Verint Systems Inc (VRNT) 2014 Q2 法說會逐字稿

Good morning and welcome to the Q2 2014 Verint Systems, Inc., earnings conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session.

(Operator Instructions)

As a reminder, the conference call is being recorded today, Wednesday, 4th of September 2013. I'd now like to turn the call over to Alan Roden Senior Vice President of Corporate Development. Over to you.

Thank you, Operator. Good morning, everyone, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO and President, and Doug Robinson, Verint's CFO. By now, you should have received a copy of our press release that includes selective financial conditions for a second fiscal quarter ended July 31, 2013. Our Form 10-Q 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'd like to draw your attention to the fact that certain matters discussed in the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the Federal Securities laws. 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 in or implied by the forward-looking statements. The forward-looking statements are made as of the date of this call and except as required by law, Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. 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 ended January 31, 2013, or Form 10-Q for the fiscal quarter ended July 31, 2013, filed and other filings we make with the SEC.

The financial conditions discussed today is primarily non-GAAP a reconciliation of the non-GAAP financial measures to GAAP measures is included in today's earnings release as well as in the GAAP to non-GAAP reconciliation 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 information and comparative purposes. The non-GAAP financial measures the Company uses have limitations and may differ from those used by other companies. At the end of the call today, I will provide an investor relations update, but now I'd like to hand the call over to Dan. Dan.

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

In Q2, we delivered $223 million revenue and $0.70 of fully diluted earnings per share. Gross margins improved to 68.8% and operating margins improved to 23.1%, leading to $55 million of EBITDA and strong cash flow from operations. We are very pleased with our second quarter results which reflects our focus on innovation, expanding portfolio of analytical solutions, and strong competitive position, and we believe we are well positioned for strong second half and acceleration in growth longer term.

In the enterprise intelligence market, revenue increased 11% sequentially and 7% year over year as we continue to perform well relative to our competitors. We believe our strong performance is due to our ability to anticipate the emerging needs of our customers and to deliver innovative analytical solutions that address 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, migration of workforce optimization solutions into new areas across the enterprise such as back office and branch operations. And, three, the adoption of innovative customer experience analytic solutions including speech, text, and feedback analytics to drive the customer centric enterprise.

I would like to share with you some recent customer orders that reflect our successful execution against these three trends. During Q2, we received a $7 million order from a healthcare services customer in connection with its preparation for the Affordable Care Act. This customer is deploying a workforce optimization suite across more than 5,000 agents including recording, call optimizing, speech, text analytics, and desktop analytics. We believe this large order reflects the market trend towards purchasing multiple products of a single vendor. Verint is well positioned to capitalize on this trend given our broad integrated suites and large global install base.

We received a $4 million order from a financial service customer who is deploying our solutions throughout its customer operations. This deployment reflects the market trend of workforce optimization solutions migrating outside the current center across other parts of customer operations, including back office and branches. This trend, which we have highlighted in the past, is gaining incremental traction and we are executing well with the unified suite. Relative to the customer experience analytics trend, we continue to see interest from our workforce optimization install base as well as new customers. For example, one of our existing financial services customers who previously purchased several million dollars of workforce optimization solutions recently placed a $1 million order to support a new customer experience initiative. We believe we are well-positioned to provide customer-centric organizations with a broad suite of analytics.

These customer examples reflect the ongoing innovation we're bringing to the market which in turn presents new growth opportunities. Behind our success is our focus on innovation and we continue to introduce new actionable intelligence solutions to further help our customers make sense of big data to achieve their goals for enterprise optimization. For example, in Q2 we introduced seven new solutions that enable our customers to deliver mobile and market channel enterprise feedback management. To maximize revenue, customer loyalty, and cost containment goals across the enterprise, to improve performance management across back office and retail branch operations, and to comply with industry regulations and analyze customer complaints.

We are continuing this technology innovation this quarter by running out new solutions designed to help organizations manage a comprehensive and pre-engagement program. The solution leverages our market leader analytics technology to provide companies with a single holistic view of both the voice of the employee and voice of the customer, to cultivate personnel, enhance products and services, and improve employee engagement and customer loyalty. We believe behind our strong competitive position in the enterprise intelligence market is our focus on innovation and our broad portfolio of high ROI solutions. As we continue to innovate and introduce new applications, our revenue mix will be shifting to less recording and more analytics driving higher growth rates over time.

Turning to our security market. In communications and cyber intelligence we believe that terrorism, criminal activity, cyber and other security threats combined with the expanding forms of communications, devices, and protocols are driving demand for innovative security solutions. In Q2, revenue increased 2% sequentially and 10% year over year. During the quarter, we received several large orders including a $5 million order for a new customer in the Americas, a $5 million order from a customer in AsiAPACific, an order of over $10 million for a project in EMEA, and an additional $10 million in orders from another project in EMEA. We are particularly pleased with winning two eight-digit projects in EMEA considering the recent macroeconomic environment in the region, and I'll discuss our views on EMEA a little later. We believe these large orders, which will be deployed over multiple quarters, reflect demand from existing and new customers around the world for innovative security solutions that effectively collect, fuse, and analyze very large amounts of content to generate actionable intelligence.

We continue to make investments in our new cyber intelligence initiative and we see increased business activity in what is still an early stage market. Our cyber solutions portfolio provides our government customers the ability to gather web intelligence and to identify malware that affects networks. For example, customers use our solution to conduct a deep search of the web well beyond the capabilities of usual search engines. And, as a result, they are able to collect large amounts of information which can be further analyzed to provide actionable intelligence. Another example is our ability to analyze data packets in real-time and identify malware that has already penetrated the network. Cyber is a large and growing market and our approach is to concentrate on specific parts of the market where we believe we are well-positioned competitively and technologically to address growing customer demand and we plan to broaden our cyber portfolio over time to capitalize on our opportunities in this market.

Turning to video and situation intelligence, in Q2 revenue increased 11% sequentially and declined 17% year over year compared to a very strong Q2 last year. We are pleased with our sequential growth in Q2 which included an $8 million order from a financial services customer. We are looking forward to a strong second half and overall slight growth for the year following changes in our product mix away from coders and more towards actionable intelligence solutions. Our overall strategy for video analytics and situation management remains focused on high-value, high-margin applications to help our customers enhance business performance and safeguard (inaudible) assets. We continue to execute well on such high-value applications within the retail, banking, enterprise and (inaudible) infrastructure markets where customers are expressing a desire to leverage insights on video and integrate video with data from other sources. We view video as another important source of actionable intelligence and we believe that many organizations that currently record video for general security purposes are in the early stages of adopting a more strategic approach and are looking to glean insight for video and operationalize those insights to improve security, reduce fraud, and enhance business performance.

To address market demand we continue to innovate and enhance our video and situation management portfolio. Here are three examples. One, retail and finance organizations have ongoing concerns about fraud around the branch and ATM machines. To address fraud more effectively, we're enhancing capabilities of our video solution such as facial recognition, providing our customers the ability to identify suspicious transactions in the video and match known fraudsters with facial identification. Two, also in retail and finance we're expanding our video portfolio for branches to help them understand customer experience by providing branch manager with analysis of customer traffic, customer engagement, and shopping experience. And, three, our situation management solution now supports integration of multi channel data from a wide array of security systems providing security officers with holistic actionable intelligence to more effectively safeguard people and assets. Overall, our expanding portfolio of security intelligence solutions presents us with new growth opportunities over time.

Turning to our guidance. As a result of our strong Q2 in first half and the positive trends that we have discussed today, we're incrementally more confident in the year and expect a strong second half. With respect to EMEA, we believe the regions revenue will decline this year as compared to last year. However, a potentially improving macroeconomic environment will impact in a positive way next year. After a long period of weak environments, we believe now could be a good time to invest in EMEA to drive growth for the long term.

At this time, while we have a strong Q2 and we are more confident in the full year, we are maintaining our annual outlook for revenue growth of 6% to 7% and earnings per share of $2.75 plus or minus $0.05. Now, I would like to turn over to Doug to discuss our financial results in more detail. Doug.

Thanks, Dan. Good morning, everyone. Most of our discussion today will focus on non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available as Alan mentioned in our earnings release and in the IR section of our website. 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 Converse. I'll start my discussion today with the areas of revenue, gross margin, and operating margin.

In the second quarter we generated approximately $223 million of total revenue across our three segments with $126 million in enterprise intelligence, $32 million in video intelligence, and $65 million in communications intelligence. This compares to approximately $215 million of total revenue in the second quarter of the prior year with $118 million in enterprise, $39 million in video, and $58 million in communications intelligence. In terms of geography, in Q2 we generated $120 million in Americas, $46 million in EMEA, and $57 million in APAC. This compares to approximately $124 million in the Americas, $50 million in EMEA, and $41 million in APAC in the second quarter of the prior year. Q2 gross margins were 68.8% compared to 66.4% in Q1 and 66.6% in Q2 of the prior year.

As we've discussed in the past, due to the product and revenue mix within or across segments, and particularly within the security segments, overall gross margins can fluctuate significantly from quarter to quarter. We expect Q3 gross margins to be down from Q2 but, as we discussed last quarter, we expect gross margins for the full year to be similar to last year. During the second quarter we generated $51 million of operating income compared to $37 million in Q1 and $43 million in Q2 of the prior year. Operating margins in Q2 were 23.1% compared to 17.9% in Q1 and 20% in Q2 in the prior year primarily due to improvement in gross margins as I just went through. Our Q2 EBITDA came in at $55 million or 24.8% of revenue, up from 20% EBITDA margin we recorded in Q1. This brings our last 12 months EBITDA to $211 million.

Now, let's turn to other income and interest expense. In the second quarter, other expense net totaled $8.6 million, reflecting $7.4 million of interest expense which includes some amortized interest costs with the balance related mainly to the impact of foreign exchange. For the first half, the foreign exchange negative impact on our nonoperating income was approximately $3 million or about $0.05 to our earnings per share. Our Q2 cash tax rate was 10.5% reflecting what we now estimate to pay in cash taxes for the remainder of the year. 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 and low tax rate jurisdictions. These results drove diluted EPS of $0.70.

Now turning to the balance sheet. As of July 31, 2013, we had approximately $356 million of cash and short-term investments including restricted cash compared to approximately $327 million of cash at the end of Q1. Q2 cash from operations on a GAAP basis came in strong at $47 million. For the first half of the year, GAAP cash from operations was $73 million versus $39 million in the first half of last year. We entered the quarter with total debt of $645 million and net debt of approximately $290 million. At quarter end, we had 53.6 million average fully diluted shares outstanding.

Before moving to Q&A, I'd like to discuss our guidance for the year ending January 31, 2014. As Dan noted earlier, we expect revenue to increase between 6% and 7% compared to the prior year. We expect Q3 revenue to be at a similar level to Q2 which would result in more than 10% year over year growth in Q3 and, as usual, we expect Q4 to be our strongest quarter of the year. We are targeting operating margins similar to last year slightly above 22%. Based on recent foreign exchange rates, we expect quarterly interest and other expense to be approximately $7.5 million in each of Q3 and Q4. We expect our non-GAAP tax cash tax rate to be approximately 10.5% for the year, reflecting the amount of taxes we expect to pay this year. Based on these assumptions and assuming approximately 53.7 million average diluted shares outstanding for the year, we expect non-GAAP EPS to be $2.75 plus or minus $0.05.

In conclusion, we are pleased with our performance in the first half, have more confidence in the year, and are well-positioned for accelerated growth longer term. This concludes my prepared remarks and with that, operator, can we please open up the lines for questions?

(Operator Instructions)

Daniel Ives of FBR Capital Markets.

This is [Jim Moore] in for Dan. Great quarter. And first question, just wanted to drill down a little bit on EMEA. Sounds like things are getting a little better or you're seeing some improvement. Maybe you could just talk about you're seeing deal sizes change or just overall demand picking up?

Yes. So, clearly on the government side which we highlighted government spending in EMEA was an issue last year. Very pleased to have two orders, eight digits, more than $10 million each. So, that's a clear shift and we have a large customer base of government customers in EMEA that are very interested in our portfolio of security solutions, so they're ability to get budgets approved and get back to purchasing large projects is obviously very encouraging.

In terms of the enterprise side, we see overall some signs of macroeconomic improvement. As I mentioned before, we don't think this is going to be reflected in this year's performance. We still think EMEA will decline for us in the year, but that all is very encouraging relative to next year and that's why we think that from a resource allocation standpoint, while we allocated some less resources over the last few years recognizing that EMEA is going through some difficulties, we now believe it's time to allocate more resources in EMEA in preparation for growth.

Okay. Great. Thanks. And then on the margin side, you guys had really nice tick up here in the second quarter. Is this just a function of the security business being a little lumpy and you guys getting more in the second quarter or can you maybe explain the dynamics there?

We actually had positive execution almost on all fronts. We discussed at the enterprise business we expect it to improve from Q1 to Q4 as it does every year. And we said we expect to be $10 million improvement every quarter. So, in Q2 the enterprise business improved more than $10 million, around $13 million. So, that obviously was in the trend that we expected and would be stronger and the security was strong as well. And in addition to the over achievement in revenue, we also had a good mix that drove gross margins to a good level and we continue to have good expense controls. So, we really had all these things contributing to strong EPS and on top of that, we're very pleased with our cash collection efforts which drove very strong cash flow from operations and overall cash position.

Great. Thanks very much.

Paul Coster of JPMorgan.

I just want to focus in on this gross margin question a little bit more if you don't mind. What percentage of revenues are now coming from analytics versus capture? And shouldn't we still be expecting gradual margin improvement as a trend looking forward with that shift?

I think we have discussed in the past that we have an opportunity to accelerate growth over time as we continue to add analytical solutions. This is not going to be a mix that will change in one quarter. So, overall we still have about 50-50 mix between capture products and analytics but clearly we are growing analytics portfolio. Analytics is growing at higher growth rates which kind of shift the overall growth rates of the Company. And we discussed we're not giving guidance for next year, we discussed growth acceleration over time.

In terms of the near-term gross margin, we do see for the year, as Doug mentioned before, gross margin will be similar to last year. We think in Q3, it may be somewhere between Q1 and Q2 as Q2 was stronger than we expected. So, maybe a little bit of a number between Q1 and Q2 but overall for the year similar to last year. And the big opportunity for gross margin improvement over time is with the hardware components of our revenue will be declining over time.

Dan, you stated that there was a lot of seven- and eight-digit deals this quarter. What does this mean in terms of visibility now? Is your visibility into next sequential quarter much better than it's been in the past and does it now extend out to or even three quarters? And I've got one last follow-up.

Yes. Some of these large deals are going to be recognized over multiple quarters, but I think overall we think that, as we said, we feel more confident in the year. We think that the macro environment is somewhat the same, but we are executing better and we're ahead of our plan, internal plan in [H1]. We feel like we're getting some market share. And we feel like we have a very complete and competitive product offering and very important for us is the fact that we have invested in the unified suite which we think is helping us to get customers to deploy larger projects as their comfortable buying more solutions from Verint but in an integrated unified fashion that can drive more ROI into their organization.

Okay. My last question is the malware cyber application that is used for government customers amongst others. Have you assessed the addressable market there? And with the initial success that you've had, are we in the first inning of penetration or are we further along than that?

So, we are excited about cyber intelligence. We see that as more than just malware detection which is just one product as we offer in this category. We like to think about a completely different approach to cyber and use intelligence and actionable intelligence to address a number of different challenges that our customers, our government customers, are sharing with us. One of them is that there's a lot of players in the cyber security market that are focused on protecting the network, putting a perimeter around the network. Our approach here is to use packet inspection and dip intelligence from the network to identify malware that somehow already penetrated. So, despite the fact that there's a lot of efforts by organizations to put a perimeter around it, there could be different ways for the network to get affected and we see that our customers are excited about that opportunity.

So, we're not looking the addressable market for cyber is very large. For us, it's still a very small business but one that we believe we have the technology to become a player. And we're not targeting to compete with large players, mostly we compete with smaller, very innovative start-up companies. But because of unique technology and because of our very good relationship with large government customers, we think that presents an opportunity for us to be a strong player in this market over time.

Thank you.

Shaul Eyal of Oppenheimer.

Good quarter, congrats. A couple of quick questions on my end. Dan, the healthcare customer, the big contract that you mentioned at the beginning of the call, is that a Greenfield opportunity? Was that a displacement or even an existing client?

That is a separate -- it's an existing client but it's a Greenfield opportunity because it's a different division of an existing client with a very, very large company and this division in preparation for the Affordable Care Act had to deploy some technology and found that we have what they need. So, I guess it's a combination of an existing customer and a Greenfield opportunity.

Fair enough. You also mentioned that you find this is the right time to invest more in Europe. What do you mean by that? Hiring more sales people? Looking into some kind of adjacent markets to invest? What's the intent behind it?

So, this is more of a resource allocation. So, I don't think you should think about it as a huge investment, but we clearly -- we had over the last few years we had strong Americas and APAC performance and we've allocated more of our resources to this geography and we're now looking to shift back into EMEA. Specifically, it will be translated into a number of different actions, some of them will be hiring. We do have a hiring plan overall for the second half of the year in preparation for next year and certainly EMEA will get their fair share.

Fair enough. And, Dan, as you continue to grow your share as you do more in the analytics discussed also, do you see Verint running into a new set of competitors that you haven't seen in prior years?

Yes. We certainly think that as we expand our addressable market, and that is a natural evolution of Verint, we're preparing to become hopefully not in the too far future, $1 billion plus software company and that by evolution will get us into more solutions that compete with other companies. Our approach, however, is unique. We're not looking to compete directly with solutions from other companies. We are integrating additional capabilities to our existing suite and that's a very important and differentiating approach to how do we expand our addressable market into adjacent markets?

Thank you very much and good luck.

Michael Nemeroff of Credit Suisse.

This is [Mike Anderson] on behalf of Michael. Congrats on the quarter and thank you for taking our questions. Can you first of all give us a split of the product and service and support growth rates within enterprise intelligence as well as security intelligence?

I'll have Doug address this in a moment, but I think it's important to understand how I think about product and services and what is our business model here? As we discussed before, we have a growing portfolio of products and we are bundling many different products when we sell a project. As a result, we've seen more large projects, over $1 million projects in Q2 over Q2 last year and we also have in H1 last year, so that business model becoming more strategic and more meaningful vendor to our customers is driving large projects. And what happens in some large projects there's a different allocation to products and services than we had before and that is kind of shifting from product to service. So, again, I'll let Doug explain it but I just want to say that from my perspective I'm more concerned about growing overall revenue for Verint and that shift or that allocation between product and services is not an issue that I focus on. Doug.

Sure, Dan. Mike, I wouldn't read too much into the product service split. As Dan mentioned, we do have large projects and as they get bigger and they get more complex just from an accounting perspective, we have to allocate more into the services, but we look at it as it's a bundled deal, we do look for one amount and it's more than allocation in there. We're having good product growth across all the segments and what we see is the way the numbers are playing out it's more of what gets allocated from a given quarter.

Okay. That's helpful. And then speaking of large projects, I think last quarter you signed two very large projects in APAC that you were expecting to go live in the second half of this year. I'm just wondering, is -- did that -- either of those projects start to go live in this quarter? Was there any like quicker implementation?

Some of these large projects have milestones so it's not necessarily that they are completed but we do recognize revenue over time. We do expect for the year and that's reflected in the second half to your question, we do expect for the Americas to be in line with our overall guidance. EMEA will be declining and APAC will have very strong growth. So, I think you're right, some of the projects we announced in Asia-Pacific will contribute to very strong year in Asia-Pacific that will offset the weakness in EMEA this year.

Okay. Great. And that's all we have for now. Thank you very much.

Jeff Kessler of Imperial Capital.

The movement toward analytics in your revenue base, can you describe the types of data and the types of solutions that clients are looking for that is different than what you've seen in the last let's say a year ago or are two years ago? What types of data are they trying to figure out and make sense of?

Yes, that's a very good question. Clearly across all customer base there is a trend toward omni channel data. Not only that they want to look at more different types of data but they also want to collect this data and look holistically across data channels because they recognize that there is correlation that exists within different data channels, but the type of data clearly there is growth in web and social media data and the desire to add that to the mix. Clearly, the trend within speech data is increasing as customers recognize that the speech analytics technology is really working and creating a lot of value. And there's all kind of textual data that comes from e-mail and chat sessions that contain important data and obviously video.

Video is probably the area where video analytics is in the very early stages but there are many different things that the technology is capable of doing in terms of unearthing actionable intelligence within the video, so almost every type of data is of interest and the capture of the data comes from a lot of different networks and devices, so there's a large variety of technologies that we have the ability to integrate with help our customers capture the data and then more importantly, help our customers gain the insights from the data and operationalize the insights in their organization. As they get more data, and as they get more insights, our customers realize that this data is very valuable and they are looking for additional workflows and applications that help them to operationalize this data so it can become more actionable, and we think that this is really what we do across all our products and markets. We provide our customers actionable intelligence which is capturing the data, getting the insight from the data, and then operationalize the insights so they can become actionable.

One quick other question and it's a question I've been getting from a lot of clients that is -- and it's related to EMEA and EMEA's version of what privacy means. Given the fact that granted we've had some incidents here like Sandy Hook and the Boston Marathon which require obviously with boost demand for your product, some of the NSA issues so to speak that we've seen has caused, let's say, some backlog or push back on privacy issues over in EMEA and I'm wondering if any of the -- despite the fact that you just signed two very large projects obviously over there, are you finding it a little bit harder to market or are you finding anything -- any type of pushback in terms of privacy versus the types of work you want to do for governments over in EMEA?

No. We don't find any of this. And we believe that we're excited about the growth opportunity in this area because we think there's really two separate issues here. One is the fact that nobody debates the fact that collecting actionable intelligence is very effective to fight crime and terror. So, that desire and demand for leveraging actionable intelligence is there.

The second debate is what are the controls, internal controls, that the government needs to implement to make sure that data is used to fight crime and terror and not for illegitimate purposes? And that's a separate debate and in different countries may end up in different internal controls, but we are of the view that this is not going to diminish the appetite to fight crime and terror and collecting the data and analyzing the data is a very, very important component in doing that effectively.

Okay. Thank you very much.

[Corey Alan] of CRT.

This is Brian Ruttenbur actually. A couple quick questions probably for you, Dan. The growth in the industry long term that you're competing in, is it 6% to 7%? I'm just trying to understand what you see as the long-term growth and long-term margins for your business. Can you address that? You're going to be kind of flattish on the gross margin this year, 6% to 7% top line. Is that something that we should anticipate going forward?

Yes. So, (inaudible- technical difficulties) different products. Some of them are more legacy products such as the recording capture products that are very slow growth now and some of our product our double-digit growth. So, the overall growth opportunity for Verint has to do with the mix of the slow growth and the high-growth products.

Now, it's very important to understand that we sell our products in a bundled integrated suite so we don't have the appetite to have our recording products declined because if you don't record it, you don't capture the information obviously the opportunity to get the insights and to operationalize those insights is diminishing. So, we're very excited about continuing to provide our customers the ability to collect and capture data, but we recognize that this is a slow growth opportunity and once they collect more and more data, they have more appetite to analyze the data and that comes and Verint is able to address that with a lot of different analytical solutions that have high double-digit growth opportunities. So, it's the mix. And our strategy is to continue to add more capabilities to analyze the data and operationalize the data and that will create incremental improvements in our overall growth rate.

Relative to the 6%-7%, Brian, I think this is also a reflection of our current macro economic environment and we think this represents a good growth rate relative to our competitors. We believe we are taking market share. So, as the macro environment improves, we will improve our growth rates and on top of that, with our own execution, we see an opportunity to improve our growth rates even further. And in terms of gross margins, just to address that part of your question, we still have about 15% of our revenue, give or take, are related to hardware components that we passed through. And over time as that diminished, that presents some growth rate opportunity and we are not controlling this trend but we think that over time customers will buy hardware themselves and that will help improve our gross margin.

Great. Thank you very much.

Jonathan Ho of William Blair & Company.

Can you talk a little bit about your pipeline of opportunities and do you see sort of further eight-digit opportunities either in EMEA or in other regions for the balance of the year?

Yes, we do. We can't -- obviously we can't project every quarter we'll be announcing an eight-digit deal, but I think we have been doing that for quite some time. We clearly are positioning our larger portfolio to customers and they find it attractive and some of them decide to buy it on a [consistent] basis, so they may give us $2 million or $3 million order but the following quarter will be another $2 million and the following quarter another $2 million and obviously that doesn't -- it's unannouncable as an eight-digit project, but many of them do decide to make it all in one purchase which creates an opportunity to announce a large project. Either way, we see customers increasing their investment in Verint's portfolio and we certainly have opportunities that are eight digits in our pipeline right now for the rest of the year.

Got it. And just in terms of the typical size of deals, are you seeing that increase in terms of number of six-digit deals, seven-digit deals, eight-digit deals? I don't know if you track that metric, but I want to get a general sense of maybe how the deal sizes are progressing?

There are trending up. They are trending up.

We're seeing more large deals this quarter than we did in this quarter a year ago and a continual trend there.

Got it. And just one final question around seasonality, should we expect any type of unusual seasonality in the third or fourth quarter just given that you guys kept your full-year guidance. Is there anything that was pulled forward or any type of timing shift that we should be aware of?

Yes. With respect to the seasonality, Jonathan, Q4 is always our strongest quarter. Q1 goes into kind of rebuilding and that's similar across the industry. Q2 and Q3 are our variable. We had some good upside in Q2 this quarter. Going into Q3, you heard our comments about that. We see maybe 10% or so revenue growth from the year prior, but slight sequential growth there. So, there's obviously some timing difference around the Q2-Q3 what goes on there, but Q4 is always the strongest quarter of the year.

Great. Thank you.

Paul Coster of JPMorgan.

Quick followup. Dan, I was intrigued by this $8 million video order for a financial services company. It's difficult to imagine that site specific, so can you give us a little bit of color around the nature of that deployment was and what, if any, lessons can be drawn for future deployments of the large financial services companies or other enterprises for that matter?

Yes. I think this is one of the largest banks. They have many, many branches and ATM machines and their concern is general security, but also as I highlighted, there is a growing concern about fraud. And we believe that video and now video and facial recognition is a good combination of addressing fraud as fraudsters that go from one ATM machine to the next you can capture the video, you can identify fraudsters and you can take action very quickly. So, just one example of why we think that financial services have growing interest in leveraging actionable intelligence for video.

Do you think this is being -- would be taking note of by the industry and perhaps subsequently used by others or is this unique?

This is not unique. This type of application is not the first. We've been selling video to financial services for many years and we continue to expand the capabilities to deliver more than just the video management solution but to develop applications and analytics around video that use video analytics or use data sources in addition to video to just make the video more useful for our customers for fraud and compliance purposes, so not unique. Certainly, many banks already adopted this kind of application, but we'll continue to evolve this solution to make it more useful and I think that will continue to create demand for our product within financial services.

Thank you.

Thank you. Ladies and gentlemen, that now concludes the Q&A session. I'd now like to turn the call back over to Alan Roden. Thank you.

Thank you. Before ending the call today, I'd like to provide a brief update on our investor relations program. I'm pleased to announce that we'll be presenting at two conferences in September. The Deutsche Bank Technology Conference in Las Vegas on September 12 and the CRT Conference in Greenwich, Connecticut, on [September 23] (corrected by company after the call). We look forward to seeing you at these events. Thanks for joining and have a great day. Take care.

Thank you very much. Ladies and gentlemen that now concludes your conference call for today. You may now disconnect. Thank you very much.