Verint Systems Inc (VRNT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2016 Verint Systems Incorporated earnings conference call. My name is Denise and I will be your Operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I will now turn the conference over to Mr. Alan Roden, Senior Vice President of Corporate Development. Please proceed, sir.

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 a second fiscal quarter ended July 31, 2015. 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 the SEC website.

Before starting to 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 Federal Security laws. These forward-looking statements are based on Management's current expectations and are no guarantee 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 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 more detailed discussion of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in our forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2015 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 investors relations link on our website. Non-GAAP financial information should not be considered in isolation or as a substitute to GAAP financial information, but included because Management believes it provides meaningful supplemental information regarding our operating results when assessing our business and it's useful to investors for informational and comparative purposes. The non-GAAP financial measures the Company uses have limitation 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 achieved $297 million of revenue and $59 million of operating income with approximately 20% operating margin. These operating results drove non-GAAP diluted EPS of $0.76 when excluding nonoperating foreign exchange charges. We are pleased with our Q2 revenue, which reflects approximately 10% sequential growth on a reported basis and 8% growth year over year on a constant currency basis.

During the first half of the year, Verint continued to focus on making the world smarter in two areas of actionable intelligent, the customer engagement optimization and Security Intelligence. These two areas share similar challenges of analyzing large volumes of structured and unstructured information and leveraging critical insights from the data to allow people to make smarter decisions.

We believe that the actionable intelligence market is in early stage, providing Verint the opportunity for long-term growth. And earlier this year, we discussed our strategy for expanding our total addressable market to $8 billion. This strategy includes extending our leadership position by investing and expanding our actionable intelligence portfolio and market coverage.

Looking forward, in the second half of the year, we plan to continue to invest in advancing these strategic initiatives and I would now like to update you on the progress we are making. I'd like to start with customer engagement optimization, which we will refer to as CEO. We believe that forward-thinking enterprises are looking to address evolving consumer expectations by transforming their customer service to deliver high-quality consistent customer engagements across multiple engagement channels.

Our strategy is to address this transformation by offering the market an integrated and open actionable intelligence platform combined with the industry's broadest portfolio of customer engagement applications. Our platform approach enables enterprises to purchase multiple best of rate applications from a single vendor, reducing the amount of integration otherwise required while significantly improving optimization capabilities with actionable intelligence. The market feedback to our CEO message has been very positive, and in the second half of this year, we will continue educating the market about the benefits of this approach.

As previously discussed the breath of our product portfolio, services and platform approach positions Verint very well with enterprises with six large-scale transformative projects. At the same time we recognize that many enterprises are at early stages in their engagement strategy, and for these customers we enable them to take a more evolutionary approach.

During the quarter we received multiple large orders that demonstrate the progress of our CEO strategy, including approximately $5 million in orders from a leading information technology customer. This customer had previously deployed Verint's workforce management solutions and decided to add our desktop and process analytics to drive employee performance and process improvement for their customer service and back office operations.

Approximately $2 million in order from a financial services company in connection with their roll out of multiple CEO applications, bringing total orders from this customer to approximately $9 million since the beginning of last year. Approximately $2 million in orders from an insurance customer taking an incremental step in their omni channel customer service transformation evolution, bringing total orders from this customer for the first half of the year to nearly $5 million, and more than $2 million from another insurance customer as part of its decision to consolidate vendors to achieve the benefits of an integrated approach.

We believe these large orders were driven by our focus on innovation and expanding portfolio and that the ongoing success of our strategy is dependant on our ability to continue to secure large deals.

Another key success factor is our ability to continue to innovate, and here are some examples of recent innovations. We enhanced our identity authentication solution with better real-time decision-making. We enhanced our work simulation functionality to better plan workloads and service levels.

We added machine learning capabilities to speech analytics and further automated root cause analysis. And we added communities as another component of our omni channel offering through a tuck-in asset acquisition. Communities are an emerging customer service channel and a natural extension of our CEO portfolio. We paid approximately $10 million for the assets and gained technology and R&D team and domain expertise in communities.

Verint has become a CEO category leader by combining workforce optimization, engagement management and customer analytics. Looking ahead, we believe we are well-positioned to continued growth as we execute our CEO vision.

Turning to the Security Intelligence market, we offer an actionable intelligence platform combined with broad portfolio of Security Intelligence solutions to address a variety of security threats around the world. During the quarter, we received a number of large orders, including more than $10 million in orders from an existing customer, approximately $10 million in orders from a new customer, approximately $10 million in orders for another existing customer, and two other orders each in excess of $5 million. We believe these large orders reflect our strategy to pursue large security projects with a high level of sophistication.

As discussed on past calls, in the government market, Verint is already a leading provider with a well-known security intelligence brand. In the enterprise cyber security market, we plan to invest gradually to create awareness, including building a dedicated enterprise cyber sales force. We are pleased to announce that since launching our next-generation threat protection system in June, we have received our first cyber orders from enterprise customers. As a reminder, our go-to-market strategy is to focus on both government agencies and large enterprises with the expectation the enterprise projects will start smaller, but can scale over time.

Our success in the Security market is driven by our deep understanding of our customers existing and emerging challenges and by developing innovative solutions to address these challenges. During the quarter we continue to enhance our Security Intelligence capabilities including enhancements to our social media monitoring solution to help accelerate investigations of fraud, criminal activity, terror and national security threats.

Enhancements to our prison solution providing correctional agencies intelligence to identify illegal activities in prisons. And we continue to enhance our cyber offering with malware intelligence and investigative capabilities. To summarize, we believe our platform approach combined a broad portfolio Security Intelligence Solutions positions us well to help organizations around the world address traditional and emerging security threats.

Overall, we're making progress executing against our actionable intelligence strategy and are targeting good growth in the second half of this year. Going forward we'll continue to report a revenue growth on a constant currency basis as exchange rates continue to impact our reported growth rates. Just since our last conference call in June, exchange rates have worsened and have negatively impacted our revenue outlook for the year by another $10 million.

In addition to currency fluctuations, we're monitoring the global economic environment as recent uncertainty about regional and global growth may impact our customers' buying decisions particularly around larger transactions. The combination of these factors influence our outlook for the year and we're refining our annual revenue guidance to a range of $1.18 billion to $1.23 billion, translating to earnings per share of $3.45 at the midpoint. Our new revenue guidance reflects 8% growth on a constant currency basis at the midpoint. To summarize, consistent with our growth strategy we will continue to innovate and invest for longer term growth and we believe we're well positioned to expand our market leadership.

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 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 nonrecurring charges. For certain metrics it also includes adjustments related to foreign-exchange rates.

I'll start my discussion today with the areas of revenue, gross margin and operating margin. In the second quarter, we generated $297 million of revenue across our three segments, with $160 million in Enterprise Intelligence, $107 million in Communications Intelligence, and $30 million in Video Intelligence. This compares to $285 million of total revenue in the second quarter of the prior year with $169 million in Enterprise, $87 million in Communications and $29 million in Video.

In terms of geography, in Q2 we generated $151 million in the Americas, $100 million in EMEA and $46 million in APAC. This compares to approximately $140 million in the Americas, $97 million in EMEA and $48 million in APAC in the second quarter of last year. Overall we are pleased with the $27 million sequential increase in revenue we experienced in Q1 from -- in Q2 from Q1.

Given the recent foreign-exchange movements, we'd also like to discuss our revenue on a constant currency basis to help investors better understand the underlying operational performance of our Business. In that regard, on a constant currency basis, our revenue in Q2 would have been $308 million, or approximately $11 million higher, representing 8% year-over-year growth.

Q2 gross margins were 65.3%. As we discussed in the past due to product, services and revenue mix within or across segments, overall gross margins can fluctuate significantly from quarter to quarter. For the second half of the year we expect gross margins to be in the range of 67% to 68%, similar to the second half of last year.

During the second quarter we generated operating income of $59 million with an operating margin of 19.9%. Our adjusted EBITDA for the quarter came in at $65 million, or 21.9% of revenue.

Now let's turn to other income and interest expense. In the second quarter, other expense net totaled $9.4 million, reflecting $6 million of interest expense and a $3.4 million loss from foreign exchange driven primarily by inter-Company balance sheet translations.

Our cash tax rate was 8.6%. As we discussed previously we expect to enjoy a low cash tax rate for several years due to our NOLs and the amount income we generate in low tax rate jurisdictions. For the quarter we had 62.8 million average diluted shares outstanding. These drove results of a diluted EPS of $0.70, or $0.76 when excluding the $3.4 million nonoperating foreign-exchange loss.

Now turning to the balance sheet. As of July 31, 2015, we had approximately $386 million of cash and short-term investments including restricted cash. First half cash flow from operations on a GAAP basis came in at $66 million, similar to the $70 million we generated in the first half of last year. We ended the quarter with net debt of approximately $426 million, excluding discounts primarily associated with our convertible debt.

Before moving to Q&A I'd like to discuss our current guidance for the year ending January 31, 2016. Our revenue guidance is in a range of $1.18 billion to $1.23 billion. On a constant currency basis this translates to a range of $1.25 billion to $1.5 billion of revenue(sic-see press release �$1.225 billion to $1.275 billion�). The midpoint of our guidance reflects 8% year-over-year constant currency growth.

Following strong sequential growth in Q2, we expect Q3 revenue to be at a similar level, with operating margins similar to Q2 as well. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $6 million. Given the continued volatility in foreign exchange rates, there could be a gain or loss related to balance sheet translations in our future results, which is not included in our guidance.

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 63.1 million average diluted shares outstanding for the year, we expect EPS at the midpoint of our revenue range to be $3.45.

Overall, our guidance assumes an acceleration of growth in the second half of the year, including a strong Q4 which is typically our strongest quarter. And we are monitoring the impact of foreign exchange, state of the global economy, as well is the timing of large projects as we progress through the year. In conclusion, we're pleased with our expanding portfolio of actionable intelligence solutions and strong competitive position and believe we are well positioned for continued growth.

This concludes my prepared remarks, so with that Operator can we please open up the line for questions?

(Operator Instructions)

Dan Ives with FBR.

First off in terms of the EPS hit, (inaudible) and would tap on top line and currency, why the acceleration in investments relative to where we were three months ago? What's changed? Is it [type on], are there some larger deals out, it's more in the Security, maybe you could just explain that more in terms of the delta from a EPS perspective.

Okay. So let me address the overall outlook perspective we have, what changed and how we view the second half of the year. And then Doug can go specifically to the EPS number.

So as we look at -- we finish Q2, I am pleased with our Q2 revenue results, both in terms of sequential and year-over-year growth reflecting that Verint is well positioned. And when I look at our portfolio today we have the broadest portfolio we ever had across both Enterprise and the Security markets. Also our platform approach positions us well to help customers with their large scale transformative initiative. And our strategy has evolved to address those larger opportunities.

So, in each one we have invested in educating the market and we have many large deals in our H2 pipeline. Now when we look at this pipeline in H2, it's difficult to focus timing of large deals, sometimes customers take longer to understand the scope of the performance, and to obtain the necessary buy ins and approvals for multiple stakeholders.

Also the recent uncertainty in the economy may impact buyers' decision and may require longer approval cycles. And therefore as we look to the outlook it's more prudent to assume that certain deals may get delayed, may be eliminated or may get executed in stages.

So in summary, before I turn it over to Doug, I'd like to put our thought in perspective and context. So last year we reported double-digit organic growth and in the beginning of this year, we were also targeting a year of double-digit growth. On one hand we had good revenue growth in Q2, on the other hand there is more uncertainty. Which results in an overall outlook of 8% growth and we adjusted our revenue outlook and that impact our EPS outlook. Doug do you want to address how we think about EPS?

Sure Dan. Hey, Daniel.

In terms of EPS, don't forget we did have about $0.06 of a nonoperating hit because of foreign exchange in our numbers. So the other part of the reduction is really based on lower revenue. So at the mid point of the revenue and the earnings EPS guidance we've given, we still expect operating margins to be 22% to 23% for the year.

Got it, okay it's good to clarify that $0.06 apples to apples just given it was excluded in the number this quarter. Can you address -- there's some that's been out there in the market I'd like you to address it, that Verint's so focused on Security as it's such a big opportunity and the way you guys are going after it, but yet it could defer some of the focus or growth in some of your core brands and other areas, like on the NFIs and in some of the traditional strengths.

I think what's going on in Enterprise is we announced a strategy, what we call the CEO strategy, the customer engagement optimization strategy, and that's clearly a strategy that is expanding our TAM and driving growth long term.

So, when I look at Enterprise this year, we started the year with a slow Q1. And as we discussed before, this was a tough compare to Q1 last year as we did the KANA acquisition at the beginning of last year and we had some benefit from KANA customers holding back and giving us orders post acquisition. But overall we are pleased with the sequential growth in Q2, and we're expecting sequential growth in both Q3 and Q4 in Enterprise with a strong finish for the year, as is typical in our Enterprise business to have a strong Q4.

So last year, again as you know, we had a 37% overall growth in Enterprise, and we were approaching double-digit growth. And last year we also as we did all the integration combining the companies, we also laid the foundation for the combined CEO strategy. And we are this year in H1 we focused on the larger more transformative deals as part of this new strategy and we've been well positioned for large deals, and we have such large deals in our pipeline.

So our outlook for Enterprise suggests more growth in H2. But as I mentioned before we are cautious now as we generally see customers taking longer to make decisions, especially with large deals, which are an important part of this Enterprise strategy. So overall our customers, partners in the channel, they give us very good feedback about this -- about our CEO strategy, and we believe the strategy is still in the early stage and provides us significant growth opportunities over the long run.

Okay, sounds good. Thanks.

Shaul Eyal with Oppenheimer.

Dan, a question on the Enterprise Security on the TPS platform. So, if I'm not mistaken during the June event, during the Analyst Day, you have projected, I believe, zero revenues for the second half of this year, and I believe you've had indicated that you have booked down your first order, specifically on that product. Is that also within the current guidance?

We projected -- you're right, Shaul, we projected minimal and immaterial revenue from our Enterprise market regarding where we were in the evolution of our strategy. We did get a couple of orders, I'd like to remind everyone that, one, in the government market we go after multi-million dollar deals. Our strategy for the enterprise market is to offer customers the opportunity to start small with a sub $1 million project.

So the first couple orders we got are sub $1 million. And we still -- it's in our guidance, but as we mentioned in the June event, we do not consider a material impact from our TPS Enterprise strategy on the results this year. We are building the enterprise cyber sales force as we indicated before. And we started to build that and we'll continue to build it gradually in H2. And we're making this investment with the expectation that we generate more Enterprise revenue from cyber security next year and of course we feel the same time continue to focus on Government agencies, so our Enterprise cyber security will be complementary to our Government cyber security go to market strategy.

Got it. And those various transactions, various deals that you booked, minimal as they are, are they displacement of existing solutions? Or as you indicated also during the Analyst Day mostly Greenfield opportunities, mostly going to those enterprises, which have so far already installed and embedded many security divisions pretty much coming on top of their existing security solutions? So pretty much displacement, multi greenfield opportunities.

Right, so we are targeting larger enterprises that already made investments in cyber security and have many components, but none of them have the platform that we offer. As you may recall, our differentiated approach is offering a platform that provides the opportunity to get actionable intelligence from the various engines and components that makes the cyber security infrastructure.

So in a way we're not trying to replace one to one a similar product, but when we offer our products we may -- customer may choose to discontinue some of the products that they're using and in other cases we do get requests to integrate our product to some other cyber components that they have and they want to keep. And again part of the platform is that integration flexibility of an open platform that we can get input from existing cyber components and put that into our analytics to create better outcome.

In a nutshell, our strategy is not to try to displace similar offering because we believe most of the offerings out there are integrating -- integrators putting together projects that consist of components from multiple venders, but not as tightly integrated as our platform.

Got it. And final one if I may squeeze in, the Intelligence acquisition, so the Intelligence product, will that be added as another application/solution into the multi channel platform right now? Is that the thinking?

Yes exactly. We see communities more and more being in another channel, another engagement channel. This is a channel that is very helpful to enterprises to cut cost because it is primarily self-service as community subscribers help each other. And it's also assisted by some enterprise agents who may help the discussion over communities.

So it is an up-and-coming channel, it's very effective in certain industries where products users can help each other solve problems. And it does fit very well into our omni channel engagement strategy, the ability to understand the customer experience in one engagement channel and then correlate it through other channels and provide a more holistic view of the customer journey.

And what we intend to do in this case, we bought assets, an R&D team, domain expertise, but where we're really going to create value is by giving this to our large sales force to start to sell to our customer base and prospects and integrate that into our platform as another engagement channel.

Got it, thank you.

Michael Nemeroff with Credit Suisse.

Dan, relative to the new guidance, it sounds like you are derisking your outlook due to the macro and more out of conservatism versus actual demand weakness. Now if that statement is correct, should we expect a pretty significant rebound in the first half of 2017? And perhaps you can highlight some of the areas in the product portfolio where you might see weaker demand relative to your initial expectations this year.

Yes, I think that the area that I highlighted before is our sense of uncertainty in the macro and how that is going to impact large projects. Because what we see large projects, we've been selling large projects for many years, as we were obviously reporting to you every quarter on some great wins, and we know these large projects require long sales cycles and that's all built into our plan.

But when there's more uncertainty, the approval cycles may get prolonged. And we did start to see some signs recently that customers want to take longer, and these are big spending, and they want to make sure that their spending the money correctly.

So when we look at the time of large projects, if you asked me can we predict now that H1 next year, the macro environment will be sorted out, obviously we don't know. We're not even at this point, we're just saying we want to be cautious about where we are. Obviously, we're not suggesting that there is a major issue with the economy, we simply don't know.

But what we do see is that obviously exchange rates, we discussed that, that just during the last three months since our last conference call we got an additional negative impact of $10 million on our annual outlook from the strengthening dollar. Also the currency devaluation in certain countries may disrupt their ability to buy. There's certainly slow economic growth in certain countries, and we're a global Company, so there are some emerging countries where there may be impact on government and commercial spending. And then there's, obviously, the impact of uncertainty on large deals.

So all these things as we believe that we have, as I mentioned before, we get very good feedback about our platform approach, about the broad portfolio solutions we have and we believe we have a good strategy. This strategy, our outlook at this point is 8%. And if exchange rates will stabilize obviously next year, we're not going to have to report on a constant currency basis. And I think if uncertainty will diminish, then obviously we'll see more traction in our Business.

Great. And relative to the Telligent acquisition, can you talk about their customer base? What does a logo overlap look like and how we should think about potential revenue synergies over time? And then, Doug, can you tell us if there's any revenue contribution expected for FY16, and what that represents in terms of growth year over year? Thanks.

Yes, so be bought assets under the Telligent brand. This was actually an asset deal divestiture from another company. And it's primarily -- we bought a product in the R&D team.

And in terms of where they're ready installed, there is some overlap in customers, but, obviously, they're very -- they're a tiny company and the big opportunity is to take the product into our customer base and our sales force. And we're not expecting that that's going to happen this year. What we'll do more of education, the product integration and so forth, but certainly it will help for next year.

Great, thanks very much.

Nandan Amladi with Deutsche Bank.

Dan, one of the things that you have discussed on previous calls is the cross-selling opportunity with the [parma] base and you cited a couple of large wins on the previous earnings call. Are there any that are worthy of note this quarter?

So, we discussed this quarter, there was a $5 million deal, there's a $2 million deal, there's this part of a $5 million in H1, there's another $2 million that was part of $9 million over the last 18 months. So, as you can see some of these deals are getting bigger in one chunk, $5 million deal is big for an Enterprise market, and some of these deals are getting executed in chunks.

But our strategy is clearly to become a more strategic partner with our customers and help them solve a bigger problem. We do have the portfolio to do that and we also have the platform approach, which really makes customers more comfortable that they're not just buying point solutions, but they're buying it from a vendor who takes the time to build a platform. And all that is very important component for our strategy.

There was a question before of the growth in our Enterprise and whether we are focused on it. We believe that the KANA acquisition was instrumental for us to build the CEO category. And years ago, when we build the WFO category. Before that people just bought recording, voice recording, they bought work force management, they bought QM, they bought a lot of disparate point solutions and we were the leader in WFO.

And what we're doing now with CEO, is very much the same is putting more components of customer engagement together and putting analytics on top to allow people to do things that they need to do, and they need to do it because the consumer expectations are changing. Because all effective consumers are expecting the only channel engagement to be more unified.

So we think what we're doing is the right strategy, we hear good feedback, we continue to invest in this strategy. We believe that the large deals we have in our pipeline will materialize, and, of course, there is an issue of timing.

Thank you. And a quick follow up on the cyber side, you talked about investing gradually in the Enterprise, including sales teams and at the Analyst session you talked about the overlay approach that you were taking. Three months after the Analyst session is your view still the same? And in terms of the emphasis on your sales and marketing efforts, are you focused more on selling a broader CEO stage or more on the Security side? Thank you.

Yes, the Enterprise sales force is very, very focused on the CEO suite. That 's their primary focus, and all they do regarding enterprise cyber is they are having discussions with customers and generating leads for our cyber security dedicated sales force.

So that, obviously, emphasize what we believe is their primary job, which is there is a lot of opportunities in the CEO strategy which we wanted to focus. But at the same time, we see synergies in terms of getting the cyber product to the same customers that bought CEO and we sell in to continue to align the two sales forces. But that's the primary, the Enterprise sales force, their primary function is to sell on the CEO strategy.

When we look at the cyber opportunity, obviously, as we said before, our initial success in the cyber market was with government customers. And in the government market we target multi-million dollar projects and that's what we continue to do. We think that a cyber opportunity in Enterprise is one that we can execute over time, we think that there is a lot of gaps in enterprise markets in terms of dealing with advanced persistent threats. And that we can address those gaps with the technology, with the actionable intelligence approach and we will do it based on our gradual investments over time.

As we discussed in the past, there may be some times where we decide to invest more in accelerating the cyber security strategy. But at this point we're comfortable with gradual investments and making sure we invest equally in all our growth drivers.

Thank you, that is all for me.

Saliq Khan with Imperial Capital.

One of the things that your team had just mentioned was the fact that you're focused on building the enterprise cyber sales. Could you talk about the process that you do have and the strategies that are in place to better hire or to essentially hire away from some of the competitors that are out there, as well?

Yes, we do look to hire people with cyber security experience. So, it's probably the case that we will be hiring away from competitors. We're not obviously targeting any competitors; there are a lot of cyber security companies. Most of them are small, but there's a lot of different companies with sales people who have experience in this market.

And also, I want to point out if it wasn't clear that we are also looking to do that in a number of geographies. So this is not just a US focus, but we do intend to also hire people in other geographies and go after other territories. So this would probably be sales people that join Verint from a lot of different places.

Think it was mentioned earlier during the call was the fact that (inaudible) see large does tend to take a little bit longer and tend to have longer sales cycle. What is your team essentially doing right now to enhance your revenue visibility?

I think the visibility has to do with the overall level of uncertainties that our customers have. We do have situation, I can give some examples where our customers don't have the visibility. We have a case of a project that is over $10 million, Enterprise project that we expect to win in H2, we've been discussing this with the customer for a long time. Initially started being more than double. It is more than $20 million project and then there was a decision to do this in stages.

So the need is there. I think our customers probably would like to move faster, and as the project gets bigger, there are committees, there's a lot of buy-ins and stakeholders that needs to approve, and of course that has to do with the appetite that the customer organization have for big spending.

So I don't think it's an issue of visibility of our sales force and I think we certainly executed well in Q2 and focused on these large opportunities. But, predicting the timing of these large projects is incrementally more difficult now.

The other thing I had, and maybe it was addressed previously in the call, but the margins for both the product and service segments decreased year over year. What was in the sales mix caused this, and how do we anticipate this on an ongoing basis?

So margins, Doug maybe you want to give clarity. I think we gave some guidance before, Doug discussed the fact that we expect margins in H2 to improve.

What I meant to ask essentially was what was in the actual product mix for both the product, excuse me, and also the service business. What changed within it that caused a drop in the margins?

Yes, in terms of the gross margins, it is largely the mix that we have with large projects and the components within them. How much hardware is on some of the large security projects can influence it. What projects come in to revenue, because we bring the costs in along with the revenue. So it's generally timing.

As we said last year on the calls post KANA acquisition, KANA does have a higher level of attached services. So there's a higher more service component, therefore a little lower margin, in the Enterprise business today. But other than that it's really more the fluctuation in the Security business, the lumpiness there. The second half of the year we expect margins of 67%, 68% similar to last year.

Perfect.

So I think it would be helpful, so as Doug said we expect gross margins to improve in the second half. We also expect to increase our OpEx in the second half and still get to the 22%, 23% in our model.

So when you look at our EPS guidance, Doug discussed that there was a $0.06 impact in Q2 because of the nonoperating effect. But largely we intend to continue to invest in growth. We're a growth Company, we have a growth profile. And as we now look at reducing our revenue outlook by $20 million, some of it, obviously, falls into the EPS despite better growth margins because we also are going to increase our OpEx investment in H2 versus H1.

And I mentioned a few minutes ago we still expect our operating margins for the full year to be 22%, 23% where they were last year.

Got it. And guys, one last question for you as well. And one of the things that you just mentioned was while you are reducing the overall outlook as looking at the second half you are increasing the OpEx, but you're very focused on the growth strategy. With that being the case, you are sitting on about $360 million of cash. What is the best use of this cash as we look out, not even just one quarter, but over the next four quarters or so?

So I think, obviously, it's a relevant question. But the uncertainty that is around all of us makes it difficult to answer the question decisively at this point, because, obviously, we're very focused on growth organically and through acquisitions. And valuations may be more attractive in the future. And obviously there is a certain level that we're also going to consider doing a stock buyback. But with this uncertainty around us, it's premature for us to make a decision here.

Yes and just like to point out also that of our total cash that you see on the balance sheet only about 20% of that is in the US and we need US cash to do any kind of a stock buyback or a debt pay down.

Got it. Great, thank you.

Paul Coster with JPMorgan.

I think all of my questions have been asked and answered. Maybe just one, which is, to the extent that you're able to determine anything from the early pipeline for cyber security enterprise deals, what verticals, what geographies seem to be most interested in the solution?

So as we expand from the government verticals we're targeting are the telco, the communication service providers and then the financial services. And one of the reasons we are interested in the telco is also that some of them may not only use the product internally, but will [marriage] as managed services security providers as many of the telcos already are engaged in this practice and some have expressed interest in doing that. We potentially see a trend of enterprises outsourcing cyber security to MSSPs, to managed service security providers, and we clearly not only would like to win customers but also want to develop channels that are able to service those enterprise customers in an indirect model.

Okay, so meaning that those verticals are the first to step up, as well?

Those are the first verticals we target. Obviously we are in the early stage and we have to be more selective. And the reason we target them is we think they are more ready for the type of platform approach that we offer. That doesn't mean that if there is a lead in another vertical we're not going to try and follow up, but that's where we would like to get some more traction in the beginning. And again we like to get big customers, but we also are looking to develop a relationship with channels that can take the products to the mid market over time.

Okay, got it. Thank you very much.

Jonathan Ho with William Blair & Company.

Hi. This is [John Widen] work for Jonathan who's traveling today, thanks for taking our call. We just had one question at this point. You had mentioned the 4X impact from the top line about $10 million for the quarter, are you able to break that down by segment at all, even if it's a rough approximation?

Yes the VIS video business is small and not that much international. The other two business units split a little bit more of the impact to Enterprise versus Security Intelligence.

Okay great, thank you very much.

This concludes today's conference. I will turn the call back over to your speakers for any remarks.

Thank you, Operator, and thank everyone for joining us, we'll talk to on our next call. Have a great evening, take care.

Again this concludes today's conference, you may now disconnect. Have a great day, everyone.