Verint Systems Inc (VRNT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Verint Systems earnings conference call. My name is Tanya, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the conference over to Mr. Alan Roden.

Thank you, operator. Good morning, everyone, and thank you for joining our conference call 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 first quarter, ended April 30, 2011. Our first quarter 10-Q will be filed shortly. Each of our filings and earnings press releases is available under 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 on this call may contain forward-looking statements, including statements regarding expectations, predictions, views, opportunities, plans, strategies, beliefs, and statements of similar expecting relating to Verint. These forward-looking statements are not guarantees of future performance, and they are based on management's expectations and involve a number of risks, uncertainties, and other factors that 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 this date of the 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 the forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2011, and our Form 10-Q for the fiscal quarter ended April 30, 2011, when filed.

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, 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 June 8, 2011, as well as the GAAP and non-GAAP reconciliation found under the IR tab on our website. Non-GAAP financial information should not be considered in isolation or as in substitute for GAAP financial information but is included because management believes it provides meaningful supplemental information regarding the operating results and when assessing our business and that it's useful to investors for informational on comparative purposes. The non-GAAP financial information the Company uses has limitations and may differ from those used by other companies.

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

Thank you, Alan. Good morning, everyone, and thank you for joining us to review our first quarter results.

In Q1, we delivered $177 million of revenue, representing a 5.5% sequential decline in the $0.56 of fully diluted earnings per share. We are pleased with our overall Q1 results, which reflect a seasonal quarter in Workforce Optimization and a strong quarter in Security Intelligence, coupled with strong operating margins. In Workforce Optimization, revenue was $97 million. During Q1, we continued to see the trend of organizations seeking a unified workforce utilization suite and innovative analytical solutions to better understand the voice of the customer. There are many drivers behind the trend toward the suite, including having multiple, best of breed, tightly integrated solutions from a single vendor and efficient, IP-friendly architecture and the lower total cost of ownership. To address the market trends toward the suite, we recently announced the availability of our next generation Workforce Optimization Solution, representing our fifth-generation and most advanced analytical platform. Our latest unified Workforce Optimization Solution is designed for contact centers, branches, and the back office, setting new standards for enterprise collaboration, simplified administration, and depth of functionality. Benefits include real-time intelligence to support rapid, informed decision-making, a unified dashboard with a single entry point that allows users to easily move from one Workforce Optimization application to the next, and more scalable enhanced enterprise architecture.

Turning to our recently announced Voice of the Customer platform, we believe there is a strong trend toward customer analytics, as enterprises look to analyze market channel communications in order to gain a holistic view of customer interactions. Our advanced platform is designed to help forward-thinking organizations detect, gather, analyze, and act on insights from the Voice of the Customer. It includes applications for speech analytics, text analytics, and customer feedback analytics, as well as the ability to integrate data from Web analytics, social media channels, and other customer interaction points. We believe enterprises are increasingly looking for a comprehensive view of customer experience, and our new platform is designed to combine a variety of sources of customer interaction data into a unified view.

We recently had a chance to showcase our new Voice of the Customer Solution at our annual user event, where feedback was very positive. We believe is a significant opportunity to upsell our Voice of the Customer Solution into our installed base. In that regard, we were recently selected for more than $5 million deployment for the speech component of our Voice of the Customer platform from an existing customer that had previously deployed our recording and quality management solutions.

Following the launch of Verint's new generation of Workforce Optimization Solutions, our innovation has been recognized by the industry. A recent 7.3 research note highlighted the many benefits of our architectural improvements, including lowering the total cost of ownership and the benefits of the Voice of the Customer platform, which in their view represents a breakthrough in unified analytics and raises the bar in the industry.

During the quarter, we continued to focus on our OEM and other distribution partner, which is an important element for our growth market strategy. The OEM relationship with Avaya that was launched late last year is progressing well, and we are very pleased to be partnering with Avaya, given a significant presence in contact centers and many benefits our joint solution offers the market. Overall, our strategy is to continue to expand our Workforce Optimization suite by adding additional applications and to expand our market presence for direct and indirect channels, and we believe that we are well positioned for continued growth and success.

Now, turning to Security Intelligence, we delivered $79 million of revenue, representing an approximate 6.5% sequential increase. Our strategy is to deliver to the market a broad portfolio of innovative IP Security Intelligence Solutions to meet our customers' specific security challenges. During Q1, we experienced broad interest for our Security Intelligence Solutions across a focused vertical, including government, retail, finance, and critical infrastructure. In governments, customers around the world are deploying our innovative Communication Intelligence Solutions to effectively detect, investigate, and neutralize criminal and terrorist threats and are deploying our Video Intelligence Solutions to improve the security of sensitive facilities. During the quarter, we received orders from new and existing customers, including orders for more than $20 million from an existing government customer for our Communications Intelligence Solutions. We continue to seek governments around the world seeking solutions to keep up with the growing amount and types of network traffic and unstructured data. Our strategy is to deliver solutions to help them efficiently collect and analyze very large amounts of content and generate actionable intelligence.

In retail, customers are deploying our Video Intelligence Solutions to reduce shrinkage, manage liability and loss, and leverage video to increase sales and operational efficiency. During the quarter, we received orders from multiple retailers, including orders in excess of $5 million from an existing retail customer. We believe retailers are beginning to leverage video for operational purchases, such as analyzing the customer experience and optimizing stocking levels. We are addressing this interest by delivering innovative, retail-specific analytical solutions.

In clinical infrastructure, our customers are deploying our Video Intelligence Solutions to protect infrastructure and facilities. During the quarter, we received orders for multiple critical infrastructure customers, including an order in excess of $2 million from a new major airport customer in the US that is deploying our solution as part of a security upgrade program. We were also selected by another new major airport customer within the US for deployment involving our new Situational Management Solution that was introduced during the quarter. Our Situational Management Solution enables users to quickly and efficiently correlate and analyze data from a variety of sources to identify, initiate, and manage response to situations. This solution is already integrated with our Nextiva video solutions.

In the clinical infrastructure market, we see a growing trend toward the combination of video management and situational management solutions as the market is seeking more holistic security management. While our security business can be lumpy, we are pleased with our strong start of the year. Our strategy is to expand our innovative IP security portfolio across our focus verticals, and we believe we are well-positioned in security intelligence markets.

Looking ahead, we see similar growth opportunities in the Workforce Optimization and Security Intelligence markets and are investing for long-term growth in both markets. In Q1, we added more than 50 people to key areas throughout Verint, principally in the areas of sales and R&D, and we plan to continue to hire to extend our market leadership. We believe we are well-positioned for growth and are increasing our annual revenue growth outlook to approximately 8% and fully diluted earnings per share to approximately $2.55. We also have the opportunity to expand our market leadership through acquisitions, as our markets remain fragmented and there are many companies with a logistics valuable position. 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 the Q1 results in more detail. Doug?

Thanks, Dan. Good morning, everyone.

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. Differences between our GAAP and our 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 first quarter, we generated approximately $177 million of total revenue across our three segments, with $97 million in Workforce Optimization, $30 million in Video Intelligence, and $49 million in Communications Intelligence. This compares to approximately $173 million of total revenue in the first quarter of last year, with $97 million in Workforce Optimization, $32 million in Video Intelligence, and $44 million in Communications Intelligence.

Gross margins were 70.7%, compared to 69% in Q4 and 69.2% in Q1 of last year. In Q1, our gross margins benefited from a number of factors, including favorable product mix. As a reminder, gross margins can fluctuate quarterly due to revenue mix, potentially significantly. In the first quarter, our operating margins were 22.4%, which is in line with our previous guidance. We believe our 20%-plus operating margins, which are above many of our peers, reflects our operational efficiency while delivering 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 first quarter, this expense totaled $7 million, reflecting $9 million of interest expense as well as $3 million positive foreign exchange impact related to balance sheet translations, offset by $1 million of net losses on foreign currency forward contracts. Relative to the tax area, our Q4 non-GAAP cash tax rate was 11%, reflecting what we expect to see for the balance of the year. 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 the low tax rate jurisdictions.

Now let's turn to the balance sheet. As of April 30, 2011, we had approximately $192 million of cash, including $12 million of restricted cash, compared to approximately $184 million of cash as of January 31, 2011. During Q1 we refinanced our bank debt, providing several benefits, including lower interest expense, greater revolver capacity, an extended term, and more operational facility. As a result, we ended the quarter with $597 million of short-term and long-term debt, compared to $583 million as of January 31, 2011. I'd like to mention that our non-GAAP results exclude an $8 million non-cash charge related to the extinguishment of previously capitalized term loan fees. The new bank fees are likewise capitalized and will be amortized over the term of the loan. We had 49.6 million average fully diluted shares outstanding as of the end of Q1, including approximately 10.5 million shares underlying our convertible preferred stock.

Before moving onto Q&A, I'd like to discuss our guidance for the year ending January 31, 2012. We're increasing our annual revenue growth to approximately 8% for the year. We expect non-GAAP operating margins to be in the low 20%. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $7.8 million, reflecting the lower interest rate on our term loan. We expect our non-GAAP cash tax rate to be approximately 11% 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 $2.55.

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

Sure. (Operator Instructions).

Our first question comes from the line of Daniel Ives with FBR. Please proceed with your question.

Hi, guys. This is actually Mike for Daniel.

Just a quick question, with the increased guidance on the topline to the high end, what are you seeing in the field right now that gives you the confidence in moving up to the 8%? And then, just quickly on the margins, should we anticipate margins to continue to increase on a sequential basis over the course of the year? Can you speak to that point? Thanks a lot.

Hi, Mike. It's Dan.

So regarding the revenue outlook, we -- our outlook is based on market trends, which are intact. We've introduced new products which were well-received by the markets, and this is through a product that's across our WFO and Security markets. And in terms of the economic -- the overall economic environment, again, we see the same pace as last year. We don't see any deterioration, so it's basically what we expect in support of our revenue outlook. And in terms of the security markets, as we always emphasize, we have a global practice in security markets, and we see a strong trend in terms of governments and other security organizations looking to invest in IP security portfolio. So, based on our Q1 performance and our outlook for the year, our best view is at this point 8% growth.

In terms of margins, I'll turn it over to Doug.

Sure, Mike.

With respect to operating margins, in Q1, we did the 22.4%, which is low 20s, and we had said and guided to low 20s for the year. So I'd expect low 20s for the year. You might see some very small increase as the topline builds, but low 20s for the year is what we had guided to.

Yes. Because as we increase revenue, we also will continue to invest, as we indicated before, so we've been hiring last year, continue to hire in Q1, and we are planning to continue to hire throughout the year.

Great. Thanks, guys.

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

Yes, thank you.

Dan, perhaps you could elaborate a bit on the guidance. Are you are your expectations for the growth rate similar across each of the segments?

Yes. They are very similar across Workforce Optimization and the Security market. We believe the markets are growing at similar rates of mid to high single-digit, and we believe we can perform at least at that rate.

To your second question, within Security, right now, for the rest of the year, our view is that the Communication Intelligence will grow slightly faster than Video, but, you know, for the longer term, we believe that both Video and Communication Intelligence present similar growth rates as well.

Sir, can you say -- it sounded like you had a number of large orders come through in this quarter. Has visibility increased? Can you give us some sense of what the book to bill was in those segments or across the business entirely?

Yes. We're not disclosing book to bill, as you know, but as we said before, like the statement here where we had big differences between book and bill, or other than some lumpy projects, our expectation is that the book and bill will be checking one going forward. And then there will be fluctuations based on some large projects in any given quarter. Our expectation is that it will be -- on average, over time will be one.

Finally, can you give us some sense of where the investment spend is being directed and what kind of resources you're hiring and where?

In Q1, we primarily hired R&D and sales. In R&D, it's across all the products and it's mostly in analytics, where we are investing -- the majority of our new investments is in new analytical capabilities. In sales, I would say it's also across the world. We certainly see -- in certain emerging markets where economy is strong, we see interest, both from -- for the legacy products as well as for the new products, and we are investing accordingly. But it is spread across the globe.

All right. Thank you very much.

Our next question comes from the line of Greg Dunham with Credit Suisse. Please proceed with your question.

Yes. Thanks for taking my question.

I did want to follow up on the big deal dynamic. It does feel like you guys are seeing more big deals, and I want to get a sense, is that something that's market driven? Is it something tactically you guys are doing, or is it product-specific that you feel is driving that trend?

I think that one of the reasons -- obviously, the Company is bigger, but also because we have such a broad portfolio, we see certain customers buying more products, basically, from Verint. It's been our strategy is to leverage our install base and add more products organically and also through some of the tuck in acquisitions that we did. And the fact that we are able to offer our customers new products -- they have a track record of Verint, they are satisfied with solutions, they are expanding on the solutions, the legacy solutions that we have. But at the same time, they buy a bigger portfolio, and I think that is contributing to the trend of bigger orders.

And I think the other maybe contributor is the fact that some of our solutions are very innovative, and customers tend to start very slow. They do pilots or they test the product in a small portion of their infrastructure, and at some point they get comfortable, they see the value, they measure the return on investment, and then they're ready to place a big order. So I think some of it is our portfolio itself, it is the market getting more comfortable with the whole actionable intelligence concept.

That's helpful. And then follow kind of a follow-up to that. How has your win rate evolved over the past, let's say, six to 18 months? Obviously, there's been a lot of improvement in terms of becoming listing and reinvesting in the business more aggressively. How has that impacted your win rates?

So the market is very competitive. It is very fragmented. There's lots of different competitors, and it's very difficult to give a simple answer here.

I think we are very competitive. As before, we are not -- typically, we are not winning on price. We are competing on value. And as always, some customers tend to prefer a cheaper solution, and they will go to sometimes a small company that has the ability to offer something cheaper but not necessarily the same standards that Verint is offering. So our strategy is to compete on value. We feel we have very, very strong win rates when we work with customers and they are able to buy based on value and not just price.

But it's hard for me to say whether it was improving dramatically since we got current with our financials. Certainly, management has to spend less time explaining to customers the restatement situation, and we are now much more focused on working with our customers and partners on how to, you know, deliver value from our solutions.

That's helpful.

And then one final one for Doug. Seasonality of deferred, how should I think about that? It was actually up in April quarter, and I guess I wasn't expecting that, but maybe I just don't have a good sense of the seasonality of the deferred revenue.

Sure. Well, there's several components of deferred revenue, and as we've seen with past trends, it had come down as the restatement washed through it, but what we've seen in the last couple quarters is some build up of it. So a big component is the maintenance deferred revenue, and that should be steady. That should just continue to grow nicely as the maintenance base grows.

And then aside from that, there's some lumpiness around the business. We have certain large projects that we hit milestones and it would come out of the deferred revenue into revenue, where we'll book a new large product that will take a while to complete, and that will bring deferred revenue up. So I wouldn't look at it as much as seasonality. I think that there's parts of it that just should grow steady, and there's other parts that just will be lumpy from quarter to quarter.

Okay. Thanks.

Sure.

Our next question comes from the line of Brian Ruttenbur with Morgan Keegan. Please proceed with your question

Thank you very much.

First of all, first question is a simple one. Pro forma adjustments in the quarter, there was an other adjustment that went up about $1.1 million from last quarter. What was that related to?

Yes. That was principally some facilities' one-time lease buyouts, as well as some M&A charges going through there.

M&A charges, you didn't make any acquisitions. That's from lost M&A?

No. We've done some small acquisitions, Brian, so these are fees and costs associated with those.

Okay. That were from previous periods, is that right?

So we did -- as you recall, Brian, we did a small acquisitions of a company called Rontal, which was a Q1 event. And that's reflected in the Q1 financials.

Okay. Thank you very much.

Then on Security growth, what you have answered -- I think from a previous analyst asking about -- Security is going to grow about the same rate as Workforce Optimization. Can you talk maybe about specifically where you're seeing traction geography wise or by customer type to give us some kind of perspective out there that it's really picking up great in Eastern Europe or Western Europe or the US, or US government is weak or international government is strong? Can you give us some kind of gauges there?

Yes. So let's slice it from a number of different viewpoints.

So from a vertical perspective, we see governments this year generally strong. Our government business, as you recall, is not in the defense side. We have very little exposure to military defense agencies. It's mostly law enforcement and homeland security agencies across the world. We do see every year certain strengths and weaknesses in different parts of the world, and this year is no different. It's based on budget cycles and deployment cycles, but we don't see any major difference, so we don't see either a strength or weakness that is systemic this year, again, from the type of agencies that we are servicing. And we do see a lot of repeat business with customers that continue to expand their deployments and buy new products.

We certainly see for our new products -- and one of the products, you know, we announced today or we discussed today is the Web investigative product, which is a very new product. It allows customers to look at content of the Web, to investigate criminal activity. That's a product that is very innovative and has very, very broad interests across the globe. So even when certain government agencies have tight budgets, when they see an innovative product, they find the budget to be able to keep up with criminal and terrorist activities and state-of-the-art technology. So I think innovation is what's keeping us very relevant to our government customers across the world.

We do expect also from physical security, you know, the transition to network video and transition from just video management solutions to a more holistic view, including situational management and aggregating data from multiple sensors into a system that can analyze that data and help improve security overall is also a strong trend that we see actually globally. So we are global in our go to market strategy, and every year, we see some strengths and weaknesses in different parts of the world. This year is no different, but there's no change overall in the interest in transitioning to IP solutions.

I don't know if I caught this. Geography wise, it's stronger US or international? Or about the same?

I think overall in Security, it's very similar to our overall geographical mix, which is slightly above 50% in the US, or in Americas, including North America. And then it's split almost equally, a little bit more in [IMIA], a little bit less in Asia-Pacific. So that's our overall mix, and it's not different for Security, our security market.

Okay.

And then I didn't catch -- it was mentioned on interest expense for the year, I caught taxes 11%. Can you repeat the interest expense that you expect on the year? Or was it by quarter, you had mentioned that on the call?

Yes. It's just under $8 million, is the interest expense.

Okay. $8 million per quarter? Right. Okay.

And then the product and services mix on the year should be what percent? What percent products or what percent services?

It should be similar. We expect similar growth rates on each for the year.

Okay. So they are both going to grow 8%, and therefore, year-over-year, the pie doesn't change. The slice of the pie doesn't change?

Yes, somewhere in the neighborhood, Brian. Give or take a point on each, depending on the lumpiness and the characterization of the revenue going forward, but in that ballpark

Good. Thank you guys very much.

Sure.

Our next question comes line of Michael Kim with Imperial Capital. Please proceed with your question.

Hi. Good morning, guys.

Could you talk a little bit about your pipeline in Workforce Optimization, specifically as regards to some of the newer products versus legacy? And on the new products side, is it principally just an expansion of applications to the suite, or were there some other areas that it began to address?

Yes. So, our Workforce Optimization suite is a product that we have had for quite some time, but we have recently announced much tighter integration across the suite. And it is primarily still generating revenue from contact center markets, but we have expanded that, and we've discussed it already for almost three years that we are expanding our WFO suite into the back office and branch, which are new markets for Workforce Optimization. And that, in our opinion, is progressing well. We still see that as a relatively early stage market with a lot of potential growth down the line. So that's the Workforce Optimization suite.

As part of that suite, we've always had components of speech analytics and what is now being renamed as Voice of the Customer, as it's not only just speech analytics but it's also now text analytics and customer survey analytics and the ability to gather information from the Web and social media and have a more holistic view for our customers on interactions with their customers. And the Voice of the Customer introduction here also presents some new opportunities for Verint, because not only contact center customers are interested in analyzing the voice of the customer, but it's also other areas in enterprise. We see especially larger enterprise customers are introducing new roles of chief customer officer. Obviously, there's the chief marketing officer in some organizations, there are customer advocacy teams.

These are roles outside the contact center with the focus of collecting information on customer interactions, analyzing growth information, and improving the way the enterprise is interacting with their customers. So Voice of the Customer for us will continue to be a cross driver within the contact center, as the analytics side of our solution has low penetration in the contact center. But we also have now some customers outside the contact center that have bought our Voice of the Customer solutions, and we see that as another growth driver for the longer term.

Okay. Great.

And then switching to Security, can you talk a little bit about the integration of Rontal in the PSIM area and that you are starting to see a little stronger customer interest or inquiry about integrating PSIM? Any commentary on the progression of that?

Yes. So in terms of product integration, we basically have completed the integration. We've been working with Rontal before that acquisition, so very shortly after the acquisition, we were able to provide our customers a fully integrated solution.

We have an existing OEM relationship with them with that allowed us to get a head start on this.

Thank you, Doug.

So it's a very small company, couple dozen people, so there's no integration complexity. But we're very pleased to be -- shortly after the acquisition being selected by a major US airport, which is looking to deploy situational management. We're involved in a number of opportunities, both from our own customer base but also some new customers that have expressed interest in looking at a combination of situational management and video management to expand the way they run their security operations.

So, it's an early stage. We don't see PSIM as a stand-alone market. We believe that, like we do, it's going to be integrated with other security offerings. And we believe customers are looking at this situational management solution as an integrated part of a bigger offering. And that also presents Verint opportunities to participate in larger projects, and hopefully, we'll be able to report winning some of this in the coming quarters.

Okay. Great. Thank you very much.

Our next question comes from the line of Jonathan Ho with William Blair. Please proceed with your question.

Good morning, guys.

Just a quick question. Did the release of the new WFO platform cause any customers to defer purchases until the new release, or was there any impact from that product transition?

It's hard to tell. With every major introduction, obviously, we've done a very methodical introduction. We have discussed this with selected customers quite some time ago, and we have took a lot of customer input. So, customers were aware of this introduction. It's a major release. We invested hundreds of man years in this release, so it has a lot of architectural improvements, as well as many, many new features. So it's hard to tell whether customers were waiting for this or not.

But in terms of impact, the general availability was announced in Q1. So far, it's going very smoothly. So we certainly don't see any adverse impacts of the introduction, and we believe that as we showcase this with more and more customers now, the excitement level I can certainly say is quite high, and people are very pleased with the improvements that overall, the fact is we were right on the mark in terms of what customers are looking to have in the new release.

Great.

And can you give us just a little bit more color in terms of what you expect in terms of seasonality for the balance of the year? Is last year sort of a good proxy for that, or is there any way for us to maybe gauge what that should look like for the rest of the year, primarily on the topline?

Yes. So in WFO, we, -- as enterprise softer markets, the seasonality is typically slow Q1 and strong Q4. And in Security,, there's really no seasonality. We just refer to this as lumpiness, because it's affected by large projects and it's not predictable, relative to the timing of receiving those orders.

Great.

And just one last question. As we look at sort of the deal cycles that are out there, can you just give us qualitatively whether you're seeing the deal cycles now shorten, just given that the economy seems to be improving, or is it still the same as maybe last year in terms of the length of those deal cycles? And just what you're seeing in terms of the pipeline of activity, is there any type of pickup or slowdown, or is it still looking about the same?

In terms of the deal cycle, there's really no change from last year. I mean, last year there was an improvement relative to the year before, but we see the economy really on the same pace. We see decision-making process is still same as last year, but still lots of people involved requires more signatures, so don't see any improvement relative to last year, but I would say that this was baked into our assumption as we were going into this year. But at this point, I certainly don't see this worsening relative to last year, but not improving.

In terms of the pipeline, there's certainly a lot of interest that the pipeline is healthy. Customers wants to spend the money. They are looking for ROI, much more than before. But we have lots of references where we can help our customers look at what other customers are doing with our solutions and the type of return on investment that they can generate. And I think that's very helpful to our customers, as they need to support their decision-making internally. And we're certainly helping them with generating the business case and the ROI.

Great.

(Operator Instructions).

Our next question will come from the line of Craig Nankervis with First Analysis. Please proceed with your question.

Thank you very much, and good morning.

Just to perhaps clarify or recap on the revenue guidance for the year, what part of the business are you viewing incrementally different about versus 90 days ago, or is it just sort of overall?

I don't think there is a difference relative to 90 days ago. We did expect WFO to be affected seasonally. Security, we expected lumpiness. We were pleased with the strength in Security. We were pleased with the large orders in Security. But, you know, we always had the view that it's hard to predict the specific quarter where these orders would land. We continue to have a pipeline of large projects which we hope to win down the line. So I don't see any material differences in our focus now relative to the focus we had 90 days ago.

Okay. And then on the WFO side, do you have any particular color or commentary on hosted activity? And I think you're partnering for that. Is there much happening there, or --

Yes. I think the hosting trend is certainly one that will grow over time. We are partnering in some aspects. We also have some solutions that we offer on the hosting basis. But we see the hosting side of our business growing slowly. You know, we are predominantly in the enterprise market, and large enterprises are not adopting the hosting as quickly as SMB markets. The SMB market is where we partner, and we think that is a very good model for the SMB market.

So I would say that we are certainly participating in the trends, and we will have a steady growth in our hosting business, but it won't be -- from a business model perspective, it's not going to have a dramatic impact on our performance in the quarter, as you'll see perhaps a slow, steady shift of some of the SMB. Mostly, that is going to be revenues to hosting. But nothing that we see as a set function.

Okay.

On the Security side, so, you know, on the situation management, it if I -- just to sort of maybe ask a follow-on question to the answer you gave on an earlier question, is Verint's strategy, is Verint's primary strategy in situation management to sell that as a cross sell or to the existing video base, to Verint existing video base, mainly, and to a much lesser extent or to very little extent pursue just new greenfield deals where you're not already installed? Or can you just maybe clarify how the focus of your strategy and situation management is going to play out?

Yes. So because this is a new introduction, obviously initially, we go to our install base. That's the fastest way to increase revenue and build confidence in our offering. But our strategy is certainly to go after new accounts as well.

We, in the physical security market, where this fits, we are predominantly performing a go to market strategy of working with integrators. We don't see Verint as an integrator. We are a product company. But our ability to package a number of innovative solutions together is helping the integrator to avoid a lot of the integration efforts on a project-by-project basis, because we are product sizing the integration and offerings this as a tightly integrated product.

So we see that as the key strategy in penetrating into new accounts and helping integrators that perhaps historically we're looking to take control, product, and a lot of different sensors and trying to come up with a some integration points. We think that, you know, Verint can offer a much better approach to actionable intelligence, which is the ability to really collect data from a variety of sources in a way that will facilitate service integration, and then analyze the data to get a much better and more holistic view of the security environment.

Lastly, I guess back on the WFO side, do you have any particular comments on the imminent Avaya IPO and whether that will do something for you incrementally with your OEM relationship, or do you have sort of a neutral view on that?

We see our partnership with Avaya as a long-term strategy. We believe that not only Avaya has a very large presence in the contact center market, but we are working with Avaya on tighter integration between our WFO suite and their portfolio. We generally believe that in order to generate actionable intelligence, you need to develop very strong relationship and tight integration with other products. And that is delivering more value to customers. So I think what's going to drive the partnership with Avaya is not a specific event, but really the desire to deliver to our joint customers a much tighter integrated product that we see will benefit our customers and obviously will differentiate the Verint/Avaya offering from any other offering in the market.

Okay. That's helpful. Thank you very much.

We have a follow-up from the line of Brian Ruttenbur with Morgan Keegan. Please proceed with your question.

Yes, thank you very much.

On a going forward basis, the difference between GAAP operating and pro forma operating is about $20 million to $22 million. Is that the number we should be using in that range going forward?

Yes. The primary components are the stock comp charges and the amortization of the intangibles, so those will trend along.

Are they going to be going up?

No, only to the extent that there's future M& & A activity will the intangibles increase. The stock comp charges should be fairly steady. And clearly, you've seen the restatement charges come off, and we had some in Q1 which was really more kind of the follow-through from the Q4 audit, but that should be going away for the balance of the year as well, Brian.

Okay.

And then the second question, perfect, is taxes. You said 11%. In the first quarter, what you actually reported, because you're talking -- you talk a lot about pro forma and then you talk about GAAP in the sense of taxes, because that's what the tax rate is based off of, closer to. Because you had a 49% tax rate, is that correct, in the first quarter?

On a GAAP basis, it's difficult to look at the tax rate. We have a very large NOL position in the US, and then we have other areas in the world where we do pay taxes. And overall on a GAAP basis, the income may be thinner because of these non-GAAP adjustments we just spoke about. So that makes for an interesting tax rate.

On a non-GAAP basis, though, we have steadied that out, and we just look at the cash taxes that we expect to pay over the year. When we first kind of budgeted out the year, we looked at prospective income levels in the jurisdictions and approximated closer to 10% of the tax rate. We've seen as we've worked through the jurisdictions and have some tax return filings behind us, our cash taxes for the year expect to be slightly more than that. So we are forecasting about 11% for the year

Okay. So 11% based on a pro forma operating income of around $180 million, or if it's on the operating income of the 120s GAAP number? That's why I'm a little confused is --

Actually, the right answer is actually neither, Brian. It's a cash taxes. So it really depends on the taxable income, based on statutory tax in each of our respective jurisdictions. So we go through that calculation, and it's rarely what we expect to make in tax payments to the relative tax authorities on the estimated or actual basis.

Right, but in terms of percentage, it's from our non-GAAP operating income?

So the non-GAAP operating income, that's the answer, is that's the 11%. Perfect. And that's what I needed to know. Thank you very much.

Okay. You're welcome.

We have no additional questions at this time. I would now like to hand the conference over to management for closing remarks.

Thank you, operator, and thank you everyone for joining us today. Have a great day.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.