Verint Systems Inc (VRNT) 2017 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Alan Roden, Senior Vice President of Corporate Development. Sir, you may begin.

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 CFO.

Prior to this call, we issued a press release that includes financial information for our second quarter ended July 31, 2016. Our Form 10-Q will be filed shortly. Each of our SEC filings and earnings press releases is available under the investor relations link on our website, and also on the SEC website.

Before starting the call, I would like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and other provisions of 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 these forward-looking statements.

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

The financial measures discussed today include non-GAAP measures, as we believe investors focus on these measures in comparing results between periods and among 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 the investor relations section of our website, for a reconciliation of both current and prior periods.

Non-GAAP financial information should not be considered in isolation, as a substitute for, or superior to GAAP financial information, but is included because Management believes it provides meaningful supplemental information regarding our operating results when addressing our Business, and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the Company uses have limitations, and may differ from those used by other companies. Now, I would like to turn the call over to Dan. Dan?

Thank you, Alan. Good afternoon, everyone, and thank you for joining us today.

In Q2, on a GAAP basis, we delivered $265 million of revenue on a constant-currency basis, and $0.19 of diluted net loss per share. On a non-GAAP basis, we delivered $267 million of revenue on a constant-currency basis, and $0.57 of diluted net income per share. We are pleased with our Q2 results, and the progress we made in the first half of the year, and we believe we are well positioned for long-term growth in both the enterprise and security markets.

In enterprise, we experienced strong sequential revenue growth, reflecting our customer engagement optimization leadership, and our land and expand go-to-market strategy. Our goal for the year is to return to mid- to high-single-digit revenue growth on a non-GAAP constant-currency basis. And we're pleased to have achieved this goal in both Q1 and Q2, and expect to achieve it for the full year.

In security, as we have discussed on prior calls, market conditions in emerging markets have been weak, and we expect security revenue to temporarily decline this year. While it is too early to report a broad recovery, we are pleased to report early signs of improvements, and are starting to see business activity improve in certain countries, including receiving several large contracts.

Also, I'm pleased to report that we were awarded the largest government contract in Verint's history, potentially valued at more than $200 million, which we will discuss in more detail later. This large contract reflect our leadership position in cyber intelligence, and we believe we are on track to return to growth next year.

Before we review our segment results in more detail, I would like to discuss a recent change we made to our organizational structure, which results in Verint moving from three to two reporting segments. In early Q3, we moved part of our video team to our enterprise business, and another part of our video team to our security business, creating better vertical market alignment and growth opportunities. As a result, going forward, Verint will have two businesses, and consequently two reporting segments, each with dedicated management, unique prior portfolios and domain expertise that are well positioned for growth in their respective markets. I will discuss this change in more detail later.

Now, I would like to share with you some highlights from Q2, starting with our enterprise intelligence segment. In enterprise, we delivered $167 million of GAAP revenue, and $169 million of non-GAAP revenue on a constant-currency basis, representing a significant increase from Q1 and close to 6% year-over-year non-GAAP revenue growth.

We believe our leadership in customer engagement optimization is due to several factors. First, we have assembled a differentiated broad portfolio of customer engagement optimization solutions. Our portfolio is designed to allow customers to start anywhere, based on their priorities, and we are well positioned to land and expand our footprint with our customers over time.

Second, over the last several years, we have invested to make our entire portfolio cloud-ready, and our strategy is to provide customers a high degree of flexibility in advancing their specific cloud journey. We offer customers the ability to deploy our solutions on premises, in a private cloud, or in a public cloud, including a hybrid model that allows customers to combine a variety of deployment models for different parts of our portfolio. We have grown our cloud customer base to over 1,000 active cloud deployments, and are well positioned for the ongoing market transition to the cloud.

Finally, we have built an extensive global partner network. Our relationships include partners that resell our solutions and deliver associated services, partners that OEM our solutions under their own brand, and partners that deliver our solutions in the cloud. We believe strong partnerships are an important part of our growth strategy, and we continue to invest and expand our partnership program.

We recently received a number of multi-million-dollar orders from existing customers, reflecting this strength, including orders for more than $4 million for a public service organization. This customer is upgrading the latest version of our recording and quality management solution, and adding our speech analytics solution, displacing another vendor, achieving the benefits of having a unified solution from Verint.

A $3 million order from a leading telecommunications company -- this customer has previously deployed four components of our portfolio, including call recording, quality management, speech analytics, and enterprise business management. And decided to add two additional portfolio components: desktop analytics and performance management.

An order from a global financial services organization, bringing total orders from this customer for the year to $4 million. This customer, who has operations around the world, is expanding the deployment of our speech analytics solution to additional countries in Europe and Asia-Pacific.

We also received multi-million-dollar orders from new customers, reflecting our strong competitive position in the market, including an order of more than $3 million from a media customer, who is deploying several components of our portfolio across his contact center and back office operations. This new customer selected Verint after an extensive evaluation process, due to our ability to deploy a unified solution across the enterprise, and handle their complex work force requirements.

A nearly $2 million order from an aerospace company, deploying our Voice of the Customer analytics to gain insights from their customer base. Our hybrid cloud strategy, and ability to support both on-premises and cloud deploying models, was highly instrumental in our selection. We believe these orders reflect our strong market leadership, and our ability to win competitive bids and displace competitors.

As you know, over the years, Verint's leadership has been consistently recognized by industry analysts. This year, we achieved even broader recognition, with three leading industry research organizations, including Gartner, Forrester, and Ventana, all ranking Verint number one, ahead of all other WFO vendors in the market.

I'm very pleased and proud of these achievements. Overall, we are pleased with our first- and second-quarter enterprise performance, and believe we are well positioned for continued growth in the second half of the year and longer term.

I would now like to turn to our cyber intelligence segment. As we discussed on prior conference calls, after many years of strong growth, this year we expect a temporary decline, and our second-quarter revenue was consistent with this expectation. Longer term, we believe the dynamics in the cyber intelligence market remain positive, as crime, cyber attacks, and terror threats continue around the world, and government customers continue to face new technological challenges requiring sophisticated solutions.

Verint's long history of market leadership and deep customer relationships in many countries around the world position us well to win both usual run rate business, as well as very large contracts from time to time. During the quarter, we received several large run rate orders, as well as a very large contract. The run rate orders included orders in excess of $15 million, $10 million, and two orders of approximately $5 million.

In addition to these run rate orders, as mentioned earlier, we were awarded a government contract with a potential value in excess of $200 million, if all phases outlined in the contract are implemented by the customer. This very large contract, which was awarded after a long and competitive sales process, reflects Verint's highly innovative portfolio and strong reputations for the delivery of large-scale projects.

The project has several phases, to be initiated by the customer over time, and is expected to be deployed over a period of approximately 3 years. The contract was awarded to Verint by a prime contractor. And like most government-related contracts, it includes terms that allow the customer to increase or reduce scope in the future. We are very pleased to have received these large orders, and are starting to see security spending improve in certain emerging market countries.

Based on the business activity we are seeing, we are more confident that we return to growth next year. As for the balance of this year, after the decline in Q1 and Q2, we expect a decline again in Q3 year over year, and an improvement in Q4, laying the foundation for growth next year.

I would now like to turn to video intelligence, and explain the changes we're making in this segment. Over time, our video business has evolved to focus on two use cases. The first is fraud mitigation and loss prevention, and the second is situational intelligence and incident response.

The fraud and loss prevention use case is applicable to our banking and retail customers, while the situational and incident response use case is applicable to other verticals, including our public sector and campus customers. We recently transitioned the banking and retail video team into our enterprise intelligence segment, aligning it with our large banking and retail customer presence in that segment. We also transitioned our situational intelligence video team into our cyber intelligence segment, reflecting its focus on security and public safety. We believe this change creates two strong businesses of scale, well positioned for growth in their respective markets.

Turning to our annual guidance, we are pleased with the progress we made in Q1 and in Q2 in enterprise, and we continue to target mid- to high-single-digit enterprise revenue growth on a constant-currency basis this year. In security, we are encouraged by the early signs of improvement in our run rate activity, as well as the award of the very large contracts. As a result, we are more confident that this year's cyber intelligence revenue decline is temporary, and next year we will return to growth.

Overall, we continue to take steps to simplify the Organization. And as we return to growth in both segments, we also expect investments we have made to drive margin expansion over time. Now, let me turn the call over to Doug to discuss our financial results and guidance in more detail.

Thanks, Dan, and good afternoon, everyone. Our discussion today will include 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 items that can vary significantly in amount and frequency. 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 $264 million of non-GAAP revenue, or $267 million on a constant-currency basis, with $166 million in enterprise, $75 million in cyber, and $23 million in video. This compares to $297 million of non-GAAP revenue in the second quarter of the prior year, with $160 million in enterprise, $107 million in cyber, and $30 million in video.

In terms of geography, in Q2 we generated non-GAAP revenue of $139 million in the Americas, $82 million in EMEA, and $43 million in APAC. This compares to $151 million in the Americas, $100 million in EMEA, and $46 million in APAC in the second quarter of the prior year.

Q2 non-GAAP gross margins were 65.6%. As we discussed in the past, due to product, services, and revenue mix within or across segments, overall gross margins can fluctuate significantly from period to period. For the full year, we expect gross margins similar to last year.

During the second quarter, we generated non-GAAP operating income of $48.4 million, with an operating margin of 18.3%. Our adjusted EBITDA for the quarter came in at $55.7 million or 21.1% of revenue.

Now, let's turn to other income and interest expense. In the second quarter, non-GAAP other expense net totaled $8.5 million, reflecting $6.3 million of interest and other expense, and $2.2 million of foreign exchange charges, primarily related to balance sheet translations.

Our non-GAAP tax rate was 9.1%. As we've discussed previously, we expect to enjoy a low non-GAAP tax rate for several years due to our NOLs, and the amount of income we generate in low tax rate jurisdictions.

For the quarter, we had 62.9 million average diluted shares outstanding. These results drove diluted non-GAAP EPS of $0.57 for Q2. Excluding the foreign-exchange translation charges, EPS would have been $0.60.

Now turning to the balance sheet -- as of July 31, 2016, we had $376 million of cash and short-term investments, including restricted cash. Cash flow from operations on a GAAP basis for the first half came in at $69 million, compared to $66 million last year. Regarding our share buyback program, while we did not repurchase any stock during the second quarter, we do anticipate resuming repurchasing stock in Q3. We ended the quarter with net debt of $436 million, excluding discounts and issuance costs primarily associated with our convertible debt.

Before moving to Q&A, I would like to discuss our guidance for the year ending January 31, 2017. As Dan mentioned earlier, starting in our third quarter, we will report our results in two segments. These two segments will be named customer engagement solutions and cyber intelligence solutions.

As discussed on prior calls, we are currently experiencing different dynamics in the market, and I would like to discuss our expectations for customer engagement and cyber intelligence separately. We expect our customer engagement segment to represent approximately two-thirds of our total revenue this year. We are pleased to have achieved our goal of mid- to high-single-digit revenue growth in both Q1 and Q2 on a constant-currency basis, and expect to achieve that for the full year as well.

We expect our cyber intelligence segment to represent approximately one-third of our total revenue this year. And while we are pleased to see signs of improvement in certain emerging market countries, we are modestly lowering our outlook for cyber security this year, based on the timing of projects, and continue to expect a revenue decline this year. However, we are more confident that cyber intelligence will improve in Q4, leading to growth next year.

Overall, we expect total revenue in our third quarter to be similar to our second quarter, and to finish the year with a strong fourth quarter. For the full year, we expect non-GAAP revenue to be $1.11 billion, plus or minus 2%. Adjustments to our annual guidance are being driven primarily by the timing of projects in our cyber intelligence segment, as well as changes in foreign-exchange rates since our last conference call.

From an operating margin perspective, we are pleased with the sequential improvement in our operating margins in Q2, and expect our non-GAAP operating margins for the year to be approximately 20%. Since we believe the decline in security this year is temporary, we continue to invest ahead of next year's growth. This strategy creates temporary pressure on margins, but we continue to expect margins to expand as we scale the Business for the longer term.

We expect our non-GAAP 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 future gains or losses related to balance sheet translations in our future results, which is not included in our guidance. We expect our non-GAAP 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 63.3 million average diluted shares outstanding for the year, we are expecting non-GAAP diluted EPS at the mid-point of our revenue guidance to be approximately $2.85.

In conclusion, we're pleased with our first-half progress, and believe we are well positioned for sustained growth in both customer engagement and cyber intelligence. This concludes my prepared remarks. And with that, operator, can we open it up for questions?

(Operator Instructions)

Paul Coster, JPMorgan.

Obviously, this $200 million-plus contract opportunity will be front and center here. The last time you won a massive deal of this kind, it remained somewhat opaque for the duration of its execution. Can you be a little bit more specific this time around, what it actually is? There are so many features that could be exploited, but perhaps you could tell us with the main ones will be from within the Verint portfolio? Thanks.

This is a massive contract, we -- under the contract, we are going to deliver multiple products from our cyber intelligence portfolio. At this point, based on the anticipated program timeline, we expect a small amount of revenue this year as we ramp up the project. We do need to make some investments, and start to allocate substantial resources to the contract, but revenue would be small this year. The bulk of the revenue will be actually over the next two years, in fiscal year ending 2018 and 2019, and then there is some revenue that falls into FY20.

Okay, but what is it? What is it that you are actually selling on this occasion? Is it the structured information, is this some government version of your 360 engagement capability? Is it your website's abilities? Communications, interception, et cetera?

It's the cyber intelligence portfolio, so it is multiple capabilities that allow the customer to collect a massive amount of data and using big data analytics to create insights and actionable intelligence, which is really not different than what we do for every other customer. It is mostly products that we currently have, or part of our road map development. So it is certainly within the mainstream of what we do.

This was awarded to Verint after a long and competitive process, and part of that was obviously submission of proposal, but also proof of concept, and we believe we were able to demonstrate that we have strong competitive edge with our portfolio, as well as a very strong reputation for delivery. And contracts of this scale obviously require the vendor to be experienced in helping customers to deploy this massive amount of technology, to be able to make it usable, and generate the actionable intelligence.

I'm sure there will be some other questions. Dan, the other question I have got for you is that we're seeing some evidence of verticalization inside customer engagement and workforce optimization, and communicate the contact center infrastructure. So for instance as you know, NICE made an acquisition, there is talk that Genesys might buy some of the Avaya assets. What is your response to these potential and actual developments in the market, where you are seeing customer engagement and CCOI coming together with workforce optimization, to some extent?

That is a good question. What we have seen so far in M&A activity in the market is that it was entirely in the connect center infrastructure space, where we do not compete. So the infrastructure market for connect center is highly fragmented, so it is not surprising that it's going through a period of consolidation. We are not in this market of infrastructure, but I guess the question you're asking is, what is the potential impact or an opportunity for Verint?

So Verint is an application provider. We have, as you all know, a broad set of capabilities in work force optimization, customer analytics, and engagement management. And we see ourselves as an application provider, with strong partnership with many infrastructure vendors. We don't expect a consolidation to impact our partnership strategy. We see an opportunity that we actually are the only large application company that is neutral to infrastructure vendors, and therefore, we are uniquely positioned to be the partner of choice.

Generally, we believe that applications provide customer engagement, customers the ability to not only take the call, but really understand with analytics what is happening in their customer engagement, and optimizing the overall expectations the customer has for better experience, for omnichannel experience, as well as of course reducing the cost and improving the security and compliance of these calls. And this is where Verint will continue to focus.

In particular, I think it is important to know that I am very proud of the recent endorsement we got from research firms, that all three leading industry research organizations that are ranking vendors, have ranked Verint as number one. And this is not just market share ranking, this is a ranking of us based on the strength of our portfolio as well as the customer sentiment. Our customers of course, our [section] with our deployment in our customer services. We believe that our focus on customer engagement optimization, with partnership with infrastructure vendors, is the right strategy going forward.

All right, thank you.

Shaul Eyal, Oppenheimer.

Clearly encouraging results, but I think more so is the tone and color provided, and I thank you for that. A few question also on my end, and without a doubt, trying to build on Paul's questions still. On the government, the sizable contract, is that, by the way, the same customer that provided you with a 2014 contract?

As you know, Shaul, we're not discussing specific customers, but as we told you in the past, we have customers in 100 countries, and we have customers across a broad range of government agencies, law enforcement, national security, homeland security, and other government agencies. We have many large customers, so this is not unique to a specific customer.

Some customers implement smaller projects over time, while others aggregate and deploy large projects, so this is really up to the customers how they contract. But we have presence in many countries, and we have built over the years some very large installed base, with many customers around the world. And we are equally positioned well to address both smaller and larger problems.

Fair enough, and thinking about the broad base of solutions, and I imagine there's some critical infrastructure that you are going to be defending, providing your solutions upon. Do you feel comfortable with the current set of solutions, or do you think over the course of the next two or three years, you might see an opportunity to augment the current solution with some small tuck-in related technologies?

No, yes, we certainly would like to continue to do tuck-ins. There is a lot of innovation going on in our markets, both in customer engagement and cyber intelligence. While we are investing in R&D and about 14% of our revenue go back to R&D, we do acknowledge that there is a lot of innovation, and we are very interested in and continue a dialogue with smaller companies that can potentially broaden our portfolio.

I think what is interesting about both markets we are in, is that they are going through some disruption. The customer engagement piece is disrupted by consumer expecting better service, by the omnichannel, by cloud, and of course we are well positioned to address this, and would like to continue to lead the market with innovation. And in the cyber intelligence space, clearly governments around the world are facing increasing challenges with crime and terror, and it is getting more and more complex technologically. And we are very focused on working with customers to understand the challenges, and again, to be ahead of the markets, in terms of providing solutions.

I think one of the benefits of what we did with our video business, splitting it into two businesses of scale, has now aligned us to create scale in our -- both customer engagement and cyber intelligence market, and be even more focused on, how do we stay ahead of the curve, with so much innovation, and so much changes going on in the market? And I think we have the technology, we have the domain expertise, and also very important, I think we have the trust of many leading customers around the world, that continue to trust their business with Verint.

Got it. Maybe just a housekeeping for Doug. The little tweak we're seeing on the EPS guidance for the remainder of the year, is that strictly foreign-exchange driven?

Yes, some of that. We did have a foreign-exchange impact, primarily from the pound most recently, but we are continuing to invest in the security side. We see that decline as being temporary. We want to make the investment, so we can be -- ensure that we can get back to the growth there, when it comes.

Fair enough. Thank you so much for that.

Michael Nemeroff, Credit Suisse.

I am just curious, can you give us the specific rationale for combining pieces of your security into your now customer engagement division? What products specifically from security move into customer engagement?

Sure. So, the products we have in our security that focus on fraud mitigation and loss prevention, which is primarily in the banking and retail markets, the product name is EdgeVMS, and that specific product is again focused on verticals that are aligned very well with our customer engagement verticals. We have leading customers in banking, both in security and in customer engagement.

But also when you look at fraud mitigation, we have other fraud products already in customer engagement. We have our biometrics products that are used to authenticate voice calls and to reduce fraud and call takeover by fraudsters. Fraud and compliance are not a new initiative within our customer engagement. We believe that customers expect, when they contact organizations for service, they expect that the organizations will protect their identity, they expect that they will not be subject to fraud in their accounts, and of course, an organization needs to be prepared for that.

We have done customer engagement already, a fair bit of work around voice and text and other, unstructured data, but our video, our fraud mitigation business in video was in a separate segment. What we do now is we have a multimedia offering to address all type of fraud mitigation, whether it is an ATM fraud, where customers engage with the banks through an ATM, or they engage with a teller, or they call, or they chat or they go to the website. We are able to provide them, to provide our customers with a broader set of capabilities.

So we've been aligning the video business, which, the video market has been resourceful for many years, but it is actually over the last year or so, we're starting to see more and more verticalization there. So we are really responding to the fact that things are moving to a more vertical applications, and we believe that aligning our banking customers is going to provide us better growth opportunities.

Then on the contract, the previous question, I reread your answer, and I honestly don't know exactly what you said. Could you tell us specifically yes, no, or I do not want to answer, whether the $200 million is part -- is the same customer that bought your products in cyber in 2014?

In this business, again, it is not new, as you know, under contracts, we have restrictions, and the details of what we are allowed to disclose are subject to contract by contract. And in this specific case, we are unable to provide more specific details about the customer.

But we don't know who the customer was in 2014, either.

That is right.

For the same reason.

Okay, thanks very much for taking my questions.

Dan Bergstrom, RBC Capital Markets.

Just curious on the $200 million deals, if that closed as expected? Then, could you help us better understand the potentially valued and phrases statements. Are those just typical qualifiers for government contracts like this?

Yes, I think that government contracts have terms that allow the government to change the scope, that can increase or reduce the scope. And as we mentioned, there are several phases in this contract, and those phases need to be initiated by customers. And with this type of contract, until you deliver and collect, there is potential value. But we are on the contract to provide products worth more than $200 million.

Could you help us, or help me with how to better think about the recurring part of the business? You talked to 60% recurring revenue on the last call, simplistically if we assume two-thirds of the service line is recurring maintenance, that gets us to about 40% of total revenue is recurring. Could you help with some revenue buckets to bridge that gap from 40% to 60%, am I thinking about that correctly?

I will let Doug give you some more specifics, but first, I would like to make sure we understand, we are driving recurring business in our customer engagement segment. This is where we see the cloud transition. We have some in the cyber intelligence segment, but we don't see strong cloud transition there. Within customer engagement, we believe that the cloud transition, while it has been going on for a few years, will continue. We are well positioned for that.

We have been leading the transition actually, and offering customers flexible deployment models. So customers may recall on-prem, in private cloud, or public cloud, and of course they can buy the license perpetual or as a term license. So what is driving the recurring revenue is obviously customers that decide to buy term licenses. And Doug, if you want to make some comments about support, but we see the lines between the support revenue and the term licenses are blurring, as customers go through that transition.

Dan, I do not have a lot to add, but exactly. So the one thing is support base, and you are right, that used to be a 40% of total, but there has been recharacterization of the various revenue types over the last year or two, even some of the maintenance contracts are getting morphed into these highbred SaaS deployment models. It's a combination of what is left on the maintenance contracts, the term licenses, the SaaS, the hosted business that we characterize as recurring, and in our enterprise business, that is up to -- we expect that to be around 60% by the end of this year.

Thank you.

Jeff Kessler, Imperial Capital.

With regard to the split up of the video business into the two sectors, and as you define them, you talked a little bit about verticalization. Can you talk about the broader base? You've mentioned some of the things you can do now with video, as they are a part of these businesses. Were they not well integrated before?

And going forward, what is the value proposition, the solution that is going to get you higher margins, as opposed to selling hardware or selling services and hardware, which in video has pressure from the product makers? If you put them into fuller solutions, you would probably have the chance to get higher margins. But if you can describe how you are going to get those higher margins with a higher value proposition, in both of the areas that video is being split up into, that would help.

I'll give you a few examples, what we're actually already doing. In the banking area, where we see the use case is around fraud mitigation, things like facial recognition, things like license plate recognition, that are part of analytics and become more important in identifying potential fraud cases, are examples of things we do beyond video.

In our situational intelligence business, we are already providing a complete situational awareness platform, that allows customers to collect, in addition to video, sensory data from any other sensors around the perimeter, with interfaces to access control, and the ability to analyze the complete set of data, to both identify suspicious behavior as well as to better incident response, including dispatch management. Obviously, that is a much broader solution than just managing the video, and that is creating, positioning our solution higher in the food chain, and therefore potentially higher-margin, and more differentiation from competitors.

And this has been our strategy for a while, and I know you have been tracking us and visiting us in many conferences and shows, and I am sure you saw the product as they evolve to become a video plus product. But now this movement we just announced, it's not so much about the product, we have done a lot of that already, but it's really more about aligning the teams in the go to market to verticals, so we have business of scale, and we can take the product to this market at a broader scale.

Does it also include aligning the partners, the ecosystem that you have built up in that area, to work with those two separate businesses?

I think many of our partners are capable of moving up the food chain, some are not. We are not trying to align the partners, we're trying to move out the products, and get the products to be more focused on broader customer issues. And naturally, those partners are able to move up, as well. We would be happy to work with those partners, and some other partners just naturally fall off, as they are unable to compete.

One final question regarding investments, your cash flows remain pretty good. You have talked about investing in new technology, and explaining to us that technology has been changing, which it obviously has. And there has been some disruptions that you have had to deal with them in both businesses to keep up with the market. What types of investments are you making to essentially both stay ahead of the market and perhaps disrupt the market on your own?

We are at about 14%, a little bit more than 14% of our revenue in R&D, and we think that is sufficient organic investment. But as I mentioned before, if we find small tuck-in to help us to expand our portfolio, we will be very happy to do that, as well. Right now, I think that the issues that we are facing in cyber intelligence this year are not due to our lack of investment in the product.

We actually believe that our product is still at the top of the market. We are very proud that we were awarded the large contract, but beyond the fact that this is valued at $200 million, it is also a competitive process, and we were selected because the strength of the portfolio. And we see that across our customer base.

So the temporary issues in security this year, we attributed those to emerging markets economical situation, and not to product strength. And the investment we are making in the products we believe are sufficient to maintain our leadership position in our respective markets.

Okay, thank you very much.

Paul Coster, JPMorgan.

First of all, you didn't repurchase any stock this quarter. Why is that, and why are you going to start again now?

Paul, as you know, we announced our first-time program in Q1, and did buy about 500,000 shares in Q1, it was a $150 million program over two years. In Q2, we did not buy any, we had non-public knowledge of the large contract, so that was limiting, but we do expect to get back to repurchasing stock in Q3.

Okay, that will do. Thanks very much.

I am showing no further questions at this time. I would like to turn the call back to Mr. Roden for closing remarks.

Thanks, operator. Before I end the call, I would like to mention that we will be participating in several investor events in the next several weeks. On September 14, we will be participating in the Credit Suisse Small Mid-Cap Conference in New York City, hosted by Michael Nemeroff. On September 19, Paul Coster from JPMorgan will be hosting an investor bus trip to our offices. And over the coming weeks, we will be scheduling a non-deal road show with Shaul Eyal at Oppenheimer in a city to be determined. We look forward to seeing you at these events, and other investor events in the coming weeks. Thank you for joining our call, and have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.