Verint Systems Inc (VRNT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2015 Verint Systems earnings conference call. My name is Philip, and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Alan Roden, Senior Vice President of Corporate Development. Please proceed, sir.

Thank you, operator, and good afternoon, and thank you for joining our conference call today. I am 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 first-quarter ended April 30, 2014. Our Form 10-Q will be filed within the next few days. 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 and other revisions of the federal securities laws. These forward-looking statements are based on management's current expectations, and they are not guarantees of future performance. Actual results could differ materially from those expressed in 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 of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those included in the forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2014, our Form 10-Q for fiscal quarter ended April 30, 2014 when filed, and other filings we make with the SEC.

The financial information 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 under the Investor Relations link on our website. Non-GAAP financial information should not be considered in isolation or as a substitute to GAAP financial information, but is included because management believes it provides meaningful, supplemental information regarding operating results when assessing our business, and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the Company uses have limitations, and may differ from those used by other companies.

Now I 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 first quarter performance.

We are pleased to report that we started the year very strong, with broad strength across many areas of our business. We delivered $269 million of revenue and $0.72 of diluted earnings per share. Driving our first quarter results is our focus on innovation, competitive offering, and extending the portfolio of Actionable Intelligence solutions which help customers gain crucial insights from vast amounts of data. Our financial results and business activities for the first quarter have made us more optimistic about the year, and we are raising our annual guidance which we will discuss later in more detail.

Now we would like to provide some first quarter highlights. Our combination with KANA has been very well-received, as customers see significant value in our vision for customer engagement optimization. The integration of KANA into our Enterprise Intelligence segment is progressing well.

Given that we closed KANA during Q1, we [are] able to provide Q1 revenue separately for KANA. As we continue to integrate the business to realize the full benefit of the combination over time, we will report the businesses as a single segment.

In our Enterprise Intelligence segment, we achieved revenue of $167 million representing 47% year-over-year growth. Excluding KANA, Enterprise revenue was $126 million, representing 11% year-over-year growth. KANA's business also achieved double-digit year-over-year growth. We believe we have become a more strategic partner to our customers, providing the industry's broadest portfolio of customer engagement solutions.

I would like to share with you some recent customer anecdotes regarding the progression of our suite strategy, as well as the positive impact of the combination. We received $3 million in orders from an existing payment services customer. This customer has previously deployed our core recording and quality monitoring solutions, and is now expanding their Verint suite by adding our speech analytics solution.

We received a $3 million order from an existing financial services customer that is expanding its workforce optimization suite across its business, and upgrading components to the latest version as part of its customer engagement optimization program. We received a $2 million extension order from an existing technology services customer for multiple modules, including our agent desktop, knowledge management and case management solutions, as part of its initiative to provide a consistent level of customer service across its corporation.

And we received $2 million in orders from an existing financial services customer in connection with its customer optimization initiative, allowing them to unify their agent desktop to engage customers in a consistent and efficient manner. We believe these orders reflect the market trend for purchasing applications in the form of integrated suites, and the trend towards customer engagement optimization, and that we are very well-positioned to address these trends.

Turning to the security intelligence market, we continue to expand our security portfolio of Actionable Intelligence solutions including communications intelligence, cyber security, Homeland Security and situation management. As we have discussed on past calls, cyber security is a high-growth opportunity for Verint. In a world of increasing connectivity, organizations are looking for innovative solutions to protect against malicious malware and sophisticated cyber attacks.

To address this opportunity over the last several years, we have been developing an Actionable Intelligence cyber security solution that leverages our core competency in Big Data intelligence, and the insights we have gained from working with security customers around the world. In this regard, I am very pleased to announce that during Q1, we were awarded an order of more than $100 million for Actionable Intelligence cyber security solutions. We expect this large project to be deployed over three fiscal years starting this year, with the majority of the revenue to be recognized over the next two fiscal years. No revenue from this nine digit order was recognized during Q1.

In addition to the cyber security order, I would like to highlight three other large orders. During the quarter, we received an order in excess of $20 million from a new government customer, and an $8 million order from an existing government customer for communication intelligence solutions. In video intelligence, we received $7 million in orders from a financial services customer to secure its branches, mitigate risk, and reduce fraud. We believe these large orders reflect demand for innovative Actionable Intelligence solutions across a number of important areas of security, and we are well-positioned to address this demand with a broad portfolio of security solutions.

In summary, we are pleased with our strong start to the year. We achieved double-digit revenue growth year-over-year, both with and without the contribution from KANA. From a segment perspective, we experienced broad strength and achieved double-digit growth in both our Enterprise Intelligence and communications at cyber intelligence segments. And we had strong business activity with a number of large orders, including an order for more than $100 million in cyber.

With Q1 behind us, our confidence in the year has improved, and we are raising guidance. For the year ending January 31, 2015, we are increasing our non-GAAP revenue guidance by $30 million, and increasing our non-GAAP earnings per share guidance by $0.10. Our new revenue guidance for the year is a range of $1.11 billion to $1.16 billion, and our new diluted earnings per share guidance for the year is a range of $3.30 to $3.50.

As we look ahead, we look forward to continued growth and market leadership, leveraging our Actionable Intelligence foundation to address customer engagement optimization, security intelligence, and fraud, risk and compliance. And now let me turn the call over to Doug.

Yes, thanks, Dan. Good afternoon, 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 the website. Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including fair value revenue adjustments, amortization of acquisition-related intangibles, certain other acquisition-related expenses, stock-based compensation, as well as certain other non-cash or nonrecurring charges. I will start my discussion today with the areas of revenue, gross margin and operating margin.

In the first quarter, we generated $269 million of revenue across our three segments, with $157 million in Enterprise Intelligence, $76 million in Communications Intelligence, and $26 million in Video Intelligence. This compares to $205 million of total revenue in the first quarter of the prior year, with $113 million in Enterprise, $63 million in Communications, and $29 million in Video.

In terms of geography, in Q1 we generated $142 million in the Americas, $76 million in EMEA, and $51 million in APAC. This compares to approximately $111 million in the Americas, $42 million in EMEA, and $52 million in APAC in the first quarter of the prior year. We were particular pleased with the revenue growth in EMEA.

Q1 gross margins were 66.3%, compared to 68.6% in Q4, and similar to the 66.4% in Q1 last year. As we have discussed in the past, due to product and revenue mix within or across segments and particularly within the security business, overall gross margins can fluctuate significantly from quarter to quarter. During the first quarter, we generated operating income of $51 million with an operating margin of 18.9%, compared to $37 million with a margin of 17.9% in Q1 last year.

Q1 year-over-year operating income increased 39%, higher than our 31% year-over-year increase in revenue. Our EBITDA for the quarter came in at $56 million or 21% of revenue, versus $41 million or 20% of revenue in the prior period. Year-over-year, EBITDA increased 37%.

Now let's turn to other income and interest expense. In the first quarter, other expense net totaled $6.4 million, reflecting $10.1 million of interest expense partially offset by a $3.2 million gain of foreign exchange, driven by intercompany balance sheet translations.

Our cash tax rate was 9.6%. 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.

At quarter end, we had 55 million average diluted shares outstanding. These results drove diluted earnings per share of $0.72 for Q1.

Now let's turn to the balance sheet. As of April 30, 2014, we had approximately $243 million of cash and short-term investments including restricted cash. Q1 cash flow from operations on a GAAP basis came in very strong at $54 million, more than double the $26 million in Q1 of the prior year.

We ended the quarter with total debt of approximately $1.03 billion, and net debt of approximately $787 million. Our strategy with respect to our debt continues to be to access the capital markets optimistically. In that regard, during the quarter concurrent with the KANA financing, we refinanced our existing debt to a rate of 2.75% over a 0.75% LIBOR floor, reducing our annual interest rate by 50 basis points.

Before moving to Q&A, I would like to discuss our increased guidance for the year ending January 31, 2015. We expect non-GAAP revenue to be in the range of $1.11 billion to $1.16 billion. For the remainder of the year following a very strong Q1, we expect non-GAAP revenue to gradually increase from Q1 levels. However, margins may fluctuate quarter to quarter because of the revenue mix and the timing of expenses. In that regard, while we had a favorable Q1 revenue mix, we expect the mix in Q2 to be less favorable, and as a result we expect operating margins to decrease in Q2 from Q1 levels, and an increase sequentially in both Q3 and Q4. The $30 million increase in our revenue guidance drives $280 million EBITDA at the midpoint of our revenue range.

We expect our quarterly interest and other expense excluding the potential impact of foreign exchange to be approximately $10.5 million. We expect our non-GAAP cash tax to be approximately 10%, reflecting the amount of taxes we expect to pay this year. Based on these assumptions, and assuming approximately 55.6 million average diluted shares outstanding for the year, we expect non-GAAP earnings per share in a range of $3.30 to $3.50. The midpoint of our EPS guidance reflects 20% year-over-year growth.

In conclusion, we are pleased with the execution of our strategies, our expanding portfolio of Actionable Intelligence solutions and strong competitive position, and believe we are well-positioned for continued growth. So this concludes our prepared remarks. With that, operator, can we open up the lines for questions?

Of course.

(Operator Instructions)

And our first question comes from the line of Daniel Ives from FBR Capital Markets. Please proceed.

Yes, hello. This is Jim Moore in for Dan. Great quarter, first off. And secondly, could you maybe give us a little more color on what was driving the organic growth? It is definitely above our expectations. And is it purely the suite that is gaining traction, as well as just more demand for the analytics? Could you please give a little color there?

Yes. Hello, Jim. So we believe that the growth drivers that we mentioned before which is the suite, as well as the combination with KANA, which is now driving customer engagement optimization, that is a broader message, and I think customers like the vision that we are creating. But I think it is for -- it is attributed to better execution focus. And now with KANA behind us, with one quarter of very positive results, we feel we have a good start for the year.

Okay, great. And then maybe if you could just talk about what you are seeing, in terms of a pipeline for more of those cyber deals, maybe over the next year or two? Thanks

Yes. So we, as we discussed last call, we are targeting customers that have large and complex environments that are looking for very sophisticated solutions for cyber security. So naturally we are targeting multi-million dollar deals, and we have a number of deals in the pipeline. Obviously, getting a 100 -- more than $100 million deal is a very strong validation of our approach, and we are very pleased with that. It is hard to predict the size of the deals, but in terms of ASP and cyber, our strategy is not to sell point solutions to customers, but to sell more of a platform. We do offer a open platform that can scale to very large network environments, and we hope to win more deals, and we hope to announce multi-million dollar deals.

Okay, great. Thanks very much.

(Operator Instructions)

And our next question comes from the line of Michael Nemeroff from Credit Suisse. Please proceed.

Thanks for taking my questions, and nice quarter. Just want to maybe drill down on that $100 million cyber deal. What exactly does that encompass? I know you said it is a three-year deal, but what products, services specifically will that $100 million cover?

Hello, Michael. So our offering in cyber security is a platform approach, and a platform that can scale. In this particular case, we just got a big order for a large-scale solution. What the platform does, it provides capabilities in terms of advanced threat detection, so detecting sophisticated threats, malware that is embedded in the network. And like many cyber security companies that are developing solutions to prevent malware to get through the perimeter, our approach is to identify malware that is already existing in the network, and in addition to threats detection and prevention, we are offering a suite of investigative tools.

So it is the ability, not just to identify the malware and eliminate it, but also to try and find actionable intelligence regarding who is behind that malware? Who is trying to attack the network, and for what purpose? Are they trying to steal intellectual property, are they trying to do damage?

So sophisticated customers, we believe there is a cyber war going on. And like any war, we hear from customers they are looking for actionable Intelligence, and they want to understand the nature of the attack, and how to prevent, eliminate, and defend themselves from future attacks. So in a nutshell, we sell a platform. It has a lot of capabilities, and as it scales, it is also a larger project.

That's really helpful, Dan. Just I have couple more questions about the deal. How long was that deal in the pipeline? How long did it take from start to finish?

Also if you could -- I assume that is a public sector customer? And then also maybe for Doug, on that deal, what we could expect the margin profile of that business to look like, both initially and the longer-term, in years two and three?

Yes. So it's too early for us to try and identify what is the sales cycle for cyber deals. As you know, we have been discussing with customers our capabilities for over a year now. We were not hiding the fact that we are new to the market, and at the same time we have shown customers our Actionable Intelligence platform. So I think that in the future, I expect the sales cycle to shorten as we get more credibility in the market. But initially, we have to spend time, getting people to understand what our Actionable Intelligence platform can do in the cyber security domain.

Which is I guess, surprisingly not that different than what we do in Customer intelligence or any other Actionable Intelligence offering. It is about collecting a lot of data, cleaning that data, analyzing the data, finding the important insights from Big Data. And in the case of cyber security it is about, what is the nature of the cyber attack and how to defend against it.

In terms of margins, the overall margin profile will not be much different, so we don't expect that to change the overall profile -- margin profile of Verint. And in terms of the timing, we mentioned that we did not recognize anything in Q1, and we are starting to incrementally recognize in Q2 and Q4 into this year. But the majority of the -- because we need to ramp up, the majority of this order will go into next year, and then into the following fiscal year.

Thanks, Dan. And then just one last one if I may. What were your expectations for KANA coming in, in terms of the revenue contribution? I am just trying to gauge -- clearly it was stronger than we expected, and most everybody expected. I was just kind of curious as to what drove the increase in KANA, especially at a -- from -- was it pulling in revenue that you didn't think that you were going to be able to recognize as quickly as that happened? Or is this just, the business outperformed? Yes. That's a fair question. So we talked about, last quarter we talked about expecting KANA to bring between $140 million to $150 million for the year. Obviously, we got to about $40 million in Q1 which is very strong, and also as I mentioned, KANA achieved double-digit growth. We talked about if we expect KANA to achieve double-digit growth over time, so very pleased that they were able to do that in the first quarter together. At the same time, our enterprise segment without KANA also achieved double-digit growth. So it looks like -- it is early to say, but it looks like there is a positive impact on the two businesses.

We do have an overlap, about 35% of the KANA customers are also Verint customers, existing customers, and obviously the other 65% of KANA customers are prospects for Verint. So the sales cycle are longer than just one quarter, and obviously we have started to integrate, and we are going to need to (inaudible) the integration over time. But the reports we get from customers is that they like the story. I think industry analysts also like the story.

So obviously, the customers that already have, those 35% that already have Verint and KANA, are more excited to learn about how they can leverage each other. But I think generally is what I said before to Jim, it was strong execution. We were -- we had a sales force who was very motivated, and we had customers who were looking favorable at the deal. And when you have the combination of so many things, then you drive results. That's helpful Dan. Thanks very much for taking my questions. And again, nice results on the quarter.

Sure. Thanks, Michael.

All right. It looks like our next question comes from the line of Brian Ruttenbur from CRT Capital. Please proceed.

Thank you very much. A couple questions. First of all, on traction that you are getting, because it looks like you are getting a lot of traction. That seems to be what a lot of us are asking about. But is this traction as a result of -- I mean, some issues? I know they have had some management changes and some other things, and is that who your main competitor is out there, and who you are bumping up against and getting traction against?

I think we are getting good traction, but they are competitive in certain areas. I think, and Brian, you have been following us for a long time, and you know that after we were able to separate from Comverse, we started to work on a strategy. We spoke about increasing our TAM, our addressable market from $3 billion to $6 billion.

And once we started to look at the broader market, we added a lot of solutions. To cyber, we added organically. KANA gave us capabilities inorganically. But it's not just adding capabilities, it's all part of a strategy. And I think as we expand our strategy, we are able to separate away from our legacy competitors.

Obviously, we have now some new competitors we didn't have before, but that is expected with a bigger addressable market. But more importantly, we are very excited about the fact that we have the tools to compete in a larger market. We become more strategic to our customers, and when we sell, we can sometimes get some very large contracts, because we have a lot to offer.

Let me ask some more questions just on R&D and SG&A. Going forward, R&D was around $41 million. This quarter, SG&A, a little bit over $100 million. I assume that the quarter -- from this first fiscal quarter to the second fiscal quarter and third, we should see a bump down in those numbers? Is that the right direction -- directionally that those operating expenses should be going?

Yes, hey, Brian. This is Doug.

Hey, Doug.

Yes, hello. I think if you look at your model and factor in the midpoint of our range and midpoint of our EPS, and we are looking to drive EBITDA around $280 million, you can see that the kind of operating expenses coming up a little bit in total. The second half of our year tends to be a stronger year, particularly in the top line. But that really where we drive some margin, where that revenue goes up and the operating expenses go up just a little bit. So we are expecting to get back to strong margins for the overall year.

Yes. So let me give you some more strategic -- how we think about our -- your questions about the rest of the year. So we just increased guidance by $30 million revenue, and that is driving another $5 million EBITDA. Okay? So the reason we increased the guidance -- first, we overachieved in Q1. That's helpful, but we also have an improved outlook on the enterprise segment, with now that we have double-digit growth with and without KANA.

The cyber deal, while it will contribute revenue this year, it is not all going to be incremental. Some of the cyber revenue was already baked into the year. But this is obviously a little bit of an improvement. So that is part of raising guidance. And, of course, we, Doug mentioned before the EMEA numbers, the EMEA as we expected is improving, and we had a great EMEA quarter in Q1.

So all these four reasons are behind our increased guidance. And as we think about expenses and so on, if you look at last year, EPS was 40% -- 40% of our total EPS came in H1, and 60% in H2, so that is not going to be much different this year. We expect 40%, 60% also this year.

And in terms of the -- Doug mentioned that revenue will improve gradually. So we have -- usually we have a strong Q4, so you can expect small sequential improvement in Q2, and then more in Q3, and more in Q4. And margin will fluctuate -- again, Doug mentioned that we -- that depends also on product mix, and we expect margin to come down in Q2, and then increase in Q3 and Q4.

And then finally, my final point is that the midpoint of our guidance is $1.135 billion, and that represents, excluding the range for KANA that we gave, that represents about 9% growth. And then if we achieve the top -- the high end of the range is [$1.160 billion], excluding KANA, that would be 11%. So we are moving into higher growth rates, with and without KANA. And obviously we want to invest to have the business, especially in sales and services to continue and generate growth into the future. I hope -- long answer, I hope it is helpful.

Okay. So just to clarify

Oops, Brian, we lost you.

All right Thank you.

(Operator Instructions)

And your next question comes from the line of Hugh Cunningham from Oppenheimer & Company. Please proceed.

Thanks for taking my question. Congratulations on a strong quarter.

Could you talk a bit about how you see customer engagement optimization sort of evolving? And we have been through sort of a number of -- I guess, you would call them strategic buzzwords as Verint has sort of grown. And now it looks like customer engagement is sort of a focus of a lot of your customers, and for you also.

How do you see customer engagement evolving? How do you see the Verint KANA product set sort of evolving to meet the needs in this area? And then, are there any sort of capabilities that you need to develop, or maybe even acquire to get to where you think customer engagement optimization will be in say, five years?

Right. So Verint historically was focused on smaller segments, which we call workforce optimization with tools to provide Actionable Intelligence for the workforce, and also to analyze the interaction between the workforce for the customers. With the addition of the KANA capabilities, we are morphing into customer engagement optimization. Because not only we are able to -- as we did before, to do the workforce optimization and the interaction enrichment. But we also have now the ability to provide customers, our customers with customer intelligence, and capabilities such as agent-based desktop, and knowledge management for -- to self-service for omni-channel service. So these are all new capabilities that position us into a broader addressable market, and that is customer engagement optimization.

Now what is the difference between, as you said it is a buzzword, but what is the difference between customer engagement? It is really what was always CRM, and CRM has the sales CRM and marketing CRM, and then there is customer service CRM.

So for many, many years, there was an attempt to innovate in this area to help organizations maximize revenue, but for customers, but also decrease their costs, increase the customer loyalty, and reduce the risk and fraud associated with interactions. And those objectives did not change, but the market did change. The consumers are changing their behavior.

There is omni-channel experience. They call, they email, they chat, they go on the web. They visit the branch, and they expect similar customer experiences. They also expect more individualized responses. And with mobile devices and the web, customers now are much more capable of switching over to a different vendor if they don't like customer services.

So I think that the industry is moving towards more focus on customer service, and not only reducing cost of customer service, but also making sure they improve the customer loyalty, and maximize the revenue from customers and reduce risk. And for that, to achieve this objective, you need Actionable Intelligence.

You need, not just to make -- the tools to make the transactions, but also to have predictive analytics to understand, what is the next best action that agents will take? How do you take actions to maximize the opportunity the customers present when they interact.

So with that behind the customer engagement optimization concept, we bring a suite of tools. And now with the addition of KANA capabilities to improve the workforce, improve the customer experience, and reduce the cost while increasing revenue for our customers. That is a pretty transformational change, and we see more and more customers buying into this concept. And looking to consolidate what they had before which is many, many point solutions from a lot of different vendors, and as well as homegrown solutions, with a tendency to consolidate it into a suite that can achieve those objectives more effectively.

Okay. Thank you. Just one follow-up. We had talked in the past about the suite of products -- well, the products that you offer, and the progression of your customers from single package within the suite, towards taking up the entire suite, and what that would do in terms of incremental revenue for you.

Can you talk maybe a bit about the potential of the combination now with KANA, how does it adjust your -- I know you have expanded your TAM -- but can you talk about how it adjusts maybe the progression, or the expected progression of your customers, from where they are now, to where they might be in three to five years?

Yes. So the Verint and KANA portfolio, are basically targeting the same buyers. So Verint has a suite strategy of selling a module, and then expanding into more and more modules. KANA basically has the same strategy, because they also have multiple modules that they are ready install into their base. And obviously combined, we had -- we now have a much bigger set of modules that we can sell over time.

In terms of quantifying it, it varies -- from a very strategic point of view, you can think about it as with Verint, the Verint suite on a per suite basis, may be represent a $1,500 per suite opportunity, and with the KANA capabilities on top it could grow to about $2,500. This is a very rough estimate, because we don't sell necessarily all of our products on a per suite basis. But just for the purpose of modeling if you like, to get a gauge, what is the additional or incremental opportunity here, it is quite significant. And these are all modules that most customers were not buying one in one order, although some may give us some big orders. But certainly, our strategy is to expand the footprint with our customers over time.

Thanks very much for taking my questions. I appreciate it.

Thanks, Hugh.

All right. Ladies and gentlemen, that concludes today's question-and-answer session on today's call. And now I would like to turn the call back over to Alan Roden for closing remarks.

I would like to thank everyone for joining us tonight, and have a great evening. Take care.

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