Verint Systems' (VRNT) CEO Dan Bodner on F2Q 2015 Results - Earnings Call Transcript

Sep. 4.14 | About: Verint Systems (VRNT)

Verint Systems Inc. (NASDAQ:VRNT)

F2Q 2015 Earnings Conference Call

September 4, 2014 16:30 ET

Executives

Alan Roden - Senior Vice President, Corporate Development

Dan Bodner - President and Chief Executive Officer

Doug Robinson - Chief Financial Officer

Analysts

Jim Moore - FBR Capital Markets

Nandan Amladi - Deutsche Bank

Shaul Eyal - Oppenheimer

Kyle Chen - Credit Suisse

Jonathan Ho - William Blair

Paul Koster - JPMorgan

Jeff Kessler - Imperial Capital

Brian Ruttenbur - CRT Capital

Dan Bergstrom - RBC Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Verint Systems Incorporated Earnings Conference Call. My name is Tony and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Alan Roden - Senior Vice President, Corporate Development

Thank you, operator. Good afternoon and thank you for joining our conference call today. I am here with Dan Bodner, Verint’s CEO and President and Doug Robinson, Verint’s Chief Financial Officer.

By now, you should have seen a copy of our press release that includes selected financial information for our second fiscal quarter ended July 31, 2014. 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 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 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 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, our Form 10-Q for the fiscal quarter ended July 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 is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies.

Now, I like to turn the call over to Dan. Dan?

Dan Bodner - President and Chief Executive Officer

Thank you, Alan. Good afternoon, everyone and thank you for joining us to review our second quarter performance. In Q2, we reported $285 million of revenue and $0.72 of fully diluted earnings per share. We are pleased with our strong second quarter results, which reflect our focus on innovation and our expanding portfolio of actionable intelligence solutions for smarter world.

Our second quarter performance follows the strong execution we had in our first quarter and position us well for achieving our double-digit revenue growth target for the year. During the first half, revenue increased 29% year-over-year. We are also pleased to report that when we include KANA’s revenue in last year’s first half we had double-digit year-over-year growth. Our first half results combined with the strengthening of our competitive position have made us more optimistic about the year and we are again raising our annual guidance, which we will discuss later in more detail.

Earlier this year, we discussed expanding our TAM, total addressable market, as part of the acceleration of our growth strategy. Our current focus is to make the world smarter in three areas of actionable intelligence: customer engagement optimization, security intelligence and fraud risk and compliance. These areas share similar challenges of analyzing large volumes of unstructured and structured information and leveraging critical insights from the data to allow people to make smarter decisions.

One of the strengths Verint brings to this expanded addressable market is our actionable intelligence platform. The Verint platform is evolving to support, capture voice, video, text and other structured and unstructured data to process and analyze this data and finally to make the insights actionable across many domains and industries. Our platform is designed for internal use and positions Verint to quickly bring new applications to market across existing as well as new markets. A good example was our ability to quickly bring to market a new and differentiated cyber security solution by leveraging capabilities from the Verint platform and our deep expertise in real-time analytics, large scale data capture and forensic analytics. We will continue to invest in expanding our platform capabilities and to leverage synergies across our solution portfolio.

Now, I would like to provide some highlights starting with the customer engagement optimization markets. Our combination with KANA has been very well received as customers see significant value in our suite approach. The acquisition closed in February and the integration with KANA is progressing well. During the quarter, we had several legacy Verint customers expressing interest in KANA solutions. We believe we have become more strategic to our customers with the industry’s broadest portfolio of customer engagement optimization solutions and that over time we will be able to leverage the joint customer base even more.

During the first half of the year, our enterprise intelligence segment delivered double-digit year-over-year revenue growth. We also achieved double-digit revenue growth in our enterprise segment with KANA included in both periods and we believe this performance reflects strong market demand for our solutions.

I would like to share with you some recent customer anecdotes demonstrating the progression of our customer engagement strategy that was accelerated with the KANA acquisition. We received an $8 million order from a new customer in the financial services industry. This new customer is deploying multiple customer engagement optimization components of the Verint suite in connection with an initiative to improve customer service quality though multiple interaction channels, including the call center, e-mail, chats and self service.

We received a $4 million order from an existing customer, one of the world’s largest retailers. This customer has previously deployed several components of our workforce optimization suite and is now adding new components of our broader customer engagement optimization suite, such as agent desktop, knowledge management, case management, e-mail management, live chat, mobile and web self service. These applications came to Verint through the KANA acquisition and we are pleased to help this customer expand this deployment from a workforce optimization suite to a full customer engagement optimization suite. Over the last three years, optimizing customer engagement has become both more strategic as well as more complex for our customers as a result of new technologies for multi-channel interaction. We have been told by our customers that purchasing multiple point solutions from many different vendors can create challenging integration complexity and suboptimal operational results.

Listening to our customers, Verint is now offering organizations a unique broad suite of applications to achieve the strategic objective. We believe that optimizing customer engagement continues to be a high priority for enterprise spending and our strong execution combined with a suite strategy significantly increases Verint’s addressable markets exposing Verint to higher long-term growth opportunities.

Turning to the security intelligence market, we have continued to expand our portfolio of actionable intelligence security solutions to make the world smarter and safer. Within security, we focus on three areas: communications intelligence, cyber security and homeland security. During the quarter, we experienced demand for our innovative security solutions around the world and revenue in our two security segments combined increased 16% year-over-year during the first half of the year.

During Q2, we received several large orders, including one for more than $20 million, one for $15 million, and one for $10 million from three existing customers as well as one for $5 million from a new customer. We believe these large orders reflect our success in delivering innovative actionable intelligence solutions across the industry market and we are well positioned to address demands for big data intelligence solutions that help make the world a safer place.

As we have discussed on past calls, cyber security is a high growth opportunity for Verint and during Q2 we continued investing in this area with an expectation for long-term growth. Our cyber security investments were across many areas including adding people in R&D to advance our solution offerings, expanding the sales force to increase market coverage and investing in certain new marketing initiative. Our current strategy targets organizations with large scale networks and a very high focus on protecting against advanced persistent threats. In a world of increasing connectivity, organizations are looking for innovative solutions to better protect themselves against sophisticated cyber attacks. Competitively, we believe our core competency in big data intelligence combined with our unique actionable intelligence platform positions us well to help large scale organizations identify, investigate and eliminate cyber threats.

Behind our past success and our double digit growth objective is our focus on innovation. We currently have approximately 1500 people or one-third of our total employees involved in research and development. Our growth strategy involves innovating both organically through internal development as well as through acquisitions as our market remains very fragmented. During Q2 to provide Verint additional strategic flexibility, we modified our capital structure. The new guidance we are issuing today more than offsets the dilution from our recent offering and I am very pleased to be able to report strong Q2 results following a positive market reflection to the offering. Based on our solid first half and our outlook for the balance of the year we are increasing our non-GAAP revenue guidance by $15 million for the year. Our new revenue guidance is a range of $1.125 billion to $1.175 billion and our newly diluted EPS guidance has increased to a range of $3.35 to $3.50. As we look ahead, we look forward to continued growth, market leadership and a strong second half of the year.

And now, let me turn the call over to Doug.

Doug Robinson - Chief Financial Officer

Yes. 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 including the amortization of the discount on our convertible notes. I will start my discussion today with the areas of revenue, gross margin and operating margin.

In the second quarter we generated $285 million of revenue across our three segments. With $169 million in enterprise intelligence, $87 million in communications intelligence and $29 million in video intelligence, this compares to $223 million of total revenue in the second quarter of the prior year with $126 million in enterprise, $65 million in communications, and $32 million in video. In terms of geography, in Q2 we generated $140 million in the Americas, $97 million in EMEA and $48 million in APAC. This compares to approximately $119 million in Americas, $47 million in EMEA and $57 million in APAC in the second quarter of the prior year. We are particularly pleased with our revenue growth in EMEA for the second quarter in a row. Q2 gross margins were 67.5%, up from the 66.3% in Q1 and compared to 68.8% in Q2 last year.

As we have discussed in the past due to product and revenue mix within or across segments and particularly within the security business, overall gross margins can fluctuate significantly from quarter-to-quarter and we continue to expect similar gross margins this year versus last year. During the second quarter we generated operating income of $59 million compared to $51 million in Q2 of last year. Our EBITDA for the quarter came in at $64 million. This brings our first half EBITDA to approximately $120 million compared to $96 million in the first half of the prior year representing 25% year-over-year growth.

Now, let’s turn to other income and interest expense. In the second quarter, other expense net totaled $10.6 million reflecting $8.2 million of interest expense and a $2.4 million loss from foreign exchange driven by inter-company balance sheet translations. Our cash tax rate was 8.9%. And as we have disclosed – discussed previously, we expect to enjoy a low cash tax rate for several years due to our NOLs and the amount of income we generated in low tax rate jurisdictions. For the quarter we had 58.2 million average diluted shares reflecting our equity offering in the middle of the quarter. If you include the shares for the full quarter like we will do in Q3, our average share count will be approximately 61.5 million shares. These results drove diluted earnings per share of $0.72 for Q2 and $1.44 for the first half compared to $1.14 in the first half of last year representing 26% year-over-year growth.

Now, turning to the balance sheet, as of July 31, 2014, we had approximately $267 million of cash in short-term investments including restricted cash. Q2 cash flow from operations on a GAAP basis came in at $16 million brining our first half cash flow to $70 million compared to $73 million in the first half of the prior year. As we have discussed in the past our cash flows can fluctuate quarter-to-quarter due to the timing of collections and payments. For the year we expect increased cash flows relatively to last year and another strong year with cash from our cash generation.

We entered the quarter with gross debt of approximately $811 million and net debt of approximately $544 million excluding discounts associated primarily with our convertible debt. During the quarter we issued $400 million of convertible notes at 1.5% coupon rate with an effective conversion rate of $75 and issued approximately $275 million of equity resulting in less than $0.05 of dilution. The offering provided Verint many benefits including reducing our debt and interest expense, staggering the maturities of our debt and most importantly increasing our strategic flexibility.

Before moving to Q&A I would like to discuss our increased guidance for the year ending January 31, 2015. We expect non-GAAP revenue to be in the range of $1.125 billion to $1.175 billion. Our increase in revenue guidance will result in additional profitability which is partially offset by the dilution associated with our recent offering. After our strong second quarter, we expect Q3 to be at similar revenue and profitability level to Q2 and to finish the year with a strong Q4 as usual. We expect our quarterly interest and other expense for the remaining two quarters excluding the potential impact of foreign exchange to be approximately $5.8 million per quarter which is down from our prior guidance reflecting the changes we made to our capital structure during Q2.

We expect our non-GAAP cash tax rate to be approximately 9% reflecting the amount of taxes we expect to pay this year. Based on these assumptions and assuming approximately 59.3 million average diluted shares outstanding for the year, we expect non-GAAP EPS in the range of $3.35 to $3.50. The midpoint of our EPS guidance reflects more than 20% year-over-year growth. In conclusion we are pleased with the execution of our strategy, our expanding portfolio of actionable intelligence solutions and strong competition position and believe we are very well positioned for continued growth.

This concludes our prepared remarks and we are ready to take questions. Operator, can you please open up the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mr. Daniel Ives of FBR Capital Markets. Please proceed.

Jim Moore - FBR Capital Markets

Great, thanks. Great quarter, guys. This is Jim in for Dan. Can you talk a little bit about the large orders on the cyber front and maybe when you would expect to recognize those? And then also how the large order you mentioned last quarter how that’s progressing?

Dan Bodner

Okay. So, we mentioned today four large orders in the security market, of course a number of different domains that was $20 million, $15 million, $10 million and $5 million. I think at this point we have been able to report large orders almost every quarter. And I think that demonstrates our ability to win and deliver large scale projects in security. Last quarter what we announced the large cyber projects of more than $100 million that was clearly a big win for us. And we also discussed that right now with our strategy in cyber security, we are targeting multi-million dollar projects and over time we will consider when is the right time to scale down our products and go after a broader market, but we feel that there is a sizable opportunity for us right now to differentiate our offering for very large organizations that have a focus on advanced threat protection. So, that’s where we are in this area. We always are engaged in some large projects. We think we know how to deliver those projects over time and we recognize revenue over time. So, revenue of large projects are built in into our normal revenue reporting.

Generally, in cyber security, as I mentioned, first we are pleased with the progress we are making. We like the direction we are going and we like the response we are getting from customers. We are investing in cyber security and our investment is not just short-term to deliver projects. As I mentioned before, we are investing in R&D to enhance the capability of the product and we are investing in sales coverage across many geographies as well as in marketing initiatives. So, our goal here is to invest in the cyber security to make this a growing business. We expect it to grow much faster than our overall growth rates. So, when we discuss, we target overall low double-digit growth for the company, the cyber security area we are targeting much, much higher growth rates and that’s because a) the cyber security market is very big and b) the submarkets of advanced threat protection we believe is an early stage market that is showing now demand. So, this is an opportunity to accelerate growth in a market that is small, has very large potential, and we believe we are well-positioned with this market. So, our goal is to invest to grow the business over many years and to make it a meaningful component of the overall Verint business.

Operator

Your next question comes from the line of Nandan Amladi of Deutsche Bank. Please proceed.

Nandan Amladi - Deutsche Bank

Hi, good afternoon. Thanks for taking my question. The outperformance this quarter seems to have come more on the services line rather than licenses, was there any specific project related rev rec that happened on the services side?

Dan Bodner

We believe that this can fluctuate. Our overall mix of product services is 40% product 60% services. And when you look into our services it’s actually 40% product, 40% maintenance and 20% services. These are very rough numbers. But as we look forward, we expect to maintain a very similar ratio of 40, 40, 20. Obviously, we are adding products. So, we believe our product revenue will grow. Maintenance is something that is very important to our customers that they need to ensure ongoing support for the products. And services, which is 20% roughly of our business is really targeted towards helping customers to deploy our solutions ineffectively and it’s creating a lot of value for our customers, but also it’s making the product stickier. So, I wouldn’t read too much into the quarterly trends and then we believe that over time we will maintain similar mix of products and services.

Doug Robinson

Yes. I’d just like to add to that. This is Doug that while our SaaS revenues are small they are growing rapidly and that does get accounted for in the service line.

Nandan Amladi - Deutsche Bank

Right. And at some point presumably, you will break those out when they get big enough?

Dan Bodner

Yes. We discussed that the fact that they are still less than 10% and we will consider breaking SaaS when it’s at the 10% level.

Nandan Amladi - Deutsche Bank

Okay, thanks. And one follow-up if I might, after the acquisition of KANA, I know you have described several projects in the enterprise segment that you won since then. Has the cadence of license revenue recognition, is that any different with the combined portfolio or with the KANA product specifically or is it very similar to the rest of your business? Thank you.

Doug Robinson

Yes, it is fairly similar within the enterprise segment, Nandan. It’s a license maintenance services model that really hasn’t changed with the combined business.

Dan Bodner

Yes. And the business is integrated now and we are offering customers very similar business model and some of the customers now I mentioned the $4 million customer is actually a Verint legacy customer. So, we are leveraging the Verint relationship, we are leveraging the Verint contract, and obviously we are offering now customers a broader suite with more capabilities that we got from KANA, but it’s all part of optimizing the opportunity around customer engagement. So, obviously unifying and normalizing the revenue recognition model is part of unifying the business.

Nandan Amladi - Deutsche Bank

Thank you.

Dan Bodner

Thanks. Sure.

Operator

Your next question comes from the line of Mr. Shaul Eyal of Oppenheimer. Please proceed.

Shaul Eyal - Oppenheimer

Thank you, operator. Good afternoon guys. A good quarter, congrats on the outlook as well. I get to competitive landscape on the enterprise segment, specifically in light of the year recent KANA addition. Turning just for a second into the cyber security segment, who are the new names, who are the main competitors you are beginning to see in that arena as you grow stronger and faster?

Dan Bodner

Yes. So, what we see in the cyber security market is the customers are really looking at everyone. The type of customers that we are targeting are pretty sophisticated. They have their internal departments that are pretty good at doing a research in the market and looking at all the traditional players as well as many, many startups. I think that people that are responsible for cyber security feel that they cannot overlook and they have to really turn every stone and make sure that if there is a solution there that could be helpful to them that at least will kick the tire. So, very often, our customers tell us that they have looked at a lot of different people. So, clearly, the differentiating here – a differentiating factor is what is the objective and how do we differentiate specifically in achieving the objective.

And when customers are still looking to do firewalls and virus detection, so this is trying to prevent penetration of their networks we are not well positioned. We are not targeting this market. This is not where we see the opportunity. But many customers now realize that despite of their efforts to prevent penetration and to do early detection, their networks are compromised. That malware is penetrating in a lot of different ways and now they need tools to be able to understand what’s already in the network, what’s the purpose of the malware, how it’s progressing and how do they understand, who is behind it, and what it’s trying to do and eventually also obviously eliminates the threat. And there are very few people who can scale to the level that we do leveraging the big data platform that we created that it was specifically designed to address these types of threats.

Shaul Eyal - Oppenheimer

Got it. Then maybe Doug is the increase in guidance for the second half of this year is driven by strength across all product segments or is it a specific segment is it the enterprise or security or all of the above?

Doug Robinson

Yes, it’s very broad, so if you look at what we said at the beginning of the year, we raised guidance once $30 million and now we raised guidance another $15 million, so this is overall $45 million increase relative to our initial guidance. And when I look at what were our thoughts at the beginning of the year, which we shared with investors KANA was very early and we are very optimistic but we are cautious. And the cyber security as well we were very optimistic. But we didn’t really have enough proof points relatively to how much to dial into the guidance. In both areas when we are now six months into the year we are much more optimistic than we were the current integration is going well, we are already leveraging the customer base with Verint. And given the sales cycle typically is six to nine months being able to report that we already combined the business, the sales force is combined and we already got a $4 million order from a Verint customer that’s very encouraging. As well as on the cyber barely to report big wins and good pipeline is encouraging. So I would say very broad improvement across the business that drives our improved outlook for the year.

Shaul Eyal - Oppenheimer

Got it. And one final question if I may can you disclose the $20 million and $50 million and $10 million coming from existing customers and $5 million coming from a new customer, I want to stick for a second on the existing customers you have a very, very a vast install base and in your opinion how far more can you go within your existing install base and go and penetrate more with those sizable contracts or what potentially could be also defined as an actual opportunity?

Dan Bodner

Yes, we think we can go pretty far. Many of the customers that we report as existing customers could be government agencies that have a very broad oversight and while they are buying into one area they are responsible to many other areas of like security, fighting crime and terror within the jurisdiction. So while it’s a same government entity we are not necessarily addressing all facets of the opportunity. And also in some countries, we are selling to the same customers that bought cyber security and they will be buying homeland security and the responsibility for security is not necessarily just limited to cyber or communication intelligences or homeland security. So while we are very excited adding new customers and typically a new customer starts small the opportunity to sell more products into a number of different domains of security is very large.

Shaul Eyal - Oppenheimer

Got it. Thank you very much and good luck, good work.

Dan Bodner

Yes. Thanks.

Operator

Your next question comes from the line of Mr. Michael Nemeroff of Credit Suisse. Please proceed.

Kyle Chen - Credit Suisse

Hi, this is Kyle Chen for Michael. Thanks for taking the question and congratulations on the good results. Just building on the earlier point about cross selling and up selling opportunity, can you talk about how this might look from a individual, I guess product suite perspective once your product integration is completed, could you potentially see higher ASPs both on an individual product basis as well as a suite basis?

Dan Bodner

Yes. We believe we are already starting to see higher ASPs with $8 million and $4 million for the very simple fact that the customer engagement suite is much broader than the workforce optimization suite. So I think it’s important to remember that workforce optimization while it’s a suite, it’s now a sub-suite of a broader suite, right. So we are able to afford customers a journey where they can grow for workforce optimization into a full customer engagement suite. They can do that over time. They can do that buying modules individually or in some cases buying them all in bundles. So as much as we are very pleased when we have customers that make bundle ordered and we can report an $8 million deal, a lot of our customers that are migrating over time represents the same potential of $8 million, $10 million, maybe more. They just did over time and we are not – it’s not reflected in the ASP. So we are tracking ASP. We are seeing improvement in the ASP, but more importantly we are tracking what is the potential on a per seat basis we are selling to our customers a broader suite.

And obviously this means that we are increasing the opportunity in terms of addressable market. And we are doing that while actually not trying to focus with something they don’t need. We are trying to respond to the demand we hear from the market that they really want to buy those modules integrated and they don’t like to buy them from many, many different vendors and deal with all the integration issues. And it’s not just one time integrations, when they buy – what customers report is, when they buy different software packages from different vendors, they do integration and then during the life cycle as they are trying to upgrade, vendors are upgrading their components but they are not necessarily maintaining the integration that that customer have and the customer needs to redo integration as they upgrade different pieces. So the value of buying it from a single vendor is tremendous.

We believed we are – as you mentioned, obviously we will integrate deeper and deeper over time and we are going to do integrations that are much deeper than what systems integrators can do using our published APIs because we own the entire suite, we can go much deeper. But we believe that customers already benefit from the fact that they can buy the entire suite from one vendor even with the current level of integrations. So we are pleased that already in the second quarter we are able to leverage the joint customer base and as I mentioned before we believe we will see more of that over time.

Kyle Chen - Credit Suisse

Great, that’s helpful. And if you can also help give us some color on sales productivity over the last few quarters and if you can comment on your sales and hiring plans over the next 12 to 18 months just will more feet on the street necessarily translate into improved selling or is the emphasis going to be more on integration and messaging?

Dan Bodner

Yes. I think the first six months as we integrated the sales force a lot of the focus was on the cross training and making the combined sales force more effective. We did hire about – overall about I believe is more than 100 people in Q2. We are planning to hire over the next two quarters approximately 100 people per quarter. In terms of sales specifically currently sales is about 20% of our total workforce and when I look into our hiring plan in Q3 and Q4 about 20% of our hiring will be in the sales area. So, it’s pretty proportional to the overall growth in employees. While we are expanding our sales force, we also are hiring service people, so we are in a position to deploy and support the products. And as I mentioned before we also will get substantial maintenance revenue and service revenues. And obviously we also are hiring in R&D as we have a lot of innovation ideas. So the sales force I think will fairly grow with hiring, but I believe will also become more effective as time goes by and integrating the sales forces of both companies will yield a more educated and effective sales force.

Kyle Chen - Credit Suisse

Thanks. Helpful.

Operator

Your next question comes from the line of Mr. Jonathan Ho of William Blair. Please proceed.

Jonathan Ho - William Blair

Good afternoon, guys. Just wanted to start off with the strength that you guys saw in EMEA and could you guys give us a little bit more color in terms of were there any verticals or were there any sort of product segments that saw above average strength in that region?

Dan Bodner

Yes. So, it was broad. It was broad. Some of the strength came inorganically from KANA, as KANA is present in EMEA, but even without the contribution from KANA, we feel very strong growth in EMEA and we saw that across enterprise and security. I think what’s interesting is in security we saw some large projects in EMEA, which was an area that we felt was behind in prior years. We spoke in prior years about the fact that we believe is a temporary setback. It’s not something that is reflected on Verint’s capability, but budgets and it looks like in the first six months things have got much better on the security side and also good growth on the enterprise side.

Jonathan Ho - William Blair

Got it. And then can you talk a little bit in terms of the communications interception business, I mean this has shown very strong growth for multiple quarters at this point. Is there something happening there that maybe is driving that acceleration and how sustainable should we – do you think that growth can be in terms of the communications interception piece?

Dan Bodner

Yes. I think this is being, if you look at the last few years we have grown 20% there. So, it’s clearly an area where we have products that help law enforcement and government agencies to fight crime and terror. We all know that their mission is to keep the world a safer place and they need more sophisticated solutions. It’s very effective to conduct investigations based on intelligence and that’s what our products are designed for. Our security offering is broad into a number of different areas. One of the projects that we announced today is actually in homeland security. And just as an anecdote, one area of homeland security is prisons, where there is also a security and safety issue within prisons.

Verint is now positioned with a very unique portfolio. We have video surveillance capability for prisons. We have intelligence capabilities to track mobile devices within prisons. And we have a situation management capability for the overall command and control function within prisons. So, we offer a portfolio that can really help the correction market to maintain law and order within the prison and ensure the safety of inmates as well as deal with security issues. And this is an area where we announced a large win here. So, our ability to address communication intelligence, cyber security, homeland security and in all areas, in all these areas we offer customers the big data intelligence platform. This seems to be an area that the demand is growing and Verint is one of the companies that is known in the market and we are very proud that we are helping to keep the world a safer place.

Jonathan Ho - William Blair

Got it. And just one final one from me is, when you guys talk about sort of these $100 million deals, can you give us a sense of how much of that $100 million is actually product and license versus the services side and maybe some approximation in terms of the time length for that, that revenue to be recognized?

Doug Robinson

Okay. Yes. So, we are referring to large deal we announced last quarter in the cyber area.

Jonathan Ho - William Blair

Right.

Doug Robinson

So, that is a project that we are doing, that’s a percentage of completion. We will have a little revenue from it this year, most of the revenue falling into next year and the year after. And the revenue there is allocated into a product component and into a service component for the configuration and what we have to do for this specific customer. So, in total, it’s probably not disproportionate to what we have in that business unit overall.

Jonathan Ho - William Blair

Got it. Thank you.

Doug Robinson

Sure.

Operator

Your next question comes from the line of Mr. Paul Koster of JPMorgan. Please proceed.

Paul Koster - JPMorgan

Yes, thanks for taking my question. Dan, I would just like to go back to, Dan, this threat detection and cyber security. You talked about how you are different by the fact that you are able to work with massive scale, but I feel like that’s not really the thing that differentiates you alone. Isn’t it also the case that you are able to bring the experience you have got on structured data biometrics? And isn’t there some synergy here between the communication interception and the advanced threat detection, so malware type application and you are able to go back out and if you are allowed to offer this to enterprises, but you are able to go back out into network, exploiting all of those tools that you have got, that are generally made available to law enforcement and intelligence agencies to also solve problems, which no longer are – are clearly no longer just sort of enterprise specific?

Dan Bodner

They are huge synergies clearly. The comments I made about differentiating with scale is relative to explaining why at this point we are targeting very large scale organizations. We just feel that a) they have a need and many of them have the budget and b) once they take a look at our capabilities it’s much easier for us to win. Now, when you think about how we go out into the cyber security market, there are many companies that have much better brand names. So, we felt that initially we want to differentiate based on just pure capabilities that are way above what other people can do. But in terms of the overall capabilities we bring to the cyber security market, once we decide to scale down the platform and bring it to the mid-market, I think we can still compete very well for many of the reasons that you mentioned, our ability to do deep packet inspection on the fly with real-time analytics and our ability to do forensic analysis that we have evolved over many years of working in the security arena on the communication intelligence side. So, we think we have very strong capabilities overall, but again the scale is certainly an advantage at this point when we go after larger projects. And as we bring the – we scale it down we will be positioned very well against competitors all across.

Paul Koster - JPMorgan

Well, last one, last question. And to what extent that you are able to offer your enterprise customers some of the tools and capabilities associated with law enforcement and anti-terrorism?

Dan Bodner

There are lot of synergies both in terms of the platform itself where capturing voice, video, text, applying analytics, speech analytics, biometrics, these are things that we do across enterprise and security customers. So, that’s the platform capabilities. And there is also we operate around enterprise risk mitigation whether it’s enterprise facility surveillance, whether it’s fraud detection, so a lot of the investigative tools that we develop for the law enforcement market are very applicative to enterprise investigations of fraud and improving security. We do believe that we will move the cyber offering into enterprise with the market over time, but we think we are going to be very busy with the large scale organization and we just need to prioritize how we go after the market. I mentioned before that we are looking to grow the cyber business at a very rapid pace. So, this is not low double-digit growth that we are targeting, different businesses within Verint will grow at different rates. The cyber business, our strategy is to grow it at a much higher rate and make it a very meaningful component of the overall Verint business.

Paul Koster - JPMorgan

Okay, thank you. Thank you, Dan.

Operator

Your next question comes from the line of Mr. Jeff Kessler of Imperial Capital. Please proceed.

Jeff Kessler - Imperial Capital

Thank you. You focused very highly on increasing the TAM for the overall security market, communication, fraud, and cyber security. What are you doing to create, let’s call it a larger ecosystem using other analytics companies using your own R&D to expand the adjacencies that you are in. So, for instance what – how do you expand, what are the other types of, what are the types of activities that you can use either internally or externally to expand fraud and the cyber side and the communications side so that the TAM grows as fast or even faster than the revenue growth that you are trying to target for that area?

Dan Bodner

Yes. So we do that on a number of levels. First is our platform. Our approach to the big data platform and again this is not a platform that we offer to other companies as a product, this is a platform that we use to accelerate our time to market when we are targeting expanding TAM and we want to bring quickly a product to market. But one of the features of our platform is the ability to use a lot of different analytical engines. Some of them we develop and some of them we get from other companies. So that creates an ecosystem of an analytical engines that are working within the platform and so our customers can really benefit from analyzing data with a lot of different engines from a lot of different sources some of them they already have, some of them they buy from Verint, some of them they can buy from third parties.

That approach is very compelling for customers as they – analytical engines don’t work in a vacuum, you need a platform to capture data and we have expertise in the unstructured capture to normalize the data and process it to transform unstructured data into searchable structured data and then to provide analytics. So, one level is the partner ecosystem. And then in terms of the go to market strategy, overall in Verint 50% of our business is direct and 50% is indirect. And many of our partners actually are great vehicles to get us to new markets within the extended TAM because they already have relationship with Verint, they already have positive experience with Verint, they are already in new markets and very often they suggest to us why don’t we take you into a new market and I mean if we believe we want to go there then we develop some additional capabilities in our platform and through our partners we can get to the new markets very quickly.

Jeff Kessler - Imperial Capital

Okay. And so like you are – in the end your ability to take on a structured data is hugely the base that the other parts of the ecosystem are going to work with other analytics providers, other guys who provide APIs and things like that?

Dan Bodner

Yes, we do. We do in cyber security we have very good analytical engines, but what we found and actually what we heard from customers when they buy products from a lot of different companies and trying to detect let’s say detect malware even competing products that are supposedly having very similar capabilities have different performance relative to a specific malware. So it does make sense where you are, I am a customer and you want to really protect yourself, it does make sense to apply different engines to address the same problem in parallel and our platform has the capability to process data into multiple engines and get the results and then combine those results and alert our customers on what’s the next best action. So it’s a win-win where we allow our customers to get the best engines from Verint, but also to get a platform where they can deploy other engines.

Jeff Kessler - Imperial Capital

Okay. Just quickly on R&D, I know that you have spoken in the past running on in line with revenues, is there the possibility though that given the R&D intensity of this type it is growing faster than the rest of the company that your R&D might be growing faster than revenues overall at some point?

Dan Bodner

Yes. So – you are right, so that’s always a temptation. But we talked about targeting R&D at 13% to 14% of revenue. Last year we did 13.5%. So, we are right in the middle. This year, it is creeping up a little bit. We believe it’s going to be around 14%, but we have a discipline, we have a business model, and we are targeting the R&D to be at that level. We think that can create enough innovation to drive growth and we are being selective. We have a lot of ideas for additional innovation, but we are working with this within this model.

Jeff Kessler - Imperial Capital

Okay, Dan. Thank you very much.

Dan Bodner

Sure. Thank you.

Operator

Your next question comes from the line of Mr. Brian Ruttenbur of CRT Capital. Please proceed.

Brian Ruttenbur - CRT Capital

Yes, thank you very much. Couple of housekeeping. Interest expense going forward, I want you to repeat that if you could.

Doug Robinson

Yes, Brian, this is Doug, about $5.8 million for the next couple of quarters.

Brian Ruttenbur - CRT Capital

Perfect. And then you mentioned I believe Dan or you mentioned EPS in the third fiscal quarter will be equivalent to second fiscal quarter, is that correct on a pro forma basis?

Doug Robinson

No, we said similar revenues, so…

Dan Bodner

Yes, similar revenues should drive similar EPS. And we think that typically Q4 is our strong quarter and that’s where the balance of the EPS will come from.

Brian Ruttenbur - CRT Capital

Okay. Last question in terms of your capital raise are you going to – obviously you are going after more M&A activity. Who do you see out there competing? Is it still NICE competing or are you seeing new competitors out there on the hunt for acquisitions?

Dan Bodner

So, we are in a very fragmented market. We have a lot of competitors. We list them in our 10-K. So, we believe we are well-positioned against our largest competitors as well as smaller competitors, but when it comes to the largest competitors whether it’s Oracle or other large companies, obviously they have capital and they have the ability to acquire. We did discuss in prior calls when we talked about KANA that it was a competitive process and that we had quite a few competitors. So, having the flexibility and of course financial flexibility is important, is something that we feel is strategic for us if we decide to compete on an asset. We do have a pretty large portfolio. So, at this point we are not, defensively we are not looking to make an acquisition to fill the gap in our portfolio, but as we want to accelerate growth and we mentioned that we do target organic growth, but obviously with an increasing TAM, there will be opportunity for acquisitions. We are going to continue to be selective and we are very happy to complete the offering recently that provides us this strategic flexibility.

Brian Ruttenbur - CRT Capital

Thank you.

Dan Bodner

Sure.

Operator

Your next question comes from the line of Mr. Dan Bergstrom of RBC Capital Markets. Please proceed.

Dan Bergstrom - RBC Capital Markets

Yes, thanks for taking my question. So, you had some nice success over the last several quarters with sizable government wins. Any thoughts on that vertical as we approach the federal year end?

Dan Bodner

So, this is a global business for us. We have discussed many times before that we very early in developing our security portfolio, we would like to help the world become a safer place. So, the U.S. government is just one government customer for us. And also within the U.S. government, we operate on the federal, state, and local and we deal with a lot of different agencies. So, customer concentration in our security business has not been an issue for us. We right now are not very dependent. So, we are not focused on predicting whether there is going to be an increase in spending. I believe that the homeland security front and the cyber security front are two areas that generally should get more attention and more funding, but because it’s a global business and highly diversified, we are comfortable with our guidance and not dependent on the end of the fiscal year for the federal government.

Dan Bergstrom - RBC Capital Markets

Thank you.

Dan Bodner

Thanks.

Operator

There are no further questions in the queue at the moment. Please proceed with closing remarks, sir.

Alan Roden - Senior Vice President, Corporate Development

Thank you, operator and thank you everyone for joining us today. We look forward to talking to you on our next call. Have a great evening. Take care.

Operator

Ladies and gentlemen, thank you so much for your participation. You may now disconnect and have a great day.

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