Verint Systems Inc (VRNT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Verint Systems Incorporated 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) As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Alan Roden, Senior Vice President of Corporate Development. Please proceed, sir.

Thank you, operator. Thank you, everyone, for joining us today. I'm here with Dan Bodner, Verint's CEO and President; and Doug Robinson, Verint's Chief Financial Officer. By now you should have seen a copy of our press release that includes selected financial information for our fourth fiscal quarter and full year ended January 31, 2011. We expect to file our Form 10-K for the year shortly.

These are our filings and earnings and press releases are available under the Investor Relations tab of the 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 this 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 are based on management's expectations that involve a number of risks and uncertainties which could cause the 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 these forward-looking statements, please see our periodic filings with the SEC as well as our Form 10-K for the fiscal year ended January 31, 2011, when filed. Certain financial information discussed today is not prepared in accordance with Generally Accepted Accounting Principles and is non-GAAP. For 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 use these measures, is included in our financial press releases, as well as the GAAP to non-GAAP reconciliation found under the Investor Relations tab on our website.

Non-GAAP financial information should not be considered in isolation or a substitute to 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 it is useful to investors for informational and 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 fourth quarter and full year results. In Q4, we delivered $187 million of revenue and $0.66 of fully diluted EPS. For the year ended January 31, 2011, we delivered $727 million of revenue and $2.79 of fully diluted EPS. We are pleased with our fourth quarter and full year results which were ahead of our expectations.

We believe that our performance reflects the market opportunity for actionable Intelligence solutions and our leadership position in both the workforce optimization and security intelligence markets. In workforce optimization, we generated $112 million of revenue in Q4 and $411 million of revenue for the year. We finished the year very strong with a 17% increase in Q4 revenue versus the prior year representing more than 10% growth in each of our three major regions, Americas, EMEA, and APAC. We believe there are three main factors behind our success in the WFO market; our innovation and expanding suite of integrated solutions, our commitment to customer service, and our focus on strategic partnerships.

Let's start by discussing our first factor, the market adaption of the suite. We believe that organizations are increasingly seeking a unified workforce optimization suite that includes multiple, tightly integrated applications. Such unified workforce optimization suites can provide certain business and financial benefits to our customers. A recent report from Gartner Research indicated that there are many drivers behind the trend towards the suite, including having a single vendor contract, removing integration problems, delivering a lower total cost of ownership, the incorporation of cross-function work flow, and providing a single management dashboard and a single server back end.

To address the market demand for a suite throughout last year, we introduced new analytical capabilities including new sentiment and text analytics that mind customer interactions and feedback across multi-channel customer communications including e-mail messages, web chat sessions, blogs, social media, and other text-based channels, and new desktop and process analytics that allow our customers to perform deeper analysis. We also added new languages to our speech analytics application to address demand in certain emerging markets, including Hindi, Mandarin, Cantonese, and Portuguese. We believe the market migration towards the suite is in its early stages.

According to Gartner, less than 10% of contact centers have deployed workforce optimization application as a suite. Gartner's observations are consistent with our own view that certain customers are slowly migrating to the suite approach by adding individual applications over time. At the same time, we are starting to see other customers move to the full suite more rapidly. For example, during Q4, we received a single order for approximately $10 million from a new customer for our Workforce Optimization suite including core recording, quality monitoring, performance management, speech analytics, workforce management, eLearning and customer feedback solutions.

This new customer is deploying our suite across nearly 40 call centers handling tens of millions of calls per year to improve the efficiency of their customer service operations and to enhance customer service. The second factor contributing to our success is customer centricity. The core part of our growth strategy is to ensure that customers maximize value from our solutions. We believe that the combination of Verint's differentiated unified workforce optimization solution and our commitment to customer service has been a major factor in our success.

We're very pleased to have recently received CRM Magazine's Service Winner Award for workforce optimization for the fourth consecutive year. The award was based on customer interviews and market research across three areas; reputation for customer satisfaction, depth of product functionality and Company direction. Verint received the highest ranking overall as well as the highest ranking in each of the three areas. Our focus on customer service combined with our large installed base presents the opportunity to sell more product into our customer base. A significant portion of revenue is generated from selling additional products including upgrades, expansions and additional new applications into our customer base.

We believe our high customer loyalty is also reflected in the high retention rate of our maintenance business. And the third factor to our success is our continued focus on our OEM and other distribution partners which is an important element of our go-to-market strategy. We believe the investments we've made have strengthened our relationship with our partners and expanded our market coverage. The OEM relationship with Avaya that was launched late last year is progressing well and we're very pleased to be partnering with Avaya given their significant presence in contact centers and the many benefits our joint solution offers the market.

Overall, our strategy is to continue to expand our WFO suite by adding additional applications for contact centers, branches and customer service operations and we believe we're well positioned for continued growth and success in the year ahead. Turning to the security intelligence market, we believe long-term market growth trends remain intact. We generated $75 million of revenue in Q4 and $360 million for the year. While security can be lumpy, we are pleased with both our Q4 and full year results.

We believe there are two main factors behind our success in the security intelligence market, our large and expanding portfolio of security intelligence solutions and our large installed base of global customers. Throughout the year, we expanded our security intelligence portfolio, introducing many enhancements to our video intelligence and communication intelligence portfolio. Some of the recent enhancements include Fusion, web Intelligence solution, new IP communication interception capabilities and several video enhancements which will be announced at the ISC security trade show later this week.

We also recently made two small technology acquisitions, adding physical security information management solution and IP decoding capabilities. The second factor in our success is our large and growing base of government and commercial customers around the world. With more than $300 million of annual revenue in security, we have a significant customer base who have adopted our IP security intelligence solutions. The combination of our broad portfolio and our customer base presents us the opportunity to understand our customer challenges and to offer innovative products to both existing and new customers.

While initial orders from new customers typically tend to be small, we do from time to time receive large orders from existing customers as they upgrade or expand our solutions. For example, in the fourth quarter we received an expansion order in excess of $5 million for our video intelligence solution and an order in excess of $10 million for our communication intelligence solution. Overall, our strategy is to expand our IP security intelligence portfolio to help our customers address their security challenges and we believe we're well positioned for continued success and growth.

Looking ahead, we see similar growth opportunities in the workforce optimization and security intelligence market and are investing for long-term growth in both markets. Last year, we added nearly 250 people to key areas throughout Verint principally in the areas of sales, service and R&D, and this year, we plan to continue to hire to strengthen our market leadership and to support our long-term growth. As a result, we are raising our annual revenue growth outlook to a range of 7% to 8% and maintaining our outlook for operating margins in the low 20s.

Our growth outlook reflects our view that our market can grow mid- to high-single-digits and we're well positioned to grow at least at market rate and take market share. We also have the opportunity to expand our market leadership through acquisitions, as our markets remain fragmented and there are many companies with an (inaudible) value proposition. Our acquisition strategy is to add technology and products that leverage our large installed 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 our Q4 and full year 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 our 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, certain other acquisition-related expenses and stock-based compensation, as well as certain other non-cash or non-recurring charges.

Our earnings release provides further information on these non-GAAP adjustments. I'd like to begin today's discussion with the areas of revenue, gross margin and operating margin. In the fourth quarter, we generated approximately $187 million of total revenue across our three segments, with $112 million in workforce optimization, $35 million in video intelligence and $40 million in communications intelligence. This compares to approximately $173 million in total revenue in the fourth quarter of last year, with $96 million in workforce optimization, $28 million in video intelligence, and $49 million in communications intelligence.

For the full year, we reported approximately $727 million of revenue, with $411 million in workforce optimization, $134 million in video intelligence and $182 million in communications intelligence. This compares to approximately $704 million of total revenue last year, with $375 million in workforce optimization, $145 million in video intelligence and $184 million in communications intelligence. Again, on a non-GAAP basis, gross margins were 69% compared to 70.5% in Q3 and 67.2% in Q4 of last year.

As a reminder, gross margins can fluctuate quarterly due to the revenue mix potentially significantly. For the year, gross margins were 69.3% compared to 67.9% in the prior year. In the fourth quarter, our operating margins were 22.9% and for the year our operating margins were 25.4%, in line with our expectations and previous guidance. We believe our 20%-plus operating margins which are above some of our peers reflects our operational efficiency as well as 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 fourth quarter, this expense totaled $9 million reflecting $9 million of interest expense as well as $1 million positive foreign exchange impact related to balance sheet translations which is offset by $1 million of net losses and foreign currency forward contracts.

For the year, other expense net totaled $41 million, reflecting a $41 million of interest and related expense as well as a $1 million positive foreign exchange impact related to balance sheet translations, again, offset by $1 million of net losses and foreign currency forward contracts. Relative to the tax area, our Q4 non-GAAP cash tax rate was 2.4% bringing our annual cash tax rate to 5.9%. 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. EPS on a non-GAAP basis was $0.66 in Q4 and $2.79 for the year.

We had 47.4 million average fully diluted shares outstanding for the year and as of the end of Q4, we had 49 million average fully diluted shares outstanding including approximately 10.4 million shares underlying our convertible preferred stock. Now turning to the balance sheet. As of January 31, 2011, we had approximately $184 million of cash, including $14 million of restricted cash compared to approximately $152 million of cash as of October 31, 2010. During Q4, we repaid our revolver and as a result our bank debt decreased to $583 million from $598 million as of October 31, 2010. We regularly monitor debt market conditions to take advantage of favorable terms and to enhance our financial flexibility. We recently observed an improvement in the credit markets and as such are considering a potential refinancing.

Before moving to Q&A, I'd like to discuss our guidance for the year ending January 31, 2012. We expect annual revenue growth of 7% to 8% for the year. While we don't provide quarterly guidance, please remember there are seasonal trends in the enterprise software industry. We expect Q1 revenue to be down sequentially from our Q4 levels potentially significantly due to typical Q1 seasonality, as well as a difficult compare to our strong Q4 January 2011 results. We expect non-GAAP operating margins to be in the low 20s.

We expect our quarterly interest and other expense excluding the potential impact of foreign exchange to continue to be approximately $8.5 million. We expect our non-GAAP cash tax rate to be approximately 10% for the year, consistent with the amount of taxes we expect to pay. Based on these assumptions, and assuming approximately 49.7 million average fully diluted shares outstanding for the year, we expect non-GAAP EPS to be around $2.50. This concludes my prepared remarks and so with that, operator, can we open up the lines for questions?

Yes, sir. (Operator Instructions) Our first question comes from the line of Daniel Meron with RBC Capital Markets. Go ahead.

Thank you. Congrats on the good execution, Dan and Doug, and Alan. A couple of questions. The first one, again, I think in your prepared remarks you mentioned that you expect the output and the growth for enterprise and security to be about the same. How should we think about it given the budget worldwide right now and (inaudible) some budgets in [defense] video agreement should impact that business, have you seen anything on that front?

Daniel, you were a little bit hard to hear, but I think you were asking about our expectation with similar growth in both the security and workforce optimization market and the impact of what's happening in the US on the security outlook?

Yes, and then just your thoughts on the worldwide government budgets in the security business, and, yes, you've got it right.

Right, right. Okay. This is Dan. So our security business is quite diversified across many, many different countries and we participate in a lot of different security initiatives. Some of them are government on the federal level, as well as state and local and public transit transportation authorities, as well as we have a significant portion of our security business is with commercial customers such as retail, banks, corporations, education and so forth.

So overall, a very diversified business and we did not see any material change in customer behaviors in governments. We believe that because we participate in the IP part of the security market which is early stage and growing and presents a lot of opportunity for our customers to conduct their security operations more effectively, we don't believe there is any material change in the customer demand for IP solutions. We do see a lot of interest in some of our new products.

We do have the ability to aggregate information from a lot of different sources, and to fuse information and then distill it through analytics and allow our customers to make better secure decisions based on Actionable Intelligence. So with that, we think that the main growth drivers in the market remain intact and the growth drivers are, as before, heightened level of security generally and certainly increased interest in IP solutions and IP analytic solutions which is the portion of the market that we play. And with these growth drivers intact, we do believe that our prospects for next year are to grow at least at the market rate and potentially take market share.

Okay, thank you, Dan. And then can you provide a little bit more color on the geographic trends that you see in emerging markets versus other developed markets, or US versus Europe, et cetera? Thank you.

So our geographical distribution was slightly above 50% in the US, the Americas actually, mostly in the US, within the Americas. We have about 25% of corporate business in EMEA and slightly above 20% in Asia Pacific, and that geographical breakdown really did not materially change from the prior year. We do see some growth in Asia Pacific but we are investing in all regions. We've hired salespeople in certain emerging markets territories to address what we believe will be increasing demand in emerging markets.

As you may recall, Verint's business was historically mostly focused on the more developed countries and we see growing opportunities with the developing countries and we are investing accordingly, but we're not expecting any material change in the geographical breakdown in the near term.

Okay, thank you, Dan, and good luck.

Our next question comes from the line of Shaul Eyal with Oppenheimer. Go ahead.

Thank you, hi, good afternoon, guys. A good quarter. A couple of questions on my end. Doug, or Dan, can you discuss with us kind of the backlog levels or at least kind of what the backlog looks on the heals of a strong fourth quarter, maybe also a word about deferred revenue?

Yes, sure, Shaul. This is Doug. Yes, backlog is not a terribly important metric for us. A lot of our business is revenue in the same quarter that we transact it, and it has several components to it, the largest being the deferred revenue. So kind of speaking to that question that you had.

There's multiple elements of deferred revenue and the maintenance, deferred maintenance is a significant component and that's been growing nicely for us. We continue to enjoy high maintenance retention rates. The other components are a little bit more lumpy, as we've talked about in the past with particularly the security business, so we have deferred revenue that will build up awaiting a certain milestone completion and then we'll accomplish that in deferred revenue, we'll drop that quarter.

But overall, once we kind of wash through this, kind of the impact statement where we had to catch up with VSO, and as we've talked about previously a lot of that is washed out behind us now. And also, I'd like to point out in Q3 to Q4 this year on a sequential basis, we did have about a $7 million increase in short-term deferred revenue, so we've seen a little turn there. So going forward, I think deferred revenue will grow as the business grows, given our lumpiness, not every quarter may grow, but I think over time it's going to grow along with the business.

Got it. And, Doug, while I have you on that topic, the cash from operations this quarter, can you provide us with this number?

Yes, there's a GAAP number that's in the press release that we issued, but when you take out the one-timers, the cash from operations is about $150 million for the year, so we had a fair amount of one-timers and I know impacting cash from Ops, but just a cash balance in general. We finished the year with a strong $184 million of cash and even that, we paid down some debt, we bought off the swap and we had about $54 million of restatement expenses, so we're still able to maintain a good cash balance, grow operating cash by, as I said, like over $150 million and be able to pay off a lot of these one-time charges that we had. Got it. And you did mention, Dan, did mention, I think, that during fiscal 2010 you guys hired around 250 new employees. How do you see this number shaping up in fiscal 2011?

This is Dan. So we'll continue to hire and we finished the year with approximately 2,750 employees and we expect our headcount at the end of the current fiscal year to be approaching 3,000.

Got it. All right, thank you very much for now. Good luck, good quarter.

Okay, thank you, Shaul.

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

Hi, guys. In terms of cash flow for the year, I mean, are there sort of any one-timers we should expect or should it be pretty steady for 2012?

Yes, in terms of the current year we're in going forward, we think these one-timers are behind us. As you see from our non-GAAP adjustments, there was a small amount of some continuing restatement expense but small, $1.8 million, so we don't really expect anything in the way of significant one-timers on the year now going forward.

Okay, and then when I think about your business, obviously, workforce optimization has been the strong spot, security we'll call it has just been lumpy. Why going into the year do you think it kind of levels out to similar growth rates? What are you sort of seeing where that sort of converges?

Yes, well you have to remember that the security revenue growth year-over-year is kind of not really revealing the complete picture of what's happening in the year. And as we explained before, because of restatement, we had a lot of security-related projects that were recognized in different periods, and, therefore, the revenue trends that you see in the numbers do not reflect the overall business activity in security that we saw in 2010. So this is not like we have a different view on security going into the [Gen 12] year. From an overall business activity, it's basically the same trends that we saw in [Gen 11] but because, as Doug mentioned, all these restatement issues are now behind us and [Gen 12] will be more of a normal year, then we also are comfortable to guide to our 7% to 8% growth outlook is similar in WFO and security.

Okay, because if you apple-to-apple this year it's pretty similar growth rates taking all of the accounting adjustments?

Well, if you take into consideration the overall business activity which includes not just revenue trends which are sometimes skewed, but orders and pipelines and so forth, yes, we see the years somewhat similar overall, for the overall security, obviously, it was in different product lines, we have all kind of trends.

And then just the last question. Just competitively, I mean, obviously, it's felt like pretty similar competitive landscape the last few years. Is there any changes, anything that's going on, Dan, that you're seeing in talking to customers on either the workforce optimization or security business?

Yes. It's a highly fragmented market, so there's always small competitors that kind of drop and companies that come in, but there's no material change. The main competitors remain the same. But as always, there are companies that look to play in selected portions of a market, so we do see in WFO some new players here and there but no one that is offering the full suite and has the same focus that we do on that market.

Okay, thanks. Good quarter.

Yes, thanks, Dan.

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

Hi, good afternoon. (Inaudible) on behalf of Tom. You talked about, you had several big contracts during the quarter. I was just wondering qualitatively what percentage of the business is sort of upselling into the existing customer base versus kind of a wholesale replacement of older equipment or taking share where you rip and replace a competitive product?

Yes, well, I think it's both, but in any given period, obviously, we have a very high percentage coming from existing customers. I made a comment before that typically, new customers, the way they come in is on a small scale. They will buy just maybe one product or buy that for a portion of their operations and as they get comfortable with the vendor, they'll tend to continue to buy. So with the nature of the market, when you look at the percentages, they are very high for existing customers, just upgrading and expanding, but we do have every year a lot of new name customers that we do add even though they typically start small.

Okay. And then just a quick note on Japan. How much of your business is in that country and any impact for this year?

So we do have a subsidiary in Japan. All our people there are fine. We had a little bit of damage in our, to our equipment in our office there, but nothing material, very small. And in terms of customers, it's not a highly material percentage of the overall revenue but we do have projects that are ongoing. There are a couple million dollars of revenue that we are expecting in Q1 and potentially could be delayed.

We don't know yet but we could see potential disruption, nothing that we expect to lose, but potentially a delay in terms of implementation and our ability to recognize revenue from those projects.

Okay, thank you, and just one quick one, if I might. What is driving growth in Asia Pacific? What types of projects?

It's really all around. We do see a lot of growth from workforce optimization including adopting the suite approach, as well as in security it's very broad demand that we see across almost all our products.

Okay, thank you very much.

Sure.

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

Hi, guys. Can you just maybe talk a little bit about some of the levers around operating margins that you guys are looking at for 2012, whether we're going to be targeting more of the higher end of that range or the lower end of that range, and maybe some of the puts and takes that you're seeing in your business that could drive that?

Yes, sure, Jonathan. This is Doug. So, yes, we had said in our guidance we expect operating margins in the low 20s, starting with a gross margin of the mid- to high-60s. And looking at the cost structure, if you look at Q4, we had an operating margin of around 22% and we did 25.4% for the year, so you can see we're investing more in the business. Dan spoke a moment ago about the headcount, so with that we do think we're at the lower end of the low-20s, but we think that's a good place to be. It's certainly at or above most of the peers and it's a good balance between returning shareholder value and the investing we can do to ensure Verint's long-term growth.

Okay, and then in terms of your expectations for the first quarter revenue decline, can you give us maybe a little bit more, I guess, precision or how should we be thinking about maybe the seasonality pattern over the course of the year as well?

So we're not giving any specific guidance for Q1. Our policy is to give annual guidance. We just want to remind investors that in the enterprise software business there is seasonality which is typically a strong Q4 and a weaker Q1 and a large portion of our business is enterprise software. And in terms of the impact, we're not providing any specific guidance.

Okay. And then just one last question on the OEM deal, you guys kind of talked about that being a nice contributor as far as your growth. Can you give us maybe a sense of the magnitude of that or how far along we are in that deal and maybe what it can contribute into the 2012 timeframe in terms of your OEM deal with Alcatel?

Yes, the OEM deal is with Avaya, and it is a private label OEM deal, so Avaya is offering a product called Aura WFO, which is powered by Verint. And Avaya has announced this product to their markets in the fourth quarter last year and since then its been progressing well in terms of creating leads, developing pipeline, and also growing revenue. We are excited about this for two reasons. First, Avaya has a very significant presence in the [contact] center market and especially after their acquisition of the Nortel assets, they represent way more than 50% market share in terms of infrastructure, communication infrastructure in the contact center and that's touching a lot of customers.

And the second reason why we're excited is because part of this OEM agreement was to develop some specific integration points with Avaya communication infrastructure products, so that creates even further benefits for the Avaya installed base. So it does make sense not only for Verint and Avaya, but we believe it also makes sense for the end user. And in terms of materiality, it's something that was only announced six months ago and it's progressing well and we have some expectations but they are baked into the guidance that we provided for the [Gen 12] year.

Great. Thanks for the correction. Thank you for answering my questions.

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

Yes, thank you very much. I had two questions. First of all, the first quarter of fiscal 2012 you mentioned is going to be down sequentially. How about year-over-year? Will it be at that level or up 7% or 8% from first quarter of fiscal 2011? Can you give us some kind of bearings on that?

We can't really say more because we have a policy of just basically sticking to an annual guidance and we're not guiding to Q1. Last year, we had $175.2 million that was at Q1 last year, and Q4 obviously was $187 million, but in terms of specifically guiding to a number in Q1, we are unable to do that because of the annual policy.

Okay, then maybe you can address was there anything that was one-time in nature in Q1 fiscal 2011 to make it abnormally high or low?

So we were still in restatement and, obviously, it's hard to analyze every component, especially in security where it's lumpy in general, and I can't help you to be really precise about how to look at the 7% to 8% growth year-over-year in Q1.

And then that said, maybe the beginning of April, but as you know, with software companies there's still a lot of the quarter left to do. So we're looking at what the quarter looks like at this point, but still it's hard for us to guide to Q1 because it's difficult for us to actually have the visibility to see where Q1 will come because of still a lot of business left to do.

Okay, and then if you could talk a little bit about cash generation on the year, you mentioned $150 million of cash flow. Do you expect barring any one-time events like a debt offering where you'd have charges and things like that, but if there were no charges you would generate approximately $150 million? Is that the goal in 2012 of cash to the balance sheet?

Yes, that would be similar, Brian. Again, as we've talked about, operating income is a pretty good proxy for cash flow, so you work your model in kind of low-20s operating margin and then maybe take a little bit out for some working capital use, but you're going to get somewhere in that neighborhood barring any one-timers as you mentioned.

Great. Thank you very much.

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

Yes, thanks, good afternoon. Perhaps, Dan, you can just talk a little bit about visibility this year versus the same time last year, your confidence in the overall business at this point versus the same time last year?

Yes. I think it's, certainly in terms of the overall economic outlook, it is improved. I believe last year, we said that we are starting to see signs and we were hoping that things will improve, but certainly today, in terms of the enterprise, software spending, it looks pretty robust. So I'm quite comfortable on the workforce optimization side. In terms of security I think I addressed this before.

I think that the underlying growth drivers in the security business are strong. I'm very pleased with our product portfolio. So while we can have situations like we saw in Europe and I discussed this last quarter where in certain countries in Europe, the government budgets were really shut down because of economic crisis in the country, but nevertheless, I think we were able to do pretty well and I'm pleased with how the overall business activity in security was last year because of the diversification that we have in the security business.

So the security business, it's a much larger market and it's much more fragmented but because of the strong portfolio and because of the diversification, I still believe that our visibility is pretty good, and it's, I would say, unchanged from what we had last year.

You talked about potentially gaining some market share in the year ahead. I just eyeballed the organic growth rate for your nearest competitor and your own and they're very similar. When you talk of market share gain, are you thinking that it's kind of in the head-to-head against them or is it more versus the fragmented competition, and I'm thinking here specifically around workforce optimization.

Yes. So we typically, we lose some and win some deals against our primary competitor in the WFO market. We believe we win more deals than we lose, and we certainly believe that we win deals from other vendors that are not well positioned with the suite. We really have a very clear differentiation with the suite. We believe we have done a lot of work to integrate the components, not just to offer the components as a portfolio but to create the work flow, the integration points that benefit our customer from the suite, and that is a clear differentiator and very helpful in gaining customers.

The $10 million order that I mentioned before in WFO, and I have to say that historically, we did not see too many $10 million orders in this market, and one of the reasons could be that historically we and other players offered discrete modules. Here, we have a customer, and this is by the way a new customer for Verint, that actually decided to buy many, many modules, almost our entire suite in one order. And, obviously, it's a large customer but also because they buy more modules in a single order, it became a much larger order. So we're very pleased that customers are adopting the suite approach.

Some of them are buying the whole suite in one single order and we also believe that the reason we were selected by this customer is because we offer an integrated suite. So in terms of gaining market share, we believe that we have that opportunity just because we're well positioned and what is the market growth rate? Obviously, it's impacted by the economy and the stronger the economy and the stronger IT spending dynamics, the more we'll benefit from that.

Last question. I know it's a bit tedious to get this question, but is there anything you can say regarding the liquidity in the stock and the possibility of perhaps diluting Converse's ownership over the course of the coming year?

Not much. I can remind everyone that Verint and Converse really have no operational synergies, so Converse is an investor, if you will, in Verint. They like Verint. They like the growth potential and the Actionable Intelligence vision. They did sell a little more than 2 million shares recently, but that was really as they announced was because of liquidity issues so they were kind of forced to sell down Verint to address this liquidity issue. So we have no knowledge of intentions to sell anymore shares from Converse.

All right. Thanks very much.

Okay, sure.

Our next question comes from the line of Michael Kim with Imperial Capital. Go ahead.

Hi, good afternoon, guys. Specific to video intelligence, can you talk a little about the strength of adoption from clients with existing analog video infrastructure versus clients who are new or establishing entire IP video networks? And also, could you comment on pricing and deal sizes and what trends that you're starting to see?

Okay. So the video market is very fragmented, even more so than our other markets, and there are a lot of players that basically deliver components, whether they are cameras or other sensors, DVRs (inaudible) and so on.

Our approach to the market is more of an enterprise sale where we deliver video components but also an application. As we've discussed before, we are focusing on three verticals, retail, finance, and critical infrastructure and we are developing not just video management systems but also application layers that help our customers really benefit from not just a collection of video and storage of video, but more so from analyzing the video and using that data in order to enhance operation, improve security, and in some cases also better understand behavioral trends.

So that is our focus and because of that, we are able to get margins that are somewhat higher than many other video vendors that are more into the sensor and DVR components. That's our strategy also going forward, to differentiate our video portfolio with analytics and software that creates an application and valuable position, and we see a lot of customers, typically at the high end of the market that are very open to this approach. We see many customers where the IT organization is partnering with the security organization to deploy an enterprise level type of solution and those trends are what we are, what we believe will continue to drive growth for our business.

And among those three main verticals are you seeing difference in adoption rates? Is critical infrastructure maybe taking a little bit of a lead over retail or financial services or vice versa?

I would say that retail and financial services are probably slightly ahead of critical infrastructure. Within critical infrastructure, there's a lot of submarkets and you can always find organizations that have very sophisticated approach to security, but overall, I think the market is somewhat still behind and we are enjoying within retail and banking, we're enjoying this trend of looking at leveraging video to more than just security.

And lastly, you talked a little bit about visibility. Is your pipeline involving mostly large scale, several large scale deployments or a series of smaller deployments or a mix of the two?

It's really a mix of the two, and many of the small deployments are with very large customers, so we tend to start, as I mentioned before, with small deployments and then over time, as customers get comfortable expanding into bigger and bigger deployments. But we do have also an SMB market, small and medium business products, which we primarily address through partners. It's not a major chunk of the business but it is an important maybe longer-term growth driver for the business.

At this stage, we see that the eye on the market is still at the very early stage of adopting some of the unique capabilities that we have. So we are mostly addressing the higher end of the market and SMB will come probably later on.

Okay, and then just on another topic, I think you talked a little bit about it earlier in the prepared comments about refinancing the debt. Can you talk a little bit about what terms you might be able to expect and how that might change your interest expense?

Yes. This is Doug, Michael. We're looking at potential opportunities here. We've been having an eye on the credit market.

They got very attractive and they tightened up and are starting to look a little better now. But it's really a balance of the terms, right, we'll look at the interest rates, we'll look at the floors, we'll look at the terms and kind of [Ts] and [Cs] of the arrangement and make a determination. So nothing fixed right now but we expect to get a look very soon and then make a determination. We do like the current terms we have and we have a nice arrangement right now that was priced very attractively. So we'll see what's out there, see where the markets are at and compare and make a decision.

Yes, so basically, this has been just to complete, so we like the current terms. We may or may not do a deal and our guidance reflects the current terms.

And would you consider refinancing a portion of the debt or the entirety, or do you have any preference or sentiment one way or the other?

We are being advised and we will look at every potential improvement in terms of flexibility.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Craig Nankervis with First Analysis. Go ahead.

Thanks very much. I also echo the congratulations on a nice quarter. A couple of accounting or finance questions. First, Doug, on the VSO, do I understand that's completely gone now in the year-over-year comps and that the April quarter is entirely an apples-to-apples revenue growth comparison?

Well, Craig, most of the, all of the material, VSO areas, have been obtained. That has happened kind of over time here over the last couple of years, but we've been pretty much there. That said, we still had, back particularly in the [Gen 10] year a fair amount of deferred revenue that got caught up when we didn't have VSO and that kind of bleeds in. As we had mentioned, most of that is behind us now but there's not exactly any such thing as an apples-to-apples, right, but I think that as we said earlier, [Gen 10] had a fair amount of activity in it, [Gen 11] less so and it's pretty much behind us now and that's not all that material going into the [Gen 12] year.

And on the gross margin front, you turned in 69% in the quarter and is that sort of within the range of your expectations or is that a little on the high side? I just want to understand what your expectation going forward is on gross margin?

Yes, I mean it's certainly in the range, Craig, but as we've discussed it's kind of at the higher end of the range. We did have in the security business some lumpiness that was favorable to us Q3 as well and also Q3 continuing into Q4. So we have talked about mid- to high-60s as a gross margin, so at 69% kind of that is the high end of what we would expect but it's not out of the range certainly.

Okay. And then on the acquisitions, can you discuss sort of what kind of contribution roughly you might be expecting in the current year guidance from the acquisitions?

Yes, so we did two small technology acquisitions. One was basically just technology. We didn't buy the company, we just bought the assets and we incorporated the technology into our product portfolio. And the second acquisition we did that was accompanied at basically against, very small.

Last year they had two customers and $2 million of revenue and we bought it because we OEMed the technology before and we like the technology and the people and we decided to bring it in. But clearly, with $2 million of revenue, two customers, that's not a meaningful impact on Verint from a financial perspective. We just think the technology fits very well within our vision of IP and analytics and fusion of information and so on.

So that second deal that you referred to was the IP decoding acquisition, and the PSIM was just a technology buy?

No, it's actually the opposite. The IP decoding was the assets deal. The PSIM technology is a company called Rontal, based in Israel. Again, this company, we bought the company with the PSIM technology and most of the employees are now working for Verint and they had two customers, $2 million revenue last year.

We paid for the IP decoding, we paid less than $10 million, and for the PSIM we paid a little north of $10 million. So basically, small technology acquisitions and in both cases, we feel technology that fits very well with the portfolio and we think we will do good things with this.

Dan, on the PSIM deal, did that become a necessity to have from a competitive perspective or have you just sort of concluded over whatever period of time that this is a good, interesting, emerging market opportunity and you finally wanted to own something? Can you talk about that?

Yes. That's quite interesting. We always believed that PSIM fits very well within our vision. We discussed before how we not just sell video but we sell also application layers. And what PSIM does is really it helps to aggregate information from a lot of different security sources, so it's not just video information, but we aggregate information from access control and other sensors and so forth and do fusion and events management and rule-based (inaudible) and so forth.

So we started actually to develop PSIM-like features in our product quite some time ago. And then last year, we wanted to accelerate this development and we signed an OEM agreement with Rontal, and then after some experience with the OEM product and we liked the technology, we decided to bring it in. So the adoption of PSIM is not something that is new to us, but certainly we want to accelerate our participation in this market and our ability to reach the application layer that aggregates information from a lot of different sources and provides a more complete security analytics capability to our customers.

Okay, I appreciate that. On the WFO side, in your talk of the suite approach and what not, are you offering metrics or are there any metrics that sort of talks about your progress in terms of the number of apps you're selling per customer? Is there any color that you can offer on that?

We are starting to track that better and we will track it better over time. In many deals, it's a bundled deal and it's kind of tricky to separate value for the applications. Our focus is to sell as many applications as we can, obviously, but some customers prefer to buy on a piecemeal basis. Some customers would like to start with [feature] analytics, others would like to start with workforce management, and some would like to buy two at a time or three.

So rather than focusing on tracking each one separately, we are much more interested looking at how quickly our customers migrate into the suite approach and that for us is the best indication that our strategy works.

Okay, and then, I guess, just lastly back on the security side real quick. You talked about partnerships or OEM partners on WFO. Are there any partnerships in security that are promising for you that you might know?

We do not have OEM relationships that are material but we do have, I would say, cooperation and partnerships with IT integrators and security integrators and they are important to us. In many cases, we go to market and generate demand with the end user ourselves, but we fulfill that demand in partnership with security integrators and IT integrators and those partnerships are very important to us.

We believe that they enhance the value to customers. Some of the integrators are providing end users with integration services that we do not want to be in that business, we are a product Company and we seek partnership with value add resellers that can help our customers deploy, integrate and maximize the value that they can get from our solutions.

Okay. Thank you very much.

Sure.

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

Thank you, operator, and thank, everyone, for joining us today. We look forward to talking to you on our next call. Have a great evening.

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