Verint Systems Inc (VRNT) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third-quarter 2011 Verint Systems Incorporated earnings conference call. My name is Melanie, and I will be your coordinator. At this time all participants are in listen-only mode. We will accept your questions at the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Alan Roden, Senior Vice President, Corporate Development and Corporate Treasurer. Please proceed.

Thank you, operator. I'm here with Dan Bodner, Verint's CEO and President, and Doug Robinson, Verint's Chief Financial Officer. Good afternoon and thank you for joining our conference call today. By now you should have all seen a copy of our press release that includes selected financial information for our third fiscal quarter ended October 31, 2011. Our third-quarter Form 10-Q 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 I start the call, I would 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 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 and uncertainties and other factors that could cause actual results to differ materially from those expressed in 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 on 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 ended January 31, 2011, and other filings we make with the SEC.

Most of the financial information discussed today is not prepared in accordance with generally accepted accounting principles and is therefore non-GAAP. A reconciliation of non-GAAP financial measures provided in today's call to the most directly comparable GAAP financial measures as well as the explanation of why Management use these measures is included in our press release dated December 7, 2011, as well as in the GAAP to non-GAAP reconciliation found on the Investor Relations tab on our website. Non-GAAP financial information should not be considered in isolation or as a substitute to GAAP financial information but is included because Management believes it provides meaningful supplemental information regarding operating results and when assessing our Business is useful to investors for information and comparative purposes. The non-GAAP financial measures the Company uses has limitations and may differ from those used by other companies. Now I would like to turn the call over to Dan. Dan.

Thank you, Alan. Good afternoon, everyone, and thank you for joining to us review our third-quarter results. In Q3 we delivered $205 million of total revenue representing 9.6% year-over-year increase and 4.5% sequential increase. We are pleased with our third-quarter revenue which reflects a record quarter for Verint with strong performance in both the Enterprise Intelligence and the Security Intelligence markets. In Enterprise Intelligence we delivered $117 million in revenue representing a 10% year-over-year increase and a 10.9% sequential increase. In Security Intelligence, we delivered $88 million of revenue representing a 9.1% year-over-year increase and a 2.9% sequential decrease. As we have discussed in the past, revenue in Security Intelligence on a quarterly basis can be lumpy due to the timing of large projects and customer deployment schedules.

In Q3, our gross and operating margins each increased approximately 1% sequentially to 67.8% and 21.5% respectively. Margin expansion combined with revenue growth drove operating income up approximately $4 million from Q2. We achieved strong operating income and margins while adding 350 people since the beginning of the year in key areas, principally in sales, R&D, and services. Adding these resources, coupled with our investment in innovation, positions us well to achieve double-digit growth and to expand our market leadership.

Turning to our innovation strategy, since the beginning of the year we have added innovative products to our Enterprise Intelligence and Security Intelligence portfolios. In Enterprise Intelligence, we are investing in three early stage growth areas. The first is delivering the broadest most unified suite of Workforce Optimization Solutions to contact centers. The second is migrating our unified suites across the Enterprise to branches, to remote offices, and to back-office operations. And the third is offering a broad multichannel Voice of the Customer analytics platform.

Within the first investment area, earlier this year we introduced a fifth generation Workforce Optimization Solution representing a more comprehensive WFO suite and advanced analytics. This solution sets 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 navigate across applications and a more scalable enhanced Enterprise architecture. Our market leadership and commitment to innovation was recently recognized by Gartner which again placed Verint in the Leader's Quadrant in its November 2011 report.

While the market's migration to its purchasing WFO as a suite remains in the early stages we are seeing good progress. For example, during Q3, we received a single order for more than $15 million for our WFO suites including call recording, quality monitoring, e-learning, performance management, workforce management, speech analytics, and desktop analytics. This customer is deploying our suite to enhance customer service and improve the efficiency of his customer service operations across tens of thousands of agents who handle tens of millions of calls per year. This deployment, which replaces multiple point solutions from different vendors, will take place over an 18-month period, with most of the revenue occurring next year. We believe this deployment is indicative of the trend towards purchasing unified solutions from a single vendor in the form of a suite which positions Verint very well given our broad suit and our large install base of more than 10,000 customers. As part of our growth strategy we will continue to invest and add more solutions to our unified WFO suites to address contact center market demands.

In the second investment area, expanding our Workforce Optimization Solutions Enterprise wide outside the contact center, we recently introduced the industry's first fully web-enabled Enterprise Workforce Management Solution. This new solution provides a single view into employee skills and availability across the Enterprise. To support our Enterprise strategy, in October we announced acquisition of GMT which added branch and back-office solutions, domain expertise and resources. While the Enterprise opportunity represents a small part of Verint's business today, we believe it is a large early stage opportunity that we are now very well positioned to address.

The third area of investment is Voice of the Customer multichannel analytics solutions which addresses demand for customer experience analytics by chief customer officers and other customer advocacy teams across the Enterprise. Early this year, we introduced our advanced Voice of the Customer analytics platform which is designed to help forward thinking organizations detect, gather, analyze, and act on insights from customer interactions across multiple channels. During our third quarter, we added Enterprise feedback management solutions by acquiring Vovici.

Our Voice of the Customer solution now comprises applications for speech analytics, text analytics and Enterprise feedback management including the ability to integrate data from web analytics, social media channels, and other customer interaction points. Although only recently announced, we have already seen a good level of interest in our Enterprise feedback management solution from our install base, which supports the view that customers are interested in buying multiple solutions from one vendor. As we continue to add products to our portfolio to accelerate growth, we are also investing in expanding OEM and other partnerships. We believe partnerships are an important part of our go to market strategy, and we continue to expand our ecosystem including partnerships to support hosted and software as a service offerings. For example, during Q3, we expanded our relationship with inContact, a software as a service provider which will offer Verint's portfolio of Workforce Optimization Solutions including quality monitoring, workforce management, e-learning, and performance management solutions as a SAS offering. As the market evolves, we will continue to invest in developing new software as a service solutions and partnerships.

Overall we believe we are extending our leadership position in the Enterprise Intelligence markets by expanding our portfolio, strengthening our partnerships, and investing in new growth areas. In Q3, we experienced strong business activity, and we are focusing a strong Q4 in acceleration in growth next year.

Now turning to Security Intelligence, our innovation strategy is focused on three areas; communications and cyber intelligence, Video Intelligence, and situation management. During the year we added many innovative analytical solutions across these three areas. In Communications Intelligence, we are expanding our portfolio to include new cyber security solutions. We decided to enter the cyber intelligence market because we believe it's an early stage market driven by new government initiatives around the world to protect networks from cyber attacks and because we believe we can leverage our core competency in technology related to IP networks and analytics. In general, our success in the communication intelligence market has largely been driven by our brand, market leadership, and innovation. During Q3, revenue in communication intelligence increased 9.7% year-over-year, and we continue to receive large Communications Intelligence orders, including two orders in excess of $5 million each.

Turning to the Video Intelligence market, our success has been driven by our focus in retail, financial services, and critical infrastructure. We recently announced key enhancements to our retail analytics solution including people counting and queue management as well as improved ability to integrate with RFID systems. In financial services, we expanded our portfolio by adding new facial recognition and license plate recognition capabilities to support financial fraud investigations. During Q3, revenue in Video Intelligence increased 8.1% year-over-year.

In situation management, our newest Security Intelligence investment area, earlier this year we introduced a new solution that allows our customers to more effectively protect critical infrastructure such as airports, seaports, transportation networks, government facilities, utilities, and municipalities. This solution allows our customers to more quickly view, correlate, and analyze data from a variety of security sources to improve situational awareness and expedite response. We recently received a significant order from a new international transportation authority customer, for integrated Video Intelligence and situation management solutions. This transit customer plans to implement our Video Intelligence solutions in nearly 30 rail stations, and use our situation management solution across several of these stations to integrate video, fire intrusion and access control for the purpose of better managing security situations and improving passenger safety. Overall, we believe we have created a broad and innovative portfolio of IP and analytic solutions, and we are -- we are well positioned for future growth in the Security Intelligence market.

Looking ahead, we see similar growth opportunities in the Enterprise Intelligence and Security Intelligence markets, fueled by the growing amount of structured and unstructured data in both markets. Our strategy is to capitalize on this opportunity by adding new analytical solutions to our Enterprise and Security Intelligence portfolios, through internal development and selective acquisitions, making us more strategic to our customers and partners. This year, we invested in new analytical solutions across our portfolios and acquired several small companies which brought us new capabilities for our install base and supports our expansion into new growth areas. As a result of this strategy, we expect to deliver strong results in the current year and accelerate revenue growth next year while maintaining healthy operating margins ahead of many of our direct peers.

For this year, our outlook for revenue is in range of $784 million to $792 million, and our outlook for our operating margin is in the low 20% range. Behind our annual guidance is an expectation for continued revenue growth and margin expansion in the fourth quarter of this year. Our outlook for EPS is $2.40 plus or minus approximately $0.05. While we had strong Q3 operating results and expect strong Q4 operating results, the change in guidance is primarily due to factors below the operating income line, which Doug will discuss in more detail later in the call. Looking ahead to next year, we are providing an initial outlook of approximately 10% revenue growth, operating margins similar to this year's level with EPS growing in line with or potentially slightly faster than revenue growth. Now I would like to turn the call over to Doug to discuss our Q3 results and outlook in more detail. Doug?

Thanks Dan and good afternoon, everyone. Most of the 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 now like to discuss the areas of revenue, gross margin, and operating margin. In the third quarter we generated approximately $205 million of total revenue across our three segments with $117 million in Enterprise Intelligence, $33 million in Video Intelligence, and $55 million in Communications Intelligence. This compares to approximately $187 million of total revenue in the third quarter of last year with $106 million in Enterprise Intelligence, $31 million in Video Intelligence, and $50 million in Communications Intelligence. In terms of geography, we generated $112 million in the Americas, $55 million in EMEA, and $38 million in APAC. This compares to approximately $91 million in the Americas, $49 million in EMEA, and $47 million in APAC in the third quarter of last year.

Gross margins were 67.8% compared to 66.6% in Q2 and 70.5% in Q3 of last year. As we've discussed in the past, gross margins can fluctuate quarterly due to the revenue mix potentially significantly. Because of this we continue to believe our gross margins will be lumpy and average in the mid to high 60%s. In Q3 we experienced strong sequential operating income growth and operating margin expansion. Our operating income increased $4 million sequentially to $44 million from $40 million in Q2, driving our operating margins up almost 1% to 21.5% in Q3. Our Q3 EBITDA came in at $48 million, or over 23% of revenue.

Now let's turn to other income and interest expense. As Dan mentioned earlier, while we had strong operating income in Q3, there were two factors below the operating line that impacted our EPS. The first of which was other expense. In the third quarter, other expense net totaled $9.7 million, which is approximately $2 million higher than the guidance we gave during our prior call. During Q3 the dollar strengthened significantly relative to most foreign currencies which resulted in an increase in expenses associated with balance sheet revaluations. Verint operates in multiple locations where the functional currency is not the US dollar and where we have many inter-company transactions among our operating entities. When an inter-company transaction is not denominated in an entity's functional currency the resulting inter-company receivable or payable must be revalued into the entity's functional currency.

Given the situation in the worldwide financial markets, particularly in Europe, and the associated increased volatility in foreign exchange rates, we experienced foreign exchange losses on the revaluation of our inter-company payables and receivables. Our prior guidance was based on our practice of forecasting other expenses based on spot exchange rates at the time of guidance and as we have previously stated does not contemplate potential future movements of foreign exchange rates. So while we guided to $7.8 million, we ended up with $9.7 million of other expense.

The other factors are tax rate. As we got closer to year end we have refined our annual tax rate guidance to approximately 11.5% from our prior guidance of 11%. In Q3 we recorded a 12.5% catch-up tax rate to bring our average tax rate on a year-to-date basis to approximately 11.5%. 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. The combination of these two factors had a $2.4 million or $0.05 impact on our Q3 results relative to our prior guidance. In other words, EPS in Q3 would have been $0.64 if these below the line expenses had come in at our prior guidance.

Now turning to the balance sheet. As of October 31, 2011, we had approximately $120 million of cash including $8 million of restricted cash compared to approximately $195 million of cash as of July 31. During the quarter, we spent approximately $90 million on several small acquisitions funded from existing cash and cash we generated during the quarter. Excluding interest payments and other non-recurring items, we generated cash from operations of $26 million in Q3 and approximately $90 million for the first three quarters of the year. We ended the quarter with $599 million of total debt. We had 49.9 million of fully diluted shares outstanding as of the end of Q3, including approximately 10.7 million shares underlying our convertible preferred stock.

Before moving to Q&A, I would like to discuss our guidance for the year ending January 31, 2012, and initial outlook for the year ending January 31, 2013. For the current year, our outlook for revenue is a range of $784 million to $792 million, and our outlook for our operating margin is in the low 20% range. Behind our annual guidance is an expectation for continued revenue growth and margin expansion in the fourth quarter this year. Our outlook for EPS is $2.40 plus or minus approximately $0.05. While we had strong Q3 operating results, and expect strong Q4 operating results, the reduction in EPS guidance is primarily due to the two non-operating factors that already impacted our Q3 results as well as the further impact we expect in Q4 based on today's spot rates and tax rate outlook.

Looking ahead to next year, we are providing an initial outlook of 10% revenue growth, operating margin similar to this year's level with EPS growing in line with or potentially slightly faster than revenue growth. While we don't provide quarterly guidance, please remember there are seasonal trends in enterprise software industry and we expect Q1 next year to be down sequentially from Q4 levels. In conclusion, we're pleased with our operating results in Q3, expect to finish the year strong, and believe the investments we made this year will allow us to accelerate our growth next year. This concludes my prepared remarks. So with that, operator, can we please open the lines up for questions?

(Operator Instructions) Daniel Meron, RBC Capital Markets.

Dan, I may have missed the first part of your prepared remarks. Can you provide us with a little bit more color on the business environment you're seeing as far as the demand? It seems like the macro shifts did impact items below the operating line. What's the impact that you see on the general demand both in the Enterprise segment and in the Security segment?

Okay. We certainly have a very strong demand continuing in Q3. We have reported strong results across all three segments in both markets Security and Enterprise markets. We introduced a lot of new solutions that customers really like and we feel like there is demand and we continue to invest in those growth areas. We've been doing very well competitively. It looks like our suite approach has been working as is evidenced by the $15 million displacement that we won where the customer was really excited about buying multiple solutions in one suite rather than point solutions from various vendors. So overall from a market perspective, it's pretty much as expected. We got into the year. We didn't expect this year to be great in terms of the macroeconomic environment, but it's progressing as expected and we're pleased with the results and also going into Q4, what we see now in terms of business activity, and forecast for Q4 we expect to continue and enjoy a positive momentum this year.

Okay. And the macro impact, if you can just try to quantify it in one way or the other and what's the feedback you're getting from your customers? Do you see changes in their spending plans?

There is obviously some concern about Europe. I can say that so far this year we had pretty strong results in Europe. Actually we increased our EMEA revenues every quarter this year so we went up from Q1 to Q2 to Q3. It's up from last year. So far the results are pretty good in Europe. I guess that's because we're highly diversified, we operate in east Europe and west Europe and we have solutions across many different verticals, government and commercial and so forth, so so far our results in Europe are pretty strong. We are monitoring the situation but it's hard to predict whether the noise is actually going to affect and we'll continue to monitor closely. APAC is strong and America seems to be strong relative to our expectations. So no negative impact of noise around the macroenvironment so far.

That's helpful. Doug, a question on the non-operating items that impacted you guys. You said $0.05 this quarter. Sounds like it's going to be another $0.05 next quarter, if I understand correctly. Is there a way to quantify it or at least how should we think about 2012 from that perspective? You did indicate that you were going to have low 20%s operating margin, but what kind of numbers should we calculate for in 2012?

Yes, so for this foreign exchange gain loss, et cetera, for next year, if you know if the dollar is going to strengthen or weaken against these currencies, you can dial that in. When we budget for next year we assume flat foreign exchange. We don't try to speculate one way or the other. So I don't know what to tell you there. From a tax rate perspective, last year was a little less than 10%. This year, 11%. It will probably go up slightly for next year. Interest expense, flat to what you're seeing this year.

Okay, that's helpful. Thank you and I'll hop back into the queue.

Shaul Eyal. Oppenheimer

Few quick questions on my end. Dan, on the $15 million contract on the WFO front, can you just tell us what vertical is it in?

In financial services.

Financial services. And again, you did indicate it was a displacement over a number of different vendors, correct?

The customer in this particular case had a number of point solutions all ready deployed. Not everything that we're deploying now. This was competitive bid. We believe that our strategy to have a unified suite was very, very important to the customer when they consider the displacements.

Got it. And, Dan or Doug, can you talk about the book to bill or kind of the backlog picture? What it kind of looks like right now. I know you guys do not provide us with the hard numbers, but maybe just a little bit of an overview or some color.

Yes so we're not providing book to bill. As I mentioned, business activity is healthy. And Q4 certainly consistent with seasonality in the industry, is expected to be a strong quarter for us. We're looking forward to strong business activity, also in Q4. Doug? Anything else that you can add?

A lot of our business is book ship, so to speak, so we don't run the business off of backlog. We do have a portion of the business that's larger projects that contribute to a deferred revenue stream as well as maintenance is deferred revenue so that's kind of the way we look at it. Deferred revenue is the backlog. It kind of burns off as it gets replenished, then we have some kind of lumpiness around the product deferred revenue that comes in as projects are completed. So some portion is off balance sheet, is backlog but we really don't quantify that or look at that too much in terms of the operating results.

Got it. One final question on my end. Hiring. So 350 employees added year to date. What's the current thinking with respect to the fourth quarter and what's the current thinking with respect to fiscal 2012 in terms of the headcount addition?

Right. So obviously, we have made significant investment already this year. We believe that this investment is highly consistent across the strategy we have in very specific areas where we think we can generate double-digit growth. When we look at the investment, we have to trade off between short-term profitability and acceleration of top-line. We are comfortable at low 20%s operating margin, pleased with the 21.5% in Q3, because we believe this is ahead of many of our peers, so it's healthy margins, while providing us opportunity to invest in accelerating revenue growth which obviously also generates more income. So 350 year-to-date is probably -- you are not going to see the same rate in Q4. There is going to be less of increase in OpEx, but some increase according to our plan. And some continued investment into next year. We are targeting double-digit growth for the Company for the long term. We get an initial outlook of 10% for next year, and part of this growth is going to be also additional resources, but we will be very careful to balance the investment and to deliver healthy operating margins that are at least at par or ahead of our peers.

Got it. Thank you very much, guys, and good luck.

Brian Ruttenbur, Morgan Keegan.

Cash from operations in the quarter was $17 million. I think that Doug you had said in the past that free cash flow should equal cash from operations when you look at the pro forma numbers. Was the difference between the cash from operations -- maybe you can just walk me through the math the difference between cash from operations and free cash flow? I know that a lot of it was foreign exchange. Maybe could you walk me through real quick. $20 million was this, $10 million was that and help me understand that.

Sure. Yes, the cash from operations it can be a little lumpy. There's some seasonality to it. So far this year when we adjust for some non-recurring type of items, like some of that phantom stock we had as a result from getting ourselves current in investing, and when you put the interest back in and look at the cash that way, we generated almost $90 million through the first three quarters. Last year in Q4 we generated almost $60 million so as you can see we're a little back end loaded. So Q3 year-to-date, we're well ahead of last year. If we have a strong Q4, I think the cash on an adjusted basis should be in the neighborhood of $140 million, $150ish million for the year.

Okay. Again, could you walk me through the numbers? In the quarter itself, and say, okay, cash from operations is $17 million, and the difference -- can you help me out? Foreign exchange was this. Help me out with the line items.

Sure. We have the interest, of course, is about $7 million. It's one of the adjusting items. Spending as you can see from the non-GAAP adjustments a little less than $3 million a quarter, from a P&L standpoint. It was a little north of $3 million from a cash standpoint in Q3. And there is the foreign exchange cash flow, so net-net that's $17 million. Adjusted, we get $26 million as a piece of the $90 million on a year-to-date basis.

Okay. So $10 million or $7 million was the foreign exchange? So $7 million was the foreign exchange, is that right?

No, I said $7 million was the interest.

Okay. Then how much was the foreign exchange?

Foreign exchange is a few million.

Okay. Very good. Sorry to do the remedial stuff. The other question I have is about guidance in the out years. You were talking about 10% revenue growth. The first question is about revenue growth. Does the acquisition that you just did, obviously contributed to that, so you're really talking about internal growth of about 9%. I'm just trying to understand our internal growth rate. Is it 8%? Is it 10%? Where is your internal growth?

Okay. I can give you the run rate. We announced two acquisitions. One was GMT that fits into our Enterprise WFO strategy. Second was Vovici that fits into our Voice of the Customer multichannel analytics. So for Vovici last year, they did $18 million of revenue, and this year in the first three quarters, they are on a run rate kind of $4.5 million per quarter. So this is the run rate, and you can take it into next year if you want to do organic versus inorganic. GMT, last year did $9 million, and in Q3, we only got in October, so there was very minimal revenue in Q3, but it's going to be a few million in Q4. So you can extrapolate it into next year.

More importantly we look at this as components of our portfolio and our ability to actually accelerate growth by offering our install base and leveraging all our sales force, and that way we already start to do that with Vovici, obviously we'll be doing it with GMT in Q4. So our plan is to accelerate growth for these companies next year, and while integrating them into our infrastructure, and obviously these are areas, that we think are high double-digit growth. So while we have a number of different components in our portfolio, some of these components like recording and QM as you know are growing at low single-digits, but we're continuously adding components that are in markets that are growing double-digits, and therefore, into the future we think we are certainly going to be able to generate higher growth rates because the mix of our products in our portfolio will allow us to leverage the install base, the sales force and enjoy higher growth rates.

I'm sorry, go ahead.

No, no, please, go ahead.

The other question I had was about operating margin guidance. Just trying to understand, it appears operating margins that you're giving the guidance are down or flat. Is that correct, or am I misreading the guidance?

No, I can help you there. We achieved 21.5% in Q3 and actually that's the same level for the first three quarters, 21.5%. If you do the math with our annual guidance, for this year, you will see that we're expecting to achieve a little bit better margin in Q4, but we're right there. 21% to 22% operating margin, which is consistent with our low 20%s target, and that's the same target we have for next year as we obviously will create some efficiencies next year, with scale but at this point as I discussed before, the trade-off we intend to reinvest in efficiencies in order to achieve even higher growth rates, and some of this investment we're making -- let me give you an example, Brian. We announced today that we got into the cyber intelligence market, and we're very excited because we think this is a very fast growing market, but this is a very early stage for us and we're now developing the offering, which we will be selling in a market next year, probably with very little revenues next year, but much more revenues in the following year. So some of this investment takes time, but they do build up the portfolio to allow us to enjoy acceleration in growth rates.

So that's why next year margin, to answer your question again, when we say we intend to target similar to what we had this year, we're really not changing our view on the opportunity that we see in this space. The whole unstructured space and the demand we see from customers for more and more analytics really gives us the reason why we think it makes sense to sacrifice some short-term profit, while we're still ahead with very healthy margins, ahead of many of our peers, and use those efficiencies to reinvest and accelerate growth into the future.

Great. Thank you very much.

Jonathan Ho, William Blair.

Just a quick question on the growth rates for 2012 between Enterprise and Security. They've been pretty similar in the past. Do you see any change there at this point, between the growth rates, and is one going to be faster than the other?

I would say generally similar. Right now, my view is that Enterprise can grow a little faster next year, but not in a meaningful way.

Got it. That's helpful. And then in terms of the seasonality from Q4 to Q1 you guys kind of pointed out that we should be aware of that. Do you see that being more pronounced from Q4 to Q1 this year in terms of that seasonality?

More pronounced versus last year's trend?

That's right.

Yes. We know it will come off. Natural seasonality, I think every software company has it. We had a decline last year of sequential 5% or so. I would expect similar. It could be more for this year.

Great. And then just the last question around the cyber security opportunities that you guys laid out. How big is this in terms of an opportunity right now, and do you think this will be a meaningful contributor to the Business over time, or could this ramp up fairly quickly as an opportunity for you guys?

It will take time to ramp up but we think it can be significant. We see a lot of commonality in our government customers. As I mentioned before, governments are looking to ramp up investment in this area. It's a big concern. Protecting sensitive infrastructure within country from cyber attacks. There are a lot of players in this market. Most of them are just coming into the market so the whole market is highly dynamic. But we think our approach is unique, and we do have customer relationships, so we're not really looking at this as a new market. It's really a new solution to offer to some of our existing customers, that our government agencies responsible for analyzing and protecting cyber networks. But in terms of meaningful revenues, we certainly don't think there's going to be meaningful revenues next year, and it's going to start to build up. There will be some orders that we'll take next year. We hope so and plan so but in terms of revenue, it's going to build up the following year.

Great. Thank you.

Michael Kim, Imperial Capital.

You've talked a lot about moving towards a unified suite, and I'm curious if that's starting to extend or impact the sales cycle, and also how -- if you can quantify, the increase in average deal size, if that's a double-digit number or single-digit number. Any kind of metric would be helpful there.

Yes, could I give you direction. I don't have the metrics, but directionally, you're right, we get, when we sell unified suites, we get bigger deals. I think the impact is not so much on the sales cycle, perhaps some impact there, but it certainly creates an impact on converting orders to revenue, bigger deals, sets new milestones, and as I mentioned before, this $15 million deal that we booked in Q3, most of the revenue will be recognized next year. So there's some impact, when you sell larger deals.

But I think where we are more excited is to see this opportunity, the customers that already have a number of different point solutions from different vendors. It's very difficult to displace a competitor when you just sell another point solution and you compare that feature-by-feature. Selling the unified suite with the workflows and the ability to administer and benefit from information from one application feeding into another application, that creates a tremendous differentiation, and that's very helpful to the sales cycle. So bigger deals, more complex will tend to make the sales cycle longer, but our ability to differentiate ourselves is very unique in this area for those customers that are getting excited about it, actually really is very helpful in making the sales cycle more efficient.

But I hope that over time I will be able to report more about this trend. Most of our customers still don't have unified suites, and therefore, we see this as a great opportunity within the contact center, and also because we have this strategy to go outside the contact center into the Enterprise, we also see some of this $15 million order, for example is for addressing a portion of the back-office operation that is not in the contact center. So we're not only differentiating our solution within the contact center as a unified suite but really helping customers to go outside the contact center and this is a very important trend because in many industries, you have people in the back office that you want to be able to utilize when you have an increase in volume of calls so you don't have to keep a lot of agents in your contacts center idle, just waiting for loads, but you can take back-office agents and have them take calls when you have -- you're running a promotion and you have an increase in volume. So this flexibility to use the workforce in the contact center to do back-office transaction or back-office employees to take calls is also very interesting to customers. So we are excited about this and we think this is a big component in our growth acceleration strategy.

Okay, and then switching to Security, are the project sizes also starting to expand, are these sort of multi-quarter type projects, and is that starting to take some of the lumpiness out of that business into next year?

I think the lumpiness has to do with it, the projects, some of them are large, and have been like that before, so the lumpiness is not just in terms of timing of taking the order, but is also in terms of delivery, sometimes the term dictates that revenue recognition will be upon a milestone or a later deployment, so the lumpiness is just the nature of the size of the projects and the terms of the delivery.

And are you seeing any divergence between government and non-government customers in terms of Security drivers?

No, I think the main driver for Verint is analytics. The Security business is a very large market, and there's a lot of different solutions, but Verint's portfolio of IP and analytics is quite unique, and I think for those customers that really I think looking to benefit from analytics. It's not different driver between government and commercial customers. We clearly are more focused today on the larger government agencies and commercial customers, if you will, the high-end of the market, that are more kind of adopting the IP and analytics, and over time, I'm sure it's going to go into mid-market. But at this point, we're pretty high-end focused, and whether it's a commercial, retailer, or bank, or a government agency, I think that their needs to analyze huge amounts of information, unstructured information and trying to better understand trends and identify events and so on is pretty unified across all those customer types.

Okay. And then lastly, on the guidance for next year, when you talk about the average growth rate, considering the investments that you've made this year, particularly in headcount, does that imply that the second half of next year demonstrates a higher growth rate than the first half? And also in operating margins, would it be reasonable to expect that operating leverage in the first half would drive better margins than the first half?

I think consistent with the seasonality trend that Doug discussed, I think what you said is true, and we do generate better second half than first half, yes.

Revenues generally start in Q1, a little down from Q4, build throughout the year. The expenses don't go at that same rate so the second half margins are generally a little higher than the first half.

And then just year-over-year, second half versus first half, I guess does that imply that second half growth would be north of that double-digit sort of considerably better than 10%?

I think it's the end of Q3. We just provided initial guidance for next year. I think dissecting next year further is something we should do next quarter, when we finish Q4, but we wanted to give the market an understanding of how we think about the Business, what is its strategy, what are the growth areas, and clearly we talk about acceleration. So we did intend to send initial outlook for next year, and as we continue the investment, we are targeting to improve from the 10% over time.

Okay, fair enough. Thank you very much.

Tom Ernst, Deutsche Bank knew.

Hi, this is Jobin Matthew on behalf of Tom. You can start with your SAS offering which should come out next year. Is this a re-architecture of your existing products, or do you mean existing partners hosting more of your products? How should we think about this? And what are the incremental investments that could go behind these new products? Thanks.

So it is -- what we've done with our product is not just host it, which we've been doing for quite some time, but we've turned the product to be multitenant SAS products. We are in the process of doing it with different applications. We've got quite a few already at the SAS compliance level, and some that are in process. That is from a product perspective, so we want to give our customers the flexibility to buy products through SAS, or license or hosted, as they prefer. At this point, we see the majority of interest in SAS is from the mid-market, not from high-end. And because we -- mid-market for us is a small portion of our business, SAS is actually an incremental opportunity for us, for incremental revenue.

So the way we want to go to market is from a product perspective, we will have some flexibility for our customers, and from a go to market perspective, it makes sense to us to partner to go after the mid-market, and our companies that provide complimentary offerings, like we mentioned inContact that provides a call center offering, and we are very pleased to have not only a relationship, we are the WFO part of their contact center SAS offering. We are also providing SAS solutions directly to customers, but the combination of direct and partnership is how we're going to go to market, and our approach is to be flexible in terms of what we can offer to our customers.

Got it. As a follow-up to that, if your SAS offering comes at a lower price point, which is what I'm assuming, and helps to target a new mid-market, do you think that this could potentially cannibalize some of your existing larger customer offerings?

So right now, because the SAS is primarily driven by mid-market, and is incremental, it doesn't cannibalize revenues because it's really an incremental opportunity. And SAS is evolving over time, so we don't see that into next year as a major drag. We'd rather see that as an opportunity to accelerate revenue growth. Again, because it is mainly targeted into incremental revenue opportunities in the mid-market, and obviously, the way SAS is structured, over time, it presents more favorable economics. So the nature of that for us is actually very positive and we're not really concerned about cannibalization.

Okay, thank you.

Ladies and gentlemen, that does conclude the time that we have available for questions. I would like to turn the call back over to Management for any closing remarks. Please proceed.

Thanks, operator. And thanks everyone for participating in our call today. Have a great night.

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