yes. Thanks very much. My questions has mostly been asked. I'm just wondering if I could get a little more feel if security was light in my estimate in the quarter. What is going on there? And what's happening with your recently unbundled analytic software and how your success is there?

I -- in terms of security, I don't have any macro trends to update today. We're -- basically as we indicated before, the security business is split approximately 50% video surveillance and IP video applications and approximately 50% in the law enforcement and government intelligence gathering area, and that's been the case for quite some time and also it's pretty consistent, one, that the business approximately 50/50. So in terms of if you look at sudden granularity and different trends and the different components across the business, there's going to be no change to report. I think that what we see is the overall security market is in very early stage, certainly we see very fragmented market, a lot of different offerings. The whole video market is just still in the early stage converting from analog to digital and now to IP video and analytics. So -- and typically to an early market, when we were smaller, we could benefit from higher growth rate. But as we pick up scale, we think that we certainly are growing and going well with the market. But our outlook now is low double digits.

With all that's going on on the other side of the house, the enterprise side, do you feel you still can have good focus on growing the security business if they're on the margin, sort of less of a focus on security currently given the acquisition?

So, first, going forward, approximately 60% of the business would be enterprise and 40% would be securities, so 40% of the business is still a very sizable -- And we certainly are committed to the security business. Also I'd like to mention that as we organize the WITNESS Actionable Solutions organization, we also obviously because of the new scale organize Verint's role and I think the security business is supposed to also benefit from the scale. I mentioned before, we have a metrics organization, so within the regions and the Americas, the (inaudible) and Asia Pacific, we have sales organizations focused on enterprise and on security, but we've increased sales, better systems, better business processes and just more people to support the business, this will certainly benefit also the security organization. Plus I think Verint overall with the scale will have better brands and more channels, and a lot of the security business is focused on also the IP organization within our customer base, because when we deliver our actionable intelligently organizations, the IT organization is pretty heavily involved in selecting the right products. And just having a better brands of role and more presence with the IT organization on the enterprise side, I believe is going to also help us in driving our security solution, especially driving the confidence of the IT organizations that Verint is a credible vendor and can deliver on many of their needs.

Okay. Thanks very much for the help.

And we'll take a follow-up question from Daniel Meron.

Just want to understand if I got it right. Thanks, Douglas, you just mentioned that your backlog is about one quarter's worth. If memory serves, didn't you used to say your backlog is one quarter's worth? If you can clarify that. And if there is actually a smaller backlog at least compared to the overall quarter's, if you can quantify whether in absolute terms the backlog did grow sequentially year-over-year, and why is there a difference now?

Yes, I think you're reading maybe a little too closely into what I said. We have over a quarter's of backlog, currently. We have said that in the past, we continue say. That beyond that, we would prefer not to get too granular looking at specific backlog numbers going backwards.

Would you be providing this metric going forward as opposed to WITNESS acquisition?

We'll see how that goes and WITNESS has a little bit of a different model. It's more what we refer to as a book-shipped model, and less working off of backlog. Deferred revenue, particularly around the maintenance is a little bit more sizable. So there's a little bit of a business model shift. We'll evaluate that in terms of our disclosure going forward.

Okay. Thanks so much. Good luck.

Okay. You're welcome, thanks.

And that does conclude the question-and-answer session. We'll turn the call back over to our speakers for any additional or closing remarks.

Thank you, operator, and thanks, everyone, for participating in our first quarter conference call. Have a great evening.

And that does conclude today's conference call. We'd like to thank you all for your participation, and have a great day.