Verint Systems Inc (VRNT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Verint Systems Incorporated earnings conference call. My name is Janada, 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 turn the conference over to your host for today, Mr. Alan Roden, Senior Vice President Corporate Development and Corporate Treasurer. Please proceed.

Thank you, operator, and good morning, everyone. I'm here with Dan Bodner, Verint's CEO and President, and Doug Robinson, Verint's Chief Financial Officer. Thank you for joining our conference call today. By now you should have seen a copy of our press release that includes selected financial information for our second fiscal quarter, ended July 31, 2011. Our second quarter 10-K will be filed shortly. Each of our filings and earnings press releases is available under the investor relations 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, use, 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, 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 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 its forward-looking statements, please see our Form 10-K for the fiscal year January 31, 2011, and other filings we make with the SEC.

Certain financial information discussed today is not prepared in accordance with Generally Accepted Accounting Principles, and is non-GAAP. A reconciliation of non-GAAP financial measures provided on today's call to the most directly comparable GAAP financial measures, as well as an explanation of why management uses these measures, is included in our press release dated September 8, 2011, as well as in the GAAP and non-GAAP reconciliation found under the investor relations tab on our website.

Non-GAAP financial information should not be considered in isolation or as a substitute for GAAP financial information, but is included because management believes it provides meaningful supplemental information regarding the operating results and when assessing our business, and 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. Good morning, everyone, and thank you for joining us to review our second quarter results. In Q2, we delivered $196 million of revenue, representing a 10.8% sequential increase, and an 8.3% year-over-year increase, and $0.57 of fully diluted earnings per share. We are pleased with our Q2 results, which reflect a record revenue quarter for Verint, with strong performance in both the Workforce Optimization and security intelligence markets.

In Workforce Optimization, revenue was $106 million, representing an 8.6% sequential increase, and an 11.5% year-over-year increase. During Q2, we continued to see certain market trends as we have discussed previously, including organizations seeking the unified Workforce Optimization suite, the migration of Workforce Optimization Solutions across the enterprise into new areas such as back office and branch operations, and the adoption of innovative analytical solutions to better understand the Voice of the Customer.

To address the market trends toward the suite, earlier this year we announced the availability of our 5th generation Workforce Optimization Solution for enterprises, including contact centers, back office operations, and branches. Our enhanced unified Workforce Optimization Solution sets new standards for enterprise collaboration, simplified administration, and depth of functionality, and has received positive recognition by industry analysts.

One industry analyst stated that by unifying a wide range of W4 applications, our 5th-generation W4 solution delivers new and important benefits to enterprises. Another industry analyst commented that our 5th-generation Workforce Optimization Solution, combined with our Voice of the Customer analytics platform, is likely to have a significant impact on the way that organizations gather and use information, helping these companies address issues before they become more widespread or disruptive.

Overall, we believe that our latest offering has further distinguished us in the contact center markets, and reflects our commitment to invest in innovation and market leadership. We also continue to see interest in our Workforce Optimization Solution outside of the contact center in other areas of enterprise, such as branch and remote office locations, and back-office operations.

Turning to our Voice of the Customer platform, we believe there is a visible trend towards customer interaction analytics, as enterprises look to analyze market channel communications in order to gain an analytic view of the customer experience. Our advanced Voice of the Customer platform is designed to help forward-thinking organizations detect, gather, analyze, and act on insights from customer interactions across multiple channels.

We recently expanded our Voice of the Customer offering by acquiring Vovici, a leader in enterprise feedback management solutions. Our Voice of the Customer solution now comprises applications for speech analytics, text analytics, and enterprise business management, including the ability to integrate data from web analytics, social media channels, and other customer interaction points.

Market reaction to this acquisition has been very positive. Forrester Research cited the growing focus on the customer experience in many organizations, and Verint's ability to now provide senior level executives, including chief customer officers with end-to-end customer experience insights.

[Schedule 3 Research] commented that the acquisition allows Verint access to new enterprise customers, while delivering added value to its existing customer base. Although only recently announced, we've already seen early interest for our enterprise business management solutions from our install base, which supports our view that customers have a preference for buying multiple solutions from 1 vendor.

Overall, our strategy is to continue to expand our Workforce Optimization suite and Voice of the Customer solutions by adding additional applications. And we believe that we are well positioned for continued growth and success. Given the current environment of increased economic uncertainty, it's important to point out that our solutions have significant value in both good and bad economies, as they help organizations manage their largest expense, their people, and also help organizations to increase revenue by retaining customers.

Turning to security intelligence. We delivered $90 million of revenue, representing a 13.5% sequential increase, and a 4.8% year-over-year increase. Our strategy is to deliver a broad portfolio of innovative IP security intelligence solutions to meet our customer-specific security challenges across several vertical markets, including government, retail, finance, and critical infrastructure. In government, customers are deploying our innovative communications intelligence solutions to effectively detect, investigate, and neutralize criminal and terrorist threats, and are deploying our video solutions to improve the security of sensitive facilities in infrastructure.

We see opportunities worldwide for our security intelligence solutions, and our strategy is to expand our solution portfolio and focus on regions that we believe are investing in new security initiatives. In that regard, we recently acquired a small company located in the Americas region as part of our communications intelligence business, providing us increased local products and presence.

We continue to see governments around the world seeking solutions to keep pace with the growing amount and types of network traffic and unstructured data. Our strategy is to deliver solutions that help them efficiently collect and analyze very large amounts of content, and generate actionable intelligence.

During Q2, we received orders in excess of $1 million in all 3 of our regions -- Americas, EMEA, and APAC, including an order in excess of $4 million from an existing government customer. In retail, customers are deploying our video intelligence solutions to reduce shrinkage, manage liability, provide a safe environment to employees and customers, and leverage video to enhance business performance. During the quarter, we received orders of approximately $4 million from an existing retail customer.

We believe retailers are beginning to leverage video for operational purposes such as benchmarking store performance, analyzing the customer experience, and optimizing staffing levels, facilities layouts, and product placements. We are addressing this interest by delivering innovative retail-specific analytical solutions. In addition to helping retailers manage video, we are delivering innovative solutions for measuring shopper conversion rates, Q management, and shopper tracking. In that regard, we recently completed the rollout of a video business intelligence solution for measuring shopper conversion rates across 1,000 stores for a large retail chain.

In critical infrastructure, our customers are deploying our video intelligence solutions to protect infrastructure and properties such as airports, seaports, transportation networks, utilities, and safe city initiatives. During the quarter, we received an order in excess of $4 million for a new critical infrastructure project for a major facility in the New York City area. To better address the critical infrastructure opportunity, we have recently integrated our video management and situational awareness solutions, and are starting to propose a unified offering in a variety of transportation, safety, and other projects worldwide.

In financial services, our customers are deploying our video intelligence solutions to enhance the security of their branches, corporate facilities, and other sensitive areas. During the quarter, we received orders from multiple banks, including $6 million in expansion orders from an existing customer. We continue to add analytics to our video solutions to help banks to detect fraud, and conduct investigations.

Overall, we are pleased with our Q2 performance. As we've previously discussed, our security business can be lumpy in terms of revenue and gross margin. In Q2, revenue was up sequentially and year-over-year, while gross margins were down due to the mix of projects completed during this quarter. We believe that enhancing security remains an important objective for enterprises and governments around the world, irrespective of the economic environment. Verint's security business is highly diversified, with a broad portfolio and a global presence, positioning us well to help our customers achieve their security objectives.

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. During the first half of the year, we added more than 100 people to key areas throughout Verint, principally in areas of sales and R&D, as well as services. We are planning to increase headcount in the second half of the year, as well.

Given the trends we discussed today, we believe we are well positioned for growth. We are setting our annual revenue growth outlook at approximately 9%. And refining our fully diluted earnings per share to approximately $2.50. Our annual guidance reflects organic growth, acquisition contribution, and expected product mix, as well as our continued investment to capitalize on the long-term opportunity in the Workforce Optimization and security intelligence markets.

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

Thanks, Dan, and 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 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 would like to begin today's discussion with the areas of revenue, gross margin, and operating margin. In the second quarter, we generated approximately $196 million of total revenue across our 3 segments, with $106 million in Workforce Optimization, $41 million in video intelligence, and $49 million in communications intelligence. This compares to approximately $181 million of total revenue in the second quarter of last year, with $95 million in Workforce Optimization, $37 million in video intelligence, and $49 million in communications intelligence.

In terms of geography, we generated $105 million in the Americas, $53 million in EMEA, and $38 million in APAC. This compares to approximately $97 million in the Americas, $45 million in EMEA, and $39 million in APAC in the second quarter of last year.

Gross margins in the quarter were 66.6% compared to 70.7% in Q1, and 68.5% in Q2 of last year. As we have discussed in the past, gross margins can fluctuate quarterly, due to the revenue mix, potentially significantly. In Q2, our gross margins declined from Q1 levels, which had an unusually favorable revenue mix. We continue to believe our gross margins will be lumpy, and average in the mid to high 60%s.

Q2 operating expenses increased sequentially from Q1, consistent with planned continued investment in the business. Our operating margin was 20.6%, in line with our previous guidance for the year.

Now let's turn to the other income and interest expense. There are 2 primary components to this expense net line -- interest expense associated with our bank debt and impact from foreign exchange. In the second quarter, this expense totaled $7.5 million, reflecting $8 million of interest expense, as well as $1 million positive foreign exchange impact related to balance sheet translations, offset by $0.5 million of net losses on foreign currency forward contracts.

Relative to the tax area, our Q2 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 low tax rate jurisdictions.

Now turning to the balance sheet. As of July 31, 2011, we had approximately $195 million of cash, including $16 million of restricted cash compared to approximately $192 million of cash as of April 30, 2011. We ended the quarter with $597 million of short-term and long-term unchanged from the prior quarter. Following quarter end, we used approximately $67 million of our cash for acquisitions, including $56 million for Vovici and the balance for a security company. We had 49.9 million average fully diluted shares outstanding as of the end of Q2, including approximately 10.6 million shares underlying our convertible preferred stock.

Before moving to Q&A, I'd like to discuss our guidance for the year ending January 31, 2012. We're increasing our annual revenue growth from approximately 8% to approximately 9% for the year. We expect non-GAAP operating margins for the year to be in the low 20%s, unchanged from our previous guidance. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $7.8 million, reflecting the interest rate on our new 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 this year. Based on these assumptions, and assuming approximately 50 million average fully diluted shares outstanding for the year, we expect non-GAAP EPS to be approximately $2.50.

Given the usual seasonality of our business, we expect a strong fourth quarter. This guidance reflects our current view of the economic environment, which we will continue to monitor closely.

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

(Operator Instructions) Daniel Meron with RBC Capital Markets.

Thank you. Hello. Congrats on the ongoing execution. Dan, can you provide us with a little bit more details. You mentioned that you guys think you would grow -- you expect the economy, which I certainly can understand based on your cyclical growth drivers -- but can you give us a sense of what you're hearing right now from your various customers in the end markets? Are they impacting one way or the other by the macro picture? And have you seen change in the pipeline or momentum in general?

Yes, sure. The recent change in the economic outlook. It is basically only starting kind of in August. Looking back in our business activity in August, we really didn't see much of a change, this year relative to last year. Obviously, as I commented before, there is an environment now with economic uncertainty. But it's very early and from what we see so far, it doesn't really impact the business. So, we didn't change our guidance to reflect any downward economic activity.

As we commented and as we experienced from the last [position] 3 years ago, in our enterprise Workforce Optimization, tends to be -- have less impact than other IT companies from a potential recession because the nature of the ROI and the nature of the solutions helping organizations to maintain costs and be effective in how they deploy their people. And security, as we all know, is also somewhat immune to economic downturns. But we're not yet seeing signs of economic downturn. Obviously, the economy is not strong, but we did not expect the economy to be very strong. So, we are monitoring the situation very closely, but at this point we do not see any significant change and that is why we maintain our growth outlook.

Okay. Thank you, Dan. Doug, maybe if you could provide us with a little bit more granularity on what is going to be the impact of Vovici and the other acquisition, which I think, Dan, you mentioned Communication Interception segment. Can you quantify what is going to be the revenue impact maybe on a 2012 basis or any other time frame that we can think of? And then on the operating margin side, what is the profile in those businesses, especially Vovici?

Yes, so let me first say that we made these acquisitions because we believe there are growth opportunities for us in those markets. And we see those as strategic in supporting our strategy of expanding our portfolio. Clearly, short-term, I can give you some numbers. But Vovici, in the first half of the year, the six months that it completed, their revenue was just under $9 million and they were losing several hundred thousand dollars. We expect to have similar top line in the second half of the year. And we expect them to be break-even.

But clearly the -- this is a short-term outlook where we integrate Vovici into our Workforce Optimization Solutions. Next year, we are expecting double-digit growth in this area, in the Voice of the Customer area and we expect that also to be EPS accretive. We believe that there is demand for Voice of the Customer solutions and we are uniquely positioned to provide multiple solutions from a single vendor that can address customer feedback through multiple channels. So whether the customers are responding to surveys, or customers are saying things through the social media, or customers are talking to contact center agents, we are able to capture all those interactions for multiple different channels and have a [league] of solutions that provide our customers with a more unified view of what customers are saying and how to improve customer programs.

I think what is interesting about the market now is that many organizations are appointing chief customer officers or executives that are responsible for customer retention or customer advocacy teams. And there is a growing focus in our organizations on how to launch the right customer programs to retain customers and increase revenues from customers. Those chief customer officers and the like actually need tools to help them to do their jobs. And this is a whole new demand for analytical tools that are supporting those CCOs in their new initiatives.

We see the Vovici acquisition as really complementing what we've already begun in terms of a more holistic Voice of the Customer solution portfolio, and Vovici fits very well into that vision of analyzing customer feedback from a lot of different points and different communication channels.

The security, just to complete my answer, Daniel, on the security side. This is a very small acquisition. We paid just over $10 million to this company. They did a couple million dollars in revenue in H1, they were losing money in H1. We expect to do several million dollars in H2 and break even as well. But again, our strategy in security is to add technology and have local expertise. And we expect that this company, when we combine their technology with ours, we are going to be able to offer customers in that region a much stronger portfolio of solutions and we expect next year high growth. Although, obviously, high growth off a very small base.

Okay, that's very helpful. Then the last question for me. Do you guys still feel comfortable with the high-single digits growth on a long-term basis or do you think that this number could accelerate? How should we think about it?

Our outlook for our market was mid- to high-single digit growth for the market. We believe that the current outlook, if we are able to achieve our guidance, we will be gaining some market share. And in terms of overall outlook, longer term, obviously, the economic environment does impact the outlook and if there is going to be improvement in economic environment we will be looking at higher growth rate from our markets and obviously vice versa.

Okay. Very good, thank you. Good luck.

Thanks.

(Operator Instructions) Paul Coster with JPMorgan.

It's actually Mark Strouse on behalf of Paul. Backing into the guidance with some of the details you have given on Vovici, it sounds like there is no change in your organic growth rate of about 8%. Is that a fair statement?

Yes. That is a fair statement. No change in organic outlook. And additional -- approximately additional 1 point that we expect from acquisitions.

Okay, got it. I know you guys won't give an exact number on backlog, but can you just talk about any trends as far as sequentially or even year-over-year? Anything in general as far as, is that number greater than 1 quarter revenue, 2 quarters revenue? Anything that can get us a bit more comfortable with your visibility?

Let me start and Doug will add some more details. We generally -- we are not a backlog business. We do have deferred revenue. And I'll have Doug talk about that. But our visibility is not coming from a backlog, but it's based on a very large percentage of our revenues come from existing customers that continue to expand with Verint adding either more licenses or new applications. And the relationship we have with these customers, as well as our indirect strong channel and OEM business, provides us the basis for visibility and focus. In terms of the backlog, the deferred revenue is the largest piece. Doug?

Mark, we really haven't seen much in the way of a trend change relative to the backlog. As Dan said, most of the business is near term. But we have a nice repetitive piece to that. In our backlog, deferred revenue certainly most of it, a lot of that is the deferred maintenance which we have very good visability on. There is some other contract work and some other pieces that rotate through when we do a particularly large contract in the communications intelligence area in particular. That stays up in deferred revenue for a little bit and then on a milestone basis, or sometimes at the end of it, we will take it down. But that all kind of rotates through and it will be a little bit lumpy from quarter to quarter. No longer-term trend change that we seeing around our backlog.

Got it. That's it for us. Thank you very much.

Thank you.

Brian Ruttenbur with Morgan Keegan.

Just a couple quick follow-up questions. You are talking about the market and the competition out there and that you're gaining market share. Is that you're gaining market share against the small guys in both the video side and the call center market, or are you gaining market share against the big guys?

The win/loss analysis that we do every quarter shows that we do win against the big guys, certainly, very often and sometimes we win against small guys. I think that generally -- we have a lot of different solutions. So, when you look at the market share, the way we define the market at mid- to high-single digits is based on the weighted average of what we believe the market is growing and as long as we can grow faster than that rate, we believe we are taking market share. But we are not able to dissect it granularly and analyze how much market share we are taking from a specific competitor, and whether more from large or small, we don't know. But we are very competitive in terms of our portfolio and our ability to compete against some of the very big guys out there.

Okay. And then in terms of the next couple of quarters; non-recurring charges. That was a little bit higher than I anticipated this quarter. Is that going to run the 3 to 5? Where is it going to be on the third and fourth quarter in terms of non-recurring charges?

Yes, you're referring to kind of the non-GAAP adjustments, the other bucket. That has primarily been the M&A that we have had lately. First half of the year in the beginning we did some facilities change outs that we took there. I would expect a similar number from what we saw this quarter.

Which was 5.4? Is that right? I just want to make sure I am dealing with right number.

We just did 2 acquisitions so it kind of depends on what we do in the second half. It could trend down a little bit, but again, I would look at our M&A activity as the gauge to that.

Okay. And then in terms of other income expense. Last quarter you were at $7 million loss -- or expense, excuse me. This time it was a $700,000 positive. What do you expect going forward and why was the big swing from quarter to quarter?

Yes, the foreign exchange, we'll swing that. Going forward, we don't try to predict that. It depends on what the dollar is going to do. Your guess is as good as ours, I suppose. The biggest component there is the interest expense, right? So, that going forward will be similar; around $8 million a quarter for that. And interest income is fairly minimal and the other component is foreign exchange, which can swing.

Okay, so modeling at $7 million or $8 million assuming that we don't have a foreign exchange swing this quarter, is where you are thinking?

Yes.

No foreign exchange swings, right?

Right.

Perfect, thank you very much.

Okay thanks, Brian.

Shaul Eyal with Oppenheimer.

Good afternoon everybody. 2 quick questions on mine. I might have missed that during the first part of the discussion, Dan. What is the geographic breakdown and are you seeing any change in terms of the demand from 1 geography to the other?

It is really stable. We do have slightly more than 50% from the Americas. About a quarter from Europe and the balance from APAC. Europe has been very consistent over the last few quarters with about a quarter. There were a little changes up and down in the Americas and APAC for the last few quarters, but they stayed on average more than 50% in the Americas and just under a quarter in APAC, so no change in the mix.

Got it. Dan, you mentioned that you guys are still hiring. Interested in knowing if you can quantify how many headcount you think will bring again and in what specific areas?

In the first half, we hired and we gave the number 100 people of net hiring that was primarily in sales and R&D. A little bit in services. In terms of the head count increase going forward, we are investing in the long-term growth of the business. And we are expanding primarily in newer areas, new applications. A little bit of geographical expansions, but I think most of the focus that we have is on additional applications and where we think we have higher growth opportunities.

In terms of functional head count increase, I do expect increase across the Company. And I can't give any more specific outlook. But I think you should expect us to continue to increase our OpEx also in H2 relative to H1.

That's helpful. Thank you very much and good luck.

Thanks.

Michael Kim with Imperial Capital.

A couple of questions. First, can you talk a little about your visibility on the government sector business? Particularly given the budget uncertainty and how that compares relative to the enterprise sector? And to follow-up on that, given your guidance for the -- revenue guidance for the year, do you see comparable growth across both government and enterprise?

Government is, roughly speaking, a quarter for our business. But it is highly diversified across the world. We work with many, many governments and also within countries we work with multiple government agencies across federal and state and local levels. So, we believe that the diversity of our government business across geographies, multiple agencies, as well as across many different solutions is providing us with a level of stability regardless of specific political or economic conditions within a certain country. And this has been our experience in the past, that we were able to grow our government business over time. While we had a lot of differences in every year -- we see differences in specific areas, specific countries and specific demands for certain solutions, but it averages itself. And that is what we expect also now that we will continue to see good growth in our government business.

In terms of -- when we speak about government, obviously it is our top portfolio. The question is more relative to security versus enterprise. We do -- in our outlook we stated before that we see similar growth opportunities for security and enterprise solutions. This is still our view for the balance of the year. That overall, the growth opportunity will be at a similar level.

Are you seeing any overall delay in procurements on part of your government customers? I know you mentioned that your base is fairly diversified. In terms of the procurements themselves, are you seeing that start to lengthen out or getting pushed to the end of the year?

It is hard to tell because the government business is lumpy and the sale process is long. We do have all kinds of delays in government procurement processes also last year when it was a much more robust economy. So, I don't think that we see, at this point, something that we can report as a significant change. But the nature of the business is a lumpy business. It is one that sale forces -- the sale cycle is long and building to that cycle is always delays and last-minute changes, and negotiations that can take longer than expected. We are kind of used to that.

Okay great and switching gears to security. Can you provide an update on the adoption for situation management in PSIM, the activity levels with either existing customers or new customers?

Yes, sure. As we stated last quarter, the PSIM, or what we refer to as situational awareness solution, we do not believe that this is a stand-alone market for us. So, we did start to integrate a situational awareness and video management solutions into a more holistic security product. We continue with the integration efforts. We are engaged with a number of customers in active discussions.

So, for us it is progressing according to expectations. We do see long sales cycle in this type of procurement. This acquisition brought very few existing accounts. I believe we mentioned last quarter that this company had 2 customers. So there is, obviously, some ongoing discussions with their customers, but most of the opportunity is in integrating this technology into our overall security portfolio and providing customers with a much broader solution than we were able to do before. And in terms of revenue generation, I think this is going to take into next year.

Where are you starting to see the initial reception? Is it in critical infrastructure or are there other markets that you're starting to see some early interest?

The integrated solution, I think, will be very compelling to safe city initiatives worldwide, and to transportation, including airports, and overall transportation and in some utilities. Those are the main areas where we believe that we will have a differentiating value proposition.

Okay great, thank you very much.

(Operator Instructions) Craig Nankervis from First Analysis.

Thanks and good morning. A couple questions. Just to clarify on the operating margin performance and your guidance. We had a variability of almost a couple hundred basis points sequentially, yet both results, I think, are characterized as being in line with guidance. So in the second half, is it just fair to say that we could have operating margin that could be anywhere from 20% to 23% or better? Is that -- I know that you can have lumpy dynamics to your mix and what not, but is that the best way to summarize how the second half could look?

Yes, that is not a bad characterization. We said operating margins in low 20s and that is where we have been. Operating expense in Q2 was right on plan; a sequential increase from Q1 as we continued to invest for growth in business. As Dan just talked about a few moments ago, we continue to expand and invest in the business through the second half.

Q4 is definitely our strongest quarter, so Q3 we'd look at as being similar to Q2. Q4; seasonality is typical. That would be a much higher margin quarter for us. Then we get back into Q1 and normal seasonality cycle there again.

Okay, thank you. And on that hiring. Is the hiring rate accelerated as you look to the second half or probably the same -- a similar pace that you have been on in the first half?

Yes, I think at this point, because we stated that we are monitoring the economic environment very closely, we will have an increase in our headcount, and that is something that we are comfortable sharing. But in terms of more specific, what we are going to do in terms of hiring, we will watch the economic development very closely and potentially change decisions as we move forward.

Most of the hiring that we will do in H2, obviously, will help us in longer-term growth. There is not much that have a long -- a short-term impact because in our business it takes time to get the people, get them trained and get them to contribute. So, we have very specific plans. We have a lot of areas where we know we want to expand and we believe that those will be growth areas and it makes sense to expand, but in terms of the rate of hiring, we will make those decisions as we go.

That make sense and that is helpful. Thank you. I guess lastly on the free cash flow generation in the quarter was on the lighter side. Are there seasonal dynamics that are affecting that, can you just maybe walk through how to think about the cash generation and expenditures?

You are right, Craig. There is seasonality to that. Just like the profitability, the stronger cash flows come in the second half of the year. As you can see from our cash flow in the first half, we had about, before interest -- including interest about $28 million of cash from operations. When you add back the interest and some 1-time stock payments having carryover -- cash stock payments carrying over from restatement days and some other 1-timers. You get a little bit north of $50 million in cash from operations adjusted for first half, and then we expect second half to be stronger than that.

Okay, thank you. That does it for me.

Okay, thank you.

At this time we have a further questions. I would now like to turn the call back over to management for closing remarks.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.