Verint Systems Inc (VRNT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Verint Systems earnings conference call. My name is Derek and I'll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the conference over to Mr. Alan Roden, Senior Vice President of 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 CFO. By now, you should have seen a copy of our press release that includes selected financial information for our fourth fiscal quarter and full year ended January 31, 2013. Our Form 10-K will be filed shortly. Each of our SEC filings and earnings 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 within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. These forward-looking statements are based on Management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed or implied by these 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. Investors are cautioned not to place undue reliance on these forward-looking statements. 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 the forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2012 or Form 10-K for the fiscal year ended January 31, 2013, when filed, and other filings we make with the SEC.

Some of the financial information discussed today is non-GAAP. The reconciliation of the non-GAAP financial measures to GAAP measures is included in today's earnings release, as well as in the GAAP and non-GAAP reconciliations found under the Investor Relations 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 our business and is useful to investors for informational and comparative purposes. The non-GAAP information 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 us to review our fourth-quarter and full-year results. Our fourth quarter is typically our strongest quarter and we are happy to report we finished the year very strong. In Q4, we delivered $230 million of revenue, with $0.91 of fully diluted earnings per share ahead of our expectations. We also achieved strong results across many other important financial metrics, such as gross margin, operating margin, and cash from operations. For the year, we generated $848 million of revenue and $2.64 of fully diluted earnings per share. Operating margins came in at 22.3%, slightly ahead of our annual target, driving $205 million of EBITDA and $123 million of GAAP cash from operations.

From a market perspective, despite headwinds in EMEA last year, we experienced double-digit growth in our Enterprise Intelligence and Communication Intelligence markets, with 11% and 10% year-over-year growth respectively, partially offset by a 14% decline in the Video Intelligence market. We will discuss the trends we are seeing in each of these markets in a moment.

From a geographic perspective, we experienced strong growth in the Americas and Asia-Pacific regions, with 9.4% and 13.6% year-over-year growth respectively and 4.6% decline in the EMEA region. While the EMEA region was weak last year, longer term we see good opportunities for growth in all three regions, and therefore, have been investing to drive growth globally. During Q4, we experienced strong business activity for our Solutions, which are designed to help customers Make Big Data Actionable. In Enterprise, we continue to see three market trends as we have highlighted in the past. One, organizations increasingly looking to purchase work force optimization solutions in the form of unified suite from a single vendor. Two, the migration of work force optimization solutions into new areas across the enterprise, such as back office and branch operations. Three, the adoption of innovative voice of the customer analytic solutions to drive the customer-centric enterprise. We believe that our execution on these trends contributed to our strong finish and our 11% revenue growth in Enterprise Intelligence last year.

I would like to share with you some recent customer anecdotes. During Q4, we received a $4 million order from a new financial services customer for our work force optimization suite, including recording, quality monitoring, e-learning, performance management, work force management, and customer feedback. Our solutions, which replaces point solutions from two different vendors, is being deployed across 16 sides and more than 5,000 customer service agents, and we believe reflects a market preference towards purchasing multiple products from a single vendor. We received a $7 million order for our branch work force optimization solutions from an existing banking industry customer, one of the largest banks in the US. This customer has previously deployed our work force management solution and decided to add additional components of our suite as part of the bank's ongoing initiative to drive efficiencies while delivering a positive customer experience in its branches.

We received a $3 million order from an existing global insurance industry customer for our back office work force optimization solution. This customer had previously deployed our recording and quality monitoring solutions in portion of its contact center and wanted to expand to an enterprise suite for both its contact center and back office function. Moving to the voice of the customer analytics, we received a $3 million order from an existing customer for our enterprise feedback management solution, bringing total orders received from this customer for our work force optimization suite to close to $30 million over the last two years.

We believe these anecdotes are indicative of the market interest in suite-base work force optimization solutions, not only in contact centers, but also increasingly in branch and back office operations. We also believe these anecdotes are indicative of the value that our customers see in having the ability to purchase multiple applications from a single vendor, sometimes all at once, but more often over time. To better address market demand for our Enterprise Intelligence Solutions, we continue to invest in OEM and other partnerships. We believe partnerships provide variant, broader market coverage and our partnership strength is an important differentiating factor of our go-to-market strategy. Last year, we continued to expand our partner network, including both new OEM and SAS partnerships, which we believe provided our customers flexibility to deploy our solutions in a way that is most suitable to their needs. Overall, we are pleased with our performance in Enterprise Intelligence last year. We believe behind our strong performance is our leadership position and our broad portfolio of high ROI solutions that have value in both strong and weak economies.

Turning to our security markets, in communications and cyber intelligence, we believe that terrorism, criminal activities, cyber and other security threats, combined with expanding forms of communications, devices and protocols are driving demand for innovative solutions. Verint is the leader and delivered 10% growth in this market last year by offering a broad portfolio of communications and cyber intelligence solutions. We recently received orders totalling more than $15 million from an existing international government customer to expand its communications intelligence solution. We also received large orders from new customers, including two $4 million projects. We believe these large orders, which we expect will be deployed over multiple quarters, are indicative of customer demand for innovative security solutions that efficiently collect, fuse and analyze very large amount of content to generate actionable intelligence.

Our portfolio continues to expand, benefiting from the insight we have gained through many years of working closely with governments around the world. Last year, we launched a new cyber offering, including web and cyber intelligence solutions, and we are encouraged with the initial traction.

In Video Intelligence, we offer customers a broad portfolio of hardware and software products. As we have discussed for many years, we've been driving our product mix toward less hardware and more software over time, consistent with our strategic focus on delivering higher value and higher margin, big data video solutions. Last year our hardware encoder business declined more than we expected, negatively impacting growth in our video business. Looking ahead, while we expect the encoder business to gradually decline, it should have a minimal impact on our overall results going forward, because encoder represents less than 2% of our total revenue.

Let me discuss some examples of recent deployments that are illustrative of the transition to high value, software-centric solutions. During Q4, we announced the Safe City Security Initiative in Surat, India, a metropolitan city with a population of 4.5 million. Our video and situation management solution is being deployed as part of a new centralized control center to monitor activity in certain areas of the city and help ensure public safety and quick response from first responders.

During the quarter, we also announced the deployment of our video and situation management solution at the Minneapolis-St. Paul international airport. In this ongoing deployment, the Verint solution is designed to collect and analyze data from thousands of sensors to provide more comprehensive security. We believe these deployments are indicative of the market transition to sophisticated software-based video and situational intelligence solutions. Our solutions drive value for our customers beyond traditional video recording, by fusing data from many disparate sources, applying analytics and providing alerts and work flows. Our strategy is to focus on delivering high value solutions for the retail, banking, enterprise, and critical infrastructure verticals, and we believe we are well positioned with the broad portfolio.

Behind our success in both the Enterprise and Security Intelligence markets is our commitment to innovation. Approximately one-third, or 1,000, of our total work force is involved in research and developments. Our R&D investment last year was over $100 million, or approximately 13% of revenue. We continue to invest in innovative Enterprise and Security Intelligence solutions with the goal of maintaining our market leadership, gaining market share, and sustaining long-term growth.

Looking ahead to our current fiscal year, our working assumption is that the economy will not deteriorate further. We see signs that the US economy has stabilized. We expect another year of growth in Asia-Pacific and we are assuming that EMEA is not going to decline again. In the government area, we expect another good year, despite uncertainty with respect to US government spending, and as a result of our highly diversified global government business. Our long-term financial model is to drive revenue growth by helping customers Make Big Data Actionable and expand margins gradually over time, as we scale the Company.

With respect to operating margins, we believe that our current margins are healthy for a company of our size, already ahead of some of our peers. As discussed on our prior calls, last year we were targeting operating margins in the range of 21% to 22%, with incremental improvement from that level over time. We actually delivered an operating margins of 22.3% reaching our overall margin expansion goal one year early. As a result, for this year, we're targeting an operating margin of 22%, similar to last year. With that in mind, I would like to turn to guidance.

For the year ending January 31, 2014, we expect total revenue to increase between 6% and 7% and expect approximately $2.75 earnings per share plus or minus $0.05. With respect to our earnings per share guidance, please note that while the Comverse merger will be accretive to earnings up to two years, the one-time issuance of shares to consummate the merger had a $0.05 dilutive impact to the current year, which is reflected in our earnings per share guidance. I would like to take this opportunity to mention that we are very pleased to have completed the merger with Comverse. Verint is now an independent, non--controlled public company. The elimination of the convertible preferred stock and quarterly dividend simplified and reduced the cost of Verint's capital structure. The distribution of Verint's shares directly to the Comverse shareholder significantly increased various public floats and liquidity.

To summarize, we are pleased with our strong finish to the year and are excited about the opportunity to Make Big Data Actionable for our enterprise and government customers. Now, I would like to turn it over to Doug to discuss our financial results in more detail. Doug?

Yes, 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 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, including expenses associated with our merger with Comverse. 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 income.

In the fourth quarter, we generated approximately $230 million of total revenue across our three segments, with $143 million in Enterprise Intelligence, $28 million in Video Intelligence, and $59 million in Communications Intelligence. This compares to approximately $219 million of total revenue in the fourth quarter of the prior year, with $125 million in Enterprise, $36 million in Video, and $58 million in Communications. In terms of geography, in Q4 we generated $131 million in the Americas, $50 million in EMEA, and $49 million in A-Pac. This compares to approximately $121 million in the Americas, $57 million in the EMEA, and $41 million in A-Pac in the fourth quarter of the prior year.

For the full year, we generated approximately $848 million of total revenue across our three segments, with $495 million in Enterprise Intelligence, $121 million in Video Intelligence, and $232 million in Communications Intelligence. This compares to approximately $796 million of total revenue in the prior year, with $445 million in Enterprise, $140 million in Video, and $211 million in Communications. In terms of geography for the year, we generated $466 million in the Americas, $202 million in EMEA, and $180 million in A-Pac. This compares to approximately $426 million in the Americas, $212 million in EMEA, and $158 million in A-Pac in the prior year. On a constant currency basis, total revenue growth for the year would have been 8% compared to our reported revenue growth of 6.5%.

Q4 gross margins were 70.5% compared to 70.2% in Q3 and 68.5% in Q4 last year. As we've discussed in the past, due to the product and revenue mix within or across segments, gross margins can fluctuate significantly from quarter to quarter. For the full year, gross margin was 68.9%. During Q4, we generated $61 million of operating income compared to $46 million in Q3. Operating margins in Q4 increased to 26.5% compared to 22.6% in Q3. For the year, operating income came in at $189 million, with operating margins of 22.3%, up 7% from $176.5 million in the prior year. Our Q4 EBITDA came in at $65 million, or 28.3% of revenue, up from $50 million in Q3. For the year, EBITDA came in at $205 million or 24.1% of revenue.

Now, let's turn to other income and interest expense. In the fourth quarter, other expense net totaled $8.2 million, reflecting $7.8 million of interest expense, with the balance related to the impact of foreign exchange. For the year, other expense net totaled $30.5 million. Our annual cash tax rate was 11.5%. As we've 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. These results grow diluted EPS of $0.91 for Q4 and $2.64 for the full year.

Now, let's turn to the balance sheet. At the end of Q4, we had approximately $235 million of cash and short-term investments, including restricted cash, compared to approximately $164 million of cash at the end of last year. Q4 cash from operations on a GAAP basis came in at $58 million. For the year, cash from operations on a GAAP basis was $123 million, compared to $106 million in the prior year. Our strong Q4 business activity resulted in strong operating cash flow and a healthy sequential increase of approximately $24 million in deferred revenue. We ended the quarter with total debt of $577 million and net debt of $342 million. Following quarter end, we refinanced our term loan to take advantage of improved terms available to the Company in the credit markets. The improved terms provided several benefits to Verint, including the ability to increase the size of both our term loan and revolver, while maintaining a similar level of interest expense as under the prior credit agreement. We were also able to improve a number of terms and conditions, including the removal of financial covenant on the term loan. Post refinancing, Verint had approximately $650 million of total debt and an additional $60 million of cash.

For Q4 and for the year, we had 51.8 million and 51.4 million average fully diluted shares outstanding respectively. Following quarter end, we eliminated the convertible preferred and issued an additional 1.1 million net shares as part of our merger with Comverse. As a result, on an adjusted basis, including the shares issued to Comverse at the end of Q4, we had approximately 52.9 million average fully diluted shares outstanding.

Before we move to Q&A, I would like to discuss our guidance for the year ending January 31, 2014. We expect revenue to increase between 6% and 7% compared to the year ended January 31, 2013. As Dan discussed, we over achieved our operating margins last year and as a result we are targeting operating margins similar to last year at approximately 22%. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $7.3 million. Our interest expense guidance reflects our new term loan and assumes that our prior term loan is accounted for in the extinguishment resulting in a one-time charge of approximately $9.7 million in Q1, which would be excluded from our non-GAAP results. We expect our non-GAAP cash tax rate to be in the range of 12% to 13%, reflecting the amount of taxes we expect to pay this year. Based on these assumptions and assuming approximately 53.3 million average diluted shares outstanding for the year, we expect non-GAAP EPS to be $2.75 plus or minus $0.05.

While this is our annual guidance, please remember there are seasonal trends in the enterprise software industry, and following a strong Q4, we expect Q1 revenue to be sequentially down by more than 10%. Consequently, in Q1 we expect operating margins to be less than 20% and gradually improving throughout the year. In conclusion, we're pleased with our strong competitive and broad product offering and believe we are well positioned for continued growth. This concludes my prepared remarks. With that, operator, can we please open the lines for questions.

(Operator Instructions)

Jonathan Ho, William Blair.

Just wanted to understand a little bit where you potentially could be making some more investments or where on the operating expenses you could spend additionally in the upcoming year? Just wanted to get a sense from you where you see some of those opportunities? Would it be more in the R&D line or more in the sales and marketing side?

Yes, it's pretty much equally between sales and marketing, services, and R&D. Obviously, we have a lot of innovative ideas that we'd like to turn into products. At the same times, we are expanding sales coverage. We also supporting our customers through a variety of professional services and managed services programs.

Got it. Just in terms of your Security business, historically that's been a little bit lumpier. Can you talk a little bit about the linearity this year and any particular quarters that you might have some visibility towards that being stronger or weaker right now just in terms of that security business?

Yes, it is lumpy both in terms of new orders and certainly large projects, the timing of winning the project is hard to predict. Also in terms of the revenue recognition, only after we win the project and prepare the stepping of work and so forth that we can predict with more accuracy the spread of the revenue is across the multiple quarters that it takes to deploy large projects. So, while it's hard to predict on a quarterly basis, we clearly are providing some annual trends. As we discussed earlier, we believe in our Communication and Cyber Intelligence business. We grew 10% last year. We expecting another year of growth in the mid to high-single digits.

Video business where we expect -- we experienced headwinds last year, we expect this year to be kind of flat or better. Our corridor business continued to decline gradually, but it's really what's left there is very small amount. We mentioned about 2% of our revenue, so it will continue to decline, but it's not going to have a meaningful impact on the overall security results. In longer term, we are leader in communication and cyber intelligence markets. We expect, long term, that we'll continue to grow and we expect to accelerate growth somewhat as the mix shifts from collection to more analytics, which is also a trend we discussed in the past relative to our overall business.

We do have some large base of customers that bought products from Verint for the purpose of recording and collecting information. This customer base is more and more adding analytics. As I mentioned, some of the projects that we won, some of the large projects, you notice that many of them are existing customers that maybe historically were more for collection and going forward are interested in analyzing and leveraging the content within the collected information in order to improve business performance and security. So overall, as our mix shifts moves toward more analytics, we also have an opportunity to accelerate organic growth. We are very focused on that, on driving organic growth and accelerating that through innovation and through shifting to more high value solutions.

Great, thank you.

Michael Nemeroff, Credit Suisse.

Thanks for taking my questions and nice quarter. Just wanted to dive in a little bit on the work force optimization in the Enterprise business. Could you discuss what the ASP trends has been like and what it was in the quarter? And then also, if you could let us know what percent of the Enterprise base is digging a suite and what percent of the new sales this quarter were for suites?

Okay. I think, generally, we see larger deals in this business as people buy more of the suite approach. I mentioned the $4 million, $7 million, $3 million deals. These are definitely larger deals than we've reported in the past. In terms of the penetration, we really are not tracking this on a quarter-by-quarter basis. We believe that within the connect center, this is about 15% give or take that are fully embraced suite.

It could be a little bit more that bought more than one module. We certainly see growing interest from customers to buy those solutions as a suite rather than as point solutions. And I think, again, the examples that I gave before where customers are replacing sometimes civil vendors that they had with one single vendor and then adding more modules that they didn't have before to take full benefits of the suite. So, that's relative to the connect center.

Relative to the other functions within customer operations, such as the back office and the branch, we think those are more early stage opportunities. We see very strong growth rates there. It's still small relative to our overall business, but those parts of the business are growing fairly fast for us. Obviously, one of the exciting things we are discussing is the fact that all those functions within the enterprise, the conduct center, the back office and the branch have been operating as silos. We're not just providing a suite for each of those silos, but our suite allows them to unify the tools across the various customer service touch points and then adding the voice of the customer analytics on top is a very unique opportunity for our customers to really understand the customer journey.

As today, unlike 5 or 10 years ago, people don't just call when they need something, when they want to buy a product or get service. They can send an e-mail. They can chat. They can connect through the web. They can use social media and obviously there's a lot of service that are being used by organizations to understand the customer sentiment. So, the ability to operate across all the various touch points between customers and -- our customers and their customers, provides a unique capability to optimize the entire enterprise to be more customer centric and to maximize the opportunity for maximize revenue opportunity, while at the same time, maximizing the customer satisfaction.

And that's very helpful, Dan. Thank you very much. If I may, one follow-up for Doug. Doug, what are you expecting the cash flow guidance in fiscal '14 to look like?

Yes, so we did cash from ops of $123 million on a GAAP basis this past year, the Jan '13 year, up from $106 million. So, that was some nice growth. We look at maybe $130 million to $140 million in cash from ops for the current Jan '14 year.

Thank you very much.

Paul Coster, JPMorgan.

Dan, I always ask this question. Can you talk a little bit about visibility and pipeline, book to bill, if you're prepared to do so, the size of the deals in the pipeline, and what you're seeing in terms of visibility out beyond one quarter?

Yes, sure, Paul. So we mentioned that we had strong business activity in Q4, so it was particularly strong in terms of new orders and that's obviously good in terms of starting the year with some backlog. Backlog is not, as we discussed in the past, is not a meaningful number for us, but clearly strong Q4 in terms of new orders is encouraging. In addition, we do see an unusually high number of large deals, large projects in our pipeline. That's obviously, we need to win those projects and it's always binary, but I would say the pipeline is richer in terms of high projects than it has been a year ago. The overall visibility, as you know, we've discussed it many times in the past, we have large revenue come from maintenance agreements. We have a significantly large portion of our revenue comes from our existing customers that have very large infrastructure and are deploying over many, many years.

Of course, as we offer new applications, we're able to go back to the customer and sell them new features and new capabilities. So that always helpful to our visibility overall. Generally, I think we're encouraged with the pipeline visibility. At the same time, we came out of a year of fairly difficult economic environment. We feel like we performed well last year, relative to the environment. I mentioned that we do believe EMEA is not going to decline again this year. It's a volatile environment and visibility in pipeline is only good in terms of what's in the hopper. What we're able to close is depend on strong economic environment. Our view this point is that the environment will be maybe different mix, but not dramatically different from last year and therefore, our guidance is also somewhat similar to our performance last year.

Follow up question regarding your guidance. It's been, in retrospect, a little bit conservative over the last couple of years. This year I think many of us will be concluding much the same. In large part because your gross margins seem to now be ready to stay at the more elevated level, particularly with the shedding of some of the encoding technology from the video segment and your shifting towards analytics, which I think attracts higher margins as well. Against that backdrop, the 22% operating margin just seems a little bit conservative to me. Can you talk about the operating margin guidance in the context of what looks to me to be a step up now in gross margin?

Yes, I think we agree with your observation that gross margin has improved, about 69%. So, that's clearly a monkey year trend that we've discussed in the past that our Enterprise business is primarily software, but we do have some hardware in the Security business which we expect will decline over time, maybe not completely diminish, but discerningly decline. We're not giving guidance in terms that, the rate, if you look at the kind of unpredictable. We're comfortable with the gross margins level that we have now.

So, in terms of the operating margins, as I mentioned before, we have an opportunity to continue to invest in accelerating the organic growth rate. This is important to us. We targeted last year to be around 21.5% and we came ahead of ourself. We did 22.3%, but that's primarily because Q4, if you look at Q4, we did almost 27% of overing margins. Some of the programs we had in mind for Q4 we now defer to Q1 and Q2, but those are still very good programs to support long-term growth. We'd like to go ahead and move with those programs.

Keeping, with that in mind, we are still committed to a moral of improving operating margins over time. We just already achieved our target for this year, one year early. We targeting about 2 points of operating margin improvement over the next three to five years. Some of it will come from gross margin improvement and some will come from efficiencies of scale. In terms of top line, we do see an opportunity when the economy improves to accelerate. We certainly are working hard to innovate with a mixture toward analytics that will allows us also to accelerate organic growth rates.

Thank you.

Jeff Kessler, Imperial Capital

It's a good year for you guys again. I was at a conference about a month ago in which an integrator was talking about a couple very large projects they were doing in which they were using the data from video as well as access and storage, better analytics to basically combine video ID, IT security, IR and building management capabilities in one, for one dash board. The question from that becomes are we at a point now at which the use of better video transmission and storage and analytics can allow you to take the parts you have in video and kind of merge them into other functionalities at the site so that it begins to get a little bit murky between what your video revenues are and what some of your communications revenues are?

Yes, Jeff, I think it's actually already happening and we're trying very hard to bifurcate and report exactly what our Video segment is. It is an accounting segment for us and we're recording accordingly. The reality is that more and more we are offering a combination of our video product with non-video products. We believe that in addition to what you described, one of the exciting opportunities for the physical security market is to combine intelligence gathering and analytics in order to anticipate and be more proactive in security, but that's all part of the future.

I think that's part of transition, when I mentioned our strategies to focus on the higher margin and higher value projects, it's really beyond video recording. It's really about fusing video and other data sources and providing a comprehensive and holistic view of a situation. That's the opportunity. We do have, as we discussed, we do have significant portion of our video business is still individual recordings and we are a very good products in video recording. For us, the strategy is to continue to deliver high-quality video recording products, but more and more combined with features and capabilities that are related to fusing data from multi sources and providing a work flows and application focus for our customers.

A follow up question that is given that you've begun, you and actually a couple of other companies, larger and actually much smaller, have all gone through this journey of taking clients who are primarily analog, getting them on to encoders as the digital era evolved and then getting them on to digital, making that transition, which both cannibalized revenues as well as finally when you end up completely digitized, you end up taking away on the encoder side by losing the encoder revenue. Where are you on that process? To what extent has your base begun to be fully on a network so that you're now at a point at which, and you've mentioned that you're down to 2% encoders, that it's basically up from here, and you don't have to -- well you can still service that analog base, you don't have to worry about them pulling down your margins or cannibalizing your revenue anymore?

Well, I think we are going through a journey that is very similar to the journey we had with our voice products. If you look back to our IPO days, 10 years ago, a big chunk of our voice business was hardware. We then cross encoders. Those were kind of mediation devices that connected PBXs to digital recording. So, a very, very similar journey where people first move from analog to IP and then once it was IP they started to leverage the content of the information in order to drive business value. I think we are still in the early stage of driving business value in video. Where we focus in terms of R&D and capabilities is certainly there. We are offering our customers the ability to do more than recording, but many of our customers are still investing in putting the infrastructure, which is putting that basic capability of moving video across their networks and recording it digitally maybe centralized recording and all the data warehousing and infrastructure investment that one need to make before they can actually leverage the content in a more comprehensive way.

Their effectively, at this point, a big chunk of your customers have to be replacing those encoders with the equipment that allows them to work on the network and actually begin to analyze the content on that network?

That is correct. If a customer buys IP camera, they don't need an encoder because the camera is already IP enabled.

Okay. Great. Good to here from you and thank you for taking my call.

Brian Ruttenbur, CRT Capital

The question I have on, there's a couple. Some house keeping, first of all, easy stuff. Post the merger you have $650 million in debt, how much in cash, and how much in interest expense per year and G&A per year going forward?

Okay. So, post the merger, we're a little less than $300 million in cash. I mentioned we had another $60 million that we got when we went up to $650 million in capacity of the debt. Interest expense, as I mentioned earlier, we traded off getting a better interest rate with the refinancing against that little extra capacity, so kind of washes. So, it's still around $30 million a year, Brian, for interest expense, including the amortization of the fees is in that, too. There's about $1 million of that and $29 million or so of the cash interest expense. In terms G&A, maybe some slight increase from what you see in the past. Traditionally it hasn't been a big number. It's been north of $15 million, $15 million to $20 million ish, in that zone.

Okay. Very good, thank you for clarifying. On the communications intercept side, as a business, the federal government business, what do see happening with sequestration, if anything?

This is a global business for us and we work normally globally with federal governments, but we also work a lot with state and local and different agencies of the government. So, it's a highly diversified business. In addition, we also deliver solutions to telecom service providers who are regulated by the government to provide capabilities in their networks that the government need. We don't see really impact from the US government situation and we don't see that short term. Also, we think that last year, despite the fact that US government wasn't really robust even last year with very strong year in government, and we expect another strong year in government.

What do you expect in terms of government in 2014?

Government overall, again global and federal, state, local all together it's about 25% of our total revenue. We expect it to be at the same level in the current year.

Great. Thank you very much.

Daniel Ives, FBR Capital Markets

This is actually Jim Moore for Dan Ives. Just a quick question on the cash balance, net cash is definitely improving a little bit. Just wondering if -- what the appetite is out there for any kind of M&A? If there's anything that looks attractive? Thanks.

We, obviously as a software company, we always have to keep an eye on potential acquisitions. We don't feel right now that we have any holes in our portfolio, so we're not driven to an M&A in order to fill a gap. Obviously, tuck in acquisitions make a lot of sense for us because we have more than 10,000 customers. We have a large sales force and a strong brand, so if we can get a product that we can certainly accelerate our overall growth. In terms of what we can do with the cash, obviously we can pay down the debt, but that's only 4%, that will be the return to shareholders. We can consider buyback, that will be higher return to shareholders.

If we are going to do acquisitions, they're going to be accretive and especially the tuck in acquisitions, then we can accelerate growth, obviously, that's where we see the potential for higher return to shareholders. Last year we didn't do any acquisitions other than, of course, the Comverse acquisition. That was a big deal for us. The year before we were acquisitive. I think generally you can assume that we have an acquisitive posture and we have a pipeline of potential acquisitions, but in terms of specific targets, specific holes, we take a much more comprehensive approach to creating shareholder value through acquisition on top of accelerating organic growth.

Great, thanks.

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

Thank you, operator, I'd like to thank everyone for joining us tonight. We'll see you in the next call. Have a great night.

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