Verint Systems Inc (VRNT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Verint Systems earnings conference call. My name is Derek, and I will be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now turn the conference over to Mr. Alan Roden, Senior Vice President, Corporate Development. Please proceed.

Thank you, Operator. Good afternoon, 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 second fiscal quarter ended July 31, 2012. Our quarterly report on Form 10-Q will be filed shortly. Each of our SEC filings and earning press releases is available under the Investor Relations link on our website and also on the SEC website.

Before starting 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 that involve a number of risks, 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 of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in forward-looking statements, please see our Form 10-K for the fiscal year January 31, 2012, or Form 10-Q for the fiscal quarter ended July 31, 2012 when filed, and other filings we make with the SEC.

Some of the financial information discussed today is not prepared in accordance with generally accepted accounting principles and is, therefore, non-GAAP. A reconciliation of the non-GAAP financial measures discussed 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 September 5, 2012, as well as in the GAAP and non-GAAP reconciliation found under the IR link on our website.

Non-GAAP financial information should not be considered in isolation or as a substitute for GAAP financial information but is included because management believes it provides meaningful supplemental information regarding our operating results when assessing [the performance of] our business and 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 afternoon, everyone, and thank you for joining us to review our second-quarter results.

In Q2, we delivered $215 million of revenue, representing a 10% year-over-year increase and $0.58 of diluted earnings per share. Overall, we are pleased with our second-quarter results, which reflect our leadership position in both the enterprise intelligence and security intelligence markets. We experienced broad revenue strength in Q2, with year-over-year growth in both Enterprise and Security Intelligence. In Enterprise, we delivered $118 million in revenue, representing an 11% year-over-year increase. In Security, we delivered $97 million of revenue, representing an 8% year-over-year increase. Geographically, we experienced year-over-year growth in both our Americas and Asia Pacific regions and a decline in our EMEA region.

Overall, we began the year with a strong first half, with a 12% increase in total revenue, a 13% increase in Enterprise, and a 10% increase in Security year over year. Contributing to our strong first-half results are broader portfolio of Enterprise and Security solutions, more diversified geographic reach, strong OEM and strategic partnerships, and competitive position in the market.

In Enterprise, we continue to see three market trends that we have highlighted in the past. One, organizations are increasingly looking to purchase workforce optimization solutions in the form of a unified suite from a single vendor. Two, the migration of workforce optimization solutions into new areas across the enterprise, such as back-office and branch operations. And three, the adoption of innovative, Voice of the Customer Analytics solutions to drive the customer-centric enterprise. I would like to share with you some second-quarter customer anecdotes that we believe are illustrative of these three trends.

During Q2, we received an approximately $5 million order from an existing customer in the insurance industry for our text analytics solution. This customer had previously selected our call recording, PCI encryption, quality monitoring, eLearning, performance management, workforce management, speech analytics, and desktop analytics for its call center operations and our focusing on scheduling solutions for its back-office operations. During the quarter, this customer also selected our text analytics as part of its Voice of the Customer initiative to more effectively capture and act on customer feedback and sentiment across multiple customer interaction channels. This brings total orders from this customer to more than $25 million over the last four quarters, and we believe reflects a market preference to its purchasing multiple products from a single vendor, sometimes all at once, but more often over time.

We believe that Verint is well positioned to capitalize on this trend, given our broad integrated solution suite and large global install base. We continue to see interest our enterprise solutions outside the contact center across a number of industries. During Q2, we received an order of approximately $4 million from another insurance industry customer that had already deployed our recording and quality monitoring solutions in portions of their contact center operations and now wanted to expand to a more comprehensive and unified suite in its back-office operations.

We believe these customer anecdotes are indicative of market interest in customer-centric workforce optimization solutions across the enterprise. To better address market interest for our enterprise intelligence solutions, we continue to invest in OEM and other partnerships. We believe partnerships are an important part for go-to-market strategy, and we continue to expand our partner network.

During Q2, our enterprise solutions were recognized for innovation and market leadership by organizations around the globe. In the United States, Verint received Product of the Year and Market Leader awards from Communications Solutions and Speech Technology magazines, respectively. Call Center Magazine in Spain presented Verint with the Best Intelligence Solution for Customer Management award; and in China, the International Customer Management Institute recognized Verint with the 2012 Best Innovative Technology award.

We believe that such industry recognition is indicative of our leadership in the enterprise intelligence market. Overall, we believe that our broad portfolio offers compelling ROI for contact centers branches and back-office operations and that we are well positioned for continued growth in the enterprise intelligence market.

Turning to Security, our strategy remains to deliver a broad portfolio of innovative IP security solutions to meet our customers' specific security challenges across several vertical markets, including government, retail, finance, and critical infrastructure. In the government sector, customers are deploying our innovative communications intelligence solutions to detect, investigate, and neutralize criminal and terrorist threats, and our video and situation all intelligence solutions to improve the security of sensitive facilities and infrastructure. We continue to see governments around the world seeking solutions to keep pace with the growing amount and type of network traffic and unstructured data.

In Q2, we received a $10 million order from an existing international government customer. We believe this large order, which we expect will be deployed over multiple quarters, is indicative of customer demand for innovative security solutions that efficiently collect, fuse, and analyze very large amounts of content to generate actionable intelligence. In financial services, organizations are deploying our video intelligence solutions to enhance the security of their branches and other sensitive areas. During the quarter, we received orders from multiple banks, including nearly $7 million in expansion orders for one of the top three largest US banks.

In critical infrastructure, organizations are deploying our video and situation intelligence solutions to protect infrastructure and properties, such as airports, seaports, transportation networks and utilities, as well as in safe city initiatives. We recently received an initial order from a new government customer. This customer is using Verint security solutions, including video management, video analytics, and audio integration to secure perimeters and sensitive areas of several high-security facilities, representing a portion of the infrastructure they manage.

While our Security business can be lumpy, overall, we had a strong first half with 10% year-over-year growth, and we believe we are very well positioned in the security market with a broad portfolio of IP security solutions. In both the enterprise and security intelligence markets, we are seeing interest in our analytics solution, due to increasing amounts of unstructured data and the need for Actionable Intelligence solutions that make big data actionable.

Our strategy is to capitalize on this opportunity by adding new analytic solutions to our Enterprise and Security Intelligence portfolios through investment and selective acquisitions. We believe our investment in new analytics solutions will enhance our portfolio, allowing us to create more value for our customers and partners. We believe these investments, combined with our leadership position and our install base of more than 10,000 customers, well positions Verint for sustained future growth.

Turning to the economic environment and our guidance for the rest of the year. Despite the economic environment, we delivered a strong Q1 followed by strong Q2, driving 12% year-over-year growth in our first half. Looking forward, we continue to project growth for the second half; but at the same time, we are incrementally more cautious regarding the global economic environment as well as the impact of foreign exchange. As a result, we are refining our guidance for the year ending January 31, 2013, to a revenue range of $850 million to $870 million and an earnings per share range of $2.50 to $2.65.

I would like to take this opportunity to mention that we are pleased to have recently signed the merger agreement with Comverse. After the merger is completed, Verint will be an independent, non-controlled public company. The elimination of the convertible preferred stock and quarterly dividend will simplify Verint's capital structure, and the distribution of Verint shares directly to Comverse's shareholders will significantly increase Verint's public float and liquidity. Regarding timing, we now expect the merger to close on or about February 1, 2013. Of course, the merger is subject to a number of conditions, and its completion cannot be assured.

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

Thanks, Dan. 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 mentioned. 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, stock-based compensation as well as certain other non-cash or nonrecurring charges. Our earnings release provides further information on these non-GAAP adjustments.

I'll start my discussion today with the areas of revenue, gross margin, and operating margin. In the second quarter, we generated approximately $215 million of total revenue across our three segments, with $118 million in Enterprise Intelligence, $39 million in Video Intelligence, and $58 million in Communications Intelligence. This compares to approximately $196 million of total revenue in the second quarter of last year, with $106 million in Enterprise, $41 million in Video, and $49 million in Communications Intelligence.

In terms of geography, in Q2 we generated $124 million in the Americas, $50 million in EMEA, and $41 million in APAC. This compares to approximately $105 million in the Americas, $53 million in EMEA and $38 million in APAC in the second quarter of last year. The strengthening dollar versus the euro negatively impacted our reported revenue on a year-over-year comparison basis. Looking at EMEA on a constant-currency basis, EMEA would have been up about $1 million year over year, rather than down $3 million as reported.

Q2 gross margins were 66.6%, compared to 68.1% in Q1 and 66.6% in Q2 of last year. As we have discussed in the past, due to the product and revenue mix within or across segments, gross margins can fluctuate significantly from quarter to quarter. During Q2, we generated $43 million of operating income, compared to $39 million in Q1. Operating margins in Q2 increased to 20%, compared with 19.7% in Q1. Our Q2 EBITDA came in at $47 million, or 22.1% of revenue, up from $44 million in Q1.

Now, let's turn to the other income and interest expense. In the second quarter, other expense, net, totaled $8.4 million, reflecting $7.9 million of interest expense and the balance related to the impact of foreign exchange. Our annual cash tax rate is expected to be approximately 12%, reflecting what we currently see for the balance of the year. As we have 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. This drove $0.58 of diluted EPS.

Now turning to the balance sheet. At the end of Q2, we had approximately $184 million of cash, including restricted cash, compared to approximately $164 million of cash as of the end of our fiscal year. As mentioned during our Q1 conference call, Q2 cash from operations was impacted by our unusually strong first quarter. Q2 cash from operations on a GAAP basis came in at a negative $8 million following $48 million of cash from operations generated during Q1.

For the first half, cash from operations on a GAAP basis was $39 million, compared to the $28 million in the first half of last year. Excluding interest payments and other nonrecurring cash expenses primarily related to M&A, cash from operations would have been approximately $59 million for the first half of the year.

We ended the quarter with total debt similar to last quarter at $594 million. Our net debt as of July 31, 2012 is $410 million. At the end of the quarter, we had 51.1 million average diluted shares outstanding, including approximately 11 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, 2013. We are refining our annual guidance to a range of $850 million to $870 million. Following our better than expected Q2 performance, we expect Q3 revenue to decline from Q2, followed by strong fourth quarter. Looking at our two markets, our expected Q3 sequential decline reflects the lumpiness of the Security business and an expectation that Enterprise Intelligence will increase sequentially in both Q3 and Q4.

For the year, we expect non-GAAP operating margins to be in the low-20%s. We expect Q3 operating margins to be similar to Q2, with an improvement in the fourth quarter of the year, commensurate with revenue growth. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $8 million, reflecting the interest rate on our new term loan. We expect our non-GAAP cash tax rate to be approximately 12% for the year, reflecting the amount of taxes we estimate to pay this year. Based on these assumptions, and assuming approximately 51 million average diluted shares outstanding for the year, we expect non-GAAP EPS to be in a range of $2.50 to $2.65.

In conclusion, we are pleased with the first-half results and are well positioned for continued growth in the second half and beyond.

This concludes my prepared remarks. With that, Operator, can we please open the lines up for questions?

(Operator Instructions)

Shaul Eyal.

A couple of quick questions on my end. Dan, can you provide us with a little bit of color with respect to bookings this quarter and what's the overall backlog, qualitatively, what it looks like right now?

Yes, Shaul, as you know we are not disclosing booking, and backlog is not a meaningful metric for us. Generally, as we look at the business activity in the first half of the year, we feel that we're looking at what we expected a pretty strong business activity in the backdrop of global environment that is not great; but as we were starting the year, we didn't expect the environment to be great. I think that the first half, Q1 was strong and Q2 was stronger than we expected, overall.

As we look forward, we start to see some changes in EMEA, which is causing us to be more cautious. So EMEA, if you look at EMEA overall, and again, I'm not discussing booking but I'm giving you revenue over time, revenue booking are equal. EMEA last year had a 13% year-over-year growth and EMEA in Q1 had a 7% year-over-year growth, so in Q1 we felt that what other companies are reporting about EMEA didn't catch up with Verint.

But, as we look at EMEA Q2, as Doug mentioned, EMEA Q2 for us is $50 million, and that is down from $53 million last year. But actually, as we look deeper into these numbers, under constant currency, EMEA would have been $54 million this quarter, so it would be actually $1 million up, as opposed to the actual results of $3 million down.

Overall, what we see that the EMEA situation has caught up with Verint; and while we are projecting overall for EMEA for the year still may grow slightly, flat to a slow single-digit growth, this is certainly below what we had seen last year and what we've seen in Q1. And, I think this gives you a little bit of an explanation of what has been changing for Verint since the beginning of the year.

Got it. While we are on the EMEA region, when we look at the third and maybe the second-half '12 guidance, any product, whether it is the Enterprise or Video, which is slightly more impacted, or it's basically softness across the board?

It looks like in EMEA right now, in certain countries, and certainly not across the entire region, but in certain countries, government budgets has been affected more than enterprise budgets. I have to say the government, overall, has performed very well for Verint in the first half. We had three orders that are in excess of $10 million, and we have a lot of excitement about some of the products that we have introduced this year.

Certainly, if I look at EMEA, certain countries within EMEA, government budget has been affected, and we believe that it's not sustainable. We believe governments will need to invest in the technology that helps them to collect and analyze data so they can fight crime and terror. But for now and for the rest of the year, we think we will be have some impact from government customers in EMEA.

So, that impacts the Security side a little bit more than the Enterprise side, we'd say.

Got it (inaudible). One final, Dan, big-picture question for you. You mentioned during your prepared remarks, initially, the big data driver. Do you think -- and all of us know about Splunk and about CLIQ and their products and what they do, do you think that Verint could be positioned or maybe investors should be starting to think also on Verint more in the sense of the big-data play, down the road?

What I mentioned is that our solutions are making big data actionable, and this is not something that we have started to do now. It is actually what we have been doing for many, many years. We are helping our customers to not just collect information and store information, but analyze it for very specific business applications or security applications. Verint has been participating in helping customers collect very large data sets of structured and unstructured data, and making sense of them, and applying them in a way that creates [NOI].

What I see from a macro industry that a lot of the investment a big data now is around IT infrastructure, and typically applications are lagging, and they tend to start to accelerate once the IT infrastructure has been already dealt with. We have seen a lot of growth for Verint that is driven by actionable intelligence and making big data actionable, but we certainly believe that this is a early-stage industry where the potential for companies to really leverage the content and the insight from big data is just at the very beginning.

I just give one example that one of the orders that we mentioned that we got this year, we are helping this customer to collect a huge amount of information. One of our customers is collecting one billion products per day, and this is a government customer that needs to collect information that includes phone calls and e-mails and webpages that suspects are visiting. So, you can imagine that this is a huge amount of information, one billion products per day, this requires storage of multiple petabytes and a lot of sophisticated analytics to really understand the content and help drive investigation and create evidence that helps fight crime and terror.

We surely are already participating in the big data; and I think relative to where the industry is, we are surely focused on applications, not on infrastructure, and will continue to focus on business applications.

Thank you for that. Good luck.

Daniel Meron, RBC Capital Markets.

Thank you, it is Daniel Meron. Dan and Doug, congrats on the ongoing execution even despite the tough backdrop.

Just to follow-up on Shaul's question on big data. As you look at the growth rates that you have now, I think that the macro noise is somewhat of a blurring the picture, you did have a great first half. What you think, when you net out the FX noise, the macro noise, et cetera, is the underlying growth this year, and maybe as you look historically what it was last two, three years? And, as big data moves into more applicable or actionable data, as you term it, how do you think that that growth rate may play out via in the enterprise realm or the security realm?

Yes, I do think that the recognition of big data is an important factor for enterprise and governments. It is certainly going to help Verint's growth in the future.

When we started delivering Actionable Intelligence solutions, we did a lot of market educations, and there was a lot of skepticism of whether there is really content that creates value for customers. I think now people are much more recognizing that you can really extract value from the information chaos, and big data is creating a big information chaos. I think that affected companies are investing in big data infrastructure, whether it is more storage or more processing power, that's an infrastructure that can support applications such as Verint is deploying.

We have seen in the past customers concerned about deploying our solutions because they felt the infrastructure was not ready and was not -- could not support the bandwidth of our solutions. So, all that infrastructure investment is going to be helpful; and in a normalized economy, we certainly are going to continue to invest in accelerating growth.

Okay. Is there a way to quantify what growth would have been this year, absent the FX noise and the economy?

The FX, I think we quantified the FX for EMEA in Q2, which was about $4 million in EMEA. I think the overall FX effect on revenue in Q2 is $6 million, so it is mostly EMEA, but there were some other small adjustments in other emerging countries. FX is not something we like to predict, we can only report the impact so far. We certainly are dialing this into how we think about the future. As we look forward, I think that FX and what we see in EMEA is what is causing us to be more cautious short term.

Okay. Last question for me, you talk about FX headwinds on the top line. Are there headwinds or benefits on the bottom line?

Yes, there is some natural hedging from the expense side, so to the extent we are profitable, that's exposure to us. The earnings is shielded a little bit more. However, we do hedge some of the expenses in certain currencies where we have an expense and no revenues, so that doesn't give us the pick up. So net-net, the dollar strengthens will hurt the earnings but hurt even more so to the top line.

Got you. Okay, thank you so much. Good luck.

Paul Coster, JPMorgan.

Perhaps, Dan, we can just get a little bit more specific about what you're seeing that's caused you to rein in guidance a little bit. Sounds like it's more the government sector in Europe. Is it that you are looking at their budgets and inferring the cutbacks, or are you actually seeing changes in the behavior of your customers? Are they taking longer to make decisions? Is the close rate on the pipeline slowing down? If you can just give us a little bit more color, that would be great.

The expectation that we have is that we finish the year, and that is dialed into our guidance, our refined guidance, finish the year with about double digit, 10% type of growth in Enterprise and more like mid-single digit in Security. What we see, and I mentioned before the governments in Europe, so I'll just give you an anecdote.

We had a request from a customer that have been testing our products for quite some time, and they really have an urgent operational need for the product, and they requested if we can give them the product as a pilot so they can address their operation, add it operationally, but they just don't have the money right now to purchase the product. Obviously, this is something you don't typically see from government customers. Usually, when they need something they find the money; and right now, it seems like, temporarily, they can not find the money. So, the pipeline is there and the needs are there; and it is basically, in some instances, just not being able to purchase it right now.

Again, as I mentioned before, I -- based on history and past recessions and slowdowns in different parts of the world, these things tend to be quite temporary because there is an operational need that doesn't go away, and technology does help to deal with the mission -- the critical mission elements of what they have to do. But, how long it's going to take, obviously, depends on the specific situation in country.

Generally, this economy is not great; and I think this economy, overall, creates somewhat longer sales cycle and somewhat more nervousness around the buyers and more signatures required to get deals done. But I think generally, we have been expecting a tough environment, and where it is clearly different that what we've seen before is what we have encountered in Q2 in EMEA.

Okay, thank you.

This year you -- well, earlier you depicted calendar year '12 as an investment year. Is this slowdown causing you to change your investment activity at all? And for that matter, the guidance that you've issued, does it include additional investments associated with the separation from, or rather the reverse merger now, with Comverse?

Yes, the big investment was last year and we mentioned that we got to hire close to 400 people last year, and that is behind us, and that is obviously contributing to this year growth. We mentioned that this year we will continue to invest but at a lower pace, and that is really our plan.

We -- in Q2, we have hired 30 people, mostly in sales. Two-thirds actually were in sales, and in H2 we will continue to hire; but it is again, going to be mostly around the sales area, as we prepare for growth next year. And, we just need to leverage, what I referred before, as the market opportunity and the strong pipeline, we need the salespeople to work the deals. So, that is where we are going to be certainly investing in H2, and we will be more cautious in other areas with investment, monitoring the economy.

The deal with Comverse doesn't have any operational impact; but clearly, we are pleased that we can put all that behind us. It has been a very long period of uncertainty that obviously affected investors, but also affected customers and employees. Now, when we can have clarity and certainty around the ownership structure and simplify the capital structure, that certainly is going to be encouraging. But, it doesn't necessarily change our investment posture in the short-term.

Okay. Last question is, obviously, we are looking for a big data story and from it, Verint's. And, I'm just wondering if there is any chance that maybe next year you think the big data, the analytics side, the non-data capture part of your business will be big enough that you can disclose it as a segment report, and then we can start to get our hands around what that segment of the business might be worth versus the slower growth and probably lower-margin elements of your business?

Yes. No, I understand. Look, we -- I want to make sure that we are clear here that we are not -- this is not a new business for Verint, we are not jumping into a big data industry. Actually, we think that right now most of the big data industry is focused on IT infrastructure, which is not what Verint does, but we do believe that there are parts of Verint's business that are growing faster because the leveraging, the ability of organizations to capture large data sets.

We will certainly consider disclosing what we do in collection. It is not necessarily new segment, but we will start to more closely monitor what we do in capture versus what we do in analytics. I believe that the capture side is still very important because customers tend to prefer to buy from a single vendor both the capture solution and the analytics solution in a tightly integrated fashion that creates a lot of value and ability to extract value from the information in a much better way. But I think it will be, as we see moving into the future some acceleration in analytics, it will be important to disclose that as you suggested.

Got it, thanks very much.

Brian Ruttenbur.

My only question is just about cash from operations. You mentioned it was negative in the period, I think about $8 million negative. Can you talk about -- was that because of receivables? What was driving the negative cash from operations?

Yes, Brian (multiple speakers). Yes, you are right, receivables, we had some timing around receivables. We had some large orders in Q1 that ended up going into AR into Q2, so between Q1 and Q2, there's a little bit of an anomaly there.

We mentioned on the call last time at Q1 that the Q1 cash came in really strong, there were a number of collections that we got that, based on certain milestones and deliverables, that we had expected in Q2. So, we stole a little bit of Q2 into Q1.

If you remember, we had $47 million of cash from operations on a GAAP basis in Q1, up from $19 million just the year before. I think it's better to look at it on a first half over first half because of these quarterly timing differences. We are pleased with $40 million of cash from ops in the first half versus the $27 million last year, so I think the trend is good. I think the quarterly number is a little misleading.

Okay. Can you talk then about, just to follow-on to that, it's going to be cash from operations will be second-half weighted, or can I just double the $40 million for the year? What is your projection for cash from operations on the year?

Yes, when you add back the interest expense that we have and any other one timers, we are looking at an adjusted cash from ops for the year of $150 million to $160 million for the full year --

How does that relate to the $40 million that you just reported?

The difference is the interest is missing, so we have about [$16 million] of interest expense that you would add to that.

Okay, so --

It is still a little stronger second-half cash generation than first half.

If I did apples to apples with what you said, you basically did cash from operation with interest of $56 million in the first half of the year, and cash from operations for the entire year is $150 million, including the interest. Is that correct?

Yes, $150 million to $160 million for the full year. Yes.

Thank you very much.

Craig Nankervis, First Analysis.

Actually, my questions have been asked. I would like to clarify, Dan, on the domestic front the tone of activity is relatively unchanged from 90 days ago or so? It is really all overseas is where the caution comes from?

Yes. I would say that we expect, on the domestic front, a strong year. Then, APAC is behind that, and EMEA will be flat to low-single digit. That is our view on geography for the year.

Yes. Okay, good enough, thanks a lot.

Michael Kim, Imperial capital.

Just turning to video surveillance, could you talk a little bit about your positioning there? And, what your thoughts are to recover growth in that segment, given the first-half performance? Also, related to that, how situation management can tie into the video surveillance side?

Yes. In our physical security intelligence operations, we are actually targeting three verticals. It's retail, finance, and critical infrastructure.

In the critical infrastructure market, we see video management and situation management tying very well together because a lot of this critical infrastructure elements, whether it is an airport or transportation agency with a lot of facilities, they have video -- the customer a lot of different customers, but they also have many other sensors. They have access control, they have alarm controls, so what they really need is to not just collect video data but to collect data from a lot of different sensors; and fuse all that data, so they can correlate, and generate alarms, and manage the situation based on information that comes from all the sensors.

If you have an active control event, you may want to be able to pull the video and have a picture, see what's going on, and make a decision how to react, or how to deploy first responders and so on. We do have the combined solution for situation management that include video management with analytics that provides intelligence management of physical security.

In our retail and financial services, while they are also looking at situation management, they are much more interested in video analytics because, as you can imagine, there is a lot of value in the content of the video for retailers. They had the cameras overhanging the ceiling forever, but the ability to actually understand the video and look at, not just security, but also track shopper behaviors, and count how many shoppers they have in different parts of the store, and how many people are in queue in front of the cash register. There is a lot of opportunity in video analytics. So, that's our focus as a result of what customers are looking for.

Just to tie it all together to what we discussed before as big data, again, this is not something that Verint does recently, we have been doing it for many years. But, some of our retail customers, one in particular, one large customer has a huge amount of video that requires several dozens of petabytes storage to be able to capture and then analyze all this video in order to extract value from this very large number, amount of information. The video, again, most of the video market is focused on collection, but we do see that in the future in the video market from analyzing the content of the video, fusing video with other sensory data and other structured data that comes from different systems, and being able to extract intelligence from this large amount of data to drive situation management and drive value for security and non-security applications.

Are you seeing a pause in any of the verticals, retail or financial or critical infrastructure, is it across the board? Or, are you seeing some growth opportunities stronger in one area versus the other?

We think that, as I mentioned, most of the market is still really looking to transition from analog video to IP video. We do see still very, very early in innovative customers that are looking to move beyond IP into analytics. Because this is driven by relatively small number of customers and typically very large projects, this is one of the reasons our Security business is lumpy.

You can see Video was strong in Q2, much stronger than Q1. We actually do expect, for the rest of the year, we expect Security to be down in Q3, and then up in Q4 from Q3. I think this kind of lumpiness comes from large projects and from the fact that the market is still early stage, and mostly, is still focused on collection and not on the analytics side, as opposed to the Enterprise side, where is still, I think also relatively early stage, but a little bit more predictable. And, we can see in Enterprise we project -- we had growth from Q1 to Q2, and we project sequential growth also in Q3 and Q4. This lumpiness in the Security business represents also the nature of where the market is.

Great. Then, just switching gears, I think last quarter or last couple quarters you briefly mentioned some of your SAS offerings. Can you provide an update on how that is progressing?

As we mentioned, we offer flexibility to our customers. We do offer, not all of our solutions, but a growing part of our portfolio is being offered on a SAS basis, so customers can choose. What we see so far that mostly customers within the mid market tend to buy SAS. While at the high end, when they have more sophisticated infrastructure and IT organizations, they still prefer to buy on the perpetual basis.

Great, thank you very much.

At this time, I am showing no further questions in queue. I would like to turn the call back over to Mr. Alan Roden for any closing remarks.

Thank you, everyone, for joining us tonight. We look forward to talking to you on our next call. Have a great night.

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