Verint Systems Inc (VRNT) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2010 Verint Systems earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I will now like to turn the call over to Mr. Alan Rodan, Senior Vice President Corporate Development and Corporate Treasurer. Please proceed, sir.

Thank you, operator. This is Alan Roden. I'm here with Dan Bodner, Verint's CEO and President and Doug Robinson, Verint's Chief Financial Officer. Thank you for joining our conference call today. By now, you should all have seen a copy of our quarterly report on Form 10Q for the quarter ended April 30, 2010, which we filed today as well as a press release that includes selective financial information for that fiscal quarter. You should have also seen a copy of our annual report from Form 10K filed on March 17, April 8 and May 19 as well as press releases issued on February 3, April 8 and May 19. Each of these filings that we have on our website and also on the SEC's website. The copy of these press releases is also available on our website.

Before starting the call, I'd like to draw your attention to the fact that certain matters discussed in this call may contain forward-looking statements within the meaning of the Private Securities and Litigation Reform Act 1995 including statements regarding expectations, predictions, use, opportunities, plans, strategies, beliefs and statements with similar fact relating to bearing. These forward looking statements are not guaranteed to performance and they are based on management's current expectations and involve a number of risks and uncertainties, any which would cause actual results to differ maturely to those expressed in or implied by the forward looking statements.

The forward looking statements made as of this date, of the day of this presentation and as set as required by law, Verint assumes no obligation to update or revise them or to provide reasons why actual results may differ. Investors are cautioned not to place undue reliance in these forward-looking statements which are time sensitive and speak only as of today. For more detailed discussion of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in these forward looking statements, please see our Form 10-K for the year ended January 1p, 2010. Unless otherwise noted all the financial information discussed today is nonGAAP. A reconciliation of nonGAAP financial measures provided in today's call to the most directly comparable GAAP financial measure as well as an explanation of why management use these measures is included the end of this web cast presentation and our press release dated February 3, April 8, May 19, and June 9. NonGAAP financial information is not meant as a substitute to GAAP results but is included because management believes such information is useful to investors for informational and comparative purposes. In addition, management uses certain nonGAAP measures internally to evaluate and manage operations. The nonGAAP measure the company use have limitations and may differ from those used by other companies. These nonGAAP measures should be considered in addition to and not a substitute to results prepared in accordance with GAAP. Now, I'd like to turn the call over to Dan. Dan?

Thanks, Allen. And thank you all for joining us today. We are delighted to be hosting this conference call to review our financial results, discuss industry trends and provide an update on outlook for current fiscal year. Verint solutions enable organizations of all sizes to make timely and effective decisions. Today, more than 10,000 customers in over 150 countries including over 80% of the Fortune 100 use Verint solutions to capture, distill and analyze complex and under used information sources such as voice, video and unstructured text.

We have strong positions in two attractive markets enterprise work force optimization and security intelligence. In the enterprise market, our work optimization solutions help organizations enhance customer service operations in conference centers, branches and back office environment to increase customer satisfaction, reduce operating cost, identify revenue opportunities and improve profitability. In the security intellegence market, our video intellegence, public safety and communications intellegence, investigative solutions are vital to government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime.

Customers in this market share a common challenge of having too much information and not enough actionable intelligence and are looking for new tools such as those that Verint offers. Before discussing the first quarter results, I would like to briefly review our performance over the last several years now that we have completed our restatement. Verint is emerged as a strong company and a global leader in actionable intelligence solutions and value added services. We've increased our scale and profitability while maintaining a focus on product innovation, customer service excellence and delivering high solutions.

Over the last five years, our revenue has grown significantly for approximately $279 million to $704 million in our latest fiscal year. Today we believe that we are one of the largest companies focused on delivering sophisticated actionable intelligence solutions that's captured online, structured and unstructured information such as voice, video and data. Also over the last five years, our product mix has shifted more towards softer due to transitions to IP solutions and our customers purchasing hardware directly from third parties. As a result, our gross margins have increased from the low $50's to the mid to high $60's.

We have significantly increased our organizational scale driving operating margin from approximately 60% to more than 20%. Behind our success, are approximately 2600 dedicated professionals who are focused on delivering a broad portfolio of innovative actionable intelligent solutions and best in class service to our customers and partners around the world.

Close to 1/3 or approximately 800 of our professionals are in R&D. This reflects our belief that innovation has been a key part of our success and will continue to be key to our future success. During Q1 we continued to hire and invest in the business with the support of growth plan.

Our solid performance continued into the first quarter of this year on a nonGAAP basis and will deliver approximately $173 million of revenue and 69.2% gross margin at 24.5% operating margin, and $0.57 of diluted EPS. Our first quarter results benefited from a gradual improvement in the economy after the 2009 recession.

In the first quarter, we experienced increased over all business activity compared to the prior year. We had broad strengths in the work force optimization market and some large deals in the security market which can be lumpy. On original basis business showed continued improvement in America, was strong in Asia Pacific, and we did not see a negative impact in Amea from the current crisis, although we are keeping a close eye on general economic conditions in foreign currency implications in Amea.

Verint is a global business we sell in many countries around the world and during the first quarter we continued a global expansion. Also we continue focusing on delivering outstanding customer service which has been key to our success and during the first quarter a little less than half of our revenue was generated from services of support, the majority of which was recurring maintenance from our install base.

Having a large install base of highly satisfied customers presents to opportunity to sell more products to existing customers and se consistently generate a significant portion of revenue from selling additional products including upgrades, expansions, and additional new applications into our install base. We also continue to pick up new customers across many geographies and improve opposition with key strategic partners. I will discuss this more later.

Now, I'd like to discuss key tends in both of our markets. We generate more than half of our revenue in enterprise work optimization market but we have a very strong position, we believe the key growth trends in this market including crisp, strategic focus on conference center demands for more integrated work force optimization solutions and new customer interaction analytics for greater business inside as well as the reduction of work force optimization solutions across enterprise into new areas such as back office and branch operations.

The on going migration to voice over IP infrastructure continues to present an opportunity for us and deliver work force optimization solutions to our customers. We believe that our success in enterprise work force optimization market over the last several years is due primarily to five factors. First, we believe we have the broadest and most unified ways of publications in the industry. A core part of our product strategy is being to tightly integrate our W4 applications. Today we believe we offer the most comprehensive unified suite in the industry. Our unified suite offers many advantages to our customers both in terms of functionality and total cost of ownership and we believe this approach helps further distinguish us in the market.

As I mentioned earlier, innovation is key to our success and in that regard we have recently added desktop analytics to our unified suits. Desk top analytics allows customers to do further analysis of customer service performance. The second factor is our highly advanced customer interaction analytics. We were early innovation of speech analytics for call centers and today offer the market a highly advanced suite of customer interaction analytics which include speech, data and customer feedback solution.

We believe that the market for customer interaction analytics has evolved beyond the early adaptor phase. Today these solutions are attractive to a broader set of customers and enabling them to better understand work performance, the customer experience and the factors underlying their business trends. To address the demands from a broad range of countries around the world, we've begun to introduce new languages for speech analytics.

The third factor is our strategy of taking our work force optimization solutions outside the call center. Work force optimization solutions have traditionally been deployed in conference centers. However, many customer employees work in other areas of enterprise such as the back office and branch and remote office locations. Today, we believe that enterprises are interested in deploying work force optimization applications outside the conference center to enable the same type of performance measurement that has been historically available in the conference center and Verint has built a portfolio of solutions specifically for this opportunity.

The fourth factor is a focus on delivering best in class customer service. A core part of our strategy is to ensure that our customers maximize value from our actionable intelligence solutions. We believe a combination of the best unified W4 solutions and our focus on customer service has been a major factor in our success. As part of this focus, just last month we held regional user event that was well attended by more than 400 customers significantly more than the prior year.

The fifth factor is our strong and growing OEM and partners relationship. Over the last four years, we have increased our focus on our OEM and other distribution partners which is a core element of our go to market strategy. Today, we are announcing that Avaya has selected Verint as the lead W4 technology provider for its next generation conference center suites. We are very pleased to be chosen by Avaya as this further demonstrates our market leadership and we look forward to further expanding our relationship with Avaya.

During the quarter our market leadership in the work force optimization market was acknowledged by CRM magazine, for the third year in a row, Verint was selected as the service leader in CRM magazine's annual award program due to our reputation for customer inspection, depth and functionality and company direction. CRM magazine also noted Verint's innovation in speech analytics and partnership as additional strength.

Now, let's turn to the security markets. In security intelligence, we continue to see demands driven by on going terrorism and crime around the world that presents significant challenges to governments, law enforcement and commercial organizations. We believe these on going threats combined with transition to IP and higher volumes of communication are driving interest in innovative security solutions that collect, integrate and analyze information.

We believe there have been three key factors to our success individual intelligence and communication intelligence market over the last several years. The first is expansion of our portfolio of security solutions. We have expanded our security intelligence portfolio to address broad range of security threats. Today, our communications intelligence portfolio include solutions for communications in interception, communication service provided compliance, mobile location tracking, fusion and data management, financial crime investigation, web intelligence, integrated video monitoring, and tactical communication intelligence.

Turning to video intelligence, our expanded portfolio include IP video management software, wired and wireless edge devices, video analytics and network digital recorders. We have continued to evolve our portfolio which today enable our customers to deploy either an end to end IP system or continue to leverage their existing investment in analog technology while they migrate to a full IP solution. Our strategy has been to help our customers through the IP transition and also to enable them to generate greater value from their investments by delivering applications that include analytics and integration to third party solutions.

The second factor is our ability to leverage a global customer base and establish high quality customer relationship. Verint has security customers around the world including large and sophisticated government organizations as well as commercial companies that are leaders in their respective markets. We have long term relationships with many of these customers that allow us to gain tremendous insight into these challenges and develop new solutions for a broader set of customers.

During Q1, we received multiple orders from existing customers including two large orders each in access of $15 million. These large orders include the deployment with some of our new and more advanced security solutions. The third factor is our significant experience helping customers transition to IP. The transition to IP has created both challenges and opportunities for our security customers. We believe our significant experience in IP differentiates us in the market.

For example, in the first quarter we received a multimillion dollars order from one of the largest banks in the US, as part of on going upgrade. This customer we displayed another vendor we believe that our ability to deliver highly scalable quality solutions and our ability to help these customers transition to IP over time was the reason for our success.

Over the last year, we have received more than $10 million in orders and given the large size of this customer, we continue to see opportunity. Over all, over the last few years we have modified our strategy for the video intelligence market and are now focusing on high value softer driven IP solutions.

Before turning the call to Doug to review our financial results, I would like to discuss our outlook for the full year. Our first quarter results, combined with on going demands for actionable intelligent solutions, strong competitive position in our market and a gradually improving economic environment has given us increased confidence in the year. Therefore, we are increasing our revenue guidance for the year, to a revenue range of $700 million to $750 million. We also increasing our nonGAAP operating margin outlook for the year to a range of 20% to 23%. Our operating margin outlook reflect continued investments in our growth plan.

I am extremely pleased to have the opportunity to talk to you today. It's a very exciting time at Verint. We have significantly increased the scale of our business. We are a leader in the actionable intelligence market and we have the restatement behind us. Now, I would like to turn the call over to Doug. Doug?

Yeah, thanks, Dan. It is a pleasure to talk to all of you today and be in a position to share our financial information with you. Today, we'll focus our discussion on nonGAAP measures. A reconciliation between our GAAP results and our nonGAAP measures is available in our press related and in our related form 8K.

The difference between our nonGAAP and our GAAP financials include nonrecurring and noncash adjustments related to acquisitions including amortization of acquisition related intangibles, integration costs, acquisition related write downs, in process R&D, impairment of good well and intangible assets as well as the adjustments for stock base compensation which includes certain stock base compensation arrangements settled in cash, expenses related to our extended filing delay and certain other noncash or nonrecurring charges.

I'd like to begin with the revenue and gross margin. Okay, we'll start with our revenue trends. Over the last five years total revenue increased from approximately $279 in the January, 2006 year to approximately $704 million in our year ending January 2010. In the first quarter, we had approximately $173 million of revenue and we expect revenue between $700 million and $715 million for the current year.

It's importance to note that as previously disclosed, our results in the previous year were positively impacted from changes in our business practices and the application of certain revenue recognition methodologies as we work towards the completion of our filings. Therefore, year over year comparisons of our first quarter results and full year outlook are not highly indicative of business trends. Because of last year's anomaly relating to the changes in our business practices, I'd like to point out there our revenue outlook reflects our expectations that order activity will increase year over year significantly faster than our revenue growth year over year.

Gross margins increased from approximately 53.5% in January 2006 year to 69% in Q1 of this year. Behind our improved gross margins is shift to higher value solutions including a greater mix of software versus hardware. Our margins in the first quarter were also positively impacted by a favorable revenue mix due to some higher unusual margin projects on the security side of the business. Security projects can be lumpy and will continue to cause our revenue as well as our margins to fluctuate quarter to quarter., potentially significantly.

Going forward, we expect gross margins to vary from quarter to quarter but remain in the mid to high 60's. In terms of operating margins, our operating margins have steadily increased with our revenue. Our operating margin expansion is due to higher gross margins combined with lower operating expenses as a percentage of revenue as we drove more efficiencies in the business. Our operating margins reach 27.8% in January 2010 year.

However, those operating margins benefited from the positive revenue impact discussed earlier as well as other factors including certain temporary expense control initiatives. In the first quarter, our operating margins were 24 .5% closer to what we believed to be a more formalized level. As Dan noted earlier, for the year, we expect operating margins in the range of 20% to 23% as we invest for growth.

So now let's turn to other income, interest expense and taxes. You can see that our other income lines turn to expense in the year ended January 2008. This is due to the financing of the witness acquisition with debt which was outstanding for approximately 8 months during that year.

There are two other primary components to other expense net line. Interest expense associated with bank debt including cost of our swap and impact from foreign exchange. In the first quarter, this expense came from $13.5 million reflecting and approximately $2 million foreign exchange impact primarily related to balance sheet translation associated with declining Euro and approximately $11.5 million of interest expense. Because foreign exchange is difficult to forecast, if you assume that FX for the rest of the year will remain at the same rate as Q1 or quarterly interest and other expense is expected to be approximately $11 million a quarter. However, we're keeping a close eye on general economic conditions and foreign currency implications particularly in Amea.

Our nonGAAP tax rate, which we measure on a cash basis has been less than 10% over the last several years. This is for two reasons, first we have approximately $250 million of NOL's in the United States. Second outside the US we generate income in many different tax jurisdiction some of which are at low rates. We expect a tax rate of between 9% and 13% for the full year and expect to maintain a low double digit nonGAAP tax rate on cash basis over the next three to five years. For Q1 and our full year outlook we're assuming 11% nonGAAP tax rate, the midpoint of our range.

So now let's turn to revenue by segment. During the last five years work force optimization has been increasing steadily with a big step up following the witness acquisition. And security intelligence has been growing but in a lumpy fashion.

In Q1, WFO increased year over year and video intelligence and communications intelligence were down while security is down year over year in Q1 security remains a growth opportunity for us. Overall we believe there's a good opportunity for our actual intelligence solutions in all three of our segments.

Now let's turn to the balance sheet. As of April 2010 we had approximately $154 million in cash which includes $5 million of restricted cash and $620 million of bank debt. Following the end of the quarter we paid down a portion of the bank debt and the current balance is about $598 million.

We have $293 million of convertible preferred stock which carries a paid in kind dividend. Including dividends, the accrued value is currently approximately $329 million. In Q1 we had 43.9 million fully diluted shares outstanding including approximately 10 million shares underlying the convertible preferred. For the year, we expect to have approximately 46.7 million fully diluted shares outstanding. Reflecting additional vestings that we expect to have between now and year end due to our anticipated NASDAQ relisting and other events.

In order to enhance our financial flexibility, we're currently reviewing our capital structure. Alternatives could potentially include amending our current bank facility, refinancing the debt or raising capital. Before moving to Q&A I'd like to summarize outlook for current year. We currently expect revenue for the year to be in the range of $700 million to $715 million, quarterly revenue may fluctuate. We expect nonGAAP gross margin to vary but remain in the range of mid to high 60's. We expect nonGAAP operating margins in the range of 20% to 23%.

Excluding impact of foreign exchange, we expect our quarterly interest and other expense going forward to be approximately $11 million. We expect our nonGAAP tax rates to be in the range of 9% to 13% for the year consistent with the amount of tacks we expect to pay in cash for the year.

Based on the midpoint of outlook and assuming approximately $11 million per quarter of interest and other expense for each of the remaining quarters, and approximately 46.7 million fully diluted shares outstanding for the year, we currently expect nonGAAP EPS to approach $2. This concludes my prepared remarks regarding financials. Again, we're pleased to be reporting again doing these earning calls with all of you have extended filing delay behind us. It's also nice to report on what we feel to be a pretty solid Q1 that allows to improve our guidance for the year. We have a lot of opportunities ahead and we look forward to sharing with results for you in the future. So, with that operator, we can open up the line for questions.

(Operator Instructions) Your first questions come from the line of Shaul Eyal with Oppenheimer and Company. Please proceed.

Thank you, hi, guys, good afternoon. Congratulations. Good to hear you back. Couple of quick questions on my end, starting kind of with the video intelligence segments and the communications intelligence, so from a year on year perspective and I kind of read through kind of the 10Q given the explanation by the year by year decline, my question is -- I also know that you guys indicated that, you know, the security business could be lumpy maybe it is better going to kind of guide later on kind of on an annual basis maybe to annually on that segment given the lumpiness -- given the lumpy nature of these segments.

Yes. So, you know, we provided annual guidance for the company. We at this point it's clear we're not guiding on a segment basis. But we did provide in our 10K press releases segment information for the last five years, which is kind of obviously lumpy security growth, but nevertheless, growth. We believe that the security market presents a similar growth opportunity to our doubly full market. We are investing in all our business segments in of growth. And while security because of the nature of customers and certainly large projects it's harder to project, we still believe that the growth trend that we have established will continue going forward. We will consider your suggestion relative to providing more clarity in terms of projection for those markets, we'll consider that in the future.

All right. Thank you for that. And with respect and I know kind of both you an Doug touched on the kind of European foreign exchange, are you guys hedged? Are you using hedging methodologies?

Yeah, we have a combination of natural hedges because of certain areas we do have operations we have, you know, operating expansions that will naturally offset that revenue to extent we have possibility there. That's exposed. We have certain countries like Israel in particular where we have a fair amount where we don't have revenue offset that so we do have hedge there. We have some operating we run kind of a rolling hedge program. But depending on the mix of revenue an where that comes in on a quarter to quarter basis, we do have foreign exchange exposure as well as usual kind of translation exposure from a global company of our size with various international operations an payables and receivables and various currencies.

Got it. Just maybe one final question, Dan, going back to your comments on specific on the speech analytics market, you know, some of the undertaking you seeing there. Are you guys running into new ones in this market?

Not directly. I mean, nuance obviously has a lot of technology in this area and they may be participating indirectly. But they're not -- they don't have the application that is specific for conference centers, customer interaction analytics. So while we may be, you know, running into other vendors that are powered by nuance, we're not running into nuance directly.

Let me step aside. I may come back later with some questions. Thank you and good luck.

Thank you.

Your next question comes from the line of Tom Ernst with Deutsch Bank, please proceed.

Good afternoon gentlemen, thank you for taking my question.

Sure.

So, you mentioned on your forward guidance that you expect order activity to be greater than revenue. How should we -- how should we think about the actual production from growth of the business? I recognize if we look back to last year it looks like you, due to the accounting treatment, had to recognize revenue so you had a net consumption of deferred, I assume this year you're expecting to build deferred revenue. Would the right math for us to be to calculate what your revenue production netted deferral be for the quarter of the year do you think that's an accurate representation of kind of more organic business generation, if so, what kind of rates did you produce in Q1 and are looking for for the year?

Okay. So I'll Doug comment on the math. It is quite tricky to do the math relative to the restatement period and we did indicate that last year we were, you know, we had a positive impact from being able to recognize certain revenue and that order of activity there was disparity there.

But what I can do I can help you speaking of growth going forward realizing that the compared to last year may not be highly meaningful. So the way we think about the market is certainly we see some improvement as we indicate in Q1 coming out of recession, there are a number of industry reports, research reports that talk about our markets as being high single digit growth market and some of the analysts agreed that coming out of recession it's probably going to be somewhat more modest this year, potentially mid to high single digit this year. We believe that we have a very strong position in all the markets that we participate and therefore we have an opportunity to grow at least at market rate organic growth. So when we are thinking about our outlook, you know, what's driving our outlook is our expectation to grow at market rate.

And then obviously our guidance only represents modest year over year increase relative to last year revenue, but that's where, you know, the positive impact statement last year is making it difficult, we do not expect it to be a issue next year in terms of year over year compare, but or any of the quarter, the coming quarter in this year relative to respected quarter last year, the compare is certainly going to be challenging. Doug?

Yeah, Tom, in terms of what were you were discuss in terms of deferred revenue, deferred revenue is a little bit of mixed bag, we have a advanced payments that go there and that gets a little bit lumpy with the nature of the business. We have, you know, depending on the mix of the business that we do in a given quarter and deliverables that we agree to do, there will be more more or less revenue that we have to defer there. But basically in working through the restatement we've gotten through a point now where I think we're back to normal business model. That is product getting recognized upon delivery, services that are performed getting recognized when network is complete. Maintenance of course spread over the maintenance period. So we think we've straightened things out. We're on to what kind of our normal business model is and, you know, we've had some passed revenue getting mixed around pretty much work through that and we expect to go forward basis things will be a little more normalized with our top line.

Okay. Helpful on that detail helps. I guess in implicit in that we should expect a revenue bill this year with the revenue outlook you provided?

It's of lumpiness, if we do some big projects that are long term in nature. It kind of works itself off. You may see that, you know, come down.

So it' going to -- I would say going forward in longer term, we probably should go up and rebuild our maintenance base.

Okay. Good. One follow up. The hardware business, you mentioned the attached rates consistently come down over time. What is the hardware attach rate today and do you continue to expect a decline looking forward?

In terms of the hardware component, we measured that based on the amount of hardware that we need to purchase because we don't make hardware, so we purchase hardware in case we need to bundle that and provide a complete solution. And that's represented by 15%, 15% of our revenue. That is expected to decline probably not at the same rate that's been declining already because there's always going to be customers that will prefer to buy consider currency system and we will accommodating those customers, but we certainly I can say if you those customers, but we certainly I can say if you look ten years back, we had substantial portion of hardware and now it's down almost to this number. In this business obviously the position to IP is more recent and therefore that's where, you know, the majority of the hardware that we deliver is in security, we believe that's going to be worked out as well but probably over time.

Perfect. Thanks, again.

Okay. Thank you, Tom.

Your next question comes from the line of Daniel Ives with FBR, please proceed.

Hey guys, a few questions. Could you walk through the timeline on the relisting process?

Sure. So, you know, we now have our audited financials, you know, caught up through June 10 with the K that we filed on May 19. Tonight we filed the April 30, Q1. Really what we have left. Large mechanical at this point the numbers are really done. We have them in pretty good shape. The numbers an stuff to go through. With that we we will have the last 12 months of filings all caught up and out there we've already been working with NASDAQ and listing process. So shortly there after we expect to get relisted.

This is the final question. Based on your positive commentary in the market and competition but obviously apples to apples, do you think you're growing faster than your nearest competitor? Based on the trends that you're seeing in the market?

We believe that we have very good competitive position. You know, we look at that full market, we have a more close competition with our nearest competitor. But we believe that we have very broad portfolio, highly position in market and also that we announce today we're very pleased to be chosen by -- lead technology provider, which is another indicator in my mind of our strong position. On the security's side, that's much larger market. We do have many competitors. I would say that while our -- as you referred to our nearest competitor participate in that market, they are probably and we see -- we seem them in some opportunities, but not, you know, certainly not as as many as we see them in W full segment and we have many other competitors. But we do believe we have strong competitive position also on the security side. So over all I think, you know, that the market is growing. It's a market that really appreciate innovation. It's constantly looking for solution. We are very active on the innovation part. We have, you know, more than 450 patterns and applications. We continue to launch new solutions and I think that's what getting our customers excited about their end. It's not just, you know, Verint being a provider of solutions but many of our solutions see us as a partner for the long term and expecting to continue to grow with Verint as we are able to provide more and more of their needs.

Okay. Thanks, Dan.

Thank you.

Your next questions comes from the line of Brian Ruttenbur with Morgan Keegan. Please proceed.

Thank you very much. First of all, can I talk about -- or ask questions of revenue by quarter. You did about $172 million total revenue. Do you expect any from first second quarter, fourth quarter going to be heavily weighted? Give us some kind of guidance on how that works revenue wise.

You can see from the $172 that we just recorded, you know, annualize that comes in a little lighter than what we're guiding through in total revenue but not all that different, from that you can see a little bit of a build up. You know, Q4 like any software company tends to be the larger quarter you tend to join the pipeline and Q1 tends to be the smaller quarter. We do have that lumpiness around the security business where certain projects get mild stones get recognized. So with that it's not, you know, the normal software company hockey stick.

You should have growth from first quarter third quarter to fourth quarter.

Yeah, generally but you're doing to have some lumpy projects in between a little bit in between.

And then gross margins by quarter, I think you mentioned that gross margins are going to be down a little bit this quarter from first quarter.

Well, first quarter was normally high. We had a few anomalies with certain projects that have higher than usual gross margins that happen to hit in the quarter. So it really depends on kind of revenue mix. We said kind of mid to high 60's is what we expect average for the year. Q1 happened to be at the high number so you'd think for the rest of the year that you'd have some that were lower as well.

Okay. And then you gave a nonGAAP earnings number for the year and you reported nonGAAP of was it $0.49 in the quarter. Is that right?

$0.57.

$0.57, I'm sorry. $0.57 nonGAAP. So that means that the -- if you're only looking for t$2.00 bucks you annualize 57 times four. Second quarters going to be less profitable, is it third quarter or fourth quarter? Can you give me some kind of how the nonGAAP earning is going to fluctuate?

Okay. So we now have a policy to provide only annual guidance, so when we give some color on the quarter, it is really just to sensitize investors that you know they should expect certain lumpiness in our result as a result of security large project and as a result of some revenue mix because some of our projects carry very high margins and some carry with lower margins depends on among other things the amount of hardware that we need to provide as part of our solution. So, you know, if we lend the -- land the project where we are, turnkey provider and we need to, you know, buy certain servers, storage, network components and provide the customers a total turnkey solution, obviously, the margins and such project can be lower and therefore, you know, gross margin will be lower at the time we believe of this project and recognize the revenue. And we basically guided Q1 with 69.2% gross margin is kind of above what we expect as our normalized gross margin for the year. And we also as part of our guidance when we look at -- this the really high end level of margin opening margin in the industry and, you know, we believe that we are proud we're able to perform at this level, that, you know, appropriate level for company can be between 20% and 23%. So absolutely we -- the result of Q1 once you'd expect that the quarters is going forward will be somewhat lower margin so the overall average margin for the year will be between 20% and 23%.

Okay. The next question I have along those same lines, you gave nonGAAP operating margin of what you just said 20% to 23%. Can you tell me what open that means in GAAP margins?

No, if you look at our nonGAAP adjustments, Brian you can kind of see the differenced there. They're going to change. I mean stock comp.

Negative number. Your operating margins will be a negative number?

No I'm just saying, take our nonGAAP numbers, look at the nonGAAP adjustments we have. Restatement fees --

A million and a quarter then so I should take 41 million out; is that right?

If you look at our press release, we have a couple of pages that go through each of the differences of the reconciling items in GAAP and nonGAAP through statements, am Amortization are the three big ones, right? If you would adjust for those and you can come up with, you know, with the GAAP numbers are if you need them.

Okay. So those numbers if I take the first quarter numbers and annualize those first quarter adjustments throughout the year that should be a good way to look at in terms of gap?

Let's look at, you know, the biggest number on our adjustment is our professional fees related to our delayed filing and that was $20 million that we incurred in Q1.

Okay.

Okay. Doug can you comments on what is our expectation going forward for professional fees?

Yes, so we've gotten current now, so you know, through Q1 those were big numbers. You know, we had the number of filings in Q2, so Q2 will be sizable but not as much as Q1 then it should taper off. So you can't analyze Q1 obviously because that was the bulk of the work getting current I mean in March we filed the Jan, 2008 and prior in April we filed the Jan. 2009 K. So restatements will be coming down. You can look at Q1 as the high point for the year for restatement fees and then bring that down accordingly.

Okay. So, would it be dropping at half by third quarter or dropping at zero by the end of the year?

I don't -- there are some on going things that are related to the delay in the filing, some structural things we're doing that will probably categorize that way, but certainly it's going to tail off.

Okay. So can you give me color on any of the other nonGAAP metrics besides professional fees?

Yes, stock comp expense is a big one. You know, in the quarter was about $18 million. You know, with any new grant that would go up a little bit, you know, it does fluctuate based on certain parameters changing. That's not a number, you know, to annualize that it probably wouldn't be far off.

And anything else that you can help me with.

Amortization of the intangibles. That's something if we do new acquisition and pop up a little bit, other than that it's, you know, kind of steady and will trail off in time.

That looks like it's going to be steady. If I just look, then, your not GAAP EPS you're saying around $2. If a look at a GAAP EPS with just adjusting for this coming down should be a negative number still?

No, Brian, if we were able to we could provide it as our policy is to provide GAAP and nonGAAP number where we're able to. Coming out of this restatement we are not able to preticket with accuracy what will be our nonGAAP adjustment. So other than giving you some of the commentary that it Doug provide, we're not in a position to basically provide GAAP outlook.

Okay. Very good. Another question, sorry for all these, but what do you -- if you don't change your capital structure or redo anything this year, what do you anticipate based on your guidance that you've given that you'll have debt and cash at the end of your fiscal year?

We do not provide outlook for debt and cash. We have the flexibility to pay down the debt if we choose to. We just -- a couple of weeks ago we paid down $22 million of debt. Now the level is $598. And we are not at this point providing any specific guidance on whether we'll pay down the debt further or any other alternative that we will choose to execute relative to our capital structure.

Does that mean generate cash for operations or not?

We expect to generate cash for operations during the year, Brian. Even if we don't change capital structure, it's just a choice of what we choose to do with the cash.

Do you have an estimate that you've given, what you're going to generate from cash to operations?

From Q1 if you adjust for all the, you know, the GAAP, nonGAAP adjustments back into the cash-flow, you should get approximately $30 million of cash from operating activities.

And annualizing that would be pretty conservative.

Somewhere in that neighborhood.

Okay. Thank you very much. I appreciate it.

Thank you.

The next question comes from the line of Paul Coster with JPMorgan. Please proceed.

Thank you and welcome back to the market. I am -- that is, why are you looking to restructure the balance sheet?

We made the comment that we are now looking at several alternatives so our existing capital structure is three years old. We put it together when we did the acquisition. We did not really have an opportunity to look alternatives over the last few years because we didn't really have all the financials which limited our options. Now, that we have all the financials, we do have either option and we are in the process of evaluating capital structure.

Are there any covenants that we should be aware that are restrictive in your operations at the moment?

We have one single covenant which is debt to EBITA ratio.

Can you tell us what that is and where you stand relative to at the moment?

We're in compliance with it. So it's a step down ratio at 3 and a half times currently for Q1. So we're in compliance with on our last 12 months EBITDA basis.

Then you said that you expect mid high single digits, does that I ply to all three segments or are there differences between the segments?

This is an expectation for market growth that could be some variances, but generally we think that the opportunity within those segments is similar and, you know, one is hard to predict exactly what's going to happen in each of the segments this year. We think that long term we see the opportunity for high single digit growth in all segments.

Is there anything you can share with us regarding visibility? I know one of your competitiveness talks about two quarter of visibility about, you know, the size of the pipeline, anything that helps this gets some sense of how far out you can see revenues.

Yeah, you know, we done look at backlogs as being that meaningful for us. But we do have what we believe to be pretty good visibility. You know, we have a pipeline. We have the deferred revenue we spoke about earlier in the call. You know, we do have some contracted work that's off balance sheet as well. We have the large, you know, main innocence screen. We have a fair -- maintenance screen. We have a fair amount of business. We feel we have a pretty sustainable revenue model.

What percentage of your revenue is approximately on maintenance?

A little bit north of our -- of that service component, you know, three quarters or so is maintenance based.

Oh. Okay. All right. That's good. That's helpful. Thank you. My last question, Dan, is there any -- are you likely to verticalize your , I don't know in that's a word, verticalize your enterprise of USO solutions for specific industries or is it going to remain flexible kind of broad horizontal solution for

Yeah, there are some vertical effects. We do not see in the near future different offerings for different verticals. But we do have certain expertise that we develop over time that is applicable to certain verticals so we positioning the product in a way that can help people that vertical to gain the same benefit that, you know, people in their industry gain from our product. So verticalization, probably not now, but certainly, you know, an approach to the base on a subject matter expertise.

Great. Thank you.

Sure.

Your next question comes from the line of Jonathan Ho with William Blair, please proceed.

Good afternoon, guys. And I'd like to echo my congratulations for coming back as well.

Thank you. Nice to be back.

Just a quick question in terms of your viewpoint on penetration of the technology and the end market. Can you maybe on a segment by segment basis talk about sort of how far the technologies have gone and maybe some of the opportunity on a up scale versus a existing customer base type of a split going forward?

Sure. Segment we position our solution as a suite and in terms of penetration of the suite approach, it's still very low. Lots of companies still have solutions that are the straight modules that are provided by a number of vendors. We certainly see demand for the suite approach. We hear from a lot of customers that they get the benefit of having an integrated solution in terms of functuality, in terms of ownership. But penetration is still low and obviously one of the opportunities is for us to control -- Al those discrete modules into one package provided by variance. And we are executing on that model.

Relative to the variance discrete modules, the recordings, elements is the one that is probably the penetrate the most, you know, lot senor already have some some the most, you know, lot senor already have some some sort of recording solution. At the same time recording -- the current changes as customers moving to IP technology and cloud recording. So why lots of customers have recordings that Dunn mean they have the latest technology recording they may still have at seven or ten years old recording box which certainly there are benefits for replacing them with some more advanced IP based recordings. And then there's a speech processing as a reference before, we think now it's moved from early stage where lots of customers were experimenting with this to a point where it's been adopted as, you know, a technology that provides real value but certainly still very operation and high growth rates and also I mentioned that we see this demand now coming for many many countries we have more than 10 languages, we continue to add languages as we see the opportunity to expand outside of the English speaking countries.

Shifting through security, security I will say that there's general demand for more analytics. The majority of the customers have solutions that are focused on collection but much less than analytics also demand from fusion, brings data from lot of different sources that can be looked at in a more realistic fashion. The actual intelligence concept which is consolidated and analyzed data and provide people with alerts and analytics to help them to make better situations -- decisions is really what's driving the market and the penetration rate for analytics in the security market I believe is still quite low .

Excellent. And just a second question in terms of the environment out there, are you guys seeing a snap back in demand just maybe off of the ordering base particular with areas that were hit pretty yard with the recession in 2009 and, you know, any type of activity where maybe you guys have to replace systems that are getting a little bit old at this point.

We did see in 2009 hesitation, customers were taking longer times to make decision. They eventually cut the budget. When they did purchase, they purchased smaller deals. So we did say especially in our part of the business security tends to be a little bit more immune, more resilient in a recession time, but we did see in certain countries there was also an influx in got budget. So' 09 was the year that we certainly, you know, did not -- for recession like either IP companies and we did, you know, hear from customers that they see the value and our line in solution everyone in recession, especially customers that cut cost and needed more actual intelligence to make the right decision. So relatively I think we did very well in 2009 but there was an influx and as I mentioned before we saw improvement. We're not back to the 2006, 2007 level. But some improvement that led us to, you know, give us the confidence to raise guidance for the year.

Great. Thank you. (Operator Instructions) Your next question comes from the line of Craig Nankervis with First Analysis. Plead proceed.

Yes, thank you very much. Hoping you can hear me. I'm remote here. I was wondering if there are any segments where VSOE doesn't come to into play in a year over year basis or either component VOSE issues across the business?

Like I mentioned earlier we've worked through the issues an established accept where we have there's not enough volume to get there quite yet. We don't think we have any new material changes around forward basis at this point.

The issue as we work through the issues that was not work in one day, this was a gradual change business processes and reverence policies and the result in behavior and pricing and so forth, so that's why we look at the gradual change we made in the business to get to the point as Doug mentioned that today we feel, you know, we are back to our but looking back in you are trying to understand, you know, at one point things change, they really change throughout gradually and not in one point.

Very evolutionary over the last couple of years.

Okay. Okay. I appreciate that. On Avaya, first of all, the announcement today, is that factored in your full year guidance or would any benefit from that later in the year be your guidance?

Okay. So when we have on going relationship with a buyer for years, this is another, obviously, another very exciting announcement that we're making today. As it is relative to some future action from -- that is based on this announcement can and you know this will be rolled out obviously if our updates will update accordingly.

And did I hear you say or to indicate that there may be more to come with you and Avaya in this relationship you can see continuing to evolve or progress or did I not here that?

We certainly will continue to invest in Avaya, we believe in this relationship. We believe this is the right relationship because it's right for the end user as it will allow Avaya to package in their WUFO offerings but relative to what Avaya is going to announce as far as their product launches, and W 4 offering obviously I will have to defer that to Avaya to make the announcement and go forth. We are just announcing today that we were chosen as the technology provider to power the Avaya offering.

Okay. I wonder if you might be able to review where you are or if there's a particular strategy in WFO with the witness base across selling into the witness base modern -- some water is under the bridge, obviously on that and if there's a way to review, if there's a particular strategy in that regard at this point?

For the strategy is relative to our entire base, including the Verint base end -- one, we close the witness -- we started with integration very quickly we announced that while we are going to support the legacy, we are working on the integrated switch, which includes components from the -- their legacy and products and components on the legacy Verint product. And as we announced this is the name of the offering, it's completely integrated and obviously it has a lot of different modules, the opportunity is to go to the witness base and offer them modules that they didn't have because they were in the Verint product and they were not in the witness product and quite -- an offering component, for example, you know, the speech analytics product came from Verint so it's an obvious puck. The customer feedback modules came for witness it's from Verint for legacy. So we don't distinguish any more between the basis, we look at that as the Verint base and our strategy as I mentioned before is to work with the customer to expand what I have to a more integrated product rather than having the split module and, you know, we video that as -- at this point not just an idea, but we do have a lot of success here and while the penetration rates are still low in terms of concept, we clearly hear from our customers if we are on the right direction.

Okay. I guess that will do it for me for now. Thank you for the help.

Okay. Thank you.

And we have a follow-up question from the line of Shaul Eyal with Oppenheimer and Company. Please proceed.

Dan, one more question I recall from prior discussions we had years ago when talking about the R&D for and statement marketing, when you kind of match it against the product on the segment, is it still a line in the sense that you have special R&D people for security division for the video intelligence, nor the communications reception, and a separate one for the WUFO or is it still kind of a cohesive one serving all the various needs of the three product segment.

You know, our strategy through a line development people with the customer. And therefore we prefer to have a complete alignment between the people that run the business and sale and service and the people that provide applications for those customers. We do develop actionable intelligence solutions all across and we have free flow of technology in the company so people can take any technology from any product and embed that technology in whatever new product they develop, but in terms of organization alignment we think it's better for the customer and it's much more focused execution to have that kind of structure and not one centralized organization. We are in a application software company, so it's porn for us that the people in R&D will not have good sense of technology but also a good sense of application.

Thank you for that.

Sure.

There are no further questions in queue at this time. I will now like to turn the call back over to Mr. Alan Rodan for any closing remarks.

Thank you, operator. I'd like to thank everyone for participating in today's call. We look forward to talking to you in future calls. Have a great night.

This concludes the presentation in today's conference. This concludes the presentation. You may now disconnect your line. Good day.