Verint Systems Inc (VRNT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Verint Systems earnings call. My name is Melanie, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will accept your questions at the end of this conference. (Operator Instructions).

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

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 have seen a copy of our press release that includes selected financial information for our third fiscal quarter. We expect to file our Form 10-Q for our third fiscal quarter shortly. You should have also seen our Form 10-K for the fiscal year ended January 31, 2010, filed in May, and Forms 10-Q for the fiscal quarters ended April 30 and July 31 filed in June and September, respectively. Each of these filings and our earnings press releases are available on the IR tab of our website, and also on the SEC website.

Before starting the call, I'd like to draw your attention to the fact that certain matters discussed in the call may contain forward-looking statements, 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're based on management's expectations, and involve a number of risks and uncertainties, which could cause actual results to differ materially from those expressed or implied by the forward-looking statements.

Important risks, uncertainties and other factors could cause actual results to differ materially from our 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 forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2010, and our Forms 10-Q for the fiscal quarters ended November 30 and July 31, as well as our Form 10-Q for the fiscal quarter ended October 31, when filed.

Current financial information discussed today is not prepared in accordance with Generally Accepted Accounting Principles, and is non-GAAP. A 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, September 8, and December 8, as well as the GAAP to non-GAAP reconciliations found under the investor relations tab on our website. Non-GAAP financial information should not be considered in isolation, or as a substitute for GAAP financial information, but is included because management believes it provides meaningful supplemental information regarding our operating results and when assessing our business, as well as useful to investors for information on comparative purposes. The non-GAAP financial measures the Company uses have limitations, and may differ from those used by other companies.

Now I'd like to turn the call over to Dan. Dan?

Thank you, Alan. Hello, everyone, and thank you for joining us today to review our third quarter results. In Q3, we delivered approximately $187 million of revenue, a 70.5% gross margin, a 28.5% operating margin, and $0.92 of diluted earnings per share. Overall, we are pleased with our third quarter results, which are ahead of our expectations. Our revenue overachievement contributed to a significant overachievement in operating margin and earnings per share, due to the operating leverage in our business models.

Revenue in our workforce optimization business increased from $94.8 million in Q2, to $106.5 million in Q3. Our license revenue was up sequentially in all regions. We are particularly pleased with our sequential improvement internationally in the EMEA and APAC regions, as well as in our indirect business. Revenue in our security intelligence business decreased from $85.9 million in Q2, to $80.2 million in Q3. As we've discussed in the past, revenue in security intelligence on a quarterly basis can be lumpy, driven by the timing of large projects and customer deployment schedules.

Our objective is to grow in line with, or greater than the market, by investing and gaining market share. To help drive long term growth, we continue to invest and hire, and since the beginning of the year we've added more than 150 people across Verint in key areas including sales, service and R&D. Although we've increased headcount, our revenue has grown faster than our expenses, contributing to our 28.5% operating margin this quarter. Longer term, we do not believe this level of margin is sustainable, as we continue to invest in the business.

Overall, we are pleased with the momentum that we have experienced this year, and would like to discuss trends we are seeing in the workforce optimization and security intelligence markets. We continue to see an improvement in workforce optimization activity compared to the prior year across our three principal regions, Americas, APAC and EMEA. We continue to believe that customers are adopting the suite approach, and are seeking a unified workforce optimization solution. Our objective is to meet this demand by delivering best of great solutions in a tightly integrated suite.

Customers are also looking for more innovation, and are interested in adding new analytical capability. In this regard, during Q3 we expanded our unified suite by adding sentiment and text analytics. This new offering mines customer interactions across multiple channels, including e-mail messages, web chat sessions, blogs, social media, and other text-based channels, providing a market channel view of customer experience.

In the security intelligence market, long term trends of heightened level of security, and the ongoing migration to IP-based solutions are intact. We continue to address this trend by delivering a broad portfolio of IP-based security solutions for the video intelligence and communications intelligence markets.

Turning to guidance, we are narrowing our revenue outlook for the current year to a range of $715 million to $720 million. We are also increasing our non-GAAP operating margin's outlook for the year to around 25%, and non-GAAP EPS between $2.60 and $2.70. Overall, we are pleased with our outlook for the year, which is expected to come in above our plan. Of course, revenue, operating income and EPS on a non-GAAP basis.

Looking ahead to next year, based on a gradually improving economy, we believe our market can grow mid to high single digits, and because of our leadership position and the investments we are making, we believe we have the opportunity to grow at least at this rate. Based on this view, we are providing an initial outlook of 7% revenue growth, and a target operating margin in the low 20s for next year.

Our growth outlook reflects our view that there are good growth opportunities in both the workforce optimization and security intelligence markets. And the operating margin outlook reflects a strategy to prepare for this growth by continuing to innovate, invest in people, products and customer programs.

We believe that we also have the opportunity to extend our market initiative through acquisitions, as the markets remain fragmented, and there are many companies with synergetic value propositions. Our acquisition strategy is to add technology and products that leverage our large install base of customers, and broad market coverage, as well as to strengthen our presence in certain vertical and geographical areas.

Now I would like to turn the call over to Doug to discuss the Q3 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, and stock-based compensation, as well as certain other non-cash or non-recurring charges.

I'd like to begin today's discussion with the areas of revenue, gross margin and operating margin. In the third quarter, we reported approximately $187 million of total revenue, with $106 million in workforce optimization, $31 million in video intelligence, and $50 million in communications intelligence. This compares to approximately $186 million of total revenue in the third quarter of last year, with $105 million in workforce optimization, $34 million in video intelligence, and $47 million in communications intelligence.

Gross margins were 70.5% compared to 68.5% in Q2, and were helped by a favorable mix of higher margin projects in security intelligence. As a reminder, gross margins can fluctuate quarterly due to mix, potentially significantly, and we do not anticipate our gross margins to remain at this Q3 level.

In the third quarter, our operating margins were 28.5%, up from 25.6% in the second quarter. 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.

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 impact from foreign exchange. In the third quarter, this expense totaled $6 million, reflecting approximately $9 million of interest expense, as well as approximately $3 million positive foreign exchange impact related to balance sheet translations.

Relative to the tax area, our Q3 non-GAAP cash tax rate was 5%, bringing our first three quarters average tax rate to 7%. Our expected annual non-GAAP cash tax rate is between 6% and 8%. As we discussed previously, we expect to enjoy a low cash tax rate for several years due to our NOLs, and the amount of income we generate in low tax rate jurisdictions.

Now turning to the balance sheet, as of October 31, 2010, we had approximately $152 million of cash, including $18 million of restricted cash, compared to approximately $143 million cash as of July 31. There was no change in our bank debt at $598 million. The $9 million sequential cash increase would have been $31 million increase in cash sequentially, if we had not made any payments associated with our LIBOR interest rate swap, which was terminated in the quarter.

As of the end of Q3, we had 47.7 million average fully diluted shares outstanding, including approximately 10.3 million shares underlying our convertible preferred stock. For the year, we expect to have approximately 47.4 million average fully diluted shares outstanding.

Regarding the S1, we are continuing the registration process pursuant to the Comverse registration request that we received as previously disclosed. Since the offering would be for secondary shares, it will not affect the number of our outstanding shares.

Before moving to Q&A, I'd like to discuss our guidance. We expect revenue for the year to be in the range of $715 million to $720 million. We expect non-GAAP operating margins to be around 25% for the year. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to continue to be approximately $9 million.

As I mentioned, we expect our non-GAAP cash tax rate to be in the range of 6% to 8% for the year, consistent with the amount of taxes we expect to pay in cash this year. Based on these assumptions, and assuming approximately 47.4 million average fully diluted shares outstanding for the year, we expect non-GAAP EPS to be between $2.60 and $2.70.

While we don't provide quarterly guidance, our annual guidance implies a sequential revenue decline in Q4, as our quarterly results can be lumpy. Overall, we expect to finish strong, and ahead of our initial plan for the year. Our performance this year gives us confidence we can grow at least as fast as the market, and we are providing initial outlook of 7% revenue growth, and a target operating margin in the low 20%s for next year.

This concludes my prepared remarks. So, with that, operator, can we please open up the lines for questions?

Yes, sir. (Operator Instructions) And our first question comes from the line of Shaul Eyal with Oppenheimer & Co. Go ahead.

Thank you, operator. Good afternoon, guys, good quarter. Couple of quick questions. Doug or Dan, maybe just to word or some color about the backlog and about deferred revenue. I think it was kind of sequentially down the deferred revenue this quarter. I know that you said in the past it's kind of lumpy, but any more color you can share with us will be quite helpful.

Let me start, Shaul, and I'll have Doug complete the answer with more details, but there are a number of components that make up deferred revenue. The largest component is support renewals and we have a very good renewal rate and actually our support renewal is up, but there are also other components within the deferred revenue that were down and can also fluctuate and I'll have Doug give you some more technical explanation.

Yes, sure, Dan. Of course, you have maintenance is the largest piece and the base continues to grow, but as you mentioned, Shaul, it is lumpy and there are some over components that do fluctuate. There are certain large projects that we have that hit certain milestones and when those are hit, we can recognize the revenue and, of course, the deferred revenue gets relieved. We have advance payments that can fluctuate based on other large projects where we can get some significant amount of cash up front that goes into deferred revenue and as you may know, we have a net down policy based on cash received we net down deferred revenues and that can fluctuate as well and there is a component of subscription revenues based on prior business model that's dissipating out and I think on a go forward basis we'll see less and less of that. It's not really material at this point, but that is another component that's out there in our deferred revenue.

Got it and the backlog picture, did that grow this quarter?

Yes. Backlog is not something that we are particularly track. We feel that with our business model adjusted aside from these big larger lumpy projects that as we, you know, get orders it turns to revenue in a fairly short period. So it's not a metric that we're tracking.

Got it. Got it. What's kind of the security kind of segment expectation for the fourth quarter really kind of in general terms? Do you expect it to continue kind of in decline slightly or maybe kind of flatten out a little bit?

No. We expect security to continue to grow and into the long term. As we spoke about our growth expectation for next year, we actually have expectations for our and security business. What's driving growth in security is primarily two trends. One is just heightened level security, people looking to invest in more advanced security solutions and also the IP network that provide an opportunity for the type of technology we have to be deployed and be more effective addressing security concerns. So we see those trends intact. Security is lumpy and therefore, we should look at trends on an annual basis, not on a quarterly basis, but both in video as well as communication intelligence we continue to invest. We continue to introduce new products and solutions and gain new customers and we're very pleased with our progress in this market.

Got it. Thank you very much and good luck.

Thank you.

Our next question comes from the line of Daniel Meron with RBC Capital Markets. Go ahead.

Hello, Doug and Dan, congrats on the solid numbers. A couple of questions on my end, just following up on Shaul's question, Dan, maybe if you can just clarify one point regarding security, we're hearing a lot about budget cuts in defense and other areas of government spending. Do you see any impact whatsoever on the tone of your business in any way?

We have very little exposure to defense, but obviously we are exposed to government overall which could be not just federal, also state and local and this is across many, many countries. So our government business is strong. I would say that overall if there is an impact on government budget, it's not really something that we can at this point say it's affecting our business because we're generating several hundred million dollars of revenue this market, but we are the forefront of technology. Our solutions really help our customers to address their security issues more effectively. In many cases they can do more with less people. So while we're not selling in the security market on an ROI model like we sell in our workforce optimization market, I think that the attractiveness of our solutions is that really allow our government agencies worldwide to use our technology, to be much more effective in the way that they deal with security threats. So it hasn't been something that affected us in any way that I can report today and we - - in our expectation for next year as we are looking at next year outlook, we do have growth expectations for the security segments.

And then is the growth rate that you look for in security above the 7% growth that you expect or in line?

So we, the way we look at our rough model is we believe that there is an economic improvement. Certainly the economy was improving this year relative to last year and we - - based on sustained economic improvement, we believe that the average growth in the market across all our businesses will be mid- to high single digits. We believe this will be the same roughly same growth in security and workforce optimization and therefore, when we look at our performance across all the segments that we participate, we are in the leadership position. We have a strong product portfolio. We really don't see any big holes in our portfolio. We have very large and loyal customer base. We have very strong channel and we are actually adding more partners and very pleased with the progress with partners. So taking all that into effect, we believe that we will grow next year at least at market rate, if not better, and our objective is to take market share, which is to grow faster than market rate, and we have the same objective for our workforce optimization and security markets. So, the outlook is really based on where we think the economy and where we think that the markets will be next year and we will be there to execute at least with market rate.

Great. Thank you. And then just quick question to you, Doug, on the cash flow generation I think you mentioned that your cash generation would have been $31 million if it wasn't for the interest payments, if I heard you correctly. What would it be on an annual basis maybe in 2010 or maybe 2011, some number to work with as far as the cash flow generation from the business itself?

Yes. So what we mention is that if you see the LIBOR rate swap and again, I let Doug explain in a little more detail, but we just wanted to give a sense of what the cash flow generation is. It's approximate. It's not a specific cash flow projection, but if you look at our performance in this year including the expectation for Q4, you take 25% operating margins on $720 million, so roughly, $180 million EBIT. We're going to be approaching $200 million EBITDA and our cash flow has a number of components and we had a lot of normal expenses in the beginning of the year as we were wrapping up the restatement and a lot of professional services, but that is largely behind us and we are going to be generating very strong cash flows and Doug, would you like to add more?

Sure. What I had explained earlier was the sequential cash movement in terms of the cash balance from Q2 to Q3 had an extracurricular swap termination payment that was in it and so when you add that back, you get to a little north of $30 million, kind of on a more normalized basis. So we think that that's a good cash generation for the quarter. When you look at the interest expense as well, to add that back in terms of we're covering that with the cash, you can get to numbers that then tie back to what Dan was just talking about in terms of an EBITDA of a couple hundred million, work down from there with some working capital to get cash flows kind of normalized going forward.

Okay. Very good. Thank you so much, guys. Good luck going forward.

Okay. Thank you.

Our next question comes from the line of Thomas Ernst with Deutsche Bank. Go ahead.

Hi, good afternoon. I'm [Nardium Ladi] on behalf of Tom. Has there been any meaningful change in your competitive environment, specifically from the perspective of your product portfolio as you discussed is very complete, but there's also been some channel changes among one of your competitors. So can you characterize how that is looking for you?

Could you be specific about the channel change?

Yes. There was a change in one of the major channels for one of your competitors and I thought, I just wanted to find out how that's reflected for you. Have you picked up any new channels?

Okay. I get it. So the is comparative across all segments and we have different type of competitors. Some of them are smart startup, some of them are larger companies some of them have adopted a more portfolio suite approach and others have just very specific, best of breed. So we are really kind of accustomed to be competing with different companies on different levels, if you will, and really articulating to our customers the valuable propositions of our complete solution. So in terms of the competitive environment while we have in some cases we have some competitors dropping, I think we saw on the computer side and more specifically in the video segment there were a number of smaller companies that may be dropping from the market because they just didn't make it to the next level and so this changes that I would say largely not really significant change in the competitive environment.

Relative to the channel, we have one of the strategies we have to go to market is an OEM strategy. We are very pleased with securing a relationship with [AVIA]. This is still what I consider an early stage, but we think that that has a lot of potential. We are investing and we are pleased with the progress.

Thank you and one short follow-on question, as far as your legal and other types of fees, are those now firmly behind you or do you still anticipate some residual fees looking forward?

Yes. So yes, relative to these fees having to do with our filing delays as you can see they're sequentially down quite a bit, we paid over $6 million of those fees in Q2 and over $800,000 in Q3. So we expect that to dissipate and go completely away by the time we get to Q1.

Okay, thank you.

Sure.

Our next question comes from line of Brian Ruttenbur with Morgan Keegan. Go ahead.

Yes, thank you very much. This is Brian Ruttenbur with Morgan Keegan, a couple questions housekeeping, trying to figure out your actual cash in debt at the end of fiscal '11 January, what are your projections for that and then your cash and debt where you're looking to be at the end of fiscal '12 ex any acquisitions and any capital raises.

Our debt level is about $600 million, so we don't anticipate to change that by the end of the year. In terms of next year we'd had a mandatory excess cash payment we'd have to calculate in Q1. Then beyond that it shouldn't be a lot, but beyond that is what we just voluntarily decide we want to pay back and then some determination of other uses of that cash. In terms of our cash balance as I mentioned, we had that extracurricular payment in Q3 having to do with the termination of the swap. From Q3 to Q4 we don't see anything extracurricular like that and we'd expect kind of normal cash growth from operations.

Okay. So what is the cash number at the end of fiscal '11? Your cash is going to be $100 million, $200 million, $120 million?

Brian, we're not giving specific cash forecasts, but again our cash level now is $150 million. We kind of indicated that we gave a proxy of $30 million. We can generate cash flow after interest payments and capital expenditures and that's without any pay debt down or acquisitions that we may decide to do, but we're not at this point announcing that we are doing either a debt paydown or acquisition other than what Doug was referring to as a mandatory payment that we have to do from time to time to pay down the debt.

Okay. So if I just do the simple calculation, you should be at $180 million at the end of this fiscal year of cash assuming you don't pay down any debt and assuming next fiscal year you add another $120 million to that, assuming no paydown of debt and no acquisitions, is that the right kind of way to think about this or is there something else?

We believe it's directionally correct. We're not giving a specific guidance, but it's the right way to think about our business.

I think those are reasonable estimates, Brian.

Okay, good. And then can you talk about the timing of the offering, the equity offering?

No. We do not announce timing. The decision is a Comverse decision because as we made very clear, we're not selling shares. It's all secondary, so it's up to Comverse to decide whenever they want to pull the trigger and when and this is - - I'm sorry?

Is it going to be an overnight offering? Are you going to do an actual roadshow?

Those decisions also have not been made. At this point we are continuing to work on progressing the S1 filing and at some point a decision of this nature will be made, but has not been made as of now.

Okay. Some additional questions. You talked about security versus workforce optimization, it sounded like you're expecting similar kind of growth in both areas in fiscal 2012. Can you talk a little bit about products versus services, the mix? I think it's running roughly 50/50, round numbers. Do you expect that to be the case going forward or is there going to be a higher services support component versus products component going forward?

We're not changing our services model. We will have a little pickup in our maintenance just because we have a fairly good renewal rate and then that's part of the model of the softer model that we have, but overall we're not expecting to come out of Jan. 2012 with a major change in the model.

Okay. Then last question and then I'll let somebody else ask is on your pro forma operating margin it appears that they're going down in fiscal 2012, January year-end. You're saying 25% is the goal this year, the target for fiscal 2011, but you're saying low 20s in fiscal 2012. Low 20s would imply 22%, 22.5% and I just want to make sure that that was correct. Is that right?

Yes. We're not -- we're saying low 20s. We're not guiding to any specific number because it's still early and we'll provide more specific information down the road, but what basically what's guiding our strategy is that we have believe that we are able to deliver good value to our shareholders short term while still investing in our business for long term growth. We have see lots of opportunities in our market and we'd like to be in a position to hire and invest and that's including in R&D and programs and sales and new territories and so forth. So we'd like to really capitalize on those growth opportunities and therefore, you're balancing the short term and long term prospects of the Company.

Okay. Just to look at this to do the math because with the possibly lower pro forma operating margins with the mid-20s down to the low 20s and the 7% growth, that would imply possibly either flat or very slightly up pro forma EPS. Is that correct? Am I missing something? I'm talking fiscal 2012.

Yes. I think again directionally we are talking about top line growth in the business and we're talking about investments. So clearly those are working into opposite directions in terms of the bottom line, but again we're not providing an EPS guidance at this point.

Okay, great. Thank you very much. Appreciate it.

Okay, Brian.

Our next question comes from the line of Jonathan Ho with William Blair. Go ahead.

Hey, guys, can you talk a little bit about stimulus spending and whether you're seeing any type of potential benefit that might come especially on the security side of the business from either US stimulus or just worldwide stimulus spending?

Yes. We don't know because we're not necessarily being told by customers that they -- that their progress was driven by stimulus -- we have no reason to believe that we have benefited from that to date and we're not targeting stimulus type of programs specifically. So, it's very typical for our government business that customers will get budgets sometimes by different programs and we've seen in the past that budgets came around because there were security events and although a program was not budgeted for the year and suddenly mid-year the customer found the budget because it became a priority, so in the security business we do see all kind of specific stimulus programs to address security concerns in specific countries, but we're not really targeting any specific funding of that nature.

Got it. And can you talk a little bit about maybe within the security segment where you saw strength maybe by industry or at the high end or the low end? Is there any keep of color that you can give us as to what was made a little bit stronger, a little bit weaker there?

Sure. We're still very much focused on the high end of the market. Our solution are high margins solutions and they cater more to the large organizations. We believe in over time we can get downstream, but it's still security is very, very large market and we have a better results by focusing on the more sophisticated high end type of customers. In our video segment, we are primarily focused on three verticals, retail, banking and critical infrastructure. Obviously retail and banking is nongovernment and critical infrastructure has a government component, but those three verticals we see adoption of IP solutions and we see a need for analytics and we have specific solutions focused on those markets. And our communications intelligence market we basically are looking at law enforcement and homeland security agencies. This is mostly government business. We do have a telecom component because in some countries the telecom industry is regulated and they need to buy software that will allow them to be compliant, so we will sell directly to the telecom service providers, but it's predominantly law enforcement and homeland security with some telecom business as well.

Got it. And last question would be in the workforce optimization segment can you just give us a sense of the temperature that you're getting from your salesforce in terms of the end market relative to purchasing and are there monthly new sales cycles out there? You guys kind of touched upon things looking better than last year. Is that trend going to continue into next year? How do we just broadly think about that?

Yes. It is better than last year in terms of the temperature out there. There's less hesitation. Cycles have been very long last year and deals were cut in size during the sell cycle. We see less of that this year, so certainly it's better. It's not yet where it was several years ago, so when we think about growth prospects next year, we kind of are dialing that the economy will continue to kind of sustain where it is now. We're not really dialing an improvement or a major growth in the overall economy, but we're also don't see any signs that things are deteriorating. So if things will continue as is, we think that the market will be growing at mid- to high single digit and as I said before, we really have no reason to not grow at least as fast as the market because we are basically operating on all cylinders.

Great. Thank you.

Our next question come from the line of Paul Coster with JPMorgan. Go ahead.

Yes, hi. Mark Strauss on behalf of Paul. Somewhat of a follow-up to that last question. Within workforce optimization are you experiencing any kind of upgrade cycle within your existing customer base? I guess specifically with the legacy witness software customers. And if so, is that typically open to competitive bidding?

At this point there is really no difference between the legacy witness space and the variance space. We have integrated the product and we are offering similar upgrade tasks to our customers, regardless of whether they originally were witness customers or Verint customers. In terms of overall upgrades, clearly this is part of the market is looking to upgrade to new technology. Our approach to the upward cycle is that we are not only providing our customers with best of grade solutions, but we're also providing them with an integrated solution with a suite approach and we believe that we have the most integrated suite in the market. So when the customer is looking to add more capabilities or is looking to potentially they had a number of different vendors providing them different modules, now there's opportunity with Verint to move up from multiple modules that are not connected. You have different vendors. You have different user interfaces. You have different databases and you have to really maintain a lot of different systems which increased the total cost to initiate and you also don't have the workflow that comes with an integrated solution. So the upward cycle really gives us an opportunity to work with our customers to move toward the suite approach and this is a message that we came up to the market right after we did the witness combination and I can say that three years ago this was very innovative in the early stage. I'm very pleased that the market is adopting the concept. Customers are more and more seeing value in buying all those solutions combined from a single vendor and integrated and when it comes to competing on the integrated suites, again I think that's exactly our sweet spot because we've preferred the sale for this change in the market and we feel that we have the best offering for customers that are really ready to upgrade to the suite.

Great. That's it for us. Thanks very much.

Our next question comes from the line of Daniel Ives with FBR. Go ahead.

Hey, guys, this is actually Mike with Dan, just questions on how the large deals in the quarter went specifically in both the workforce segment as well as the security and then I have a quick follow-up.

Yes. So again large deals are lumpy. We are not specifically reporting on specific deals, but the workforce optimization business typically do not have large deals, although we have some customers that spend many, many millions of dollars, but it's typically not in one large deal, but it's kind of spread over time and over many, many deals, but in the security market there are large deals. Some of them are very large deals and that's part of the lumpiness of the market. And there's no specific trend change that I can report relative to Q3 again in the security business. The way I look at it, it's more of an annual basis and looking at the underlying trends on an annual basis and there's nothing that I can single out in Q3 relative to our security trends.

And then just on the question on the margins, is there anything that you guys are ramping or should we look for in terms of in terms of expenses that we should really keep our eye on going into next year? Is there anything, any more color that you can add that we can look at for going into the next -- for FY 2012?

So in terms of the ramping, we mentioned we hired 150 people. That's net. Obviously we hired many more. We have some attrition. I considered our attrition rates are below industry and we're very pleased with that, but we beyond covering the attrition we hired net 150 people in the first nine months of the year and if you look at where we spend the money, it's about 1/3 in R&D, 1/3 in sales and 1/3 in customer service with very, very little in G&A. And as we scale the business, we do believe that we also long term are going to continue to improve our operating margin from our guidance, but we like to do that while keep investing in the business. So it's very typical to software companies. There is leverage in the business and you'll see improvement with scale.

Okay. But in terms of the allocation of expenses we shouldn't really anticipate any type of change there, right?

I wouldn't expect anything hugely proportionately different from what you've seen.

Great. Thanks a lot. Good quarter, guys.

Okay. Thanks.

Ladies and gentlemen, that does conclude today's Q and A session. I would like to turn the call back over to Alan Roden for any closing remarks. Please proceed.

Thank you, operator. And thank you everyone for participating in this call. We look forward to talking to you on our next call. Have a great night.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.