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

Nandan Amladi - Deutsche Bank Shaul Eyal - Oppenheimer Dan Bergstrom - RBC Capital Markets Michael Nemeroff - Credit Suisse Saliq Khan - Imperial Capital Paul Coster - JP Morgan John Weidemoyer - William Blair.

Good day ladies and gentlemen and welcome to the Verint Systems Incorporated Fourth Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session and instructions will follow at that time.

[Operator Instructions] I would now like to introduce your first speaker for today, Alan Roden, Senior Vice President of Corporate Development..

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

By now, you should have seen a copy of our press release that includes selected financial information for our fourth fiscal quarter and year ended January 1, 2016. Our Form 10-Q will be filed shortly. Each of our SEC filings and earnings press releases is available on the Investor Relations link on our website and also on the SEC website.

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

These forward-looking statements are based on management’s current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by forward-looking statements.

The forward-looking statements are made as of the date of the call, and except as required by law, Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements.

For more detailed discussion of how these and other risks and uncertainties could cause Verint’s actual results to differ materially from those indicated in forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2016 when filed and the other filings we make with the SEC.

The financial measures discussed today are primarily non-GAAP and believe investors focus on those measures and comparing results between periods among our peer companies.

Please see today’s earnings release for a reconciliation of non-GAAP financial measures to GAAP measures for the current period, as well as investor relations section of our website for a reconciliation of both current and prior periods.

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

Dan?.

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

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

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

Verint has a long history of strong growth and historically we had similar levels of growth in both enterprise and security.

As we have discussed in prior conference calls, we are seeing different market dynamics in enterprise and security markets, which became more pronounced in the security market in our fourth quarter, as a results, today we’ll discuss the trends in those two markets separately.

Beginning with enterprise, we generated $630 million of revenue for the year. This performance is not consistent with our historical enterprise growth and this year we expect to get back to mid-to-high single digit revenue growth.

As discussed in detail on prior calls, we believe that our enterprise results last year were impacted by our focus on large transformational projects which we believe we have now addressed by transitioning to a more gradual land-and-expand go-to-market strategy.

As we enter the year, we believe we are well positioned to achieve our enterprise growth target due to the following factors. First, the transition we began last year of our go-to-market strategy is substantially complete and we expect it to positively impact growth starting in our first quarter.

Second, we have the industry’s broadest portfolio of customer engagement optimization solutions, and we continue to broaden our portfolio. Over the last year we announced several new capabilities such as social communities, self-service, mobility and digital first solutions.

Third, we have large structural base giving us significant opportunity to land-and-expand with our growing portfolio. Fourth, we provide our customers a broad range of deployment models including on-premise private cloud and public cloud model, giving them a high degree of flexibility in the way they purchase from Verint.

And finally, we offer best-of-breed solutions and are well positioned competitively.

Our strong competitive position has been recognized by the market and during the past year we received many industry honors such as, being a leader in Gartner’s customer engagement center WFO Magic Quadrant, where Verint was recognized for having the highest and furthest overall position for both our ability to execute and our completeness of vision.

Being selected as the top winner in the workforce optimization category and CRM Magazine Service Award for the 9th consecutive year. Selection criteria were based on reputation for customer satisfaction, depth functionality and company directions.

And being selected as a leader by Forrester for our best strategy and market presence for enterprise customer service solutions. In addition to industry recognition, we were also recognized directly by many of our customers for the quality of our product and services and received high scores for customer satisfaction.

During the year, we received many large orders across multiple industries such as (inaudible) and nearly $20 million project from a leading outsourcer that selected Verint as a strategic vendor and is deploying up solution in cloud to improve workforce productivity, standardize business processes and enhance operational efficiency.

$8 million in orders from a multinational insurance company, which previously deployed our workforce optimization solution, and is now expanding with our engagement management solutions, an example of our land-and-expand strategy.

$7 million in orders from a leading US healthcare company, who is deploying our solutions across multiple customer facing areas including its contact centers and patience service centers, and six orders each in excess of $5 million from six different financial services companies, demonstrating our strong domain expertise and position in financial services.

Overall last year in addition to transitioning to go-to-market strategy, we continue to expand relationships with existing customers and partners, win many new customers, broaden our portfolio, expanded our cloud offerings and maintain market leadership recognition.

Over the five year period, prior to the year we just completed, our reported Enterprise Intelligence revenue normalized for KANA grew every year with an average annual growth rate of approximately 7%. Looking ahead to the current year, we believe we will be able to return to a similar growth rate.

I would now like to turn the Security Intelligence business. Looking at the same five year period, our reported security revenue increased an average of 11% a year, slightly higher than our enterprise growth rate.

Historically, the majority of our security revenue has been generated outside the United States with a large concentration in emerging markets, where demand for our security solutions has been very strong, driven by domestic and regional security threats.

However, as discussed on prior calls, we’ve been closely monitoring headwinds in emerging markets related to weak economic conditions and currency devaluations.

In Q4 these headwinds resulted in business activity significantly below our expectations, causing security revenue to decline both sequentially and year-over-year, adversely impacting our overall results.

Given these results and our expectations that emerging markets are unlikely to recover in the near term, I would like to discuss the environment in more detail and provide some examples, beginning with the trend in volume and size of security projects. The total number of security projects we won last year, was similar to the year before.

We continue to receive large order, including three orders in excess of $10 million and 10 orders each in excess of $5 million. However, many orders came in smaller than originally anticipated due in large part to customer budget reductions and currency devaluations.

Therefore substantially the same number of projects resulted in less overall business last year. Here are two examples; the first example relates to an emerging market country where we do business in US dollars.

In this example we expected a $10 million order from a customer, but due to budget issues the customer reduces the scope of the project to $5 million, postponing the remainder of the project until a later time. Another example related to emerging market country where we do business in the local currency.

In this example the orders we received from the country came in within the scope we expected, but due to the strengthening of the US dollar, the value on a US dollar basis was about 40% less or what it otherwise would have been at exchange rate remained unchanged.

These two examples are illustrative of some of the headwinds we are seeing in emerging markets, and while we have a healthy pipeline we’ve seen many deals being reduced in size at (inaudible) response.

Looking ahead to Q1, we expect security revenues to decline sequentially and at this point we are not assuming an improvement in emerging markets for the remainder of the year. As a result, we are currently projecting a decline in security revenue of between 10% and 15% for the current year.

Long term we believe that emerging market headwinds will result and that our growth should return to historical level driven by two factors. First, fighting terrorism and crime continues to be a high priority for many countries around the world and Security Intelligence solutions have proven to be very effective.

And second, Verint is well positioned to participate in the industry’s growth due to our broad portfolio, large installed base of customers and a leading position in the market.

Last year we continued to expand our portfolio including the introduction of a new fusion intelligence solution, enhancement of our cyber security solutions, and an innovative approach to video analytics and situation intelligence for banking, retail, transportation and (inaudible) customers.

In summary, we believe that headwind we are facing in the security are temporary, the need for Security Intelligence globally remained strong and that we are well positioned for long term growth with our expanding portfolio of innovative solutions.

Before discussing guidance, I would now like to discuss our near term investment and capital allocation approach. From a geographic perspective, we will continue to invest globally and expect the revenue mix to remain approximately 50% in Americas and 50% in the rest of the world.

From an operating margin perspective, in enterprise we expect our operating margins to improve this year commensurate with our expected revenue growth. In security we continue to invest to be well positioned to return to growth, when the emerging market environment improves.

Longer term we expect to be able to expand operating margins with revenue growth. From a capital allocation perspective, we believe the security headwinds we are facing are temporary and we have an opportunity to buyback our stock at attractive prices. In that regard, today we are announcing $150 million stock repurchase program.

Turning to guidance, given our expectations of revenue growth in enterprise and a decline in security, we expect this year to be almost flat relative to prior year in terms of both revenue and earnings per share.

Longer term we expect investments we’ve made to enable us to return to historical levels of security growth, providing us the opportunity to grow overall and expand margins overtime. And now let me turn the call over to Doug..

Thanks Dan and good afternoon everyone. Most of our discussion today will focus on non-GAAP financial measures. A reconciliation to our GAAP and non-GAAP financial measures are available at Alan mentioned in our earnings release and in the IR section of our website.

Difference between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including fair value of 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 or certain metrics that 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 fourth quarter, we generated 282 million of revenue, with a 161 million in Enterprise Intelligence and a 121 million in Security Intelligence, of which 92 million was in cyber and 29 million was in video.

This compares to 316 million of total revenue in the fourth quarter of prior year, with a 181 million in enterprise, a 104 million in cyber and 31 million in video. In terms of geography in Q4, we generated 140 million in Americas, 87 million in EMEA and 55 million in APAC.

This compares to 167 million in Americas, 94 million in EMEA and 55 million in APAC in the fourth quarter of last year. For the full year, we generated 1.135 billion of revenue with 630 million in Enterprise Intelligence and 505 million in Security Intelligence, of which 386 million was in cyber and 119 million was in video.

This compares to 1.158 billion of total revenue in the prior year, with 688 million in enterprise, 360 million in cyber and 110 million in video. In terms of geography for the year, we generated 583 million in Americas, 353 million in EMEA and a 199 million in APAC.

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

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

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

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

Now let’s turn to other income and interest expense; in the fourth quarter other expense net totaled 8.6 million, reflecting 5.8 million of interest expense and a 2.8 million loss in foreign exchange driven primarily by intercompany balance sheet translations. Our annual cash tax rate was 8.1%.

As we discussed previously we expect to enjoy a low cash tax rate for several years due to our NOLs and the amount of income we generate in low tax rate jurisdictions. For the year, we had 62.9 million average diluted shares outstanding. These results drove diluted EPS of $0.90 for Q4 and $3.04 for the full year.

Now turning to the balance sheet, as of January 31, 2016, we had 420 million of cash and short term investments including restricted cash. Cash flow from operations on a GAAP basis came in at a 157 million. Cash flows can vary from period to period due to fluctuations in working capital, particularly in our security business.

We ended the quarter with net debt of 391 million excluding discounts and issuance costs, primarily associated with our convertible debt. Before moving to Q&A, I’d like to discuss our current guidance for the year ending January 31, 2017. As Dan discussed, we currently see different near term growth dynamics in enterprise and security.

In our enterprise segment, we expect mid-to-high single digit revenue growth. In our security segments, we expect a decline in revenue of between 10% to 15%. Overall we expect total revenue to be similar to the prior year plus or minus 2%.

We expect to deliver operating margins of between 21% and 22% similar to the prior year as we continue to invest in security in order to be well positioned to return to growth when the emerging market environment improves.

We expect our quarterly interest and other expense excluding the potential impact of foreign exchange to be approximately 6 million. Given the continued volatility in foreign exchange rates, there could be gains or losses related to balance sheet translations in our future results, which are not included in our guidance.

We expect our non-GAAP cash tax rate to be approximately 9% for the year, reflecting the amount of taxes we expect to pay this year.

Based on these assumptions and assuming approximately 64.2 million average diluted shares outstanding for the year, we expect diluted EPS at the midpoint of our revenue guidance to be similar to last year, excluding any benefit from our share repurchase program.

Given the separate dynamics in enterprise and security, in addition to our annual guidance, we’d like to provide you some color on our first quarter. For modeling purpose you should assume revenue in the range of 150 million to 160 million for enterprise intelligence and revenue in the range of 90 million to a 100 million in Security Intelligence.

You can also assume operating expenses in Q1 will come up approximately $5 million in Q4 and our average quarterly OpEx for the year should be a bit lower than that. Gross margins in Q1 should be similar to Q1 of last year. Finally, as Dan mentioned earlier, we are pleased announced Verint’s first ever stock buyback program.

We believe the security headwinds we’re facing are temporary and have given us an opportunity to buy back stock at attractive prices. The 150 million program which we plan to implement over a two year period represents approximately 8% of our flow.

So this concludes my prepared remarks and with that operator, you may please open up the lines for questions. .

[Operator Instructions] our first question comes from the line of Nandan Amladi from Deutsche Bank. Your line is open. .

On the security segment, Dan you mentioned that most of the weakness was from the emerging markets.

But I wanted to ask about the departure of the head of the security business that happened couple of months ago, if revenue impact was mostly from currency and some softness in the environment, why would that drive a change in the leadership of the segment. .

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

We have as we discussed in the past, we have a highly diversified business across a 100 countries, generating about 25% of our security revenue in the US, about approximately another 25% of our security revenue come from developed countries, and the remaining around 50% is security revenue generated from countries that are categorized as emerging markets.

So you can see that we have pretty large concentration there. The emerging market countries face many security threats, and actually over the last five years we’ve generated very, very strong double digit growth from these countries and we are very happy to invest and expand our presence in emerging markets.

This year as we reported, we expect different dynamics. We try to see signs last year, we still be going to monitor the situation in Q4. We are very disappointed with the emerging market results and also in Q1 as Doug just discussed our guidance for security in Q1 is a $25 million below what we did in Q4 and in Q1 last year.

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

We’ve seen it before, the countries that had some economic issues have postponed the project, but eventually the security threats are real and eventually the countries need to spend money on Security Intelligence and we believe we have a very good relationship over many years, very strong domain expertise and security and that we are well positioned to resume growth in emerging markets.

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

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

The new person has been working for Verint in various capacities for 18 years.

So obviously he’s very, very familiar with the market, with the customers, and with our cyber intelligence business, and actually we did that transition on February 1 at the beginning of the year and over the last two months since we announced this transition it’s been very smooth.

So it’s a transition that we believe will help us to run business better, given the challenges we have now in emerging markets and will position us back to growth when the situations there improve. .

A follow-up question if I might, on the currency movements obviously very little control over that. But from a hedging perspective I know you’ve probably had some hedging of earnings because of overseas R&D staff and so on.

But what is your ability to hedge on the revenue side?.

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

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

But I think that apart from hedging the currency devaluation in some countries are creating some serious budget constraints for customers. If we take a country like Brazil where we have security operations, so we do business in local currency and we do have people in Brazil that we pay also in local currency.

But the customers, even if they didn’t have the budget cuts, because security is a priority and in some countries we see that the budget remain intact. But US dollars obviously the budget has been cut by 45%-50% depending on a country.

And in Brazil it was I think about 40% reduction in the buying power of goods, and of course that creates pressure on the budget and ability to buy sophisticated security solutions. .

Our next question comes from the line of Shaul Eyal from Oppenheimer. Your line is open. .

Dan, reflecting back gives or take 10 or 11 years ago during attacks like Madrid, like the London underground 2005. I believe you had seen a spike, a decent interest with respect to your solution. Does that hold true as it relates to recent attacks, like the one we’ve seen in Paris, like Brussels last week.

Are you seeing increased interest at least in developed countries, obviously right now, Western Europe?.

Generally, yes, we’ve seen increase in demand following the attack. Compared to where we’ve been 10 years ago, over the last five years, six years we did see tremendous growth in emerging markets and we spend a lot of our energy to build relationships and invest in expanding the business in to additional countries.

We saw the diversification across many countries and a very strong demand from emerging countries as obviously an opportunity. So we are now, with our portfolio, we are now 50% in emerging markets and 50% in the US and other developed countries. We do not necessarily want to change that profile.

As we said, we believe market headwinds are temporary and we believe the security challenges are very serious both domestically and regional threats, and while I am sure this clearly is a priority emerging countries are going through all kinds of issues right now and they need to sort it out, and it takes some time.

So in terms of our investment in growing in developed countries, we have presence there. We believe that we are well positioned with our portfolio, because it’s really not different in the solution we sell in emerging countries.

It’s just that we saw how our growth rate historically in emerging markets, so we shifted our efforts more towards the growth were and as we see now a different potential growth rates in different parts of the world, we’ll allocate the resources accordingly.

Our solution and that’s really where I’d like to leave you with that thought is that our solutions are very well positioned also in west Europe.

There’s ongoing discussion in West Europe relative to the use of intelligence, and it’s obviously a legislation and policies need to be in place to allow the use of collecting intelligence and using that as an effective way to deal with terrorism, immigration and criminal activities.

But clearly the trend is towards the public demand more security and security intelligence is a very effective way of addressing that challenge..

With respect to KANA, we are getting close to the second anniversary of the KANA acquisition.

Respecting that, are you happy with the progress, since integration was completed and go-to-market has begun to take off?.

So as you said the KANA acquisition basically is two years old and all integration activities are completed. So we have different employees and the KANA employees integrated of course, unified, functional organization.

I think, I wouldn’t say completely, but more and more people don’t ask themselves did you come from KANA or Verint, they feel they are working together to drive our customer engagement optimization and market leadership.

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

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Our next question comes from the line of Dan Bergstrom from RBC Capital Markets. Your line is open. .

(inaudible) and changes that resulted in a more balanced sales approach. Just curious, with the fiscal year, have you made any additional changes or if you feel like the changes that you made were the right approach. .

Yeah, I think the changes we made we feel were good, to give you some examples, I just mentioned land-and-expense strategy, so our customers can start anywhere. We are pursuing a best-of-breed approach, so we are focusing on customers specific end points one at a time, rather than try to sell them a transformation capability.

And as we focus on a single end point ahead, we’re demonstrating our ability to address the end points with a very competitive offering.

We also had a flexible deployment model, so we afford our customers the choice of deployment, whether its on-premise, private cloud, public cloud and we offer a menu of managed services and I think that’s also very helpful as customer really benefit from flexibility and each customers has a different set of criteria and they like to leverage their flexibility for an optimal choice of business model.

And then also at the beginning of the year we align the commission plan for the sales force to make the sales force neutral, so they can really focus 100% on customer needs.

So these are all very important steps we took and if you remember, we talked about a year ago we were trying to focus on large transformational projects and working with customers on selling them bundles and packaged offering in to very large project which they were quite interested but apparently the sales cycle is very long, the approval cycle is very long and it was very not very efficient for us.

So as we’re now in Q1 and almost one month away from the end of the quarter, we look at the pipeline of deals we have to support the guidance, we have guidance of $150 million to $160 million, which is a growth guidance, and we look at this guidance we are not dependent on large transformational deals.

So looking at these deals that we expect to close in Q1, we believe the land-and-expense strategy is working and the best-of-breed approach working well..

Could you talk about the Contact Solutions acquisition that was announced a little over a month ago at this point, how does that fit in to the customer engagement optimization portfolio?.

We discussed at lengths that one of the optimization issues of organization is the fact that customer service is no longer a single channel, you call them, but it’s an omni-channel optimization that they need to do across voice, video, chats, email, web and so on. And one channel that is growing in interest for customers is the self-service channel.

Obviously if you can create technology sophistication to allow customers to solve their issues or buy, whether its buying something or servicing themselves without adding any human intervention that’s low cost and also could be much faster and more efficient for the consumer.

So part of our approach is to come for optimization across omni-channel including self-services channel and Contact Solutions is bringing us technology in the self-service arena including some very unique and advanced technology that is also protected, intellectual property is protected in the area of mobile self-service and we believe that mobility in general and mobile self-service is on the rise.

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Our next question comes from the line of Michael Nemeroff from Credit Suisse. Your line is open..

Dan, based on the EPS guidance for fiscal ’17, it would seem that you’re expecting a pretty large rebound in revenue by fiscal ’18 at the latest.

What specifically are you seeing that gives you the confidence that the headwinds that you discussed are in really in fact share loss or long term in nature which is a nature which could last longer than a year, and why not try to generate some earnings growth in fiscal ’17 by reducing expenses this year and then spend more in fiscal ’18 if you’re pleasantly surprised..

So we’ve discussed certainly strategies of course. We believe that Actionable Intelligence is a market that has a lot of growth potential. We have customers that have access to lot of data; actually there is exponential growth in data.

But we know that they lack the tools to get the insights from the data and even more difficult is to make those insights actionable. So we see ourselves as a growth company and we see our self as hitting a bump in a road and want to continue to be in a position to participate in the industry growth.

So particularly in security when we read every day about the security challenges around the world and the need for security intelligence, it’s very clear to us that this is not a short term opportunity. So we want to be in a position to resume growth.

We can’t really deal with the headwinds, with 50% of our business in emerging market, we can’t generate enough growth quickly enough from the develop countries to offset that decline. But we do believe there’s two things, A, we believe emerging market headwind is temporary; B, we believe our solutions are equally good for any country globally.

So it will be the right thing for us to continue to invest in order to maintain the ability to grow in this what we feel is very exciting potential in the security market over time. We make some alignments in our cost structure. We expect the enterprise margins to improve as enterprise is growing this year; they’ll commensurate with this growth.

But to try to take cost out of security too much is basically to lose our competitive edge. And in terms of why we’re comfortable that we’re not losing our position in the market is we look at the pipeline that was expected in Q4 and was expected in Q1, we are not losing these deals.

We just see these deals coming either smaller size or being postponed, but we don’t see competitors are getting much stronger, we don’t see from a position perspective that we are losing our competitive edge and that gives us the confidence that we should invest for the long term growth. .

Dan, that’s helpful and may be if you could discuss some of the weakness that you saw in the enterprise business this quarter, because the weakness wasn’t just limited to the security business, so just kind of curious to get your take on what happened there this quarter as well..

Yeah, you’re right, but unlike the security weakness about two-thirds of our Q4 (inaudible) came from security and it was substantial and also it was really a deteriorating situation relative to what we saw before. We’ve been monitoring emerging markets, we’ve discussing potential risk there, but we haven’t seen that much until Q4.

Q4 was supposed to be a big quarter in terms of business activity, new orders, even collection and we saw very, very weak activity in Q4 in security. Unlike in enterprise where our revenue came a little below our expectations, but we also saw as I discussed before all the signs that the transition we are making is working.

So we knew that the relation is going to take time, we discussed the fact that it’s not going to be over in Q4. So we saw it kicking in in Q4, maybe not as much as we hoped for, but as we look at how we finished Q4 and where we are in Q1, we feel that transition is working and we feel better about what we can achieve in enterprise this year. .

Our next question comes from the line of Saliq Khan from Imperial Capital. Your line is open. .

Couple of questions for you guys, given the merger markets and of course the headwinds that you had mentioned, how does this impact your sales strategy here in the US.

You try to help offset some of the declines and failed?.

It takes a long time to build a go-to-market (inaudible) security. It requires relationship, it requires channels and we don’t expect that we can change our geographical mix and security overnight. We also at this point expect emerging markets to recover.

So we’re not of the view that we need to completely shift our go-to-market strategy away from the emerging market. So again, 50% of the business is in the non-emerging market, near-term at this point we’re not planning any major shift in our focus away from emerging markets.

We hear from the customers there their needs are growing, their funding is not, but there is no reason for us to believe that they will not be back buying sophisticated solutions like we have to deal with their security challenges. .

And then as you [skin] through your competitive landscape, how does your customer acquisition pricing strategy compare to your competitors. .

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

And because it’s such a fragmented competitive landscape in security, you will find different pricing strategies in different parts of the world, and generally I would say that we are not pursuing and we haven’t pursued [Australia] being the least expensive option, and our customers know that.

Our reputation is not for price and it’s for the quality and depth of our product and for our execution on delivery..

Regarding your capital structure and outside of the $150 million the buyback that you talked about earlier, how do you view the options to pay down the debt, given the fact that you have roughly 408 million or so in cash?.

When we look at the journey of using of capital between acquisitions and buyback and paying down the debt, obviously when we do acquisitions we expect a healthy IRR and when we compare buyback to things under debt the share repurchase program has a higher return on capital than things under debt. We have a pretty cheap debt.

Especially where we see a disconnect between where we think the long term value of the company is and the share price that obviously creates a higher return on investment for using debt capital for share repurchase. .

I’m just going to add to that. The debt is only a net debt is less than 400 million leverage ratio about 1.5 times, average interest rate around 2%, so it is cheap debt. So we’re not too concerned on paying that down and look to deploy our cash for growth and be opportunistic around reducing the shares as that presents itself. .

Our next question comes from the line of Paul Coster from JP Morgan. Your line is open. .

I’d like to take a slightly different tact with respect to the capital allocation strategy.

You talked being opportunistic Doug, but you also said you’re going to take two years to do this buyback, why not do it all in one go, or are you trying to indicate that it is part of a capital allocation strategy associated with cash flow over the course of time. .

Well that’s exactly what we’re trying to do Paul. We are trying to balance it. Ideally we want to get fair and fact on the road track and so it’s all about return to shareholders to reduce shares.

So from time to time like this we’ll see opportunity to reduce some shares, but we still want to pursue our tuck-in acquisition strategy, we still want to pursue both of the company, we’ll put the debt aside as we just described, but it’s a balance between returning shares and having cash to do the acquisitions.

And the cash is limited, while we have 420 million at year end on the balance sheet, a little less 25% is in the US and that’s what we would need to do stock buybacks or any US based acquisitions..

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

What we’re saying is that we’re announcing a program; it’s a first time that we announced a program of this nature. It’s potentially retiring 8% of the float and then when we look at what other companies be it that kind of the size of the program is pretty regular, and in terms of future capital allocation decisions, I’ll leave that to the future. .

Some other questions are, there’s only six month score or even a three months score that we were all [threatening] over your ability to close your pipeline and change the sales model and it seems like you’ve done it almost instantly. So it seems almost too good to be true.

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

Paul we talked about the enterprise pipeline. We talked about that in Q3 and Q4. So we said it’s going to take several quarters. Q3 and Q4 its been in progress, but not in full affect. As I just responded a few minutes ago in Q4, we didn’t kick in completely. We were hoping that it will kick in a little bit better.

But if you want, we already have created pipeline that is based on our new approach.

In the new year we’ll realign the self-commission plan, so we’re giving guidance for Q1 that is growth guidance and of course we’ll have to deliver on that guidance in Q1, but this is a quarter where we are not saying, we’re going to return to growth and enterprise in to two or three quarters from now.

We say we’re going to do it in Q1 and we certainly hope we’ll be able to demonstrate that. .

Looks like we have a follow-up question from the line of Shaul Eyal from Oppenheimer. Your line is open. .

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

TPS is direct protection system, its cyber security offering that we have for government and enterprise. We discussed mid last year that we are going to start offering it for enterprise customers.

Just has to be clear the focus we have with cyber intelligence and cyber security is still very much on the government side, but we still have an opportunity to expand it in to the enterprise market as well. In terms of an update, we established a dedicated sales team as discussed focused on enterprise cyber customers.

We expect the revenue from this product line to grow nicely this year, but it is from a very low base, we only announced it last mid-year and the sales efforts to the enterprise market started in the second half of the year. We are at this point offering the product only in five countries. So we do not take it globally.

And we believe that as we develop the market in those countries we’ll expand overtime. So, I’m pleased with the progress but obviously the impact from our enterprise cyber revenue this year on our overall result is going to be immaterial. .

Got it. And then just one final question, I might have missed the EPS guide for the first quarter, can you just repeat that for us. .

Sure.

So we said with the Q1 was for revenue in the range of 150 million to 160 million for Enterprise Intelligence and revenue in the range of 90 to a 100 million in Security Intelligence, and then we said assume operating expense in Q1 will come up approximately 5 million from Q4 and then our average OpEx for the year should be a bit lower than that.

Gross margins similar to Q1 last year. .

EPS some sort of a range or -..

If you work that through EPS probably in the $0.40ish..

Our next question comes from the line of Jonathan Ho from William Blair. Your line is open. .

This is John Weidemoyer for Jonathan Ho, he’s travelling today. Couple of questions, one is clarification first, your growth outlook I think that’s a reported growth rate not constant currency for both segments. .

Yeah, that’s right. .

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

So I guess from the sound the way you answered Paul’s question earlier, you do anticipate to benefit from an improvement in that area in the remainder of the year.

I’m just curious, the outlook for ’17 is bit of a step from ’16 and I’m just wondering how much of it is also things like maybe, currency stabilizing, the end market pressure easing, and maybe in general just your product suite being broader and getting more small deal selling opportunities.

Can you talk a little bit more about that please?.

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

We always had an approach that we do what customers really prefer, but we had an emphasis and a preference for trying to sell customers bundled solution where we can bundle a suite and use a platform approach and drive more transformational project.

So some customers even now may decide to bundle and buy solutions together and spend more money, but our approach is we would like to help customers to solve the pin-points one at a time, and to demonstrate that we have best of great solutions.

So we’re not just selling based on, look we can solve big problems, but we are very competitive against other companies who are only focusing on one solution or two or three.

And that approach I think is making our sales efforts more efficient rather than spend long time on a longer pool of cycle that eventually may not be approved by a senior management because it’s big dollars. We’re addressing some more urgent pin-point with solutions that we have and we can sell. And then as we land we can expand over time.

So that change I think combined with - I agree with what you mention, we have broadened our solution portfolio, we have more to solve, we emphasize the best-of-breed aspects of our solutions. We allow the customers to start with our portfolio anywhere they chose. We also allow them to buy on-prem or private cloud or public cloud or hybrid.

Sometimes they buy certain solutions on-prem and other they can buy in the cloud and that flexibility that’s not for comparison do not provide them. So we’ve done a lot of things to basically give the customers more choices, more flexibility and basically less excuses to elongate the total cycle.

They get what they need, they can benefit from the solutions quicker faster and we’re not obviously abandoning the bigger vision.

We do hear from customers that they do chose Verint because they understand Verint is not just a solutions provider, it’s a long term partner that they can count on to continue and evolve the strategy of time, and we do know that many customers in this industry prefer to work with fewer vendors and vendors that are more committed to a broad solution portfolio.

So all of that I think is the things we change, is the things we believe are going to work for us better this year and why we believe that we are well positioned for long term growth. .

And one last question, thanks for the breakdown on the market in the security business.

In the enterprise business how much of that does emerging markets contribute?.

Not much. We do operate in many countries, but the customer service industry is much more evolved in the develop world because of just what consumers are demanding and organizations are responding, and as you go to emerging market the customer service industry is still in very early stages.

Of course, unlike security where in many emerging countries the security challenges are even bigger than developed countries whether its crime, drug, immigration, a flow of security issues, fraud and compliance issues.

So there is - the reason why our Actionable intelligence business evolved differently in security and in customer services has to do not just so much from our own design, but a lot has to do with where the growth was.

And in security, the growth was higher in emerging market and in customer service the growth was higher in developed market and we followed the growth, and we’ll pursue to do that in the long run..

[Operator Instructions] And that looks like we have no other questions in the queue at this time. So I would like to turn the call back over to Alan Roden for closing remarks. .

Thanks Operator. Before ending the call, I’d like to announce that next week we’ll be conducting a roadshow in three cities. On Monday, April 4, we’ll be holding investor meeting in New York City hosted by Nandan Amladi from Deutsche Bank. On Wednesday, April 6 we’ll be holding investor meeting in Chicago hosted by Jonathan Ho from William Blair.

On Thursday, April 7, we’ll be holding investor meetings in Boston hosted by Shaul Eyal from Oppenheimer. And further up the week of May 23, we’ll be anticipating in the JP Morgan Technology Conference in Boston hosted by Paul [Kasta] as well as other conferences to be announced.

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

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

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