Verint Systems Inc (VRNT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Verint Systems Incorporated earnings conference call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded. At this time, all participants are in listen-only mode. (Operator Instructions).

I would now like to turn the presentation over to Mr. Alan Roden, Senior Vice President, Corporate Development and Corporate Treasurer. Please proceed, sir.

Thank you, operator. Good morning, everyone. 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 have seen a copy of our press release that includes selected financial information for our second quarter. We expect to file our Form 10-Q for our second quarter shortly. You should also have seen a copy of our Form 10-K for the year ended January 31, 2010, filed in May, and our form 10-Q for the fiscal quarter ended April 30, 2010, filed in June. Each of these filings, and copies of each of our earnings press releases, are available on the investor relations tab of the website, and also on the SEC website.

Before starting the call, I would 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 Litigation Reform Act of 1995, including statements regarding expectations, predictions, views, opportunities, plans, strategies, beliefs, and statements of similar effect relating to Verint. These forward-looking statements are not guarantees of future performance, and they are based on management's current expectations, and involve a number of risks and uncertainties, any of which could cause actual results to differ materially from those expressed or implied by the forward-looking statements.

The forward-looking statements are made as of the date of this call, and except 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 on these forward-looking statements, which are time sensitive, and speak only as of today. For a more detailed discussion of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in our forward-looking statements, please see our form 10-K for the year ended January 31, 2010, and our form 10-Q for the fiscal quarter ended April 30, 2010.

Certain financial information discussed today is not prepared in accordance with Generally Accepted Accounting Principles, and is non-GAAP. The reconciliation of the non-GAAP financial measures provided in today's call to the most directly comparable GAAP financial measures, as well as an explanation of why management uses these measures, is included in our press release dated May 19, June 9, and September 8, 2010, as well as the GAAP to non-GAAP reconciliation found on the investor relations tab on our website. Non-GAAP financial information is not meant to be a substitute for GAAP financial information, but is included because management believes such information is useful to investors for informational and comparative purposes.

In addition, management uses certain non-GAAP financial measures internally to evaluate and manage operations. The non-GAAP financial measures the Company uses have limitations that may differ from those used by other companies. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, the financial information prepared in accordance with GAAP.

Now, I would like to turn the call over to Dan. Dan?

Thank you, Alan. Hello, everyone, and thank you for joining us today to review our second quarter results, and update on our annual outlook. In Q2, we delivered approximately $181 million of revenue, a 68.5% gross margin, a 25.6% operating margin, and $0.69 of diluted EPS. During the first half of this year, we delivered approximately $353 million of revenue, and $1.25 of diluted EPS.

I believe our Q2 and first half results reflect our leadership position in the actionable intelligence market, as well as the benefit of an ongoing gradual improvement in the economy. Overall, we are pleased with the momentum in our businesses. Workforce optimization activity broadly improved year-over-year in all three geographic regions in which we conduct business, Americas, EMEA, and APAC. Security intelligence activity also improved year-over-year with several large orders, but as we have mentioned in the past, the security business can be very lumpy.

I believe a key part of our continued success in the workforce optimization and security markets is our focus on innovation. Close to one-third, or approximately 800 of our 2,600 professionals, are in research and development. Recently, we made several announcements related to new patents, products, and industry awards that are indicative of our focus on innovation.

In the area of patents, we announced three new patents. The first covering IP recording as a network service. The second covering the protection of interactions and sensitive information in recording, and the most recent one announced yesterday, covering IP recordings in call centers. We're very pleased to have been granted these patents, which demonstrate Verint's ongoing commitment to leading the market with innovative patent-protected solutions that deliver higher return on investment.

Today, Verint's patent portfolio includes more than 480 patents and applications worldwide, across our workforce optimization and security businesses. Our broad patent portfolio and intellectual property provide us with significant competitive advantages, and protects our investment in innovation.

During Q2, we introduced several new product capabilities. In the workforce optimization market, we introduced improvements to our back office workforce optimization solution, new focusing and scheduling capabilities for the public safety market, and new functionality for our desktop and process analytic solutions to expand our reach to certain international markets. We also introduced enhancements to our Nextiva IP video solutions for distributed environments such as retail and banking, and new capabilities for our communications intelligence investigative solution, including improved text entity (inaudible) and location analysis capabilities.

We believe our strategy of continuously enhancing and expanding our workforce optimization and security intelligence portfolios to better address customer requirements has been key to our success. Our product innovation in the workforce optimization market was recently recognized by market research firm Ovum, which rated Verint as a market leader in speech analytics, citing the breadth and maturity of our solutions, as well as end user sentiment. Earlier in the year, Frost and Sullivan acknowledged Verint's innovation and leadership in the IP video market by naming Verint the 2010 North America IP surveillance software company of the year.

Our market leadership and innovation has strengthened our position with key partners, as a means to increase our market coverage and indirect revenue. We're happy to announce that Avaya recently introduced to the market its new workforce optimization solution powered by Verint Technology. We look forward to supporting Avaya in its post-launch activities.

On the security side, during the second quarter we announced that EMC, who is a partner of ours in the IP video market, deployed our Nextiva video solution at its own facilities, including its corporate offices and certain other remote offices. We are happy to have EMC now as both a partner and a user of our solution. We believe that innovation and partnerships will continue to be key to our future success, and during Q2 we continue to hire and invest in our businesses across R&D, sales, and customer service, to support our growth plan.

Before turning the call over to Doug to review our financial results, I would like to discuss our improved outlook for the full year. The healthy growth we experienced in our business during the first half of the year, combined with ongoing demand for actionable intelligence, has given us increased confidence for the year. Therefore, we are increasing our revenue guidance for the year to a range of $710 million to $720 million. We are also increasing our non-GAAP operating margin outlook for the year to a range of 22% to 24%, and non-GAAP EPS at the midpoint of our range to around $2.25.

Our improved outlook primarily reflects our view that there are good growth opportunities in both the workforce optimization and security intelligence market, and our strategy is to capitalize on this growth by continuing to innovate and invest, including planned hiring in the second half of the year. We are closely monitoring the economy, and our guidance anticipates a stable economy in the second half of the year. Furthermore, while we increase our guidance for the year, we remind you that we have provided only annual and not quarterly guidance, and that our quarterly results may well be lumpy and non-linear.

Now I would like to turn the call over to Doug to discuss our Q2 results in more detail. Doug?

Thanks, Dan. Much of our discussion today will focus on non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available as previously described. The differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including amortization of acquisition-related intangibles, and certain other acquisition related expenses, stock-based compensation, and expenses related to our extended filing delay, as well as certain other noncash or nonrecurring charges.

I would like to begin today's discussion with the areas of revenue, gross margin, and operating margin. In the second quarter, we reported approximately $181 million of total revenue, with $95 million in workforce optimization, $37 million in video intelligence, and $49 million in communications intelligence. This compares to approximately $169 million of total revenue in the second quarter last year, with $88 million in workforce optimization, $41 million in video intelligence, and $40 million in communications intelligence.

Gross margins were 68.5% compared to just over 69% in Q1. As a reminder, gross margins can fluctuate quarterly due to product mix, and potentially significantly. In the second quarter, our operating margins were 25.6%, up from 24.5% in Q1. We believe our 20% plus operating margins, which are above some of our peers, reflect our ability to deliver high value solutions to our customers. Our high margins also give us an opportunity to invest back into the business for our future growth.

Now let's turn to other income and interest expense. There are two primary components to the other expense net line, interest expense associated with our bank debt, and the impact from foreign exchange. In the second quarter, this expense totaled $12 million, reflecting approximately $11 million of interest expense, as well as approximately $1 million in negative foreign exchange impact related to balance sheet translations.

During our last call we discussed that we were pursuing capital structure alternatives. During Q2, we amended our credit agreement, expanded our revolver, and terminated our LIBOR swap. The amendment and expanded revolver provide us with more operational flexibility, as we continue to grow the business. In connection with the amendment, we paid off the LIBOR swap that was put in place as part of our 2007 term loan.

We also filed a registration statement for the potential sale of shares of our common stock by Comverse, from which Verint will not realize any proceeds. As a result of these changes, our interest expense in the second half of the year will drop from approximately $11 million per quarter, to approximately $9 million per quarter, assuming the expanded revolver is not drawn down. This $9 million of interest expense reflects our current annual interest rate of 5.25%.

Relative to the tax area, our Q2 non-GAAP cash tax rate was 6.4%, bringing our first-half average tax rate to 8.5%. That's consistent with our expected annual non-GAAP cash tax rate of between 7% and 10%.

Now turning to the balance sheet, as of July 31, 2010, we had approximately $143 million of cash, including $15 million of restricted cash, and $598 million of bank debt. During the quarter, we paid down approximately $22 million of our debt, and following quarter-end, we made an additional $22 million payment associated with the termination of our LIBOR rate base swap.

At the end of Q2, we had 45.2 million fully diluted shares outstanding, including approximately 10.2 million shares underlying our convertible preferred stock. For the year, we expect to have approximately 46.7 million fully diluted shares outstanding, primarily reflecting additional vesting in employee equity that we expect to occur between now and year-end.

Before moving to Q&A, I would like to summarize our outlook for the current year. Assuming a stable economic environment in the second half of the year, we expect revenue for the year to be in the range of $710 million to $720 million. While this is an increase in our annual guidance, our quarterly results may be lumpy and nonlinear, meaning we may not report sequential growth every quarter.

We expect non-GAAP operating margins to be in the range of 22% to 24% for the year. We expect our interest and other expense, excluding the potential impact of foreign exchange, to be approximately $9 million per quarter for the second half. As I mentioned, we expect our non-GAAP cash tax rate to be in the range of 7% to 10% for the year, consistent with the amount of taxes we expect to pay in cash this year.

Based on the midpoint of our outlook, and assuming approximately $9 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 expect non-GAAP EPS of around $2.25.

So this concludes my prepared remarks, and with that, operator, can we please open the lines for questions?

Okay, thank you. (Operator Instructions). And our first question comes from the line of Daniel Ives with FBR. Please proceed.

Yes, could you talk on the securities side about changes in customer behavior given geopolitical issues? Is there more need for the security technology, or are you seeing sales cycles maybe come down a bit, deal sizes get bigger? Could you talk about that anecdotally?

Sure. Globally we don't see a change in the recent quarter. There is somewhat of more hesitation that we see in Europe relative to government spending given the recent economic situation in Europe, but generally there is a healthy demand for technology, and we benefit from that trend that security overall is a very big market, but within security, most of the legacy solutions are not using the most state of the art technology and the kind of solutions that Verint provides across our communications intelligence, investigative solutions and video solutions, we are able to provide customers with a much more effective way to deal with security challenges. So I would again stress that the need for security and the recognition that the world needs to be prepared and protect itself from certain criminal and terrorist acts, that is very well intact, and we believe that the second half will continue to see healthy demands. Having said that, the security business for Verint is lumpy. We tend to participate in large projects, and the timing of projects depends on specific opportunities.

Thanks. Good quarter.

And our next question comes from the line of Daniel Meron with RBC Capital. Please proceed.

Hello, Doug, Dan, Alan. Congrats on the execution here. Can you provide us with geographic dynamics between the different segments, security and enterprise? Thank you.

We operate worldwide in 150 countries, and overall there's no significant change, slightly over 50% of our business is in the Americas. About a quarter is in EMEA, and the remaining is in APAC. That geographical mix is not different overall between our workforce optimization market and security markets. But obviously for specific solutions we have different strengths as we develop relationships in certain countries where we drive potentially more business from one solution than the other. But in terms of our overall strategy, we continue to invest in all three regions, and we continue to expect to have the same kind of mix, about half of our business in Americas and a quarter in EMEA, and just under a quarter from Asia Pacific.

Okay, thank you. Good luck.

Thank you. And our next question comes from the line of Paul Coster with JPMorgan. Please proceed.

Yes, Dan, first of all, could you give us some sense on the bookings this quarter, book to bill, visibility, any color you can share with us on your near-term visibility?

Yes, sure, Paul, this is Doug. The order activity, as we have mentioned previously, it can be quite lumpy. We can do some large projects. We tend not to focus on a book-to-bill ratio or particular amount of bookings in a given quarter but look at it more kind of the quality of what we get and looking at actually what we book along with the associated pipeline. The overall activity in the quarter was very healthy. As a matter of fact, some of the things we had planned to actually get done in Q3 we were able to get done in Q2, and that was very positive. So the activity was good. We were happy with that. The revenue that resulted from that you see, and that was quite healthy as well. In terms of backlog, again for the same reasons, Paul, with the lumpiness involved and a lot of the business tends to these days be pretty much, when we get the order, we can get most of the revenue, so we don't have a huge amount of backlog there.

Dan, in your prepared remarks, you said that there was a handful of large security orders. Can you give us a little bit of color about the nature? Is it infrastructure? Is it law enforcement or homeland security? Just anything that kind of helps us get a sense of what's happening in the market there.

It's across all the above, Paul. We actually are very pleased with the amount of large orders, but as Doug said, there's no guarantee that we'll get that many large orders each period. So we're not really looking at it on a period by period basis, but overall, the large orders were across intelligence, law enforcement applications, and some were relative to the infrastructure, physical security protection, deploying video and video analytic solutions. So I think overall, as we think about our visibility, we're looking at pipeline, we're looking at customers that we have long-term relationships with, and more than 50% of our business comes from partners, and we have some history in terms of their performance.

So there's a lot of different factors that gives us confidence that the second half of the year we will be able to perform to a point that we can raise guidance for the full year. As we mentioned, and we want to prepare the market, because of the lumpiness in security, the results may vary quarter by quarter, but overall for the year, we think the economy has shown gradual improvement. We believe that at this point, we have no reason to think that it's not going to be at least stable and based on a stable economy and activity, we experienced in H1, the outlook for H2, we are raising guidance today.

Last question. Is there any change in your strategy on the workforce optimization side or the enterprise business in terms of the pursuit of verticals? One of your main competitors obvilusly had a good deal of success in the financial sector recently. Is that, for instance, a vertical that you might focus more on moving forward?

We have a very strong presence in the financial services sector. Our focus is on workforce optimization suite. So the strategy, which is to offer not just discrete modules but to allow the customers to benefit from those modules integrated around a database, where we can leverage the work flows and provide additional benefit to customers, it's proven to be very, very attractive to our customers. So we see no change there. We also believe that many of our customers have not yet implemented the full suite. They have one or two modules, but there is a lot of room for them to grow and take benefit from the fact that we offer an integrated suite and not just buy discrete modules from different vendors, and then they don't talk to each other, and the customer doesn't really leverage the opportunities that exist with the work flow.

We also, as part of our strategy, have announced and continue to make progress in the back office, including in financial services, so we have extended our solutions beyond the connect center into other areas of customer operations where people are not necessarily taking calls but are processing customer requests, and our experience is that that's another area where we have a product differentiation. We announced on the call today that we continue to develop our desktop analytic solution which is also integrated with our workforce management and optimization tools, and that is particularly attractive in the back office environment. So we believe that a big chunk of the market for us is financial services, but our approach is not just to be a supermarket for financial services but to provide solutions that are integrated, interact with each other and provide benefits for the customer to buy them in integrated fashion from one vendor.

Thank you.

And our next question comes from the line of Tom Ernst with Deutsche Bank. Please proceed.

Good morning. Thanks for taking my question.

Sure, Tom.

So I know you don't break it out, but, well, if you can, can you tell us what your support revenues are, and if you can't, perhaps what renewal rates are like and pricing and how that business is going generally? Thank you.

Tom this is Doug. Of our services revenue, about three-quarters of that is maintenance revenues, if you will, and the remaining quarter is installation services, professional services associated with installation and the workings of the product. So the maintenance base you can think of is around three-quarters or so of what we describe as our service and support line in the P&L. In terms of, I think your question is pricing and the renewal rate. The pricing has been fairly consistent, some small price increases perhaps over time. Nothing too extracurricular there, but we're maintaining the base nicely. The attrition has been low, so a very high retention/renewal rate so that's been a building maintenance stream for us.

And any change here in the last couple quarters since you've gotten your financials out in terms of the tenor of the discussions with customers on renewal or upsell opportunities to engage them?

I'll tell you this. I used to do a lot of calls as CFO with the customers and it's probably never a good thing, kind of describe the history around why we hadn't filed. We had a lot of procurement people at customers just wondering why they can't find our financials on the website so a lot of that noise has subsided. So a little bit of the head wind we had from not being current has subsided though, I think that's good tenor. We never know how much that really impacted the business, but certainly it had to at least prolong the sales cycles a little bit. So it's good to have that behind us. It's good to be a normal filing public company. Great to host these analyst calls with you guys once again, and not be a private company any more.

Okay. Last question from me. You mentioned you continue to hire on the call. How fast are you expanding, and I know you're not guiding for next year, but what kind of rate of investment do you hope to invest for growth?

We see a lot of opportunities to grow. As I emphasized on the call, what's driving our growth is innovation, and we also believe that what's driving our operating margins, which is now well above 20%, is our ability to differentiate our value add from competitors. As you can imagine, the market is highly competitive. It's still a fragmented market. There's a lot of different competitors. And some of the competitors are competing on price, and customers do have a choice to buy cheaper solutions, but the fact that we grow business and we grow it with high margin is attributed to the fact that we are able to demonstrate the value and the product differentiation.

So we will hire. We have been hiring and will continue to hire in R&D. We also are hiring in customer support, because a big component here is to help our customers to implement technology in a way that can fully benefit from the product features so we're extending customer support services and obviously we're expanding our sales coverage that is critical to growing the top line. In terms of how much, we have increased our headcount in the first half by about 100 employees. That's about 4% increase in the first half of the year, and we certainly will continue to hire, the rate which we hire will depend on our outlook for the economy and for growth, so we certainly have a lot of opportunities to invest in, but the rate we would like to preserve the flexibility to hire faster if we see that the economy is certainly improving, and that we can get the benefit of the investment back to growth in top line pretty quickly. And at the end of the year, I'll be happy to report the level of hiring we did in the second half.

You can see, I'll just add to that, that we're guiding to operating margins of 22% to 24% for the full year, and you can see from the first half performance, operating margins averaged just a hair over 25%. So you can see from that, that we're looking to invest further in the business in the second half, and poise us for better growth in the future.

Thank you again.

Sure, thank you.

And our next question comes from the line of Hugh Cunningham with Oppenheimer. Please proceed.

This is Hugh Cunningham for Shaul Eyal.

Hey, guys good afternoon. Good quarter. Dan, quick question. I want to go back to the question about the enterprise side of the equation. On the one hand, we are getting some data, usually negative data from the outsourcers, from companies that kind of host the agent, and there's clearly been a declining rate of call volume. Can you kind of help us reconcile -- users are doing well, their competitors are doing well on that front. Is that given the entire shift call center automation that you guys are benefiting from? Is that part of the question here?

Yes, I think we benefit from the demand for analytical tools. How to understand the trends in a call center, how to derive intelligence from a connect center, and improve the value that our customers can extract from the connect center, so in terms of infrastructure, I think your comments are correct, and we see the same thing. We see some trends in outsourcing being reversed. But this is more relevant to the building infrastructure within connect center.

I think that the level of using analytical tools, the penetration rate is still low, and the value from analyzing the interaction from understanding better customer sentiment and focusing on the workforce and optimizing the performance, that is certainly the trend now that drives growth for Verint. The whole idea of integrated suites is a relatively new idea. We introduced this idea a couple years ago after we did the Witness acquisition. We believe that we are leading the market in terms of the level of integration across the suite, and the penetration of an integrated suite into the connect center is very low, and that's why we believe it's poised for good growth.

Thank you for that. Good luck.

Thank you.

And our next question comes from the line of Brian Ruttenbur with Morgan Keegan. Please proceed.

Thank you very much. Just a couple quick questions. Some of them have been answered, but -- or have been asked, but I don't know if they have been answered. First of all, the book-to-bill, was that better than 1 to 1 or less than 1 to 1 in the quarter?

Brian, as Doug explained, we are not giving the book-to-bill ratio. We haven't given that in the previous quarter, and we're not giving it today, and we have no plans to do that in that the future. And the reason is, that we believe, based on the booking behaviors in our business, that it's not going to be helpful to investors to track that on a quarterly basis. The booking especially in the security business, which is almost -- security business is almost 50% of our overall business, and the booking behavior is very lumpy, where one quarter -- we can have several large projects, which will drive a very high book-to-bill ratio, but that will not be indicative of the run rate, and the next period we may have a book-to-bill of less than 1, and we wouldn't think that that would be indicative of the low run rate. And that's the reason why we know that this is something that some of our competitors provide, but we think that in our particular product mix and market, it will not be useful for investors.

Okay. Are you going to talk backlogs on an annual basis, or you disclose that at all?

Well, again, Brian this is Doug. As Dan said, kind of backlog is the same issue as the bookings. We're very pleased with the overall order activity that we have, and we measure that in a number of ways. More of the business is over to kind of a normalized software rev rec model now, so we don't have a big backlog model we work with. That said, if we've got senior deferred revenue of a few hundred million, then we have contractual commitments and gross up on top of that, you can get to a couple of quarters of backlog, if you will. That's not something we really measure. It's not something we want to report on. We look at things a little bit more aggregate in terms of the order activity along with the pipeline, and all those things look real good to us right now.

Should we be tracking to try and track something besides just revenue and how you report in the quarter, should we be tracking deferred revenue? Is that a good indication of future?

If you look at the revenue trends, I think the other metrics are noise, and as we continue to emphasize, we do have a very lumpy business. Ii know that makes it difficult for you guys who want to track us out a little bit more systematically, but we do do some very large contracts. They hit in certain quarters. The revenue gets spread a little bit from them because of deliverables and milestones, et cetera. But I think that these other metrics are a little bit misleading, if you focus just on them, because of the lumpiness and the nature of our business.

Okay. On SG&A and R&D, what percentage of revenue? Can you talk about that, that SG&A will be and R&D will be going forward? You had a big drop sequentially from first quarter to second quarter, this year. And I'm just trying to model either as a dollar amount, if you want to talk dollar amounts, or as a percentage of revenue.

Again, I think if you start with the operating margin, and we're looking to do 22% to 24% for the year.

Right.

There's nothing dramatic happening in terms of the cost structure, the gross margins, we said kind of mid to higher 60s, you do that, you can see that the R&D and SG&A are fairly consistent. As revenue pops a little bit more with the seasonality of -- particularly of Q4, the ratio relative to revenue will be a little bit lower, but I think the idea is to focus on the operating margin, kind of build up from there. You can kind of back into those amounts by looking at.

The problem is, I can't. You just reported revenue -- well, first quarter, you reported $26.4 million of R&D. Your R&D dropped $4 million plus from quarter to quarter. Your SG&A dropped $18 million from quarter to quarter. I'm just trying to figure out what is it -- is the $22 million and the $69 million kind of the numbers to use going forward, and kind of model off that as a percentage of -- I'm just trying to figure this out.

$22 million-ish on R&D, in that neighborhood, going forward.

Let me just explain R&D while Doug will continue the response, but the number of people that are engaged in R&D obviously is not declining. It is growing as we invest more in R&D, but because, again, of the nature of certain large projects in some quarters depends on the mix, some R&D folks will actually be classified as cost of goods, and therefore, in that particular project, they will be out of R&D, into cost of goods, but obviously once that project is over, they will go back into R&D functions that that are more long-term research and development, and from accounting perspective will be classified back into R&D. So we don't control this, Brian. It's really driven by the accounting rules, and there will be some fluctuations up and down, but more importantly, we're not running a shop here where we hire 100 R&D folks and then reduce the size by 150. This is not the dynamics that drive business. As Doug said, it could be 20 to sometimes a little higher, but around 12%, plus or minus, of revenue is what you should expect going forward from the R&D line.

And from the SG&A--.

12%, that's perfect. Then SG&A, if you could give me that same kind of feedback that would be great.

You saw we were low 30s this quarter, lowish 30s, 32, 34, in that range is what we would expect, Brian.

That is perfect guidance, thank you very much, I appreciate that.

And our next question comes from the line of Craig Nankervis with First Analysis. Please proceed.

Yes, thanks very much. Nice quarter. A few different questions. I wonder first if you could just talk about Europe on a sequential basis. I know you referred to it in your remarks on a year over year basis briefly. Any sequential commentary on that geography?

No, I don't think it will be highly helpful to highlight the trends. We saw in Europe on the government side some hesitation on the commercial side, the trend was positive. Government, I would say longer sales cycle. We've seen that before in Europe and also in other geographies where the government spending was questioned, but eventually, our history is that from every such cycle, even if there was pressure on government spending, the amount of money that was eventually spent on new technology was growing, so there could be pressure that eventually will keep the security spending overall under pressure, but the kind of project that we are participating in, this is -- we don't see right now that this is going to be affected, and we believe it will continue to grow, and the hesitation is basically just longer sales cycle in terms of making the decision to award the project. But otherwise, obviously there is good growth in some of the countries where the economy is strong in Latin America and in Asia Pacific, and we enjoy as well from that strong economy, but our business is across many, many countries, and even in countries where the economy is struggling, on the security side we continue to see good spending.

Thank you. That's very helpful. I appreciate that. While we're on security, I just wondered if could you maybe talk a little bit about, at least broadly the size of the large deals. It seemed to me, as I recall, in the April quarter, you also had some large deals that you talked about. I may be wrong, but that's how I remember it. Yet you had a pretty significant sequential increase. Did large deals get larger for you in this quarter? How do you talk about that?

You are right, both in Q1 and Q2, we had several large deals. Again, some of the comments we made, A, those deals, and large deals could be anything above $5 million, because our average deal will be under $1 million, so when it's $5 million, it's large. It can grow to be more than $10 million, and sometimes much more than $10 million. In some cases, we get large deals, rather than one order, we would get them split into several deals across several quarters. So within the year, it could be large deals, but not necessarily in one quarter. Obviously we focus on some large customers that have very large footprints, and while we're always happy to get a large order, if the customer decides to split and address the footprint in several kind of mid-size orders, that's fine as well. In terms of the revenue recognition, it depends. It depends on the deal. In some cases, we can recognize quickly a large chunk of the order, but in other cases, the recognition is spread over several quarters, and sometimes a couple of years. Really depends on what's driving the recognition is the customer needs, how fast they want the deployment and whether the deployment is -- requires also some certain upgrades that we provide through the life of the deployment.

Agreed upon milestones really and the deliverables we have and whatever time frame that works for the customers on those deliverables.

So while the bookings can be lumpy, driven by these large deals, revenues can also fluctuate. Depends on the nature of the deals. And gross margin can fluctuate as well. Depends on the mix, because some deals come as pure software. Other deals will have a hardware component, and lower gross margin. And as you may recall, in our workforce optimization business, it's pretty much a pure software model, but in our security business we do provide from time to time a turnkey solution which also includes some hardware components. So in terms of how you should think about modeling Verint, I think that on a sequential basis, you should expect to have some lumpiness in top line and gross margin, but in terms of the trends, and what we see right now, we see a healthy market, good demand. We believe that our markets are growing at a single-digit -- mid to high single-digit is what we discussed last quarter, and we still think that that -- that the growth rate in our market, but at the same time, we believe that with strong execution, and the investment we are making that we have an opportunity to grow faster than the market.

Okay, that's helpful. That actually handled one of my next questions. I appreciate that. Also, on the mix, the services revenue jumped significantly, almost 10% sequentially. Would that be security-related? You talked about how it's mostly maintenance, but then professional services sounds like the variable component there. Do I understand the read of that correctly?

So the mix that Doug mentioned, which is three-quarter maintenance, one-quarter professional services, did not change materially between the periods, so when you think about increase, there is an increase in maintenance revenue as well as in professional services revenue. I can say that our workforce optimization market yields higher maintenance revenue than security, for two reasons. First, it's more of a pure software model, which comes with higher rates of maintenance. And the second is that in some cases, in a security market, government customers tend to take some of the responsibility for maintenance themselves, or because of security reasons, we use third parties to provide a portion of the maintenance so historically, the security markets carried less maintenance revenue than the workforce optimization market.

Okay. And then maybe finally on the workforce optimization side, would you disclose roughly what proportion back office is as a percent of your total WFO revenue? And how much is that driving the overall growth in that business versus traditional call center? Is that a notable driver, or more notable?

Well, it's still early, so it's kind of 5% to 10% of our overall business. But we think that we have customers that have been our call center customers, and have now extended the solution to the back office. We also see some trends in the connector market, one of the -- there was a question before by Shaul related to trends, and one interesting trend that we see is that our customers, and particularly the financial services, but not only there, have recognized that the connect centers generally have done a good job in workforce optimization. We see some cases where customers are moving people that rent workforce optimization project for the connect center, they moved them into the back office to leverage their knowledge and experience and to introduce the same tools that have already been introduced in the connect center into the back office.

So while we -- as you mentioned, it's still a relatively small driver for the overall growth, I think in terms of innovation, in terms of ability to extend our portfolio and have a more holistic solution for customers, we do see that as a differentiator. And that's a big part of our strategy. We want to be a partner with our customers to drive value across the enterprise. We don't see ourselves just as a recording provider or just as speech analytics provider, and the back office is an important and integral part of our overall strategy for the connect center. It's not a separate stand-alone offering. It's more for the integrated approach.

Very helpful. Thank you.

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

Yes, hi, I'm sorry about this, Doug, I've just got a couple of quick follow-up questions. First one is can you just confirm that the year on year revenue growth rate and the quarter on quarter growth rate is now normalized, or do we still to have make some adjustments on the changes that were made in the last fiscal year?

Yes, as we talked about over the last few quarters, there still is some lumpiness around the deals, as well as some impact of the restatement we're kind of over to a normalized business model now, so less and less.

I think the problem, Paul is not now. The problem is last year. We spent some time discussing what happened last year, so we're now back to more normalized model, and we established VSOE in almost every area, but the compare year over year in terms of growth rate is absolutely affected by what happened last year, which was the positive impact for completing restatement last year. So, therefore, the growth rates that you see year-over-year are not indicative to the overall growth that we see in our underlying business, and that's going to continue to be a problem I think until the end of this year, and you can only start to really measure more accurately from a revenue perspective the growth only next year.

So we've got a tough compare, in other words. And we've talked about this before. Last year's results were a little extracurricular because of the impact of the restatement.

Got it. My other question, Doug, I'm so sorry, I just missed this, but are there other ongoing costs associated with restatement activities or has that now ended?

Actually, you didn't miss anything. That hasn't come up, Paul. So thanks for the question. Other people may have been thinking about that as well. Yes, as you can see in Q2, the restatement expenses were down to about $6 million. It was like $20 million the quarter before. So we are, thank goodness, winding that down, and now we can start investing that cash into the business instead of restatement. Much more productive use. Over the next couple of quarters, probably a few million more as we kind of wind down some loose ends there, and then that should go away, Paul.

Let me add to Doug's comment, the cost -- the charges we have is $6 million in Q2, but we also pay bills relative to work that was done in Q1, so the overall cash expense in Q2 was $20 million for professional fees, and you are not going to he see that kind of cash outlays going forward. Q2, it was $20 million. We also had $22 million of debt paydown in Q2. Adjusting these two big cash outlays of $22 million, and $20 million, you could see that while our cash overall was down $11 million from Q1 to Q2, with these two extraordinary payments, we should have been -- without those two payments, we should have been $30 million up in our cash. And the professional services are largely behind us. As Doug mentioned, a few million dollars in the next couple of quarters, and in terms of paying down the debt, the $22 million paydown in Q2 was mandatory, and we don't need to do another debt paydown in the near future. So that is just kind of to complete the analysis of cash and relative to professional services and other extraordinary items.

Great, thank you.

Sure.

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call back to Mr. Alan Roden for closing remarks.

Thank you, operator. On behalf of Verint, I would like to thank everyone for participating in today's call, and we look forward to talking to you on our next call. Have a great day.