Verint Systems Inc (VRNT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verint Systems Incorporated fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Alan Roden, Senior Vice President of Corporate Development. You have the floor, 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 our fourth fiscal quarter and year ended January 31, 2016. Our Form 10-K will be filed shortly. Each of our SEC filings and earnings press releases is available under the Investor Relations link on our website and also on the SEC website.

Before starting the call, I'd like to draw your attention to the fact that certain matters discussed 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 and/or implied by the forward-looking statements.

The forward-looking statements are made as of the date of the call, and except as required by law, Verint assumes no obligation to update or revise them. Investors are not cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion on how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in forward-looking statement, please see our form 10-K for the fiscal year ended January 31, 2016 when filed and other filings we make with the SEC.

The financial measures discussed today is primarily non-GAAP, and we believe investors focus on those measures in comparing results between periods among our peer companies. Please see today's earnings release for a reconciliation of non-GAAP financial measures to GAAP measures for the current period as well as Investor Relations section of our website for reconciliation to both current and prior periods. Non-GAAP financial information should not be considered in isolation or as a substitute for GAAP information, but is included because management believes that it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for information on comparative purposes. The non-GAAP financial measures the Company uses have limitations and may differ from other from those used by other companies.

Before turning the call over to Dan, I'd like to mention that at the end of the call, I will be providing some information on upcoming investor events, including some events taking place next week. Now I'd like to turn the call over to Dan. Dan?

Thank you, Alan. Good afternoon everyone, and thank you for joining us. Today I will be discussing our results and outlook for enterprise and security separately, as we expect different dynamics this year with our enterprise intelligence business growing and our security intelligence business facing headwinds in emerging markets.

In Q4, we delivered $282 million of non-GAAP revenue, 25% operating margins and diluted earnings per share of $0.90. The fourth quarter is typically our strongest quarter, and was previously expected to generate well over $300 million of revenue.

Unfortunately, our Q4 results came in below our expectations, primarily due to significant underperformance in our security intelligence business, in large part due to the slowdown in the emerging markets, which we will discuss later in detail. For the year, revenue increased approximately 1.5% on a constant currency basis compared to our prior guidance of 5%.

Verint has a long history of strong growth, and historically we had similar levels of growth in both enterprise and security. As we have discussed on prior conference calls, we are seeing different market dynamics in the enterprise and security markets, which became more pronounced in the security market in our fourth quarter. As a result, they will discuss the trends in those two markets separately.

Beginning with enterprise, we generated $630 million of revenue for the year. This performance is not consistent with our historical enterprise growth, and this year we expect to get back to mid-to high single-digit revenue growth. As discussed in detail on prior calls, we believe that our enterprise results last year were impacted by our focus on large informational projects, which we believe we have now addressed by transitioning to a more gradual land and expand go to market strategy.

As we enter the year, we believe we're well positioned to achieve our enterprise growth targets due to the following factors. First, the transition we began last year with our go to market strategy is substantially complete, and we expect it to positively impact growth starting in our first quarter. Second, we have the industry's broadest portfolio of customer engagement solutions, and we continue to broaden our portfolio. Over the last year, we announced several new capabilities such as social communities, self-service, mobility, and digital first solutions.

Third, we have large customer base, giving us significant opportunity to land and expand with our growing portfolio. Fourth, we provide our customers a broad range of deployment models including on-premise, private cloud and public cloud models, giving them a high degree of flexibility in the way they purchase from Verint. And finally, we offer best of breed solutions and are well positioned competitively.

Our strong competitive position has been recognized by the market, and during the past year, we received many industry honors such as being a leader in Gartner's Customer Engagement Center W4 magic quadrant where Verint was recognized for having the highest and furthest overall provision for both our ability to execute and our completeness of vision. Being selected as the top winner in the workforce optimization category in CRM Magazine's service award for the ninth consecutive year. Selection criteria were based on reputation for customer satisfaction, depth of functionality and company direction. And being selected as a leader by Forrester for our breadth, strategy and market presence for enterprise customer service solutions.

In addition to industry recognition, we were also recognized directly by many of our customers for the quality of our products and services and received high scores for customer satisfaction. During the year, we received many large orders across multiple industries, such as a nearly $20 million project from a leading outsourcer that selected Verint as a strategic vendor and is deploying our solution in the cloud to improve workforce productivity, standardized business processes and enhanced operational efficiency.

$8 million in orders from a multinational insurance company, which previously deployed our workforce optimization solution and is now expanding with our engagement management solution, an example of our land and expand strategy. $7 million is orders from a leading US healthcare company who is deploying our solutions across multiple customer-facing areas, including its contact centers and patient service centers. And six orders, each in excess of $5 million from six different financial services companies, demonstrating our strong domain expertise and position in financial services.

Overall, last year, in addition to transitioning to go to market strategy, we continue to expand relationships with existing customers and partners, won many new customers, broadened our portfolio, expanded our cloud offering and maintained market leadership recognition. Over the five-year period prior to the year we just completed, our reported enterprise intelligence revenue normalized [bokana] grew every year with an average annual growth rate of approximately 7%. Looking ahead to the current year, we believe we will be able to can return to a similar growth rate.

I would now like to turn to the security intelligence business. Looking at the same five-year period, our reported security revenue increased an average of 11% per year, slightly higher than our enterprise growth rate. Historically, the majority of our security revenue has been generated outside the United States, with a large concentration in emerging markets where demand for our security solutions has been very strong, driven by domestic and regional security threats. However, as discussed on prior calls, we've been closely monitoring headwinds in emerging markets related to weak economic conditions and currency devaluations. In Q4, these headwinds resulted in business activity significantly below our expectations, causing security revenue to decline both sequentially and year over year, adversely impacting our overall results.

Given these results and our expectation that emerging markets are unlikely to recover in the near-term, I would like to discuss the environment in more detail and provide some examples. Beginning with the trends in volume and size of security projects, the total number of security projects we won last year was similar to the year before. We continue to receive large orders, including 3 orders in excess of $10 million and 10 orders, each in excess of $5 million. However, many orders came in smaller than originally anticipated due in large part to customer budget reductions and currency devaluations. Therefore, substantially the same number of projects resulted in less overall business last year.

Here are two examples. The first example relates to an emerging market country where we do business in US dollars. In this example, we expected a $10 million order from a customer, but due to budget issues, the customer reduced the scope of the project to $5 million, postponing the remainder of the project until a later time.

Another example relates to an emerging market country where we do business in the local currency. In this example, the orders we received from the country came in within the scope we expected, but due to the strengthening of the US dollar, the volume on the US-dollar basis was about 40% less of what it otherwise would've been had exchange rates remained unchanged.

These two examples are illustrative of some of the headwinds we're seeing in emerging markets, and while we have a healthy pipeline, we have seen many deals being reduced in size or postponed. Looking ahead to Q1, we expect security revenue to decline sequentially, and at this point, we're not assuming an improvement in emerging markets for the remainder of the year. As a result, we are currently projecting a decline in security revenue of between 10% and 15% for the current year.

Long-term, we believe that emerging market headwinds will resolve and that our growth should return to historical levels, driven by two factors. First, fighting terrorism and crime continues to be a high priority for many countries around the world, and security intelligence solutions have proven to be very effective. And second, Verint is very well positioned to participate in this growth due to our broad portfolio, large installed base of customers and leading position in the market.

Last year, we continued to expand our portfolio including the introduction of a new fusion intelligence solution, enhancement of our cyber security solution and an innovative approach to video analytics and situation intelligence for banking, retail, transportation and safe city customers. In summary, we believe that headwinds we're facing in the security are temporary, the need for security intelligence globally remains strong, and that we are well positioned for long-term growth with our expanding portfolio of innovative solutions.

Before discussing guidance, I would now like to discuss our near-term investments and capital location approach. From a geographic perspective, we will continue to invest globally and expect our revenue mix to remain approximately 50% in America and 50% in the rest of the world. From an operating margin perspective, in enterprise we expect our operating margins to improve this year, commensurate with our expected revenue growth. In security, we will continue to invest to be well-positioned to return to growth when the emerging market environment improves. Longer term, we expect to be able to expand operating margins with revenue growth.

From a capital location perspective, we believe the security headwinds we're facing are temporary and that we have the opportunity to buy back our stock at attractive prices. In that regard, today we're announcing a $150 million stock repurchase program.

Turning to guidance, given our expectations of revenue growth in enterprise and a decline in security, we expect this year to be overall flat relative to prior year in terms of both revenue and earnings per share. Longer-term, we expect the investments we have made to enable us to return to our historical levels of security growth, providing us opportunity to go overall and expand margins over time. And now let me turn the call over to Doug.

Thanks, Dan and 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. For certain metrics, that also includes adjustments related to foreign exchange rates.

I will start my discussion today with the areas of revenue, gross margin and operating margin. In the fourth quarter, we generated $282 million of revenue with $161 million in enterprise intelligence and $121 million in security intelligence, of which $92 million was in cyber and $29 million was in video. This concurs to $316 million of total revenue in the fourth quarter of the prior year, with $181 million in enterprise, $104 million in cyber and $31 million in video.

In terms of geography, in Q4 we generated $140 million in the Americas, $87 million in EMEA and $55 million in APAC. This compares to $167 million in the Americas, $94 million in EMEA and $55 million in APAC in the fourth quarter of last year. For the full year, we generated $1.135 billion of revenue with $630 million in enterprise intelligence and $505 million in securities intelligence, of which $386 million was in cyber and $119 million was in video. This compares to $1.158 billion of total revenue in the prior year with $688 million in enterprise, $360 million in cyber and $110 million in video.

In terms of geography for the year, we generated $583 million in the Americas, $353 million in EMEA and $199 million in APAC. This compares to $602 million in the Americas, $363 million in EMEA and $193 million in APAC last year. Given the recent foreign exchange movements, we would also like to discuss our revenue on a constant currency basis to help investors better understand the underlying operational performance of our business.

On a constant currency basis, our total revenue for the full year would've been $40 million higher or $1.175 billion, up 1.5% year over year. Our enterprise revenue would've been down 4%, and our security revenue would've been up 9.2%. Please see table 6 in our press release for more information on constant currency.

Q4 gross margins increased approximately 2 percentage points to 68.7% from 67% in Q3. For the full year, gross margins were 66.5% compared to 67.7% in the prior year. As we've discussed in the past due to product, services and revenue mix within our cross segments, overall gross margins can fluctuate significantly from period to period.

During the fourth quarter, we generated operating income of $70.7 million with an operating margin of 25.1%. For the year, we generated operating income of $244.2 million with an operating margin of 21.5%. For the year, adjusted EBITDA came in at $268.4 million, or 23.7% of revenue.

Now let's turn to other income and interest expense. In the fourth quarter, other expense net totaled $8.6 million, reflecting $5.8 million of interest expense and a $2.8 million loss in foreign exchange, driven primarily by intercompany balance sheet translations.

Our annual cash tax rate was 8.1%. As we 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 year, we had 62.9 million average diluted shares outstanding. These results drove diluted EPS of $0.90 for Q4 and $3.04 for the full year.

Now turning to the balance sheet, as of January 31, 2016, we had $420 million of cash and short-term investments, including restricted cash. Cash flow from operations on a GAAP basis came in at $157 million. Cash flows can vary from period to period due to fluctuations in working capital, particularly in our security business. We ended the quarter with net debt of $391 million, excluding discounts and issuance costs 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, 2017. As Dan discussed, we currently see different near-term growth dynamics in enterprise and security. In our enterprise segment, we expect mid-to high single-digit revenue growth. In our security segments, we expect a decline in revenue between 10% to 15%.

Overall, we expect total revenue to be similar to the prior year plus or minus 2%. We expect to deliver operating margins of between 21% to 22%, similar to the prior year as we continue to invest in security in order to be well-positioned to return to growth when the emerging market environment improves.

We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $6 million. Given the continued volatility of foreign exchange rates, there could be gains or losses related to balance sheet translations in our future results which are not included in our guidance. We expect our non-GAAP cash tax rate to be approximately 9% for the year, reflecting the amount of taxes we expect to pay this year. Based on these assumptions and assuming approximately 64.2 million average diluted shares outstanding for the year, we expect diluted EPS at the midpoint of our revenue guidance to be similar to last year, excluding any benefit from our share repurchase program.

Given the separate dynamics in enterprise and security, in addition to our annual guidance, we would like to provide you some color on our first quarter. For modeling purposes, you can assume revenue in the range of $150 million to $160 million for enterprise intelligence and revenue in the range of $90 million to $100 million in security intelligence. You can also assume operating expenses in Q1 will come up approximately $5 million in Q4, and our average quarterly OpEx for the year should be a bit lower than that. Gross margins in Q1 should be similar to Q1 of last year.

Finally, as Dan mentioned earlier, we are pleased to announce Verint's first-ever stock buyback program. We believe the security headwinds we're facing are temporary and have given us an opportunity to buy back stock at attractive prices. The $150 million program which we plan to implement over a two-year period represents approximately 8% of our flow. So this concludes my prepared remarks, and with that, operator, can we please open up the lines for questions?

(Operator Instructions)

Nandan Amladi, Deutsche Bank.

Thank you for taking my question. On the security segment, Dan, you mentioned that most of the weakness was from the emerging markets. I wanted to ask about the departure of the head of the security business that happened a couple of months ago. If the revenue impact was mostly from currency and some softness in the environment, why would that drive a change in the leadership of the segment?

Let me address the first part, which is what happened in the emerging markets, and then we will discuss the 8-K that we published. First, I think we -- to better understand the impacts of emerging markets on our security business, I'd like to provide some additional visibility on the geographical presence that we have.

We have, as we discussed in the past, we have a highly diversified business across 100 countries, generate about 25% of our security revenue in the US. About approximately another 25% of our security revenue comes from developed countries, and the remaining 50% is security revenue generated from countries that are categorized as emerging markets. So you can see that we have a pretty large concentration there.

The emerging markets countries face many security threats, and actually over the last five years, we generated very strong double-digit growth from these countries. And we are very happy to invest and expand our presence in emerging markets.

This year as we reported, we expect different dynamics. We started to see signs, last year we started to monitor the situation, but in Q4 we were very disappointed with the emerging market results. And also in Q1 as Doug has just discussed, our guidance for security in Q1 is $25 million below what we did in Q4 and in Q1 last year.

So when we look at emerging markets, we see severe headwinds. We actually are expecting to grow security this year in the US and developed countries. But the growth that we have, we're expecting, is not going to be enough to offset the decline in emerging markets. And we mentioned, before we believe this is temporary. We've seen it before.

The countries that had some economic issues have postponed some projects, but eventually the security threats are real, and eventually countries need to spend money on security intelligence. And we believe we have a very good relationships over many years, very strong domain expertise in security, and that we are well-positioned to resume growth in emerging markets.

Now the question is of course when, and we believe that the security funding will come back in emerging markets even if the overall economy is not going to come back as strong as it was because security will become a priority. And of course, if you subscribe to this thesis, then it should not take too long.

The second part of your question was regarding the transition we announced through 8-K of leadership in our cyber intelligence segment. And what we announced is that we have appointed a leader that is previously was the chief operating officer of this unit. So we didn't bring anyone from the outside.

The new person has been working for Verint in various capacities for 18 years. He is very familiar with the market and with our customers and with our cyber intelligence business. And actually we did that transition on February 1 at the beginning of the year, and over the last two months since we announced this transition, it's been very smooth. So it's a transition that we believe will help us to run business better given the challenges we have now in emerging markets and will position us back to growth when the situations there improve.

Thank you and a follow-up question if I might, on the currency movements, obviously you have very little control over that. From a hedging perspective, I know you probably have some hedging of earnings because of overseas R&D staff and so on, but what is your ability to hedge on the revenue side?

Yes, so we don't hedge our revenue -- this is Doug. We do hedge expenses. Our revenue side for the most part, we have expenses where we have revenue. So we have an international presence in EMEA, so there's a natural hedge against the revenue where the profits fall through unhedged.

Where we do hedge is where we have expense in the Israeli shekel, where we have an expense base in Israel with little shekel revenue. So we are a little out of balance there, and we do a 12-month rolling shekel hedge on our operating expenses in Israel.

But I think that I'd like to add here that apart from hedging, the currency devaluation in some countries are creating some serious budget constraints for customers. If we take country like Brazil where we have security operations, so we do business in local currency and we do have people in Brazil that we pay also in local currency, but the customers, even if they didn't have the budget cuts because security is a priority and in some countries we see that the budgets remain intact.

But in US dollars, obviously the budget has been cut by 40% or 45% or 50% depending on the country. In Brazil, I think it was about 40% reduction in the power, in the buying power of goods. And of course, that raised pressure on the budget and ability to buy sophisticated security solutions.

Thank you. Very helpful.

Okay. Thank you.

Shaul Eyal, Oppenheimer.

Hi. Reflecting back give or take 10 years or 11 years ago during attacks like Madrid, like the London underground in 2005, I believe you had seen a spike, at least an interest with respect to your solution. Did that hold true as it relates to recent attacks like the one in Paris, like Brussels last week? Are you seeing increased interest in developed countries, obviously right now Western Europe?

Generally yes. We've seen increase in demand following attacks. Compared to where we've been 10 years ago, over the last five years, six years, we did see tremendous growth in emerging markets. And we spent a lot of our energy to build relationships and invest in expanding the business into additional countries. We saw diversification across many countries and the very strong demand from emerging countries as an opportunity.

So we are now with our portfolio, we are now 50% in emerging market and 50% in the US and other developed countries. We do not necessarily want to change that profile. As we said, we believe the emerging market headwinds are temporary, and we believe their security challenges are very serious in both domestically and regional threats. And while I'm sure security is a priority, emerging countries are going through all kinds of issues right now, and they need to sort it out. And it takes some time.

So in terms of our investment in going in developed countries, we have presence there, we believe that we are well positioned with our portfolio because it's really no different in the solution we sell in the emerging countries and developed countries. It's just that we saw higher growth rates historically in emerging markets, so we shifted our efforts more towards where the growth rates were. And as we see now different potential growth rates in different parts of the world, we will allocate the resources accordingly.

Our solution is -- and that's really where I'd like to leave you with that thought -- is that our solutions are very well positioned also in West Europe. There's ongoing discussion with Europe relative to the use of intelligence, and it's obviously legislations and policies need to be in place to allow the use of collecting intelligence and using that as an effective way to deal with terrorism, immigration and criminal activities. But clearly the trend is towards the public demand more security, and security intelligence is a very effective way of addressing that challenge.

Got it. And with respect to KANA, we're getting close to the second anniversary of the KANA acquisition. Reflecting back, are you happy with the progress you've seen since integration was completed and go to market has -- began to take off?

So as you said, the KANA acquisition is basically two years old, and all integration activities are completed. So we have the Verint employees and the KANA employees integrated across unified function organizations. I think I wouldn't say completely, but more and more people don't ask themselves did you come from KANA or Verint. And they feel they are working together to drive our customer engagement optimization market leadership.

I can say that since we closed KANA, we continue to invest in the product and technology that we brought from legacy KANA, and we expanded that offering. And we now not only expanded that as a best-of-breed solution, but also in integration with the legacy Verint. And we see the combined offerings as a unified offering. And also our sales force is basically pursuing now a land and expand strategy. So we provide our customers the ability to start anywhere in our portfolio, whether they start with a KANA product or a Verint product, and then expand over time into the rest of the customer engagement portfolio we have.

Got it. Thank you very much.

Sure.

Dan Bergstrom, RBC Capital Markets.

Thanks for taking my questions. Last year you talked to some changes that resulted in a more balanced sales approach. Just curious with the new fiscal year if you made any additional changes or if you feel like the changes that you made were the right approach?

Yes, I think the changes we made we feel were good. I will give you some examples. I just mentioned the land and expand strategy, our customers can start anywhere.

We are pursuing a best-of-breed approach, so we are focusing on customer-specific pain points one at a time rather than try to sell them a transformation capability. And as we focus on a single pain point they have, we demonstrate our ability to address the pain points with a very competitive offering.

We also have a flexible deployment model, so we afford our customers the choice of deployment, whether it's on-premise, private cloud, public cloud, and we also have a menu of managed services. And that's also very helpful as customer really benefits from flexibility. And each customer has a different set of criteria, and they like to leverage that flexibility for an optimal choice of business model.

And then also at the beginning of the year, we aligned the commission plan for the sales force to make the sales force neutral so they can really focus 100% on customer needs. These are all very important steps we took, and if you remember, we talked that a year ago we were trying to focus on large transformation projects and working with customers on selling them bundled and packaged offerings into very large project, which they were quite interested but apparently the sales cycle was very long, the approval cycle as long and it was not very efficient for us.

So, as we now in Q1, and almost one month away from the end of the quarter, we look at the pipeline of deals we have to support the guidance. We gave guidance of $150 million to $160 million, which is the growth guidance.

And we look at this guidance, we are not dependent on large transformation deals. Looking at these deals that we expect to close in Q1, we believe the land and expand strategy is working and the best-of-breed approach are working well.

And then could you talk about the Contact Solutions acquisition? I think that was announced a little over a month ago at this point. How does that fit into the customer engagement optimization portfolio?

Yes, so we discussed at length that one of the optimization issues for our organization is the fact that customer service is no longer a single channel you call them, but it's an omnichannel optimization that they need to do across voice, video, chat, email, web and so on. And one channel that is growing in interest for customers is the self-service channel. Obviously if you can create technology sophistication to allow customers to solve their issues or buy, whether it's buying something or servicing themselves, without adding any human intervention, that's low-cost and also could be much faster and more efficient for the consumer.

So part of our approach is to offer optimization across omnichannel including self-service channels. And Contact Solution is bringing us technology in the self-service arena, including some very unique and advanced technology that is also protected, intellectual property that is protected in the area of mobile self-service. And we believe that mobility in general and mobile self-service is on the rise.

Thank you.

Sure.

Michael Nemeroff, Credit Suisse.

Hi, thanks for taking my questions. Based on the EPS guidance for FY17, it would seem that you're expecting a pretty large rebound in revenue by FY18 at the latest.

What specifically are you seeing that gives you the confidence that the headwinds that you discussed aren't really in fact share loss or long-term issues in nature which could last longer than a year? And then why not try to generate some earnings growth in FY17 by reducing the expenses this year and then spend more in FY18 if you are pleasantly surprised?

Yes, so we have discussed alternative strategies of course. We believe that actionable intelligence is a market that a lot of growth potential.

We have customers that have access to a lot of data, actually there is exponential growth in data, but we know that they lack the tools to get the insight from the data. And even more difficult is to make those insights actionable. So we see ourselves as a growth company, and we see ourselves as hitting a bump in the road and want to continue to be in a position to participate in the industry growth. So particularly in security, when we read every day about security challenges around the world and the need for security intelligence, it's very clear to us that this is not a short-term opportunity.

So we want to be in a position to resume growth. We can't really deal with the headwinds. 50% of our business is in emerging markets. We can't generate enough growth quickly enough from the developed countries to offset that decline, but we do believe that -- two things. A, we believe emerging market headwind is temporary. B, we believe our solutions are equally good for any country globally. So it will be the right thing for us to continue to invest to maintain the ability to grow in this what we feel is very exciting potential in the security market over time.

We do we make some alignments in our cost structure. We do expect enterprise margins to improve as enterprise is growing this year, so commensurate with this growth. But to try to take cost out of security too much is basically to lose our competitive edge.

And in terms of why we're comfortable that we are not losing our position in the market is when we look at the pipeline and what we expected in Q4 and was expected in Q1, we're not losing these deals. We just see these deals coming in either smaller in size or being postponed, but we don't see competitors getting much stronger. We don't see from a positioning perspective that we are losing our competitive edge, and that gives us the confidence that we should invest for the long-term growth.

That's helpful. And maybe if you could just discuss some of the weakness that you saw in the enterprise business this quarter because the weakness wasn't just limited to the security business. Curious to get your take on what happened there this quarter as well.

Yes, you are right. But unlike the security weakness, about two thirds of our Q4 [base] came from security. And it was substantial, and also it was really a deteriorating situation relative to what we saw before.

We've been monitoring emerging markets, we're discussing potential risks there, but we haven't seen that much until Q4. Q4 was supposed to be a big quarter in terms of business activity, new orders, even collection, and we saw very weak activity in Q4 in security.

Unlike an enterprise where our revenue came a little below our expectations, but we also saw that as I discussed before, all the signs that the transition we're making is working. So we knew the transition was going to take time, we discussed the fact that it wasn't going to be over in Q4.

So we saw it kicking in in Q4, maybe not as much as we hoped for, but as we look at how we finish Q4 and where we are in Q1, we feel that the transition is working. And we feel better about what we can achieve in enterprise this year.

All right. Thanks so much for taking my questions. I appreciate it very much.

Sure.

Saliq Khan, Imperial Capital.

Thank you, a couple questions for you guys. Given the emerging markets and the currency headwinds that you had mentioned, how does it impact your sale strategy here in the US to try to help out some of the declines in sales?

Yes, it takes a long time to build a go to market strategy in security. It requires relationships, it requires channels, and we don't expect that we can change our geographical mix in security overnight. We also at this point expect emerging markets to recover, so we're not of the view that we need to completely shift our go to market strategy away from the emerging markets.

So again, we have -- 50% of the business is in the non-emerging markets. Near-term at this point, we're not planning any major shift in our focus away from emerging markets. We hear from the customers there their needs are growing, the funding is not, but there is no reason for us to believe that we will not be back buying sophisticated solutions like we have to deal with their security challenges.

Then as you skim the overall competitive landscape, how does your customer acquisition pricing strategy compare to your competitors?

The competitive landscape is very fragmented. We have some competitors that are large, part of the average large companies, usually defense contractors. We have many competitors that are small, some are global, many more are local and regional.

And because it's such a fragmented competitive landscape in security, you will find different pricing strategies in different parts of the world. And generally I would say that we are not pursuing, that we haven't pursued the strategy of being the least expensive option, and our customers know that. Our reputation is not for price, it's for the quality and depth of our products and for our execution on delivery.

One last question and I will hop back in the queue. Regarding your capital structure and announcement of the $150 million buyback that you talked about earlier, how do you view the option to pay down the debt given the fact that you have roughly $408 million or so in cash?

So when we look at the alternative of using our capital between acquisitions and buyback and paying down the debt, obviously when we do acquisition, we expect IRR, a healthy IRR. And when we compare buyback to paying down the debt, the share repurchase program has a higher return on capital than paying down the debt; we have a pretty cheap debt. And especially where we know we see a disconnect between where we think the long-term value of the Company is and the share price, that obviously creates a higher return on investment for using that capital for share repurchase.

Let me just add to that. The debt is only -- our net debt is less than $400 million, leverage ratio of around 1.5 times, average interest rate around 2%. It is cheap debt, so we're not too concerned about paying that down and look to deploy our cash for growth and be opportunistic around reducing the shares as that presents itself.

Perfect. Thanks, Doug.

Okay. Thank you.

Paul Coster, JPMorgan.

Yes, thanks. I'd like to take a slightly different tack with respect to the capital allocation strategy. You talk about being opportunistic, Doug, but you also said that you're going to take two years to do this buyback. Why not just do it all in one go, or are you trying to indicate that it's part of a capital allocation strategy associated with cash flow over the course of time?

Yes, that's exactly what we're trying to do, Paul. We're trying to balance it. Ideally we want to get Verint on a growth track, and so it's all of about return to shareholders through growth or through reduced shares. So from time to time like this, we will see opportunity to reduce some shares, but we still want to pursue our tuck-in acquisition strategy.

We still want to pursue growth of the company. We will put the debt aside as we just described, but it's a balance between retiring shares and having cash to do the acquisitions. And the cash is limited, while we have $420 million at year end on the balance sheet, little less than 25% is in the US. And that's what we would need to do stock buybacks and any US-based acquisitions.

I'm not sure the investors necessarily know what you are signaling here. Is it part of a capital allocation strategy, or is it an opportunistic thing? If it's the former, you might get more benefit from it, meaning that you will continue with this for the indefinite future.

What we are saying is that we are announcing a program. It's the first time that we announced a program of this nature. It's potentially retiring 8% of the float.

And when we look at what other companies did, that size of the program is pretty regular. And in terms of future capital allocation decisions, I will leave that to the future.

Okay. So my other question is that it's only six months or three months ago that we were all fretting over your ability to close your pipeline and change the sales model, and it seems like you've done it almost instantly. It seems like it's almost too good to be true.

You've talked to us now of your pipeline being robust, but that's not the same as closing the pipeline, which was the prior issue. What makes you think that these changes, pretty significant changes in your sales approach can have such a dramatic positive impact so quickly?

Paul, when you talk about the enterprise pipeline, we talked about that in Q3 and Q4, we said it's going to take several quarters. Q3 and Q4 we saw it's been in progress but not in full effect. As I just responded a few minutes ago, in Q4 we didn't kick in completely. We were hoping this would kick in a little bit better.

But in Q1, we already have created a pipeline that is based on our new approach. It's a new year where we align the sales commission plan. So we're giving guidance for Q1 that is growth guidance. And of course, we will have to deliver on that guidance in Q1, but this is a quarter where we're not saying we're going to return to growth in enterprise in two or three quarters from now. We say we are going to do it in Q1, and we certainly hope will be able to demonstrate that.

That's encouraging. Thanks so much.

Sure.

Shaul Eyal, Oppenheimer.

Thank you. Two quick ones on my end. Dan, maybe just a word about the TPS platform on the enterprise cyber front that you launched back in June and how is that progressing?

TPS is threat protection system. It's a cyber security offering that we have for government and enterprise. We discussed mid-last year that we're going to start offering it for enterprise customers. Just to be clear, the focus we have with cyber intelligence and cyber security is still very much on the government side, but we saw an opportunity to expand it into the enterprise market as well.

In terms of an update, we established a dedicated sales team as discussed, focused on enterprise cyber customers. We expect this revenue from this product line to grow nicely this year, but it is from a very low base. We only announced it last year midyear, and this also affords to the enterprise market starting the second half of the year.

We are at this point offering the product only in five countries, so we did not take it globally. And we believe that as we develop the market in those countries, we will expand over time. So, I'm pleased with the progress, but obviously the impact from our enterprise cyber revenue this year on the overall result is going to be immaterial.

Got it. And then one final question, I might've missed the EPS guide for the first quarter. Can you just repeat that for us? Thank you.

Sure. So we said with the Q1, for revenue in the range of $150 million to $160 million for enterprise intelligence and revenue in the range of $90 million to $100 million in security intelligence. And then we said assume operating expenses in Q1 will come up approximately $5 million from Q4, and then our average OpEx for the year should be a bit lower than that, gross margin similar to Q1 last year.

Got it. EPS, some range or --?

Yes, if you work that through EPS, probably in the $0.40-ish.

Got it. Fair enough. Thank you so much.

Yes, thank you.

Jonathan Ho, William Blair.

Hello, this is John Weidemoyer for Jonathan Ho. He's traveling today. Couple questions, one is a clarification first. Your growth outlook, I take it that's a reported growth rate, not constant currency for both segments?

Yes, that's right.

Okay. And I'd like to follow up on Paul's question if I could. I'd like to understand -- I think you indicated that your guidance is not -- in enterprise is not dependent on large deals. So the first quarter shouldn't benefit from your enhanced execution regarding your suite-based selling strategy.

So I guess from the sound of the way you answered Paul's question earlier, you do anticipate to benefit from an improvement in that area in the remainder of the year. I'm just curious how much -- what else -- the outlook for 2017 is a bit of a step up from to 2016. I'm wondering how much of it is also things like maybe currency stabilizing, the end market pressure easing, and maybe in general just your product suite being broader and getting more small deal selling opportunities. Can you talk a little bit more about that please?

Yes, sure. When I say we're not dependent on large deals, that doesn't necessarily mean that we're not going to get large deals. But we're not trying as hard as we did, and again, just to remind what we discussed last year, it's a matter of emphasis.

We always had an approach that we do what customers really prefer, but we had an emphasis and a preference for trying to sell customers bundled solutions where we can bundle a suite and use a platform approach and drive more transformational projects. Some customers even now may decide to bundle and buy solutions together and spend more money, but our approach is we would like to help customers to solve their pain points one at a time and to demonstrate that we have best-of-breed solutions.

So we're not just selling based on, look, we can solve big problems, but we can also -- we are very competitive against other companies only focusing on one solution or two or three. And that approach I think is making our sales efforts more efficient. Rather than spend long time on long approval cycle that eventually may not be approved by senior management because it's big dollars, we are addressing more urgent pain points with solutions we have and we can sell. And then as we land, we can expand over time.

So that change I think, combined with -- I agree with what you mentioned, we have broadened our solution portfolio, we have more to solve, we emphasize the best-of-breed aspects of our solutions, we allow the customers to start with our portfolio anywhere they choose. We also allow them to buy on-prem or private cloud or public cloud or hybrid. Sometimes they buy certain solution on-prem and others they can buy in the cloud. That flexibility some of our competitors do no provide.

So we've done a lot of things to basically give the customers more choices, more flexibility and basically less excuses to elongate the approval cycle. They get what they need, they can benefit from the solution quicker, faster, and obviously we're not abandoning the bigger vision.

We do hear from customers that they do choose Verint because they understand Verint is not a solution provider, it's a long-term partner that they can count on to continue and evolve their strategy over time. And we do know that many customers in this industry prefer to work with fewer vendors and vendors that are more committed to a broad solution portfolio. All of the above is the things we change, things we believe are going to work for us better this year and why we believe that we're well positioned for long-term growth.

Okay. Thank you for that. One last question. Thanks for the breakdown on the markets in the security business. In the enterprise business, how much of that does emerging markets contribute?

Not much. We do operate in many countries, but the customer service industry is much more evolved in the developed world because of just what consumers are demanding and organizations are responding.

And as you go to emerging markets, the customer service industry is still in the very early stages. Of course unlike security where in many emerging markets in the country, the security challenges are even bigger than developed countries, whether it's crime, drugs, immigration, a slew of security issues, fraud and compliance issues.

So there is, the reason why our actionable intelligence business evolved differently in security and in customer service, it has to do not so much from our own design, but a lot has to do with where the growth was. And in security, the growth was higher in emerging market. And customer service, the growth was higher in developed markets, and we follow the growth. And we will continue to do that for the long run.

Okay. That's what I suspected on the contribution. Thanks for clarifying.

(Operator Instructions)

We have no other questions in the queue at this time. I would like to turn the call back over to Alan Roden for closing remote.

Before ending call, I would like to announce that next week we will be conducting a road show in three cities. On Monday, April 4, we will be holding investor meetings in New York City hosted by Nandan Amladi, Deutsche Bank. On Wednesday, April 6, we will be holding investor meetings in Chicago hosted by Jonathan Ho from William Blair. On Thursday, April 7, we will be holding investor meetings in Boston hosted by Shaul Eyal from Oppenheimer. And further out, the week of May 23, we will be participating in the JPMorgan technology conference in Boston hosted by Paul Coster as well as other conferences to be announced.

To repeat the dates again, on April 4 will be in New York City with Deutsche Bank which is Monday. On Wednesday, April 6, we will be in Chicago hosted by William Blair. On Thursday, April 7, we will be in Boston hosted by Oppenheimer. And in May, we will be at the JPMorgan conference and other conferences to be announced.

We look forward to seeing you at these events, and if you're interested in participating in any of them, please connect directly with your contact at these firms. That concludes our call today. Have a great evening. Thanks for joining.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the program, and you may now disconnect your telephone lines at this time. Have a great day.