Verint Systems Inc (VRNT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 Verint Systems Incorporated earnings conference call. My name is Tony, and I will be your operator for today. At this time, al participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(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, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO and President, and Doug Robinson, Verint's Chief Financial Officer. By now, you should have seen a copy of our press release that includes selected financial information for our second fiscal quarter ended July 31, 2014. 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 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 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 or implied by these forward-looking statements.

The forward-looking statements are made as of the day 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 these and other risks and uncertainties that 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, 2014, or Form 10-Q for the fiscal quarter ended July 31, 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 on 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 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 financial measures the Company uses have limitations and may differ from those used by other companies. Now, I'd like to turn the call over to Dan. Dan?

Thank you, Alan. Good afternoon, everyone, and thank you for joining us to review our second-quarter performance. In Q2, we reported $285 million of revenue and $0.72 of fully diluted earnings per share. We are pleased with our strong second-quarter results, which reflect our focus on innovation and our expanding portfolio of actionable intelligence solutions for a smarter world. Our second-quarter performance follows the strong execution we had in our first quarter and positions us well for achieving our double-digit revenue growth target for the year.

During the first half, revenue increased 29% year-over-year. We are also pleased to report that when we include KANA's revenue in last-year's first half, we had double-digit year-over-year growth. Our first-half results combined with the strengthening of our competitive position have made us more optimistic about the year, and we are again raising our annual guidance which we will discuss later in more detail.

Earlier this year, we discussed expanding our TAM, total addressable market, as part of the acceleration of our growth strategy. Our current focus is to make the world smarter in three areas of actionable intelligence. Customer engagement optimization, security intelligence, and fraud risk and compliance. These areas share similar challenges of analyzing large volumes of unstructured and structured information and leveraging critical insights from the data to allow people to make smarter decisions. One of the strengths Verint brings to this expanded, addressable market is our actionable intelligence platform. The Verint platform is evolving to support the capture of voice, video, text, and other structured and unstructured data to process and analyze this data, and finally, to make the insights actionable across many domains and industries.

Our platform is designed for internal use and positions Verint to quickly bring new applications to market across existing as well as new markets. A good example was our ability to quickly bring to market a new and differentiated cyber-security solution by leveraging capabilities on the Verint platform and our deep expertise in real-time analytics, large-scale data capture, and forensic analytics. We will continue to invest in expanding our platform capabilities and to leverage synergies across our solution portfolio.

Now, I'd like to provide some highlights starting with the customer engagement optimization markets. Our combination with KANA has been very well received as customers see significant value in our suite approach. The acquisition closed in February, and the integration with KANA is progressing well. During the quarter, we had several legacy Verint customers expressing interest in KANA solutions. We believe we have become more strategic to our customers with the industry's broadest portfolio of customer engagement optimization solutions, and that over time, we will be able to leverage the joint customer base even more.

During the first half of the year, our enterprise intelligence segment delivered double-digit year-over-year revenue growth. We also achieved double-digit revenue growth in our enterprise segment with KANA included in both periods, and we believe this performance reflects strong market demand for our solutions. I would like to share with you some recent customer anecdotes demonstrating the progression of customer engagement strategy that was accelerated with the KANA acquisition.

We received an $8 million order from a new customer in the financial services industry. This new customer is deploying multiple customer engagement optimization components of the Verint suites in connection with an initiative to improve customer service quality through multiple interaction channels including the call center, e-mail, chat, and self-service. We received a $4 million order from an existing customer, one of the world's largest retailers. This customer had previously deployed several components of our workforce optimization suite and is now adding new components of our broader customer engagement optimization suite such as agent desktop, knowledge management, case management, e-mail management, live chat, mobile, and web self-service. These applications came to Verint through the KANA acquisition, and we are pleased to help this customer expand its deployment from a workforce optimization suite to a full customer engagement optimization suite.

Over the last few years, optimizing customer engagement has become both more strategic as well as more complex for our customers as a result of new technologies for multi-channel interaction. We have been told by our customers that purchasing multiple point solutions from many different vendors can create challenging integration complexity and sub-optimal operational results. Listening to our customers, Verint is now offering organizations a unique, broad suite of applications to achieve their strategic objective. We believe that optimizing customer engagement continues to be a high priority for enterprise spending, and our strong execution, combined with the suite strategy, significantly increases Verint's addressable market exposing Verint to higher long-term growth opportunities.

Turning to the security intelligence market. We have continued to expand our portfolio of actionable intelligence security solutions to make the world smarter and safer. Within security, we focus on three areas. Communications intelligence, cyber security, and homeland security. During the quarter, we experienced demand for our innovative security solutions around the world, and revenue in our two security segments combined increased 16% year-over-year during the first half of the year.

June Q2, we received several large orders, including one for more than $20 million, one for $50 million, and one for $10 million from three existing customers as well as one for $5 million from a new customer. We believe these large orders reflects our success in delivering innovative actionable intelligence solutions across the industry market, and we are well positioned to address demands for big data intelligence solutions that help make the world a safer place. As we have discussed on past calls, cyber security is a high-growth opportunity for Verint, and during Q2, we continued investing in this area within expectations for long-term growth. Our cyber security investments were across many areas, including adding people in R&D to advance our solution offering, expanding the sales force to increase market coverage, and investing in certain new marketing initiatives. Our current strategy targets organizations with large-scale networks and a very high focus on protecting against advanced persistent threats.

In a world of increasing connectivity, organizations are looking for innovative solutions to better protect themselves against sophisticated cyber attacks. Competitively, we believe our core competency in big data intelligence, combined with our unique actionable intelligence platform, positions us well to help large-scale organizations identify, investigate, and eliminate cyber threats.

Behind our past success and our double-digit growth objective is our focus on innovation. We currently have approximately 1,500 people, or one-third of our total employees, involved in research and development. Our growth strategy involves innovating both organically through internal development as well as through acquisitions as our markets remain very fragmented.

During Q2, to provide Verint additional strategic flexibility, we modified our capital structure. The new guidance we are issuing today more than offsets the dilution from our recent offering, and I'm very pleased to be able to report strong Q2 results following a positive market reception to the offering. Based on our solid first half and our outlook for the balance of the year, we're increasing our non-GAAP revenue guidance by $15 million for the year. Our new revenue guidance is a range of $1.125 billion to $1.175 billion, and our new diluted EPS guidance has increased to a range of $3.35 to $3.50. As we look ahead, we look forward to continued growth, market leadership, and a strong second half of the year. And now, let me turn the call over to Doug.

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 our 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 non-recurring charges including the amortization of the discount on our convertible notes.

I'll start my discussion today with the areas of revenue, gross margin, and operating margin. In the second quarter, we generated $285 million of revenue across our three segments with $169 million in enterprise intelligence, $87 million in communications intelligence, and $29 million in video intelligence. This compares to $223 million of total revenue in the second quarter of the prior year with $126 million in enterprise, $65 million in communications, and $32 million in video.

In terms of geography, in Q2 we generated $140 million in the Americas, $97 million in EMEA, and $48 million in APAC. This compares to approximately $119 million in the Americas, $47 million in EMEA, and $57 million in APAC in the second quarter of the prior year. We are particularly pleased with our revenue growth in EMEA for the second quarter in a row. Q2 gross margins were 67.5% percent, up from the 66.3% in Q1 and compared to 68.8% in Q2 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, and we continue to expect similar gross margins this year versus last year.

During the second quarter, we generated operating income of $59 million compared to $51 million in Q2 of last year. Our EBITDA before the quarter came in at $64 million. This brings our first-half EBITDA to approximately $120 million compared to $96 million in the first half of the prior year representing 25% year-over-year growth.

Now, let's turn to other income and interest expense. In the second quarter, other expense net totaled $10.6 million reflecting a $8.2 million of interest expense and a $2.4 million loss from foreign exchange driven by inter-Company balance sheet translations. Our cash tax rate was 8.9%, and as we've disclosed -- 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.

For the quarter, we had 58.2 million average diluted shares, reflecting our equity offering in the middle of the quarter. If you include the shares for the full quarter like we will do in Q3, our average share count will be approximately 61.5 million shares. These results drove diluted earnings per share of $0.72 for Q2 and $1.44 for the first half compared to $1.14 in the first half of last year representing 26% year-over-year growth.

Now, turning to the balance sheet. As of July 31, 2014, we had approximately $267 million of cash and short-term investments, including restricted cash. Q2 cash flow from operations on a GAAP basis came in at $16 million bringing our first-half cash flow to $70 million compared to $73 million in the first half of the prior year. As we've discussed in the past, our cash flows can fluctuate quarter to quarter due to the timing of collections and payments. For the year, we expect increased cash flows relative to last year and another strong year with cash generation.

We ended the quarter with gross debt of approximately $811 million and net debt of approximately $544 million excluding discounts associated primarily with our convertible debt. During the quarter, we issued $400 million of convertible notes at a 1.5% coupon rate with an effective conversion rate of $75 and issued approximately $275 million of equity resulting in less than $0.05 of dilution. The offering provides Verint many benefits, including reducing our debt and interest expense, staggering the maturities of our debt, and most importantly, increasing our strategic possibility.

Before moving to Q&A, I'd like to discuss our increased guidance for the year ending January 31, 2015. We expect non-GAAP revenue to be in the range of $1.125 billion to $1.175 billion. Our increase in revenue guidance will result in additional profitability, which is partially offset by the dilution associated with our recent offering. After our strong second quarter, we expect Q3 to be at a similar revenue and profitability level to Q2 and to finish the year with a strong Q4 as usual. We expect our quarterly interest and other expense for the remaining two quarters, excluding the potential impact of foreign exchange, to be approximately $5.8 million per quarter, which is down from our prior guidance reflecting the changes we've made to our capital structure during Q2.

We expect our non-GAAP cash tax rate to be approximately 9% reflecting the amount of taxes we expect to pay this year. Based on these assumptions and assuming approximately 59.3 million average diluted shares outstanding for the year, we expect non-GAAP EPS in the range of $3.35 to $3.50. The midpoint of our EPS guidance reflects more than 20% year-over-year growth. In conclusion, we are pleased with the execution of our strategy, our expanding portfolio of actionable intelligence solutions, and a strong competitive position and believe we are very well positioned for continued growth. This concludes -- excuse me. This concludes our prepared remarks, and we're ready to take questions. Operator, can you please open up the lines for questions?

(Operator Instructions)

Your first question comes from the line of Mr. Daniel Ives of FBR Capital Markets. Please proceed.

Thanks. Great quarter. This is Jim in for Dan. Can you talk a little bit about the large orders on the cyber front? And, maybe when you'd expect to recognize those? And then also, how the large order you mentioned last quarter, how that's progressing?

Okay. So, we mentioned today four large orders in the security market across a number of different domains. There was a $20 million, $50 million, $10 million, and $5 million. I think at this point, we are -- we've been able to report large orders almost every quarter, and I think that demonstrates our ability to win and deliver large-scale projects in security.

Last quarter, what we announced the large cyber projects of more than $100 million. That was, clearly, a big win for us. We also discussed that right now with our strategy in cyber security, we are targeting multi-million dollar projects, and over time, we will consider when is the right time to scale down our products and go after a broader market. But, we feel that there is a sizable opportunity for us right now to differentiate our offering for very large organizations that have a focus on advanced threat detection. So, that's where we are in this area.

We always are engaging some large projects. We think we know how to deliver those projects over time, and we recognize revenue over time. So, revenue of large projects are built in into our normal revenue reporting. Generally, in cyber security, as I mentioned, first, we are pleased with the progress we are making. We like the direction we're going, and we like the response we're getting from customers. We are investing in cyber security, and our investment is not just short-term to deliver projects. As I mentioned before, we are investing in R&D to enhance the capability of the product. Investing in sales coverage. Of course, many geographies as well as in marketing initiatives.

So, our goal here is to invest in the cyber security to make this a growing business. We expect it to grow much faster than our overall growth rate. So when we discuss -- when we target overall low double-digit growth for the Company, the cyber security area we are targeting much, much higher growth rates. That's because A) the cyber security market is very big, and B) the sub-markets of advanced threat protection we believe is an area stage market that is showing now demand. So, this is an opportunity to accelerate growth in a market that is small, has very large potential, and we believe we are well positioned with this market. So, our goal is to invest to grow the business over many years and to make it a meaningful component of the overall Verint business.

Your next question comes from the line of Nandan Amladi of Deutsche Bank. Please proceed.

Thanks for taking my question. The outperformance this quarter seems to have come more on the services line rather than licenses. Was there any specific project-related rev rec that happened on the services side?

We believe that this could fluctuate. Our overall mix of product services is 40% product, 60% services. When you look into our services, it's actually 40% product, 40% maintenance, and 20% services. These are very rough numbers. But, as we look forward, we expect to maintain a very similar ratio of 40/40/20. Obviously, we are adding products so we believe our product revenue will grow. Maintenance is something that is very important to our customers that they need to ensure ongoing support for the products. And services, which is 20%, roughly, of our business, is really targeted toward helping customers to deploy our solutions effectively, and it's creating a lot of value for customers but it's also making the product stickier. So, I wouldn't read too much into the quarterly trend, and we believe that over time we will maintain similar mix of products and services.

I just like to add to that. This is Doug. While our SaaS revenues are small, they are growing rapidly, and that does get accounted for in the service line.

At some point, presumably, you will break those out when they get big enough?

We discussed that (inaudible) are still left with 10%, and we'll consider breaking SaaS when it's at the 10% level.

Okay. Thanks. And one follow-up, if I might. After the acquisition of KANA, I know you've described several projects in the enterprise segment that you've won since then. Has the cadence of license revenue recognition, is that any different with the combined portfolio? Or, with the KANA products specifically? Or, is it very similar to the rest of your business? Thank you.

It's fairly similar within the enterprise segment, Nandan. It's a licensed maintenance services model that really hasn't changed with the combined business.

Yes, and the business is integrated now. We are offering customers very similar business model, and some of the customers now, I mentioned, the $4 million customer is actually a Verint legacy customer. We are leveraging the Verint relationship. We are leveraging the Verint contract. Obviously, we are offering now customers a broader suite with more capabilities that we got from KANA. It's all part of optimizing the opportunity around customer engagement. Obviously, unifying and normalizing the revenue cognition model is part of unifying the business.

Thank you.

Sure.

Your next question comes from the line of Mr. Shaul Eyal of Oppenheimer, please proceed.

Thank you. Good afternoon. Good quarter. Congrats on the outlook as well. I get the competitive landscape on the enterprise segment, specifically in light of the lease and KANA addition. Turning just for a second into the cyber security segment, who are the new names? Who are the name competitors you are beginning to see in that arena as you grow stronger and faster?

What we see in the cyber security market is that customers are really looking at everyone. The type of customers that we are targeting are pretty sophisticated. They have their internal departments that are pretty good at doing a research in the market and looking at all the traditional players as well as many, many startups. I think the people that are responsible for cyber security feel that they cannot overlook, and they have to really turn every stone and make sure that if there is a solution there that it could be helpful to them. They at least will kick the tire. So, very often, our customers tell us that they have looked at a lot of different people. So, clearly, they're differentiating here -- a differentiating factor is what is the objective and how do we differentiate, specifically, in achieving the objective.

When customers are still looking to do firewalls and virus protection so trying to prevent penetration of their networks, we're not well positioned. We're not targeting this market. This is not where we see the opportunity. But, many customers now realize that despite their efforts to prevent penetration and to do early detection, their networks are compromised. Malware is penetrating in a lot of different ways. Now, they need the tools to be able to understand what's already in the network, what's the purpose of the malware, how it's progressing, and how do they understand who is behind it, and what it's trying to do. Eventually, also obviously eliminate the threat. There are very few people who can scale to the level that we do leveraging the big data platform that we created that was specifically designed to address these type of threats.

Got it. Dan -- maybe Doug, is the increase in guidance for the second half of this year driven by strength across all product segments? Or, is it a specific segment in the enterprise or the security or all of the above?

Yes, it's very broad. If you look at what we said in the beginning of the year, we raised guidance once $30 million and now we raised guidance another $15 million. So, there's an overall $45 million increase relative to our initial guidance. When I look at what were our thoughts at the beginning of the year, which we shared with investors, KANA was very early. We were very optimistic, but we are cautious, and cyber security as well. We were very optimistic. We didn't really have enough proof points relative to how much to dial into the guidance.

In both areas, when we are now six months into the year, we are much more optimistic than we were. The KANA integration is going well. We are already leveraging the customer base with Verint. Given the sales cycle, typically six to nine months, being able to report that we already combined the business. The sales force is combined, and we already got a $4 million order from a Verint customer. That's very encouraging. As well on the cyber, our ability to report big wins and a good pipeline is encouraging. So, I would say very broad improvement across the business that drives our improved outlook for the year.

Got it. One final question, if I may. You disclosed the $20 million and $50 million and $10 million coming from existing customers, and $5 million coming from a new customer. I want to speak for a second on the existing customers. You have a very, very -- a vast install base. In your opinion, how far more can you go within your existing install base and go and penetrate more with those sizable contracts? Or, what could potentially could be also defined as an [oxit] opportunity?

Yes. We think we can go pretty far. Many of the customers that we report as existing customers could be government agencies that have a very broad oversight, and while they are buying into one area, they are responsible for to many other areas of security, fighting crime and terror within their jurisdiction. While it's the same government entity, we're not necessarily addressing all facets of the opportunity.

Also, in some countries, we are selling to the same customers that bought cyber security and may be buying homeland security. The responsibility for security is not necessarily just limited to cyber or communication intelligence or homeland security. So, while we are very excited adding new customers, and typically a new customer starts small. The opportunity to sell more products into a number of different domains of security is very large.

Got it. Thank you very much and good luck. Good work.

Thanks.

Your next question comes from the line of Mr. Michael Nemeroff of Credit Suisse. Please proceed.

Hi, this is Kyle Chen in for Michael. Thanks for taking the question, and congratulations on the good results. Building on the earlier point about cross-selling and up-selling opportunity. Can you talk about how this might look from an individual product suite perspective once your product integration is completed? Could you potentially see higher ASPs, both on an individual product basis as well as a suite basis?

Yes, yes. We believe we are already starting to see higher ASPs with the $8 million and $4 million. For the very simple fact that the customer engagement suite is much broader than the workforce optimization suite. I think it's important to remember that workforce optimization, while it is a suite, it is now a sub-suite of a broader suite. So, we are able to afford customers a journey where they can grow from workforce optimization into a full customer engagement suite. They can do that over time. They can do that buying modules individually, or in some cases, buying them all bundled.

So, in as much as we are very pleased when we have customers that make bundled orders, and we can report an $8 million deal, a lot of our customers that are migrating over time represents the same potential of $8 million, $10 million, maybe more. They just do it over time, and it's not reflected in the ASP. So, we are checking ASP. We are seeing improvement in the ASP, but more importantly, we are tracking what is the potential on a [parasitic] basis of selling to our customers a border suite and, obviously, this means we are increasing the opportunity in terms of addressable market. We are doing that while actually not trying to sell customers something they don't need. We're trying to respond to the demand we hear from the market that they really want to buy those modules integrated, and they don't like to buy them from many, many different vendors and deal with all the integration issues.

It's not just one-time integration. When they buy -- what customers report is when they buy by different software packages from different vendors, they do integration. And then, during the lifecycle as they are trying to upgrade, vendors are upgrading their components, but they're not necessarily maintaining the integration that that customer has. And, the customer needs to redo integration as they upgrade different pieces. So, the value of buying it from a single vendor is tremendous.

We believe that we are, as you mentioned, obviously we'll integrate deeper and deeper over time. We are going to do integrations that are much deeper than what system integrators can do using published APIs. Because we own the entire suite, we can go much deeper. But, we believe that customers already benefit from the fact that they can buy the entire suite from one vendor, even with the current level of integrations. So, we are pleased that already in the second quarter, we are able to leverage the joint customer base. As I mentioned before, we believe we'll see more of that over time.

Great. That's helpful. And, if you can also help give us some color on your sales productivity over the last few quarters? And, if you can comment on your sales and hiring plans for the next 12 to 18 months? Will more feet on the street necessarily translate into improved selling? Or, is the emphasis going to be more on integration and messaging?

I think the first six months, as we integrated the sales force, a lot of the focus was on cross-training and making the combined sales force more effective. We did hire, overall, about a little bit more than 100 people in Q2. We're planning to hire over the next two quarters approximately 100 people per quarter. In terms of sales, specifically, currently, sales is about 20% of our total workforce. And, when I looked into our hiring plan in Q3 and Q4, about 20% of our hiring will be in the sales area.

So, it's pretty proportional to the overall growth in employees. While we are expanding our sales force, we are also hiring service people so we are in a position to deploy and support our products, and as I mentioned before, we also get substantial maintenance revenue and service revenues. Obviously, we're hiring in R&D as we have a lot of innovation ideas. So, the sales force, I think, will certainly grow with hiring, but I believe will also become more effective as time goes by integrating the sales forces from both Companies will yield a more educated and effective sales force.

Thanks. Helpful.

Your next question comes from the line of Mr. Jonathan Ho of William Blair. Please proceed.

Good afternoon. Just wanted to sort out with the strength that you saw in EMEA, could you give us a little more color in terms of were there any verticals, or were there any product segments that saw above average strength in that region?

Yes, so it was broad. It was broad. Some of the strengths came inorganically from KANA as KANA has presence in EMEA. Even without the contribution from KANA, we saw very strong growth in EMEA, and we saw that across enterprise and security. I think what's interesting is in security, we saw some large projects in EMEA, which was an area that we felt was behind in prior years. We spoke in prior years about the fact that we believe it's a temporary setback. It's not something that is reflected on Verint's capability, but budgets. It looked like in the first six months things have got much better on the security side and also good growth on the enterprise side.

Got it. And then, can you talk a little bit in terms of the communications interception business? This has shown very strong growth for multiple quarters at this point. Is there something happening there that maybe is driving that acceleration? And, how sustainable should we -- do you think that growth can be in terms of the communications interception piece?

I think this has been -- if you look at the last few years, we've grown 20% there. So, it's clearly an area where we have products that help law enforcement and government agencies to fight crime and terror. We all know that their mission is to keep the world a safer place, and they need more sophisticated solutions. It's very effective to conduct investigations based on intelligence, and that's what our products are designed for.

Our security offering is broad into a number of different areas. One of the projects that we announced today is actually in homeland security. Just as an anecdote, one area of homeland security is prisons where there is also a security and safety issue within prisons. Verint is now positioned with a very unique portfolio. We have video surveillance capability for prisons. We have intelligence capabilities to track mobile devices within prisons, and we have a situation management capability for the overall command and control function within prisons.

So, we offer a portfolio that can really help the correction market to maintain law and order within the prison and ensure the safety of inmates as well as deal with security issues. This is an area where we announced a large win here. So, our ability to address communication intelligence, cyber security, homeland security, and in all area -- in all these areas, we offer customers the big data intelligence platform. This seems to be an area that the demand is growing, and Verint is one of the Companies that is known in the market. We are very proud that we're helping to keep the world a safer place.

Got it. And, just one final one for me is, when you talk about these $100 million deals, can you give us a sense of how much of that $100 million is actually product and license versus the services side? And, maybe some approximation in terms of the time length for that revenue to be recognized?

Yes, so you're referring to the large deal we announced last quarter in the cyber area. That is a project that we are doing that is a percentage of completion. We'll have a little revenue from it this year. Most of the revenue falling into next year and the year after. The revenue there is allocated into a product component and into a service component for the configuration and what we have to do for this specific customer. So, in total, it's probably not disproportionate to what we have in that business unit overall.

Got it. Thank you.

Sure.

Your next question comes from the line of Mr. Paul Coster of JPMorgan. Please proceed.

Thanks for taking my question. Dan, I'd just like to go back to advanced threat detection and cyber security. You talked about how your different by the fact that you're able to work with massive scale, but I feel like that's not really the thing that differentiates you alone. Isn't it also the case that you're able to bring the experience you've got in unstructured data, biometrics? And, isn't there some synergy here between the communications interception and the advanced threat detection malware-type application in that you're able to go back out -- I don't know if you're allowed to offer this to enterprises. But, you're able to go back out and submit work exploiting all of those tools that you've got that are generally made available to law enforcement and intelligence agencies to also solve problems which no longer are -- clearly, are no longer just enterprise-specific?

You have synergies, clearly. The comments I made about differentiating with scale is relative to explaining why at this point we are targeting very large scale operations. We feel that, A) they have a need, and many of them have the budget. And, B) once they take a look at our capabilities, it's much easier for us to win. Now, when you think about how we go out into the cyber security market, there are many companies that have much better brand names. We felt that initially we want to differentiate based on pure capabilities that are way above what other people can do. But, in terms of the overall capabilities we bring to the cyber security market, once we decide to scale down the platform and bring it to the mid-market, I think we can still compete very well for many of the reasons that you mentioned. Our ability to do [depect] inspection on the fly with real-time analytics and our ability to do forensic analysis that we have evolved over many years of working in the security arena on the communication intelligence side. We think we have very strong capabilities overall. But, again, the scale is certainly an advantage at this point when you go after larger projects, and as we bring the -- we scale it down, we will be positioned very well against competitors all across.

Last question. To what extent are you able to offer your enterprise customers some of the tools and capabilities associated with law enforcement and anti-terrorism?

There are a lot of synergies, both in terms of the platform itself. We're capturing voice, video, text, applying analytics, speech analytics, biometrics. These are things that we do across enterprise and security customers. So, that's the platform capabilities. And, it is also we operate around enterprise risk mitigation, whether it's enterprise facility surveillance, whether it's fraud detection. So, a lot of the investigative tools that we develop for the law enforcement market are very applicative to enterprise investigations of fraud and improving security.

We do believe that we will move the cyber offering into enterprise mid-market over time, but we think we're going to be very busy with the large-scale organizations, and we just need to prioritize how we go after the market. I mentioned before that we are looking to grow the cyber business at a very rapid pace. So, this is not low double-digit growth that we are targeting. Different businesses within Verint will grow at different rates. The cyber business -- our strategy is to grow it at a much higher rate and make it a very meaningful component of the overall Verint business.

Okay. Thank you.

Your next question comes from a line of Mr. Jeff Kessler of Imperial Capital. Please proceed.

Thank you. You focused very highly on increasing the TAM for the overall security market, communications, fraud, and cyber security. What are you doing to create -- let's call it a larger ecosystem using other analytics companies, using your own R&D to expand the adjacencies that you're in. For instance, how do you expand? What are the other types of -- what are the types of activities that you can use either internally or externally to expand fraud and the cyber side and the communications side so that the TAM grows as fast or even faster than the revenue growth that you're trying to target for that area?

Yes. So, we do that on a number of levels. First is our platform. Our approach to the big data platform -- and again, this is not a platform that we offer to other companies as a product. This is a platform that we use to accelerate time-to-market when we are targeting expanding TAM, and we want to bring quickly a product to market. One of the features of our platform is the ability to use a lot of different analytical engines. Some of them we develop, and some of them we get from other companies.

So, that creates an ecosystem of analytical engines that are working within the platform so our customers can really benefit from analyzing data with a lot of different engines from a lot of different sources. Some of them they already have. Some of them they buy from Verint. Some of them they can buy from third parties. That approach is very compelling for customers. Analytical engines don't work in a vacuum. You need a platform to capture data, and we are -- we have expertise in the unstructured capture to normalize the data and process it. To transform unstructured data into searchable structured data and then provide analytics.

So, one level is the partner ecosystem. And then, in terms of the go-to-market strategy, overall in Verint, 50% of our business is direct and 50% is indirect. Many of our partners actually are great vehicles to get us to new markets within the extended TAM, because they already have relationship with Verint. They already have positive experience with Verint. They already are in new markets and very often they suggest to us why don't we take you into a new market. If we believe we want to go there, we develop some additional capabilities in our platform and through our partners we can get to the new markets very quickly.

Okay. In the end, your ability to take unstructured data is usually the base that the other parts of the ecosystem are going to work off of -- other analytics providers, other guys who provide APIs and things like that.

Yes, we do. In cyber security, we have very good analytical engines, but what we found -- actually, what we heard from customers when they buy products from a lot of different companies and trying to detect, let's say, detect malware. Even competing products that are supposedly having very similar capabilities have different performance relative to a specific malware. So, it does make sense where you are -- [I am] customer, and you really want to protect yourself. It does make sense to apply different engines to address the same problem in parallel. Our platform has the capability to process data into multiple engines and get the results, and then combine those results and alert our customers on what's the next best action. So, it's a win-win where we allow our customers to get the best engine from Verint, but also to get a platform where they can deploy other engines.

Just quickly on R&D, I know that you've spoken in the past about running R&D in line with revenues. Is there the possibility though that given the R&D intensity of (inaudible) growing faster than the rest of the Company, that your R&D might be growing faster than revenue is overall at some point?

Yes, you're right. That's always a temptation, but we talked about getting R&D at 13% to 14% of revenue. Last year, we did 13.5%. So, we were right in the middle. This year, it is creeping up a little bit. We believe it's going to be around 14%. We have a discipline. We have a business model, and we're targeting the R&D to be at that level. We think that can create enough innovation to drive growth, and we are being selective. We have a lot of ideas for additional innovation, but we are working with this -- within this model.

Okay, Dan. Thank you very much.

Sure. Thank you.

Your next question comes from the line of Mr. Brian Ruttenbur of CRT Capital. Please proceed.

Thank you very much. A couple housekeeping. Interest expense going forward, I wanted you to repeat that if you could?

Yes, Brian. This is Doug. About $5.8 million for the next couple of quarters.

Perfect. And then, you mentioned -- I believe Dan or you mentioned EPS in the third fiscal quarter will be equivalent to second fiscal quarter. Is that correct? On a pro forma basis?

We said similar revenues.

Similar revenues should drive similar EPS. We think that, typically, Q4 is our strong quarter. That's where the balance of EPS will come from.

Okay. Last question in terms of your capital raise. Obviously, you're going after more M&A activity. Who do you see out there competing? Is it still Nice competing, or are you seeing new competitors out there on the hunt for acquisitions?

So, we are in a very fragmented market. We have a lot of competitors. We list them in our 10-K. We believe we are well positioned against our largest competitors as well as smaller competitors, but when it comes to the largest competitors, whether it's Oracle or other large companies, obviously, they have capital and they have the ability to acquire. We did discuss in prior calls when we talked about KANA that it was a competitive process and that we had quite a few competitors.

So, having the flexibility and, of course, financial flexibility important, is something that we feel is strategic for us if we decide to compete on an asset. We do have a pretty large portfolio. At this point, defensively, we're not looking to make an acquisition to fill a gap in our portfolio. But, as we want to accelerate growth, and we mentioned that we do target organic growth. But, obviously, with an increasing TAM, there will be opportunity for acquisitions. We are going to continue to be selective, and we're very happy to complete the offering recently that provide us this strategic flexibility.

Thank you.

Sure.

Your next question comes from the line of Mr. Stan Bergstrom of RBC Capital Markets. Please proceed.

Yes. Thanks for taking my question. You had some nice success over the last several quarters with sizable government wins. Any thoughts on that vertical as we approach the federal year-end?

So, this is a global business for us. We have discussed many times before that we very early in developing our security portfolio, we would like to help the world become a safer place. The US government is just one government customer for us. Also, within the US government, we operate on the federal, state, and local, and we deal with a lot of different agencies. So, customer concentration in our security business has not been an issue for us. We -- right now, we are not very dependent. We're not focused on predicting whether there is going to be an increase in spending. I believe that the Homeland Security front and the cyber security front are two areas that generally should get more attention and more funding. But, because it's a global business and highly diversified, we are comfortable with our guidance and not dependent on the end of the fiscal year for the federal government.

Thank you.

There are no further questions in the queue at the moment. Please proceed with closing remarks, sir.

Thank you, Operator, and thank you, everyone, for joining us today. Look forward to talking to you on our next call. Have a great evening. Take care.

Ladies and gentlemen, thank you so much for your participation. You may now disconnect, and have a great day.