Verint Systems Inc (VRNT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2015 Verint Systems Inc. earnings conference call. My name is Cia, 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, Corporate Development. Please proceed.

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 third fiscal quarter ended October 31, 2014. Our Form 10-Q will be filed shortly. Each of our SEC filings and earnings press releases is available on 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 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 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 these forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2014, or our Form 10-Q for the fiscal quarter ended October 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 press 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 it is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes.

The non-GAAP 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 third quarter. In Q3, we reported $289 million of revenue and $0.84 of fully diluted earnings per share. Revenue increased 28% year-over-year, and we are also pleased to report that we achieved double-digit revenue growth in Q3 of this year compared to last year if we include KANA in both periods.

Overall, we are pleased with our strong third quarter results which reflect our focus on innovation, strengthening of our competitive position, growing [brand] and expanding portfolio of Actionable Intelligence solutions for a smarter world. Our third quarter performance followed the strong execution we had in the first two quarters, and we believe we are well-positioned to finish the year strong. Today, we will be providing preliminary guidance for our next fiscal year.

And in that context, I would like to discuss the progress we are making executing a growth strategy. As you know, earlier this year, we discussed our growth strategy and expanding our TAM to all addressable markets. We are pleased with the progress we have made, not only as reflected by the financial performance of the last three quarters, but also in terms of the foundation we have laid for category leadership in the customer engagement optimization, security intelligence and fraud risk and compliance.

These market areas share similar needs and can greatly benefit from implementing Actionable Intelligence solutions that enable customers to analyze large volumes of structured and unstructured information and unearth critical insights from the data for smarter decisions. We believe the Verint actionable intelligence platform is a key differentiator in our ability to execute on our strategy. Verint offers its customers advanced technology, domain expertise, and customer centric services to support a capture voice, video, text and other structured and unstructured data, to process and analyze this data, and to generate actionable insights across many domains and industries.

Over the last decade, Verint has invested more than $1 billion in research and development. Our R&D investment this year has increased in terms of percentage of revenue, reflecting our investment in new innovative solutions, some of which will be launched to market next year. Our long-term business model is focused on both top line growth and gradual margin expansion. We believe that efficiencies of scale can allow us to increase our investment in innovation while improving operating margins over time.

Our markets remain highly fragmented, and we will continue to make selective acquisitions that would help accelerate our growth in innovation, increasing shareholder value. Now I would like to discuss in more detail the trends and growth drivers in two key areas, customer engagement optimization and cyber security. The acquisition of KANA and the unique combination of workforce optimization solutions with customer service management solutions positions us well to compete in the larger CRM market.

Traditional CRM solutions are not designed to effectively address today's omnichannel customer service requirements. As a result, we have been able to see our end market is going through a period of disruption, as organizations are increasingly looking for actionable intelligence that can help them deliver a consistent level of customer engagement across all of their interaction channels. The integration of KANA is progressing well.

Today, Verint offers the market the broadest portfolio of customer engagement optimization solutions. Verint's portfolio is clearly differentiated and we will continue to lead the market with innovation. During the quarter, we announced a new cloud-based offering for actionable intelligence across multiple customer channels, such as voice, Web, mobile, chat, social media and self-service.

With this new offering, called Engagement Analytics, organizations can match their customer journeys across multiple channels, gain a deeper understanding of their customers' experience, as well as their employees' performance. As discussed earlier, we believe are actionable intelligence platform helps us to introduce new analytical solutions more quickly in response to evolving market requirements and this new offering is an example.

Our existing and prospective customers see the immediate and long-term benefits from purchasing multiple best-in-class solutions from a single vendor. These benefits include reduced integration effort, the ability to gain a multi-channel view of their customers' journey and improved overall customer experience. During the quarter, we saw existing Verint customers interested in adding KANA applications. We saw KANA customers interested in adding Verint applications, as well as new customers selecting Verint and citing our broad portfolio as a key differentiator.

We are encouraged by our progress with cross-selling opportunities, and we expect our strategy and unique position to support sustainable growth over time. Turning to the area of cyber security, threats continue to evolve and organizations are looking for new technologies and processes to better protect themselves against sophisticated cyber attacks. We believe that leveraging actionable intelligence is the right approach for building a more effective cyber security program. Today, cyber security customers are purchasing multiple technologies, and I would like to explain where are Actionable Intelligence cyber offering sits within the overall cyber market.

According to a framework established by an industry research firm, the cyber market is comprised of three components which they call fundamental technologies, advanced technologies, and lean-forward technologies. These components are defined as follows. Fundamental technologies are designed to keep malware out of the network with products such as firewalls and intrusion invention.

Advanced technologies are designed to consolidate and prioritize security events across multiple network devices to enable more efficient incident management and include security information and event management solutions. Finally, they believe that even more sophisticated solutions focusing on network endpoint and payload behavior are necessary, and they refer to these solutions as lean-forward security technologies.

Within this framework, Verint is focused on the third component, lean-forward cyber security technologies. Our strategy is to leverage actionable intelligence to address the demand for innovative cyber security solutions, and to help large-scale organizations identify, investigate and eliminate cyber threats. Our cyber security platform is open and scalable and designed to help customers analyze network end point and payload behaviors.

This includes capabilities such as network analysis that identifies malware already inside the network environment, endpoint behavior analytics and advanced investigative solutions that capture network data over time to enable both real-time and historical forensics. As we discussed during our last call, our go-to-market strategy has been focused on government customers that require sophisticated and scalable solutions. We continue to grow our pipeline in the government market segment.

In addition, we are now investing in a go-to-market strategy for the enterprise market segment, with initial focus on the enterprise that have high risk of cyber attacks. The enterprise market represents expansion of our cyber TAM and we expect to be in a position to enter this market in the second half of next year. Our cyber investments in Q3, which we expect to continue into Q4 and next year, includes adding people in product development, expanding the sales force to increase market coverage, and expanding marketing programs.

Overall, we are pleased with the progress we are making in the cyber area and expect it to drive significant revenue growth next year. One additional market I would like to cover is fraud risk and compliance. As discussed in prior calls, this market is highly fragmented and customers are looking to leverage insights from big data to mitigate fraud and ensure compliance.

We believe that Verint's actionable intelligence platform is a strong foundation that allows us to fuse data from many different sources, unearth insights from the data, and apply those insights to address fraud and compliance pinpoints. In particular, our expertise in voice and video analytics represent differentiated capabilities. For example, in the retail market, our ability to leverage insights from video and analyze shoppers and employee behavior is an effective tool to identify store theft and reduce shrinkage.

In the banking market, voice biometrics and video behavior analytics, combined with facial recognition and transaction data are effective tools to identify ATM fraud and call center fraud and ensure compliance. As discussed in the past, video is an important data source for fraud risk and compliance, as well as for security intelligence. And in that regard, we continue to align our video business into these two areas.

At this point, I would like to thank Verint's 4,700 professionals for their passion and focus on innovation and execution. I believe we are executing well against our growth strategy and I'm very proud of what our employees accomplish every day. Thanks to their hard work, I believe we are well positioned for sustained growth and continued market leadership. Turning to guidance.

For the year ending January 31, 2015, we are slightly increasing the midpoint of our non-GAAP revenue guidance, while narrowing the range to $1.14 billion to $1.165 billion. Our guidance for non-GAAP diluted EPS is unchanged at a range of $3.35 to $3.50, as we continue to invest for long-term growth. For the year ending January 31, 2016, we are introducing preliminary guidance as follows.

We expect non-GAAP revenue in the range of $1.225 billion to $1.275 billion and non-GAAP diluted EPS in the range of $3.65 to $3.85. The high end of this revenue guidance represents double-digit organic growth compared to the midpoint of our current year guidance. Consistent with our long-term business model, our EPS guidance reflects some margin expansion. We look forward to continued growth and market leadership. And now let me turn the call over to Doug.

Yes, thanks, Dan, and good afternoon, everyone. Most of our discussion today will focus on non-GAAP financial measures, and unless otherwise indicated, results discussed are on a non-GAAP basis. 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 done on our convertible notes. I will start my discussion today with the areas revenue, gross margin, and operating margin.

In the third quarter, we generated $289 million of revenue across our three segments, with $172 million in enterprise intelligence, $93 million in communications intelligence, and $24 million in video intelligence. This compares to $225 million of total revenue in the third quarter of the prior year, with $126 million in enterprise, $71 million in communications, and $28 million in video.

In terms of geography, in Q3, we generated $153 million in the Americas, $97 million in EMEA, and $39 million in APAC. This compares to $119 million in the Americas, $49 million in EMEA, and $57 million in APAC in the third quarter of the prior year. Q3 gross margins were 67.8%, up from the 67.5% in Q2, and compared to 69.1% in Q3 last year. Year-to-date, gross margins were 67.2% compared to 68.1% in the prior year due to the inclusion of KANA and their services mix.

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 expect gross margins for the year approximately what we experienced in Q3. During the third quarter, we generated operating income of $65 million compared to $56 million in Q3 of last year. Our EBITDA for the quarter came in at $70 million.

This brings our first nine months EBITDA to approximately $189 million compared to $157 million in the first nine months of the prior year, representing 21% year-over-year growth. Now let's turn to other income and interest expense. In the third quarter, other expense net totaled $7.4 million, reflecting $6 million of interest expense and a $1.9 million loss from foreign exchange driven by inter-Company balance sheet translations offset by $0.5 million of interest in other income.

Our cash tax rate was 8.3%. 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. For the quarter, we had 61.5 million average diluted shares.

These drove results of diluted EPS of $0.84 for Q3, and $2.28 for the first nine months, compared to $1.93 in the first nine months of last year, representing 18% year-over-year growth. Now let's turn to the balance sheet. As of October 31, 2014, we had approximately $272 million of cash and short-term investments, including restricted cash. Q3 cash flow from operations on a GAAP basis came in at $20 million, bringing the first nine months cash flow to $90 million compared to $115 million in the first nine months of the prior year.

As we discussed in the past, our cash from operations can fluctuate from quarter-to-quarter due to a number of factors, including the timing of payments or customer collections, and we expect another strong year for cash generation. We ended the quarter with gross debt of approximately $811 million and net debt of approximately $539 million, excluding discounts associated primarily with our convertible debt.

Before moving to Q&A, I'd like to discuss our guidance for the year ending January 31, 2015. We expect to finish the year strong and expect non-GAAP revenue for the year to be in a range of $1.14 billion to $1.165 billion, a slight increase to the midpoint of our prior guidance. Throughout this year, we became more confident and we are pleased that we were able to raise our guidance several times resulting in a midpoint of our current revenue guidance being nearly $50 million higher than our initial guidance.

We expect our quarterly interest and other expense for the fourth quarter, excluding the potential impact of foreign exchange, to be approximately $5.4 million. 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 59.4 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.

As Dan mentioned earlier, today we're also introducing our preliminary guidance for next year. For the year ending January 31, 2016, we expect non-GAAP revenue in the range of $1.225 billion to $1.275 billion, and non-GAAP diluted EPS in the range of $3.65 to $3.85. The high end of this revenue guidance represents double-digit organic growth year-over-year compared to the midpoint of our current year guidance. Our EPS guidance reflects some margin expansion as we continue to scale the business.

For purposes of your models, you can assume approximately $6 million per quarter of interest expense, an annual tax rate of 9.5%, and 62 million of diluted shares for the year. In summary, we are pleased with the execution of our strategy, our expanding portfolio of Actionable Intelligence solutions, strong competitive position, and we believe we are very well-positioned for continued growth. This concludes our prepared remarks. And with that, operator, can we please open up the lines for questions?

(Operator instructions) Daniel Ives.

Operator, we can't hear any question. Are you there, operator?

Yes.

We did not hear the question.

One moment. Shaul Eyal with Oppenheimer & Co.

Thank you, operator. Hi, good afternoon, guys. [Great] quarter indeed. A couple of quick questions on my end. Dan, thank you for the break out of the cyber security modeling into those three buckets for us.

With respect to the leaning-forward segment in which Verint seems to be participating, end point, open, open source, scalable. Who are the names that you are mostly running into in the current RSP environment on that [pocket?]

As we discussed in the past, right now our focus is on larger programs. And we see ourselves competing with integrators, as well as partnering with integrators. Those integrators will put together a proposal based on many different vendors, and you can find a lot of the up-and-coming companies in cyber security that consider themselves as part of this leaning-forward technology segment.

Our goal is to provide a platform that includes many capabilities. So even when we partner with integrators, we are able to provide those integrators with a big part of the solution delivered by Verint and, therefore, consolidate a lot of the disparate solutions from multiple vendors into one platform. As we go into the future, I mentioned we are getting ready to launch next year also our approach to the enterprise market.

We do at this point see ourselves also partnering with channels and IT integrators. Not necessarily the same integrators that we see in the larger government projects, but our approach will be also similar in terms of working directly with the end users on providing them payloads and able to look at our capabilities. But at the same time, we are open to deliver our solutions either directly or through partners.

Got it. And while sticking on the cyber security segment, Dan, talk to us about -- we all hear about what is happening from a (inaudible) perspective, mainly on the enterprise front. Can you also provide us with some color as to what is happening with critical infrastructure? Type of assignments, type of threats?

Yes, the threats are actually growing in this area because of the potential damage to infrastructure. And while in enterprise organizations, they have already been exposed to casual attacks where the hackers, less sophisticated attacks trying to penetrate the network through pretty simplistic malware. When it comes to government and critical infrastructure the threats are much more sophisticated and also attackers are much more patient in terms of trying to infiltrate networks that potentially stay dormant and not cause damage until they think it is the right time.

So I think our approach of leaning-forward technologies is the ability to detect the malware even while it is not very active is the right approach for critical infrastructure that needs to, not just address cyber attacks while they're happening, but actually detect those attacks before they're happening, early enough to prevent severe damage.

Got it. Thank you for that

Daniel Ives.

Great, thanks, guys. It's actually Jim Warren for Dan Ives. If you could just go over some of the puts and takes as you are thinking about initial guidance for FY16? Just in terms of what you are seeing maybe with cross-sell opportunities and on the cyber front?

Yes. So as we look into next year, obviously, we look at two main growth drivers which we identified, are the customer engagement optimization and cyber. As we look at what we did this year, we laid strong foundations in both areas in terms of both product, and strong brand and market presence. This year, we are increasing our revenue by $250 million from $910 million last year until over $1,150 million at our midpoint. So we surely created scale in both areas.

At the same time, we're delivering very strong EPS, 20% EPS growth at our midpoint. We have introduced products to market, we are getting more, larger deals. We announced big deals every quarter, and similarly in Q3, we had a $10 million security deal and a $5 million from a new customer in security, and another $3 million in [outsourcer] and another $3 million in an insurance company.

So the number of multi-million dollar or seven-figure deals is increasing as we create a larger portfolio and are able to go into these markets as a more strategic partner to our customers. So with all of that foundation this year, we look at next year and we're targeting double-digit growth. So we set the high end of our revenue guidance at the double-digit growth.

And we opened a range of about $50 million below that target just because it is preliminary and early in the year and given the fluidity of the overall macro environment. We are very much growth oriented and we are investing to grow. At the same time, because we are getting scale of efficiencies, and as we integrate KANA, we are also getting efficiencies from the integration.

We believe that next year that we you are able to continue to invest in growth, but at the same time, we will see some margin expansion. And our EPS guidance for next year represents bottom line going faster than top line.

Okay, great. And then, could you just update us on your M&A strategy, what you might be looking at now, and what is interesting that is out there?

Yes, there are many, many things that are interesting to us. Obviously, it is a fragmented market, but also one that has a lot of private investment that is going into this market and a lot of companies are innovative. So the most compelling opportunities for us are where we can gain technology and products that we can add to our growing portfolio, and almost 1,000 people in sales and marketing that can take to market products much faster.

So clearly lots of innovation. We have been acquisitive in the past, and we're going to continue to make selective acquisitions where we see good opportunity for growth in innovation, as well as a culture fit and an opportunity to create shareholder value.

Thanks very much.

Greg Dunham with Goldman Sachs.

Good afternoon, and thanks for taking my question. I guess first off on the cyber security side and the entry to the enterprise, why is now the right time? What have you learned in cyber and what have you done on the platform side to make now the right time? And how are you going to attack this market differently than attacking the government market historically?

Okay, so one thing that we mentioned, I think in the last two calls, is that we want to gain some more traction and build some infrastructure internally before we expand our TAM in cyber security. So where we are right now, we are looking this year to generate several tens of millions of dollars in revenue from cyber solutions, and we expect to double that, our revenue from cyber solutions next year.

And that gives us, we think, the foundation of the infrastructure in terms of the number of people and the ability to pay more attention to an expanded market. As I mentioned, we are now starting to invest toward enterprise market, but we will be investing over several quarters and being ready actually to launch into the market in the second half of next year. And where we need to be prepared and what we are going to do differently is on a number of fronts.

First from a product perspective, there are some specific areas around, for example, cloud services where the enterprise market is heavily using cloud services and government customers are less concerned about that. They're more looking to secure the network overall, the backbone. So there are certain components in our solution that needs to be added or expanded to be even more competitive in the enterprise market.

We will come to the enterprise market with the same approach of a platform. So from that perspective, the experience we are gaining with customers now in delivering the platform is, obviously, something we will leverage into the enterprise market. And then we need to make more investment in terms of sales coverage, as well as marketing programs to create the brand, and as I mentioned before, to set up some new partnerships with IT integrators that we believe would be the right go-to market.

Right now we are targeting very large programs. We expect that as we go to the enterprise market, our ASP is going to be somewhat lower. Still, as I mentioned, we want to go after the very high risk enterprises which include banks, utilities. There are some companies that are much more concerned about sophisticated text than others.

So we're not looking to start with an ASP of a couple of hundred thousand dollars. But certainly not targeting the multi-million-dollar programs where we have now. So a number of new initiatives leveraging our experience and growing infrastructure. And we think it's the right time, not so much because the market has changed, we believe the market is ready for these solutions. ABut as we mentioned before, we do need internally to develop that infrastructure and we think we will be ready the second part of next year.

That's helpful. And maybe one for Doug. What was the FX impact on you this quarter, and how does FX play a role in your guidance for next year?

Yes, sure, Greg. We do have some FX exposure, the stronger dollar we've seen lately, particularly in Europe, has given us a little bit of a revenue headwind. But we also in those currencies have lower expenses. Some countries like Israel, we have got expense but not too much revenue in that currency, so we use a hedging program. In the third quarter, on a year-to-date basis, revenues would have been about $3 million higher if that were not for the stronger dollar compared to last year.

And next year, any sense of the basis point headwind?

Well, our guidance is really based on rates as we see them today, and that could really go either way for us, right?

Right. I guess my question is because it has been such a strong dollar that had FX rates -- well, we can talk offline on that. Thank you.

Yes, but generally, if I can add here, is that we see, this year we see Americas and APAC are strong and that's where we are denominated in dollars. EMEA, we are certainly recovering. We expect the recovery to continue next year. EMEA is where we have British pounds and euro exposures.

So we do see potential stronger dollar against the euro would create headwind, but if the shekel continues to be weak, that is a tailwind. But right now we don't see material changes to where we expect to be based on current rates.

Jeff Kessler with Imperial Capital.

Thank you. Given the increase in the base, the broader base of analytics that you are selling, what is the level, and who are you having the conversation with more increasingly as you go forward? In other words, has the conversation level with who you are selling to changed at the companies that you are selling your packages to and your modules to because you're now increasing your scale and your breadth in what you are actually offering to the client?

That is absolutely correct. We see many more conversations with the CXOs. IT was always an important partner. But our conversations are shifting more to the CEO, the CFO.

Some of the areas that we are addressing are also hot areas and are very strategic whether it is customer engagement that I think -- we all hear more and more CEOs talk about the fact that to personalize our service and delivery to customers. We hear CEOs talking about compliance and, obviously, cyber risk. So the topics that we are addressing affords us to have those conversations with CXOs, and, of course, now the broader portfolio of solutions that address multiple pinpoints is also very interesting.

We are also augmenting our technology with more strategic services and that has positioned us also well to deliver not just technology, but a complete solution and we do that directly, as well as with our service partners.

And that was actually leading to my next question. Can you give some type of analysis or breakdown or just general description of how services versus products are trending at this point?

Doug can add, but it is basically a 60/40 mix. And it is pretty stable right now.

Our product revenue continues to grow each quarter, and this year it is expected to grow again into Q4. As Dan mentioned, we've got about a 40/60 mix, and we're assuming it kind of continues at that level.

Okay. One final question, and that is, you have done a fairly good job of talking about where you're going to invest. My assumption is that as you do more cross-selling between KANA and your workforce and customer enhancement management services, and you do more cross-selling between your fraud cyber services with existing customers that are already using these, we will call these base products, you are gaining margin.

How do you mark that gain in margin against the investments you are going to make to try to basically come up with how you get to a margin number for next year? In other words, how are you going to gauge how much investment you are going to make given that it appears that your margins are going up by the cross-selling that you are doing right now?

Yes, you are very correct. We have a strategy of gaining mind share as well as wallet share. And clearly the wallet share, we can improve margins from the cross-selling opportunities, whether it is across Verint KANA or across our security portfolio. So wallet share progress well and we believe create margin opportunities, mind share is where we have to make the investments in creating the brand and the category leadership that could sustain growth for many, many years. And as we have stated many times we have a multi-year growth strategy.

So at the end of the day, we need to balance the margin opportunities that come from wallet share with investments that come from mind share. And where we choose to target for next year is a modest margin improvement that allow us to deliver more shareholder value short term while delivering investments for shareholder value longer term.

Jonathan Ho with William Blair.

I just wanted to see if you could, number one, give us a little bit more color in terms of the growth rates for segments next year, and how we should be thinking about that? I know you guys don't give specific segment guidance, but if you could just give us a sense of how you think they are going to grow, I think that would probably be helpful?

We think about market areas rather than segments. We organized around three segments and that is the way we report. But as we are discussing with our strategy, our customer engagement optimization and security intelligence and fraud risk and compliance is really the markets where we focus. And within those markets, we see different growth rates in different areas.

I mentioned before, we expect the cyber solutions to double, so that's, obviously, a very high growth rate. We expect other areas to have lower growth rates. I think one area that we have been declining is our video business. I mentioned that we are transitioning the video business away from the hardware product into alignment with the security situational awareness portfolio and the fraud portfolio. And we believe that we are going to transition to growth next year. And generally we see growth in all segments, but not necessarily at the same rates.

Got it, that's helpful. And then, just in terms of the SaaS solution that you talked about releasing, can you give us a sense of how that demand trend has been tracking over time? Whether you are seeing an increase in demand for the SaaS solution and how this potentially impacts your revenue model, as well? Whether there's any sort of shifts we should be aware of, if you're recognizing revenue as SaaS versus traditional license?

Yes, SaaS is growing and is growing faster than the overall revenue. But more importantly is our approach to the SaaS market, we actually target a strategy of deployment flexibility. We want to give our customers complete flexibility whether they want to deploy in SaaS or on-premise. And what we see in our market is some customers prefer SaaS and other customers prefer on-premise and other customers prefer hybrid.

Certain parts of our solutions they would like on-premise and other parts they would like to get on a SaaS basis. So our approach here is rather than making a big investment in SaaS, we make an ongoing investment in developing our technology that could be deployed in any way, in SaaS, on-premise, or hybrid. We strongly believe that this is the way of the future, that SaaS in some cases is very restrictive to customers, especially that some SaaS applications come with inability to integrate well into a customer's specific environment.

And as we deliver a platform with growing capabilities, the integration capabilities of our platform to customer's existing environment and other third-party applications is also important. So with that in mind, what we see today is that mostly the mid-markets prefers SaaS solutions, while the high end of the market still prefers on-premise solutions or hybrid.

And the mid-market for us is a TAM expansion because historically we were not focused on the mid-market and that's where we see most of our SaaS. I mentioned it is growing faster than the other revenue, but it is mostly growing because we have more and more mid-market customers that are buying our solutions as SaaS. Overall, SaaS is still a small number, it's under 10% of all our revenue. And we expect it to continue to grow at a very fast rate.

Great, thank you.

Sure.

Michael Nemeroff.

Hi, this is Kyle Chen in for Michael Nemeroff. Thanks for taking the question. Relative to your 2016 outlook, just wondering how much conservatism you are baking into the outlook given the (inaudible) portion of large deals in your pipeline and then potential timing of when deals get closed, and also the rate in which they get implemented? And also, if you can remind us when you expect to see the revenue ramp of your previously announced $100 million cyber [queue]?

Okay. So a portion of the guidance for the balance of this year, which is basically Q4, is actually pretty simple. We updated our outlook bottom up, we kind of had a few million dollars over achievement in Q3, and that's what we are now increasing the midpoint by a few million dollars. This does not have a really significant impact on EPS.

So Q4 is historically has been our strongest quarter in the year. This is a typical phenomenon in the software industry. We expect this Q4 to be very strong for us. We expect to book a large number of deals. But in terms of being able to convert large deals into revenue, obviously, the nature of large deals is that it is recognized over time.

So in terms of the large cyber security project that we announced, it is the same concept. We said that it is going to be recognized over three fiscal years, and with some revenues will be this year. And I mentioned that overall from the cyber solutions we expect several tens of millions of dollars this year and that also includes the contribution from the large projects and it will continue into next year and the year beyond. Was there any other part of your question that I did not answer?

That's really helpful color, but I guess I was more asking relative to your preliminary 2016 outlook, how much of that is contingent upon the closing of large deals? And to the extent that some of these deals come in a little quicker than expected, or the implementation of the existing deals are executed faster than expected, could that imply a potential upside for the revenue outlook next year?

Yes, so it is a preliminary guidance that is based on strong execution in customer engagement. We are progressing well with the KANA integration. We did very well this year growing in customer engagement organically, but at the same time we invested a lot of energy in the integration, and we are happy that it has been performing well. But if it all goes well, hopefully, we will see some traction into next year. So that is one area which we are excited that will be a growth driver next year.

Obviously, we discussed the cyber. And now in terms of big deals, we absolutely expect to land big deals. It has been now every quarter, part of how we go to market, and we have a pipeline a big deals. In terms of the revenue, the revenue implication of big deals, obviously, the earlier in the year that we can land those deals, the more revenue we will be able to recognize during that year, just because of the deployment cycle.

And right now, we're giving you what we target internally in terms of double-digit revenue growth. And, of course, there is the fluidity of the overall macro environment, is a risk, and there could also be upside from landing bigger deals early and recognizing a bigger portion of those deals next year.

Great, that's helpful. I guess just one more question. Relative to your sales and marketing investment, can you comment on your productivity and expectations for new salespeople, particularly within the enterprise cyber initiative? And how that should influence the shape of linearity of growth next year?

So we benefit from more than 10,000 customers and many of our customers are potential targets for cyber security. So we are fortunate that many of our salespeople are not looking at hunting new accounts, but more farming existing accounts. That's why targets and productivity and efficiency of salespeople really varies from sales guys who are more hunters looking for brand new opportunities to farmers. So that is our model.

We have salespeople that we expect to bring more than $10 million next year. We have salespeople that we expect $1 million or $2 million. In terms of the overall efficiencies, we are adding salespeople. We mentioned in the last call we expect to increase on average the head count by 100 people every quarter.

We increased close to this number in Q3 and we expect to continue in Q4. And part of that headcount increase is also in sales and marketing. So in a growth mode, we hire salespeople. We hope every one of them will become highly productive. But we certainly, as we continue to grow, we will need more and more salespeople, and you could expect that every quarter we will continue in hiring and training and training salespeople to be productive.

Okay, thank you very much.

There are no further questions in queue at this time.

Thank you, operator, and thank you, everyone, for joining us today and have a great night. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a great day.