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Verint Systems, Inc. (NASDAQ:VRNT)

F4Q 2014 Results Conference Call

March 31, 2014 4:30 PM ET

Executives

Alan Roden – SVP, Corporate Development

Dan Bodner – President and CEO

Doug Robinson – CFO

Analysts

Daniel Ives – FBR Capital Markets

Nandan Amladi – Deutsche Bank

Paul Coster – JPMorgan

Michael Nemeroff – Credit Suisse

Jeff Kessler – Imperial Capital

Jonathan Ho – William Blair & Company

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 Verint Systems Earnings Conference Call. My name is Derek and I'll be your Operator for today.

(Operator Instructions)

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

Alan Roden

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.

By now you should have seen a copy of our press release that include selected financial information for our fourth fiscal quarter and year ended January 31, 2014. 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 revisions of the federal securities laws. These forward-looking statements are based on Management's current expectations; they're not 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 date of this call and except as required by law Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2014 when filed and other filings we make with the SEC.

The financial information discussed today is primarily non-GAAP. A reconciliation of the non-GAAP financial measures to GAAP measures is included in today's earnings release as well as under the investor relations link on our website. Non-GAAP financial information should not be considered in isolation or as a substitute for GAAP financial information, but included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the Company uses have limitations and may differ from those used by other companies.

Now I'd like to turn the call over to Dan. Dan?

Dan Bodner

Thank you, Alan. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full-year performance. We are pleased to finish the year strong with $257 million of revenue and $0.91 of diluted earnings per share in Q4. For the year, we generated a record $910 million of revenue and $2.84 of diluted earnings per share. EBITDA came in very strong at $227 million, reflecting 10.8% year-over-year growth driven by a combination of revenue growth and operating leverage.

In a few moments, Doug will discuss last year's financial results in more detail. Today, I would like to focus my comments on our go-forward growth strategy and explain certain strategic initiatives to extend our leadership position, expand our addressable market and accelerate our revenue growth.

As you may know, last month Verint celebrated the 20th anniversary of our founding. For the first 19 of those 20 years, Verint was a controlled Company. Last year, in connection with Verint becoming a non-controlled Company, we began to expand our long-term growth strategy.

This strategy involves maintaining our leadership in our current markets, while identifying adjacent markets in which we can leverage our core competency and Actionable Intelligence. With this strategy, we are very excited about the long-term opportunity for Verint, as well as our near-term prospects as reflected in this year's guidance of approximately $1.1 billion of revenue with 25% EBITDA margins.

Now I would like to provide more details regarding our growth strategy focused on three areas of the Actionable Intelligence market, customer engagement optimization, security intelligence, as well as fraud, risk and compliance. We believe that these areas represent a significant opportunity for growth and provide Verint a larger Actionable Intelligence addressable market which is now doubled to more than $6 billion a year and will grow over time. Our addressable market is fragmented and with others addressing only part of the market, we believe Verint is well-positioned to emerge as a category leader.

The first area I will address is customer engagement optimization. The manner in which consumers obtain customer service has expanded from traditional call centers and in-store visits to include customer engagements across multiple service channels such as Web self-service, email, chat and social media.

Today, as organizations have looked to engage with their customers more effectively across these channels, they've been forced to purchase multiple point solutions from different vendors creating challenging integration complexity. And despite integration efforts, we believe these point solutions often do not work together effectively.

With the acquisition of KANA, we combined Verint's leadership in workforce optimization with KANA's leadership in customer service solutions to go after a larger addressable market opportunity customer engagement optimization. The acquisition was executed during our fourth quarter last year and closed in February 2014 at the beginning of our first quarter.

Today, we are delivering the industry's first customer engagement optimization solution offered from a single vendor, enabling organizations to gain a holistic view of customer service effectiveness, enhanced customer loyalty, maximize revenue, reduce operational costs and mitigate risk. We believe the recent combination positions Verint as a more strategic technology supplier and further enhances our brands.

The reaction from customers, partners and industry analyst has been very positive. For example, Gartner wrote, “A combined offering will allow organizations to align and optimize what happens in the service process with those that perform the work. This powerful combination makes a lot of sense.”

And Ovum research commented, “Verint rocked the customer engagement landscape this week with the news that it will acquire KANA, an important and long-standing CRM provider. This is the first time CRM and workforce optimization will be melded into a single suite at such a scale from one of the markets leading vendors.”

In addition to this positive market reaction, I'm pleased to report that the integration of Verint and KANA is proceeding well, greatly facilitated by a strong cultural faith based on deep customer centricity and a focus on similar buyers and industry verticals. We recently held our annual sales kickoff in which the sales forces of both Companies were trained on the combined offering and on the immediate and longer-term benefits of the joint Verint/KANA solution. With the additional KANA, Verint is offering a unique and broad set of complementary capabilities that we believe belong together and that the market wants together, but no one up to now has put together.

The next Actionable Intelligence market area I would like to discuss is security intelligence, which includes, communications intelligence, homeland security, video integration management and cyber security. Verint has been a leader in the security intelligence market for many years, as we have steadily expanded our portfolio of Actionable Intelligence solutions designed to make the world a safer place. We now have a broad portfolio of innovative solutions addressing some of the most critical security challenges.

One area in particular that has become a growing concern for many governments around the world is cyber security. In a world of growing connectivity, protecting the endpoint of the network from cyber attacks is no longer sufficient and protecting the network has become core to an effective cyber security program.

Several years ago, we identified cyber security as a natural extension of our Actionable Intelligence capabilities, addressing a growing need to protect networks from malicious intrusion, to identify malware that already exists in the network and to investigate cyber attacks. We believe that Verint is uniquely positioned to compete in the cyber security market, and we see cyber security as another strong growth area for Verint.

Our success in the security intelligence market is due to our focus on the innovation and expansion of our portfolio to meet evolving market requirements. Consistent with this focus, I'm pleased to announce that today, we acquired a provider of mobile device tracking technology. We've been a reseller of this technology for a number of years and decided to make this acquisition as we see good growth opportunities across the security intelligence market. Overall, we are very pleased with our growth and leadership position in the security intelligence market.

The final Actionable Intelligence market area that I would like to highlight today is fraud, risk and compliance. Fraud is becoming more complex, more sophisticated and more difficult to detect and prevent. The consequences of fraud can extend beyond direct financial loss to customer attrition and reputational damage. Big data analytics can be used to help identify and reduce fraud by collecting and correlating information across many different internal and external sources.

To address this market need, we are expanding our portfolio of fraud solutions. In Q4, we announced a new capability for contact centers that is designed to identify fraudsters and accurately verify customer's identity using real-time voice biometrics and predictive analytics. One of the largest banks in the world is using this solution to help identify course of the fraudsters and while this is a new market with a strong interest in our new solutions. We believe the fraud based compliance represents very attractive areas and we will continue to expand our capabilities to address this opportunity.

I would now like to turn the discussion to our business model. We sell both directly and indirectly and fundamental to our strategy is continuing to expand our partner ecosystems. We sell into more than 180 countries and we will continue to offer our solutions in multiple languages and expand our service and support footprint worldwide.

We are offering the market flexible deployment options, including both on premises and in the cloud and will expand our managed services capability to address customer needs. As we scale the business and increase our addressable market, we believe over time, we have the opportunity to accelerate our growth and expand our operating margins.

Now turning to guidance, for the year ending January 31, 2015, we expect revenue in the range of $1.08 billion to $1.13 billion and diluted earnings per share in the range of $3.20 to $3.40. The midpoint of this guidance translate to approximately $275 million of EBITDA, a 21% increase compared to last year.

Before handing the call over to Doug, I would like to thank Verint's 4400 professionals for a great year, hard work and commitment to Verint's success. I'm very proud of what our employees have accomplished and look forward to another successful year. And now let me turn the call over to Doug.

Doug Robinson

Yes, thanks, Dan. Good afternoon, everyone.

Most of our discussion today will focus on non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Alan mentioned, in our earnings release and in the IR section of our website. Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including amortization of acquisition-related intangibles, certain other acquisition-related expenses, stock-based compensation, as well as certain other non-cash or nonrecurring charges.

I'll start my discussion today with the areas of revenue, gross margin and operating margin. In the fourth quarter, we generated $257 million of revenue across our three segments, with $136 million in enterprise intelligence, $89 million in communications intelligence and $32 million in video intelligence. This compares to $230 million of total revenue in the fourth quarter of the prior year, with $143 million in enterprise, $59 million in communications and $28 million in video.

In terms of geography, in Q4, we generated $159 million in Americas, $50 million in EMEA and $48 million in APAC. This compares to approximately $131 million in the Americas, $50 million in EMEA and $49 million in APAC in the fourth quarter of the prior year. For the full year, we generated approximately $910 million of revenue across our three segments, with $501 million in enterprise intelligence, $289 million in communications intelligence and $120 million in video intelligence. This compares to approximately $848 million of total revenue in the prior year, with $495 million in enterprise, $232 million in communications and $121 million in video.

In terms of geography, for the year we generated approximately $509 million in the Americas, $187 million in EMEA and $214 million in APAC. This compares to approximately $466 million in the Americas, $202 million in EMEA and $180 million in APAC in the prior year. Q4 gross margins were 68.6%, compared to 69.1% in Q3 and 70.5% in Q4 last year.

For the full year, gross margins were 68.3% compared to 68.9% in the prior year. As we've discussed in the past, due to product and revenue mix within or across segments, and particularly within the security business, overall gross margins can fluctuate significantly from quarter to quarter.

During the fourth quarter, we generated operating income of $65 million with margins of 25.5%, compared to $61 million with margins of 26.5% in Q4 of the prior year. For the year, operating income came in at $210 million with operating margins of 23.1%, compared to $189 million and 22.3% in the prior year. Year-over-year operating income increased 11%.

Our EBITDA for the year came in at $227 million, or 24.9% of revenue versus $205 million in the prior year. Year over year, EBITDA increased 10.8%.

Now let's turn to other income and interest expense. In the fourth quarter, other expense net totaled $11.4 million, reflecting $7.4 million of interest expense, with the balance related to the impact of foreign exchange. For the year, other expense net totaled $36 million, reflecting $29.2 million of interest expense with the balance related to foreign exchange.

Our annual cash tax rate was 9%. As we've discussed previously, we expect to enjoy a low cash tax rate for several years due to our NOLs, the amount of income we generate in low tax rate jurisdictions.

At year end, we had 54 million average diluted shares outstanding. These results drove diluted earnings per share of $0.91 for Q4 and $2.84 for the full year.

Now turning to the balance sheet. As of January 31, 2014, we had approximately $417 million of cash and short-term investments including restricted cash, compared to approximately $235 million of cash at the end of last year. Q4 cash flow from operations on a GAAP basis came in strong at $63 million.

For the year, GAAP cash flow from operations came in very strong at $178 million compared to $123 million in the prior year. We ended of the year with total debt of $642 million and net debt of approximately $225 million. We continued to de-lever the Company over the year and our net debt to EBITDA ratio at year end was approximately 1.

On February 3, a couple of days after year end, we completed the acquisition of KANA which was financed with existing cash, incremental term loans and our revolver. At closing, our total debt was $1.07 billion and our net was $746 million.

We also took the opportunity and advantage of a very attractive credit market, and in March we priced our prior term loan to a rate of 2.75% over a 0.75% LIBOR floor. The repricing of our term loan will be accounted for as debt extinguishment resulting in a one-time charge of approximately $7 million in Q1 which will be excluded from our non-GAAP results.

Before moving to Q&A, I'd like to discuss our guidance for the year ending January 31, 2015. We expect revenue to be in the range of $1.08 billion to $1.13 billion. We expect operating margins similar to last year at approximately 23%.

At the midpoint of our revenue guidance, we expected $275 million of EBITDA, representing 21% year-over-year growth and a net debt to EBITDA ratio of less than 3 times. We expect our quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $10.3 million. We expect our non-GAAP cash tax rate to be approximately 10%, reflecting the amount of taxes we expect to pay this year. Based on these assumptions and assuming approximately 55.6 million average diluted shares outstanding for the year, we expect non-GAAP earnings per share in the range of $3.20 to $3.40.

While we don't typically provide quarterly guidance, to help you with your earnings models following the acquisition of KANA, we're providing additional information for our first quarter. For Q1, we expect revenue in the range of $250 million to $260 million, reflecting the addition of KANA and seasonal trends that are typical in the enterprise software industry and that we have experienced in prior years. We expect operating margins in Q1 to be similar to the first quarter of last year.

So in conclusion, we're pleased with the execution of our strategy, our expanding portfolio of Actionable Intelligence solutions and strong competitive position and believe are well-positioned for continued growth. This concludes my prepared remarks so with that, Operator, can we please open up the lines for questions?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Daniel Ives, FBR Capital Markets.

Daniel Ives – FBR Capital Markets

Yes, thanks. Great quarter. Dan, how have conversations with customers changed relative to even six months ago? And maybe you -- from a high level, walk us through how it's changed in terms of just reception from more on the platform as well as just some of the next generation shifts?

Dan Bodner

Yes, so I think as the companies scale, obviously we are having more strategic discussions with customers, it's not just about implementing a product but implementing a suite and providing solutions to their pain points across a number of different areas. So if we look at our enterprise customers, for example, we're helping them to maximize revenue, reduce operational costs, mitigate risk in the business, as well as improve customer loyalty.

The conversation is moving from the product to more of solution and applying the technology in addressing some of the big pain points they have. And I think similar on the security side, we are expanding our discussion. Cyber security is one of the areas that I mentioned before, where we feel we’re very well positioned. We had discussion with government customers before about their needs, but our expertise in big data analytics and network analytics are expanding those discussions beyond communication intelligence and homeland security also specifically to the area of cyber security.

So the expansion of our portfolio, the innovative solutions we have, as well as the market overall, positive reaction to big data analytics and their expectation to leverage big data analytics to solve business problems, I think provides us the opportunity to elevate the discussions.

Daniel Ives – FBR Capital Markets

Relative with the KANA acquisition and maybe just talk about your reception for more acquisitions, either as you look out -- how are you think about that, in terms of even some technology [tuck in] [ph] and it seems like cyber security is an area. Maybe just talk about that in terms of other acquisitions and maybe we could see, in terms of strategic areas, how are you thinking about things.

Dan Bodner

Yes, so we think about acquisitions as the means to achieve our strategic objective. And last year was a very important year for Verint, as we took steps to increase our total addressable market. And as I mentioned before, we doubled our addressable market to -- from $3 billion to $6 billion. So as we thought about expanding the addressable market, obviously, we need a broadened portfolio to address the bigger TAM and part of it is we develop organically and part of it comes through acquisitions. And we are very focused on acquiring technology that is complementary to what we do as we target adjacent markets.

So the KANA acquisition was a natural evolution of our strategic initiative. We felt that expanding beyond workforce optimization makes sense. We saw that the market really is looking for this type of solutions, and while with workforce optimization we had $1.5 billion TAM by providing more solutions that we developed organically and we launched, last year a number of solutions in the customer experience analytics area. But providing also expanding the solution by adding KANA solution and customer service solutions is positioning us to a much larger TAM of approximately $3 billion. So this is an example of how the KANA acquisition really is servicing our desire to expand to adjacent markets.

The same example is with cyber. Cyber is an area that we have extended our TAM significantly but through inorganic development. We've been leveraging the Actionable Intelligence technology we have and we added a lot of capabilities organically but has expanded a TAM and we have about $3 billion of security intelligence, addressable market that we are targeting now. So as we think about acquisitions going forward, it's the ability to either expand the TAM or to take a larger market share within that addressable market that we are targeting.

Operator

Your next question will be from the line of Nandan Amladi, Deutsche Bank.

Nandan Amladi – Deutsche Bank

Two part question. First is on the nature of competition now that you have an expanded portfolio with KANA. And what specifically do you have to take -- what actions you have to take on your sales efforts to actually make adjustments for the new competitive environment?

Dan Bodner

So obviously as we increase our addressable market, we also are competing with new names. Some of the names which we see now are Oracle and salesforce.com and Pegasystems in the KANA area. And we see Fire-i and RSA Witness, which is a division of EMC as competitors in the cyber area. So we have a large competitive landscape.

The market is fragmented. We see different competitors in different areas. And I think what's unique to Verint is our focus. We are very laser focused on big data analytics, helping our customer capture data, analyze data and the domain expertise that we bring in each of the markets we participate.

In terms of organizing the sales force, we do have a verticalized sales force. We also sell about 50% of our business is indirect through partners and we are heavily engaged together with the partners to win opportunities. And we do have, within the sales force, layers that provides the domain expertise in the specific markets. So we think we are well positioned to this type of structure. We've been building the structure now over several years, moving from point solutions to suites and large portfolios. And we have taken the steps within the sales organization to provide them the support that they need when they sell multiple products to the same customer.

Nandan Amladi – Deutsche Bank

Thanks.

Operator

You next question will be from the line of Paul Coster, JPMorgan.

Paul Coster – JPMorgan

First off, can you give us some sense of what UTX adds to 2014 revenue, or I guess fiscal year revenue and earnings?

Dan Bodner

Yes, sure. So a few details about UTX. We just signed and closed the acquisition earlier today. So this is part of our overall investment in security intelligence strategy. And as I mentioned before, we do that organically and through M&A.

UTX has been a previous supplier, so we know the company. We've been selling the product and we decided to acquire the company because we see very good growth opportunities. The company is small. It's based in EMEA, about 90 employees. The majority of the employees are focused in R&D with expertise in the seller networks domain.

And in terms of what we expect from them revenue wise, so we do sell the product, so incremental to the revenue that we generate from reselling the product we expect this year, for the remainder of the year, $10 million of incremental revenue and we expect to double that to over $20 million next year. We paid $83 million with cash outside of the US, cash that we hold outside the US. And we expect this to be accretive out of the gate.

Paul Coster – JPMorgan

Very good, thank you. And I know it's difficult to compare yourself with the same business a year ago now, because it's changing quite rapidly. But are you in a position to give us some sense of what you think the organic growth rate for this business is likely to be over the next two to three years? Also with the changes that you're affecting, what kind of gross margin and operating margin targets do you aim at now?

Dan Bodner

Yes. So I'll start with the revenue growth and Doug can talk a little bit more about the leverage in the business. So as we discussed before, we do have products that are growing double digit and we also have legacy products that are growing low-single digits. Our mix was around mid to high single-digit growth rates. And we are aiming to change that towards double digit, that's why we are making changes in our strategy. We did not just increase our TAM to $6 billion, but we selectively chose areas that we believe are high-growth areas.

So for example, KANA, we mentioned on our prior call that we expect them to grow double digit next year as they are positioned in high-growth area. UTX that we announced today, I expect it will double the incremental revenue from this company next year. And cyber security is another area which we didn't acquire, but we are growing organically and we are expecting very high growth rates into this year and the future.

So we are changing the mix. It will change over time, but we are moving toward accelerating our top line. And now let me turn over to Doug.

Doug Robinson

Yes, sure, Dan. So our revenue last year as you can see grew by about 7% and we have achieved some operating leverage. Operating expenses grew by about 4%. So operating income we're able to drive to 11% increase from the year prior with margins about 23%, a little over 23% compared to just over 22%. So we got some decent operating leverage that year.

As you can tell from what we just said, we're expecting flattish operating margins for next year. We'll see as the year progresses, but I think we were a little ahead of where we thought we would be from this year, and certainly where we guided to earlier in the year. So we do see some operating leverage as we scale the business. It'll be a little lumpy as we go through the periods. But next year, operating margin somewhere around 23%.

Paul Coster – JPMorgan

All right, thank you. And one last question, please. Enterprise IT spending, I guess you have as good as view as anyone on what's happening there. Do you sense that there's improvement taking place? If you can give us any color there, that would be helpful.

Dan Bodner

Yes. I think the IT spending is an area that we're not highly sensitive to as IT is not necessarily our direct buyer. But we do overall -- are effected obviously from the CapEx expenditure and overall technology spending. I believe that enterprise and governments are looking to spend their money wisely and they are selective. There are lots of alternative. And I think our approach is not just to sell technology but to sell solution. We combine our technology with services and with domain expertise and we are selling applications that presents a very attractive ROI. So I don't think the IT spending environment is overall strong, but I think we can take a good chunk out of that available spending.

Paul Coster – JPMorgan

Thank you.

Dan Bodner.

Sure.

Operator

Your next question will be from the line of Michael Nemeroff, Credit Suisse.

Michael Nemeroff – Credit Suisse

I've actually got a couple. For Dan, I'm trying to figure out what's going on with the Enterprise Intelligence business. Roughly flat, maybe slightly up for the year and we were expecting a little bit higher growth there. And security continues to surprise to the upside. If you could maybe give us some color on what's going on with that business and then maybe some specifics in terms of the geographies for the segments as well that would be -- and maybe large deals as well, that would be helpful.

Dan Bodner

Okay. Let me start perhaps with the overall picture for Q4 and the geographies and then I'll go specifically to our Enterprise performance in Q4. So over in Q4 we grew 12% from $230 million the year before to $257 million and we also feel very strong business activity in Q4.

Geography wise, EMEA got better, as expected. EMEA in Q3 and Q4, improved and we have -- basically we're flat in EMEA in Q4 year over year. And we were also flat in Asia Pacific. Americas grew 21% in Q4. So the overall 12% is really driven by growth in Americas during the quarter.

Specifically for the Enterprise business, at the beginning of the year, we expected Enterprise to grow 6% given that EMEA will be recovering. And as we progress through the year, EMEA was not doing well and we reported in Q1 and Q2 and in Q3, 4% growth that actually was 6% growth outside of EMEA and a decline in EMEA. So that was the first three quarters.

And then in Q4, we got revenue weak in Enterprise, I believe this is because we got busy with KANA. Some of the deals that we expected in Q4, we already got now in Q1. Some of the deals that we expect to get later in this year. And overall, we believe this year will be a very strong year for Enterprise business.

Michael Nemeroff – Credit Suisse

That's helpful, Dan. And one for Doug if I may. Want to clarify the guidance for KANA, when you closed was $145 million to $150 million, and that was for the calendar year. I was wondering what you're baking in in terms of the KANA contribution in FY15?

Doug Robinson

Yes, sure. We had provided guidance of $140 million to $150 million of revenue and we continue to expect that and that's lined up with our fiscal year end January 31, 2015. And we expect contribution from the KANA business to be similar to Verint's margins.

Dan Bodner

So if -- let me add, if you look at our guidance that we provided. At the high end of the guidance we dialed in $150 million for KANA, $10 million for UTX as we just mentioned, and the rest is mid to high single-digit growth from our legacy business.

Michael Nemeroff – Credit Suisse

Okay, thanks very much for taking my questions.

Operator

Your next question will be from the line of Jeff Kessler, Imperial Capital.

Jeff Kessler – Imperial Capital

Thank you. With regard to KANA, what has KANA done for you in terms of being able to sell multiple -- has it increased your ability to sell multiple modules as part of an entire suite? And if it has, can you give us some idea of how that ability to sell multiple modules to customers has improved during the year?

Dan Bodner

So we are running together with KANA for two months. And at this point, integration is progressing well. We have done already the self kick off with both sales forces, so we have cross trained the sales forces on the suite. And they are out there now talking to customers and presenting.

So far, we got very positive feedback from customers. There's a lot of interest and we are doing presentations. The sales cycle is typically six to nine months. So we don't expect the contribution to be that early, Jeff. But if I have to judge from the reaction, customers are excited about the ability to buy a broader set of solutions from a single vendor. And so the KANA customers and the Verint customers that have positive experiences with us are looking forward to expand with a single vendor into more solutions.

So there are steps in the integration process. In a couple of months, we're going to have a pretty large user conference where we're going to bring customers -- and we mentioned before that we have a base of about 10,000 customers. KANA has a base of about 900 customers. We're inviting customers in a couple of months to a conference where they will be able to not just hear about a product, but will showcase the product and we think this will be another step in that integration process. And so far, we're encouraged.

Jeff Kessler – Imperial Capital

Okay, second question is clearly your security business is doing quite well right now. A lot of it has to do with some of the same types of -- some of the same similar types of big data analytics that you are using in, I would say, in several of your divisions. My question to you is, to what extent are behavioral analytics becoming a larger part of your entire data analytics portion, so that you can use that to -- for both security and legal and fraud issues, as well. And if you don't understand the question, I am looking specifically at the behavioral side of data analytics.

Dan Bodner

Right. So that's what we do with predictive analytics. We do leverage voice biometrics and facial recognition, as well as other sources of information. Some is biometric and some is more predictive analytics, trying to predict behaviors, future behaviors based on past behaviors.

A big part of what we do, and again whether it's in fraud or whether it's even in cyber security, is trying to identify patterns and correlate data to understand in the case of cyber security, how is malware behaving within the network and being able to track malware and prevent future attacks. So behavioral analytics is part of predictive analytics and is part of some of the technology that we leverage across a number of different applications.

Jeff Kessler – Imperial Capital

Okay. One quick final question, are you getting -- what kind of attraction or what type of pushback are you getting from clients when you try to sell them services in the cloud at this point?

Dan Bodner

It depends on the end of the market. The entry level in the market, people are very excited about cloud-based solution. This is a very simple, quick way for them to benefit from technology.

But as you move up to the higher end of the market, there is more pushback. People are concerned about solutions to cloud in terms of protecting privacy of customers, protecting the security of the data. They also see benefits to having more control and prefer on premise deployments. We see a trend that more and more customers like to have managed services where they do ask the vendor to provide the services to manage the infrastructure, but they would prefer the infrastructure to be in their private cloud rather than on the party cloud.

So we are positioning the Company with flexible deployment options. Our SaaS business has grown double digits last year and we expect it to grow double digit this year. But as I mentioned before, it's still sub 10%. But we do believe that our clients prefer the SaaS business. But at the same time, we have the majority of our clients, at this point, prefer the on premise deployments sometimes in combination with managed services.

Jeff Kessler – Imperial Capital

So your smaller clients tend to be, let's say, less resistant to the cloud but overall, the SaaS business, the SaaS business is growing on both small and large clients?

Dan Bodner

The SaaS business is growing as I mentioned double digit and it's mostly focused on the low to mid end of the market.

Jeff Kessler – Imperial Capital

Okay, very good. Thank you very much.

Dan Bodner

Okay. Sure, Jeff.

Operator

Your next question will be from the Jonathan Ho, William Blair.

Jonathan Ho – William Blair & Company

Hey, guys, can you talk a little bit about the investments that you need to make to continue building out the cyber security business whether that's on the go to market side or product development? Do you intend to use the same sales force and the ability to start selling that solution more broadly?

Dan Bodner

Yes. So let me start by saying this, over the years we developed very unique expertise in big data analytics and in network analytics. So as we expand our TAM, our addressable market, we tend to move into markets that can benefit from big data analytics such as, we believe, cyber security.

There are many companies in the cyber security market focused on intrusion detection and on protection of the endpoints, but we believe the more up and coming area is protecting the network. And our longtime expertise in inspecting network traffic in real time and at network speeds using deep packet inspection technology, give us a capability of advanced detection of malware. Our longtime expertise in big data capture and analytics gives us the capability to record very large amounts of network events and use this repository to run analytics and investigate cyber attacks.

So as you can see, we have a lot of technology already in place and what we are adding is specific technology in identifying specific signatures of cyber attacks and so forth. So from a product perspective, we believe we are now well positioned in the market to provide state of the art cyber security solution at a network level.

Now when -- to your question about the sales force, we mentioned that our target market would be government and large organizations that are looking to protect the network and we do have the sales force that -- and the relationship with a lot of those customers that allow us the opportunity to go in and present our unique approach to cyber security. So while the business is still small for us, we expect growth to accelerate rapidly. And we now have several opportunities for big deals and we expect to win one or more big deals this year.

Jonathan Ho – William Blair & Company

Got it, that's very helpful. And then a second question around KANA and the cross sell opportunity. Is there significant overlap between KANA and your installed base today? Can you give us maybe some color as to how much of the installed base has one product or the other? And what that cross sell opportunity looks like?

Dan Bodner

Yes, so there is overlap within the customer base. We have approached these customers. Their reaction is that typically customers like the Verint solution and the KANA solution and they see an opportunity now to benefit from having those combined solutions from a single vendor. So clearly, we believe those customers that have experienced both Verint and KANA will be in the early stage of adopting the extension of their deployment with Verint.

At the same time, we've already penetrated into the base where there is no overlap, but customers are still very interested to hear about what are the new capabilities that either KANA, legacy KANA or legacy Verint can offer now with the combination. So the overlap is not necessarily where we see the biggest opportunity, but that's where we see the earlier stage opportunity and that's where we focus first.

Jonathan Ho – William Blair & Company

Great. Thank you.

Operator

And at this time, I'm showing we have no further questions in queue. I would like to turn the call back over to Mr. Alan Roden for any closing remarks.

Alan Roden

Thank you, Operator, and thank everyone for joining us tonight. We look forward to talking to on our next call. Have a great evening.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation, you may now disconnect. Have a great day.

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