Alan Roden - SVP, Corporate Development and IR Dan Bodner - President, CEO, Corporate Officer and Director Doug Robinson - Corporate Officer and CFO.

Dan Ives - FBR Shaul Eyal - Oppenheimer Michael Nemeroff - Credit Suisse Nandan Amladi - Deutsche Bank Saliq Khan - Imperial Capital Paul Coster - JPMorgan.

Good day, ladies and gentlemen and welcome to the Second Quarter 2016 Verint Systems Incorporated Earnings Conference Call. My name is Denise and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

[Operator Instructions] I would now turn the conference over to Mr. Alan Roden, Senior Vice President of Corporate Development. Please proceed sir..

Thank you, operator. Good afternoon and thank you for joining our conference call today. I’m here with Dan Bodner, Verint’s CEO and President; and Doug Robinson, Verint’s Chief Financial Officer. By now, you should have seen a copy of our press release that includes selected financial information for our second fiscal quarter ended July 31, 2015.

Our form 10-Q will be filed shortly. Each of our SEC filings and earnings press releases is available under the Investor Relations link on our website and also the SEC website.

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

These forward-looking statements are based on management’s current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed 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 risk and uncertainties could cause Verint’s actual results differ materially from those indicated in our forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2015 and other filings we make with the SEC.

The financial information discussed today is primarily non-GAAP. A reconciliation of the non-GAAP financial measures to GAAP measures is included in today’s earnings release as well as under the 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?.

Thank you Alan, good afternoon everyone and thank you for joining us to review our second quarter performance. In Q2, we achieved $297 million of revenue and $59 million of operating income with approximately 20% operating margins. These operating results drove non-GAAP diluted EPS of $0.76 when excluding non-operating foreign exchange charges.

We are pleased with our Q2 revenue, which reflects approximately 10% sequential growth on a reported basis and 8% growth year-over-year on a constant currency basis.

During the first half of the year, Verint continued to focus on making the world smarter in two areas of Actionable Intelligence, the Customer Engagement Optimization and Security Intelligence.

These two areas share similar challenges of analyzing large volumes of structured and unstructured information and leveraging critical insights from the data to allow people to make smarter decisions.

We believe that the Actionable Intelligence market is in an early stage providing Verint opportunity for long term growth and earlier this year we discussed our strategy for expanding our taller addressable markets to $8 billion.

This strategy includes extending our leadership position by investing and expanding our Actionable Intelligence portfolio and market coverage. Looking forward, in the second half of the year, we plan to continue to invest in advancing this strategic initiative and I would now like to update you on the progress we are making.

I like to start with customer engagement optimization which we will refer to as CEO. We believe that forward thinking enterprises are looking to address evolving consumer expectation by transforming their customer service to deliver high quality consistent customer engagement across multiple engagement channels.

Our strategy is to address this transformation by offering the market an integrated and open Actionable Intelligence platform combined with the industries broadest portfolio of customer engagement applications.

Our platform approach enables enterprises to purchase multiple, best of Verint applications from a single vendor, reducing the amount of integration otherwise required while significantly improving optimization capabilities with Actionable Intelligence.

The market feedback to our CEO message has been very positive and in the second half of this year we will continue educating the market about the benefits of this approach.

As previously discussed, the breadth of our product portfolio, services and platform approach positions Verint very well with enterprises with thick large scale transformative projects.

At the same time, we recognize that many enterprises are at early stages in their engagement strategy, and for these customers we enable them to take a more evolutionary approach.

During the quarter, we received multiple large orders that demonstrate the progress of our CEO strategy, including approximately $5 million in orders from a leading information technology customer.

This customer had previously deployed Verint’s workforce management solutions and decided to add our desktop and process analytics to drive employee performance and process improvement for their customer service and back office operations.

Approximately $2 million in orders from a financial services company in connection with their roll out of multiple CEO applications bringing total orders from this customer to approximately $9 million since the beginning of last year.

Approximately $2 million in orders from an insurance customer taking an incremental step in their omni-channel customer service transformation evolution, bringing tall orders from this customer for the first half of the year to nearly $5 million.

And more than $2 million from another insurance customer as part of its decision to consolidate vendors to achieve the benefits of an integrated approach.

We believe these large orders were driven by our focus on innovation and expanding portfolio and that the ongoing success of our strategy is dependant on our ability to continue to secure large deals. Another key success factor is our ability to continue to innovate and here are some examples of recent innovations.

We enhanced our identity authentication solution with better real time decision making. We enhanced our works in relation functionality to better plan workloads and service level. We added machine learning capabilities to speech analytics and further automated root cause analysis.

And we added communities as another component of our omni-channel offerings through a tuck-in asset acquisition. Communities are an emerging customer service channel and a natural extension of our CEO portfolio. We paid approximately $10 million for the assets and gained technology and R&D team and domain expertise in communities.

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

Turning to the security intelligence market, we offer an Actionable Intelligence platform combined with a broad portfolio of security intelligence solutions to address a variety of security threats around the world.

During the quarter, we received a number of large orders including more than $10 million in orders from an existing customer, approximately $10 million in orders from a new customer, approximately $10 million in orders for another existing customer and two other orders each in excess of $5 million.

We believe these large orders reflect our strategy to pursue large security projects with a high level of sophistication. As discussed on past calls, in the government market, Verint is already a leading provider with a well known security intelligence brands.

In the enterprise, cyber security market, we plan to invest gradually to create awareness including building a dedicated enterprise cyber sales force. We are pleased to announce that since launching our next generation threat protection system in June, we have received our first cyber orders from enterprise customers.

As a reminder, our go-to-market strategy is to focus on both government agencies and large enterprises with the expectation that enterprise projects will start smaller but can scale overtime.

Our success in the security market is driven by our deep understanding of our customers existing and emerging challenges and by developing innovative solutions to address these challenges.

During the quarter we continued to enhance our security intelligence capabilities including enhancements to our social media monitoring solution to help accelerate investigations of fraud, criminal activities, terror and national security threat, enhancements to our present solutions, providing correctional agencies, intelligence to identify illegal activities in prisons.

And we continue to enhance our cyber offering with malware intelligence and investigated capabilities. To summarize, we believe our platform approach combined with our broad portfolio of security intelligence solutions position us well to help organizations around the world, address traditional and emerging security threats.

Overall, we are making progress executing against our Actionable Intelligence strategy and are targeting good growth in the second half of this year. Going forward, we’ll continue to report our revenue growth on a constant currency basis as exchange rates continue to impact our reported growth rates.

Just since our last conference call in June, exchange rates have worsened and have negatively impacted our revenue outlook for the year by another $10 million.

In addition to currency fluctuations, we are monitoring the global economic environment as recent uncertainty about regional and global growth may impact our customers buying decisions particularly around larger transactions.

The combination of these factors influence our outlook for the year and we are refining our annual revenue guidance to a range of 1.18 billion to 1.23 billion translate into earnings per share of $3.45 at the midpoint. Our new revenue guidance reflects 8% growth on a constant currency basis at the midpoint.

To summarize, consistent with our growth strategy we will continue to innovate and invest for longer term growth and we believe we are well positioned to extend our market leadership. And now, let me turn the call over to Doug..

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 fair value revenue adjustments, amortization of acquisition-related intangibles, certain another acquisition-related expenses, stock-based compensation, as well as certain another non-cash or non-recurring charges.

For certain metrics it also includes adjustments related to foreign exchange rates. I’ll start my discussion today with the areas of revenue, gross margin and operating margin.

In the second quarter, we generated 297 million of revenue across our three segments, with 160 million in enterprise intelligence, 107 million in communications intelligence and 30 million in video intelligence.

This compares to 285 million of total revenue in the second quarter of the prior year, with 169 million in enterprise, 87 million in communications and 29 million in video. In terms of geography, in Q2 we generated 151 million in the Americas, 100 million in EMEA and 46 million in APAC.

This compares to approximately 140 million in the Americas, 97 million in EMEA and 48 million in APAC in the second quarter of last year. Overall we are pleased with the 27 million sequential increase in revenue experienced in Q2 from Q1.

Given the recent foreign exchange movements we'd also like to discuss our revenue on a constant currency basis to help investors better understand the underlying operational performance of our business.

In that regard, on a constant currency basis, our revenue in Q2 would have been 308 million or approximately 11 million higher, representing 8% year-over-year growth. Q2 gross margins were 65.3%.

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

During the second quarter we generated operating income of 59 million with an operating margin of 19.9%. Our adjusted EBITDA for the quarter came in at 65 million or 21.9% of revenue. Now let's turn to other income and interest expense.

In the second quarter, other expense net totaled 9.4 million, reflecting 6 million of interest expense and a 3.4 million loss from foreign exchange, driven primarily by intercompany balance sheet translations. Our cash tax rate was 8.6%.

As we’ve discussed previously we expect to enjoy a low cash tax rate for several years due to our NOLs and the amount of income we generate in low tax rate jurisdictions. For the quarter, we had 62.8 million average diluted shares outstanding.

These drove results of a diluted EPS of $0.70 or $0.76 when excluding the 3.4 million non-operating foreign exchange loss. Now turning to the balance sheet. As of July 31, 2015 we had approximately 386 million of cash and short-term investments including restricted cash.

First half cash flow from operations on a GAAP basis came in at 66 million similar to the 70 million we generated in the first half of last year. We ended the quarter with net debt of approximately 426 million excluding discounts primarily associated with our convertible debt.

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

Following strong sequential growth in Q2, we expect Q3 revenue to be at a similar level with operating margins similar to Q2 as well. We expect our quarterly interest and other expense excluding the potential impact of foreign exchange to be approximately 6 million.

Given the continued volatility in foreign exchange rates, there could be a gain or loss related to the balance sheet translations in our future results which is not included in our guidance. We expect our non-GAAP cash tax rate to be approximately 9% reflecting the amount of taxes we expect to pay this year.

Based on these assumptions, and assuming approximately 63.1 million average diluted shares outstanding for the year, we expect EPS at the midpoint of our revenue range to be $3.45.

Overall, our guidance assumes an acceleration of growth in the second half of the year including a strong Q4 which is typically our strongest quarter and we are monitoring the impact of foreign exchange, state of the global economy as well as the timing of large projects as we progress through the year.

In conclusion, we are pleased with our expanding portfolio of Actionable Intelligence solutions and strong competitive position and believe we are well positioned for continued growth. This concludes my prepared remarks. So with that, operator can we please open up the lines for questions..

[Operator Instructions] Our first question comes from Dan Ives of FBR, please proceed..

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

So let me address the overall outlook perspective we have, what changed and how we view the second half of the year and then Doug can go specifically to the EPS number. So as we look at – you know we finished Q2. I’m pleased with our Q2 revenue results both in terms of sequential and the year-over-year growth reflecting that Verint is well positioned.

And when I look at our portfolio today we have the broadest portfolio we ever had across both enterprise and the security markets. Also our platform approach position us well to help customers with their large scale transformative initiatives. And our strategy has evolved to address those larger opportunities.

So in H1, we have invested in educating the market and we have many large deals in our H2 pipeline.

Now when we look at these pipeline in H2, it’s difficult to focus timing of large deals as sometimes customers take longer to understand the scope, the scope of the performance and to obtain the necessary buy-ins and approvals from multiple stakeholders.

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

So kind of in summary before I turn it over to Doug, I’d like to kind of put our thought in perspective and in context, so last year we reported double digit organic growth and at the beginning of this year we were also targeting a year of double digit growth.

On one hand we had good revenue growth in Q2, on the other hand there is more uncertainty, which results in an overall outlook of 8% growth and we adjusted our revenue outlook and that impacted our EPS outlook. Doug, you want to address how we think about EPS..

Yeah sure, Dan. Yes hey Daniel, in terms of the EPS don’t forget we did have about $0.06 of a non-operating hit because of foreign exchange in our numbers. So the other part of reduction is really based on lower revenue.

So at the midpoint of the revenue and the earnings EPS guidance we’ve given we still expect the operating margins to be 22% to 23% for the year..

Got it, okay it's good to clarify that $0.06 apples to apples just given it was excluded in the number this quarter.

Can you address -- there's some that's been out there in the market I'd like you to address it that Verint's so focused on Security as it's such a big opportunity and the way you guys are going after it, but yet it could defer some of the focus or growth in some of your core brands areas like on the NFIs and in some of the traditional strengths?.

I think what's going in enterprise is we announced the strategy, what we call the CEO strategy, the Customer Engagement Optimization strategy. And that's clearly a strategy that is expanding our TAM and driving growth long-term.

So, when I look at enterprise this year, we started the year with a slow Q1 and as we discuss before this was a tough compared to Q1 last year, as we did the KANA acquisition at the beginning of last year and we had some benefit from KANA customers holding back and giving us orders post acquisition.

But overall we are pleased with the sequential growth in Q2 and we're expecting sequential growth in both Q3 and Q4 in enterprise with the strong finish for the year as it's typical in our enterprise business to have a strong Q4. So last year, again as you know we had a 37% overall growth in enterprise.

And we were approaching double-digit organic growth. And last year we also as we did all the integration combining the companies, we also laid foundation for the combined CEO strategy.

And we are this year in H1 we focused on the larger more transformative deals as part of this new strategy and we believe we are well positioned for the large deals and we have such large deals in our pipeline. So, our outlook for enterprise suggest more growth H2.

But as I mentioned before we are cautious now as we generally see customers taking longer to make decisions especially with large deals which are an important of this enterprise strategy.

So overall our customers, partners, industry analyst, they give us very good feedback about our CEO strategy and we believe this strategy still in the early stage and provide us significant growth opportunities over the long run..

Okay. It sounds good. Thanks..

Our next question comes from Shaul Eyal with Oppenheimer. Please proceed..

Thank you operator. Good afternoon guys.

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

Is that also within the current guidance?.

Yes. We projected – you're right Shaul, we projected minimal and immaterial revenue from our enterprise market regarding where we were in the evolution of our strategy. We did get couple of orders.

I'd like to kind of remind everyone that while in the government market we go after multimillion dollars deals, a strategy for the enterprise market is to offer customers to opportunity to start small with the sub 1 million so the first couple of orders we got our sub 1 million and we still -- its in our guidance but as we mentioned in the June event we do not consider material impact from our TPS enterprises strategy on the results this year.

We are building the enterprise cyber sales force as we indicated before, and we started to build that and we'll continue to build it gradually in H2. And we're making this investment with the expectation that we generate more enterprise revenue from Cyber Security and of course we feel at the same time continue to focus on government agencies.

So our Enterprise Cyber Security will be complementary to our government cyber security go-to-market strategy..

Got it.

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

We are targeting larger enterprises that already made investments in Cyber Security and they have many components, but none of them has the platform that we offer as you may recall our differentiated approach is offering a platform that provides opportunity to get Actionable Intelligence from the various engines and component that makes the Cyber Security infrastructure? So in a way, we're not trying to replace one to one similar product, but when we are offer product we may -- customer may chose to discontinue some of the products that they are using.

And in other cases we do get request to integrate our products to some other cyber components that they and they want to keep. And again part of the platform is that integration, flexibility of an open platform that we can get input from existing cyber components and put that into our analytics to create better outcomes.

In a nutshell, our strategy is no to try to displace similar offerings because we believe that most of the offering out there are integrating – integrators putting together projects that consist the components for multiple vendors but not slightly integrated as our platform..

Got it.

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

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

So it is an up and coming channel, its very effect in certain industries, where product users can help each other, solve problem.

And it does fit very well into our omni-channel, channel engagement strategy, the ability to understand the customer experience in one engagement channel and then correlated through other channels and provide the most holistic view of the customer journey.

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

Got it. Thank you..

Our next question comes from Michael Nemeroff with Credit Suisse. Please proceed..

Thanks for taking my questions. Dan, relative to the new guidance it sounds like you are derisking your outlook due to the macro and more out of conservatism versus actual demand weakness.

Now if that's statement is correct should we expect the pretty significantly rebound in the first half of 2017 and perhaps you can highlight some of the areas in the product portfolio or you might see weaker demand relative to your initial expectation this year?.

I think the area that I highlighted before is our sense of uncertainty in the macro and how that's going to impact large projects, because what we see large project, we've been selling large projects for many years as we were obviously reporting to you every quarter on some great wins and we know the large project that require long self-cycle and that's all built in our plan, but, when these more uncertainty, the approval cycles may get prolonged.

And we did start to see some science recently that customer want to take longer and these are big spending and I want to make sure that they're spending the money correctly. So, when we look at the timing of large project, if you ask me can we predict now that H1 next year, the macro environment will be sought it out, obviously we don't know.

We're not even at this point we're just saying we want to be cautious about where we are. Obviously, we're not suggesting that there is a major issue with economy, we simply don't know.

But we do see that obviously exchange rate, we discuss that at just during the last three months since our last conference call, we got an additional negative impact of $10 million on our annual outlook from the strengthening dollar. Also the currency devaluation in certain countries maybe disrupts their ability to buy.

There's certainly slow economic growth in certain countries and we are global company, so they are some immerging countries where they maybe impact on government and commercial spending.

And then there is obviously the impact of uncertainty on large deal, so all these things, we believe that we have – as I mentioned before we get very good feedback about our platform approach, above the board portfolio solutions we have and we believe we have good structure.

This strategy outlook at this point is 8% and if exchange rates will stabilize obviously next year we're not going to have report currency basis. And I think uncertainty will diminish then obviously we'll see more traction in our business..

Great.

And relative to the Telligent acquisition, can you talk about their customer base? What does a logo overlap look like and how we should think about potential revenue synergies over time? And then, Doug, can you tell us if there's any revenue contribution expected for Fiscal 2016, and what that represents in terms of growth year over year? Thanks..

So, we bought asset under the Telligent brand, this was actually an asset deal divestiture from another company.

And if primarily we bought a product in R&D team, and in terms of where they already installed, there is some overlap in customer but they are very – they're tiny company and big opportunities to take the product into our customer base and sales force and we're not expecting.

This year we will do more of education, the product integration so forth, but certainly it will helpful next year..

Great. Thank very much. .

Our next question comes from Nandan Amladi with Deutsche Bank. Please proceed..

Hi, good afternoon. Thanks for taking my question. So, Dan, one of the things that you've discussed on previous calls as the cross-selling opportunity with the [Indiscernible] and you just cited a couple of large wins on the previous earnings calls.

Are there are any that are worthy of note this quarter?.

We discuss this quarter, there was a $5 million deal, there's $2 million deal, this quarter 5 million in H1, There's another $2 million, there's was a part of a $9 million over the last 18 months.

So as you can see some of these deals are getting bigger in one chunk, $5 million deal is big for an enterprise market and some of these deals are getting executed in chunks, but our strategy is clearly to become a more strategic partner with the customers and help them solve a bigger problem.

We do the portfolio to do that and we also have the platform approach which really makes customers more comfortable that they're not just buying point solutions, but buying it from a vendor who takes a time to build the platform.

And all that is very important component for strategy there was a question before the growth in our enterprise and whether we are focused on it. We believe that the KANA acquisition was instrumental for us to build the CEO category and years ago when we build the WFO category.

Before that people just bought recording, voice recording, they bought workforce management, they bought QM, they bought a lot of disparate point solution and we were the leader in WFO.

And what we're doing now as CEO is very much the same, is putting more components of customer engagement together, putting down analytics on top to allow people to things that they need to do.

And they need to do it because the consumer expectations are changing because all effective consumers are expecting the only channel engagement to be more unified. So we think what we're doing is the right strategy, we hear good feedback. We continue to invest in this strategy.

We believe that the large deals we have in our pipeline will materialize and of course there's an issue of timing..

Thank you. And a quick follow-up on the cyber side, you talked about investing gradually in the Enterprise, including sales teams and at the Analyst session you talked about the overlay approach that you were taking.

Three months after the Analyst session is your view still the same? And in terms of the emphasis on your sales and marketing efforts, are you focused more on selling a broader CEO stage or more on the Security side? Thank you..

Yes. The enterprise sales force is very, very focus on the CEO suite, that's the primarily focus. And all we do regarding enterprise cyber is that they are having discussion with customers and generating leads our Cyber Security dedicated sales force.

So that obviously emphasize what we believe is their primarily job which is – there is lot of opportunities in the CEO strategy which we wanted to focus, but at the same we see synergies in terms of getting the cyber product to the same customer that bought CEO and we selling to continue to aligned to sales forces.

But that's the primary, the enterprise sales force. Their primary function is to sell on the CEO strategy. When we look at the cyber opportunity obviously as we said before our initial success in the cyber market was government customers, and in the government market we target multimillion dollar project and that's what we continue to do.

We think that the cyber opportunity in enterprise is one that we can execute over time. We think that there is lot of gap in enterprise market in terms of dealing with advance specific threat and that we can address those GAAP with the technology was actual intelligence approach and we will do it based on our gradual investment overtime.

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

Thank you. That's all from me..

Our next question comes from Saliq Khan with Imperial Capital. Please proceed..

Great. Thank you.

One of the thing that your team has just mentioned was a fact that your focused on building the enterprise cyber cells, could you talk about the process that you do have in the strategies around place, the better higher or essentially higher way from some of the competitors that are out there as well?.

Yes. We do look to hire people with cyber security experience, so its probably the case that we'll be hiring away from competitors, we're not obviously targeting any competitor, there’s a lot of cyber security companies most of them small, but there's a lot of different companies with sales people who have experience in this market.

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

The earlier thing that was mentioned earlier during the call was the fact that, [Indiscernible] large deal to take little bit longer and tend to have a longer sales cycle, what does your team actually doing right now to enhance your revenue visibility?.

Yes. I think the visibility has to do with overall level of uncertainties our customers have. We do have situations; I can give some examples where our customers don't have the visibility.

We have a case, a project that is over $10 million enterprise project that we expect to win in H2, we've been discussing this with the customer for a long time, initially it started being more than double, it was more than $20 million project and then there was a decision to do this in stages.

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

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

The other thing that I had maybe was addressed previously in the call.

But the margins for both the product and service segment decreased year-over-year, both in the sales mix caused it and how do we anticipate this on an ongoing basis?.

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

Right.

And then what I meant there essentially was that what was in the actual product mix for both the products excuse me and also the service business, what changed within that that caused a drop in the margins?.

Yes. In terms of the gross margins, its larger than mix that we have with large projects and the components within them, how much hardware in some of the large security projects can influence it, what projects come into revenue because we bring the cost in along with the revenue.

So it’s generally timing, you know as we said last year on the call is post KANA acquisition, KANA does have a higher level of attached services, so there’s a higher, more service component therefore little lower margin in the enterprise business today, but other than that its really more of the fluctuation of the security business the kind of lumpiness there.

The second half of the year we expect margins of 67%, 68% similar last year..

Okay. Thank you..

Anything will helpful. So as Doug said we expect gross margin to improve in the second half. We also expect to increase our OpEx in the second half and still get to the 22%, 23% in our model.

So when you look at our EPS guidance, Doug discussed that there was a $0.06 impact in Q2 because of the non-operating effect, but largely we intend to continue to invest in growth.

We’re a growth company; we have a growth profile and as we now look at reducing our revenue outlook by 20 million; you know some of it obviously falls into the EPS despite of better gross margins because we also are going to increase our operating investment in H2 versus H1..

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

Got it. And then Dan its’ just one last question for you as well.

And one of the things that you just mentioned was while you are reducing the overall outlook as the look of the second half you are increasing the OpEx but you are very focussed on the growth strategy, with that being the case you are sitting on about $360 million of cash, what is the best use of this cash as we look out not even just one quarter but over the next four quarters or so..

Yes, so I think obviously it’s a relevant question but the uncertainty that is around all of us makes it difficult to answer the question decisively at this point because obviously we were focussed on growth organically and through acquisitions and evaluations maybe more attractive in the future and obviously there is a certain level that we are also going to consider doing a stock buyback but you know with this uncertainty around us, its premature for us to make a decision here..

Yes and just like to point out also that you know of our total cash that you see in the balance sheet only about 20% of that is in the U.S. and we need U.S. cash to do any kind of the stock buyback or debt paydown..

Got it. Great, thank you..

Sure..

Our next question comes from Paul Coster with JPMorgan. Please proceed..

Yes thanks, I think all of my questions have been asked and answered. And maybe just one which is to the extent that you are able to determine anything from the early pipeline to the cyber security enterprise deals.

What kind of verticals, what kind of geographies seem to be most interested in the solution?.

So as we expand from the government verticals we are targeting the telco, the communication service providers and then the financial services.

And one of the reasons we are interested in the telcos is also that some of there may not only use the product internally but will emerge as managed services security providers as many of the telcos already are engaged in this practise and some have expressed interest in doing that we potentially see a trend of enterprises outsourcing, outsourcing cyber security to MSSPs, to managed service security providers and we clearly not only would like to win customers but also want to develop channels that are able to service those enterprise customers in an indirect model..

Okay. So mainly in those verticals are the first to step up as well..

Those are the first verticals we target, obviously we are at an early stage and we have to be more selective and the reason we target them is we think they are more ready for the type of platform approach that we offer, that doesn’t mean that if there is a lead in other vertical we are not going to try and follow up, but that’s where we would like to get some more traction in the beginning and again we would like to get big customers but we also are looking to develop relationship with channels that can take the products to the midmarket overtime..

Okay. Got it, thank you very much..

Operator, we’ll take the next question.

Operator?.

Our next question comes from Jonathan Ho with William Blair and Company. Please proceed..

Hi, this is John [Indiscernible] for Jonathan who’s travelling today. Thanks for taking the call. We just have one question at this point. You mentioned the forex impact on the top line about 10 million for the quarter.

Are you able to break that down by segment at all even if it’s a rough approximation?.

Yes, the VIS or video business is small and not that much international. The other two business units split a little bit more of the impact to enterprise versus security intelligence..

Okay, great. Thank you very much..

Sure..

This concludes today’s conference. I will turn the call back over to the speakers for ending remarks..

Thank you, operator. And thank you everyone for joining us. We’ll talk to you on our next call. Have a great evening. Take care..

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