Alan Roden - SVP, Corporate Development and IR Dan Bodner - Chairman, President, and CEO Douglas Robinson - CFO.

Shaul Eyal - Oppenheimer Gabriela Borges - Goldman Sachs Paul Coster - JPMorgan Jonathan Ho - William Blair Jeff Kessler - Imperial Capital.

Good day, ladies and gentlemen, and welcome to the Verint Systems Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Alan Roden, Senior Vice President of Corporate Development. Sir, you may begin..

Thank you, operator and good afternoon and thank you for joining our conference call today. I am here with Dan Bodner, Verint's CEO and President; Doug Robinson, Verint's CFO. Prior to this call, we issued a press release that includes financial information for our fourth fiscal quarter and fiscal year ended January 31, 2018.

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

Before I turn the call, I would 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 the 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 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, 2018 when filed and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures, as we believe investors focus on these measures in comparing results between periods and among our peers. Our financial outlook is provided only on a non-GAAP basis.

Please see today's earnings release in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to GAAP measures.

Non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information, but included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and 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 I turn the call over to Dan, I want to mention that at the end this call I would be providing some details regarding our upcoming Investor Day. 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 fourth quarter and full year results. The momentum we experienced throughout the year continued in Q4 and we are pleased we finished the year strong.

We believe our overachievement reflects ongoing demand for excellent intelligence solutions and we are again raising our guidance for the current year. Looking back at the year, we launched many innovative analytics and automation capabilities, improved our execution and completed our operational agility initiative.

Our annual result on a GAAP basis were $1.14 [ph] billion of revenue and $0.10 net loss per share. On a non-GAAP basis, we achieved revenue of $1.15 billion and diluted net income per share of $2.81.

Our objective is to grow earnings faster than revenue through margin expansion and we are pleased to have increased non-GAAP earnings per share 12% on revenue growth of 7%. Overall we believe the investments and changes we've made over the last couple of years laid the foundation for continued growth.

In the current year, we expect another year of high single digit revenue growth with margin expansion resulting in double-digit non-GAAP earning growth. Doug will discuss our guidance later. And now I would like to review our results and growth strategy by segment. Starting with customer engagement.

We are pleased with the momentum in our business throughout the year leading to a strong fourth quarter. Revenue in Q4 increased 11% year-over-year. For the full year revenue increased 5% with the cloud portion of our revenues increasing 25%.

Our estimated non-GAAP fully allocated operating margin which we refer to as our segment margin came in at 24.2% for the year, representing approximately 60 bps of margin expansion over the prior year.

In addition to strong financial results, we are pleased that in Q4 we’ve continued with large competitive wins and displacements, as well as extensions with existing customers. Here are some examples. $9 million in orders from a leading cable and telecommunications company.

This three year subscription order is for expanding the deployment of our self-service solution in the cloud for opening new accounts, billing inquiries and resolution of technical issues. This is a good example of how customers are using self-service automation to elevate the customer experience, while reducing operating cost.

Nearly $7 million in orders from a leading health insurance company. This customer who is deploying multiple components from our portfolio is a good example of the success of our land and expand strategy and our ability to help organizations modernize their operations over time.

Approximately $5 million in orders from a leading property and casualty insurance company. This new customer selected Verint’s Knowledge Management Solution deployed in the cloud replacing an on-premises legacy solution from another vendor. This competitive displacement is a good example of how we are helping organizations move to the cloud.

More than $5 million in orders from a leading investment and insurance company. This customer is using Verint Solution in both its contact centers and back-office operations and is now expanding and moving to the cloud in a three year subscription deal.

This is a good example of how organizations are looking to orchestrate customer engagement activities across the enterprise. $3 million in orders from a leading business process outsourcer, bringing total orders from this customer to more than $7 million this year.

This customer who had previously deployed some of our solutions decided to expand with Verint, displacing another vendor. This additional competitive displacement is another example of how successful execution of our land and expand strategy.

We believe behind these large customer orders is our strategy to help organizations simplify, modernize and automate the customer engagement operations. I would like to explain in more detail what it means to simplify, modernize and automate and why it's important to our customers.

First to simplify customer engagement, we offered solutions that are open, easy to deploy and simple to use and are designed to integrate into organizations current and evolving technology environments.

Our open portfolio is also compatible with leading providers of communication solutions, providing organizations with flexibility to select the most suitable communications solution, while leveraging Verint’s neutrality.

We believe this neutrality is particularly important now, as the current set of communications market is going through disruption with new entrants offering new approaches to communications.

Second, to modernize customer engagement, we offer organization a smooth transition to the cloud through our hybrid cloud model, including public cloud, private cloud and perpetual license models or combinations of these models. Our API-rich portfolio provides organizations the ability to easy share data across the enterprise.

And third, our strategy is to infuse automation capabilities throughout our solution portfolio. Our automation capabilities deliver intelligence and context in real-time, reduce errors in manual work, help ensure adherence to compliance requirements and enable customer experiences that are faster, personalized and more enjoyable.

With this strategy in mind, we have expanded our offering over the last several years to position Verint as the customer engagement company across the entire enterprise. For most organizations customer engagement is no longer just a contact center function.

It's a responsibility shared across the enterprise, including contact centers, back-office, branch operations, self-service, e-commerce, customer experience, marketing, IT and compliance. Today our offering is one of the broadest in the market, cloud ready and incorporates the latest artificial intelligence and analytics technology in our industry.

We believe that our strategy position us well to address the new trends in our market and help organizations achieve exceptional customer experience at a lower operating cost. Looking ahead to the current year, we expect another year of growth as we continue to scale the business. And now turning to Cyber Intelligence.

Q4 revenue came in strong at $111 million, driving annual segment revenue growth of 11% year-over-year. Our non-GAAP segment margin expanded approximately 1 percentage point over the prior year from 10.1% to 11%. We are pleased with this margin expansion and expect this trend to accelerate.

During Q4, we continue to win many large deals around the world, including five large deals each worth between $5 million and $15 million. We are pleased with these large customer wins and are focusing another year of double-digit revenue growth.

We believe behind our cyber intelligence success is our ability to address three market trends that I would like to discuss. First, security threats are becoming more complex. As a result security and intelligence organizations find it more difficult to detect, investigate and neutralize threats.

They are seeking more advanced data mining solutions, designed to capture and analyze data from multiple sources to address the challenge increased complexity. Second to overcome this challenge, security organizations are seeking advanced data mining solutions that automate and accelerate functions previously performed by human.

Security organizations are using data mining solutions to help conduct investigations and generate actionable insights, and typically data mining solutions require intelligence analysts and data scientists to operate them.

However there is a shortage of such qualified personnel globally, which can lead to elongated investigations and increased risk that security threats go undetected. And third, security organizations are looking for predictive intelligence as a force multiplier.

Predictive intelligence is generated by correlating massive amounts of data from a wide range of disparate sources to uncover previously unknown connections to identify suspicious behaviors and to predict future events.

Predictive intelligence is a force multiplier or in other words, it enables security organizations to better prioritize and allocate their resources more effectively, make them actionable intelligence. Looking forward to the current fiscal year, we expect another strong year due to several factors.

First, our data mining software is already deployed in over 100 countries and we continue to focus on helping government’s, critical infrastructure and enterprise organizations around the globe to neutralize and prevent terror, crime and cyber threats.

Our relationships provide us deep insight into their challenges which we used to help develop new innovative solutions. Second, Verint offers a unique approach to security that we call intelligence powered security.

This approach is based on over two decades of cyber intelligence experience, combining data mining software, deep domain expertise and advanced intelligence methodologies.

Third, we have an intelligence powered security portfolio already deployed successfully to address a broad range of security missions for intelligence cyber and physical security organizations.

Our portfolio leverages the latest artificial intelligence and predictive intelligence technologies, position Verint at the forefront of data mining solutions for the secure market. And fourth, we have a significant margin expansion opportunity if the cyber intelligence market adopts a more traditional software model.

Today we offer our solutions in two business model, a software model and the turnkey solutions model, which can include also hardware. We believe over time, our cyber intelligence business will evolve into more free soft [ph] tomorrow.

So overall, we believe demand for innovative Cyber Intelligence Solution is strong and as a market leader we are well positioned for sustained growth. And before handing the call over to Doug, I would like to highlight a few points.

First, as discussed in prior calls, today we are providing some additional metrics in an effort to help investors understand the underlying drivers of our business.

Second, following our overachievement in Q4, we have increased confidence in the year and we are raising our annual non-GAAP guidance for both revenue and earnings for the second time since our last call.

And third, we look forward to our Investor Day coming up in six weeks, where we will discuss growth trends in our industry and strategy in detail and demonstrate our latest customer engagement innovation. And now let me turn the call over to Doug.

Doug?.

Yeah. Thanks, Dan. Good afternoon, everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available as Alan mentioned in our earnings release and in the IR section of our website.

Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including fair value revenue adjustments, amortization of acquisition related intangibles, certain other acquisition related expenses, stock based compensation, as well as certain other items that can vary significantly in amount and frequency.

For certain metrics it also includes adjustments related to foreign exchange rates. I'll start my discussion today with the areas of revenue, gross margin and operating margin. In the fourth quarter, we generated $323 million of non-GAAP revenue. Non-GAAP segment revenues were $212 million in customer engagement and $111 million in cyber intelligence.

This compares to $300 million of non-GAAP revenue in the fourth quarter of the prior year, with $191 million in customer engagement and $109 million in cyber intelligence. In terms of geography in Q4 we generated non-GAAP revenue of $168 million in Americas, $102 million in EMEA and $53 million in APAC.

This compares to $166 million in Americans, $92 million in EMEA and $42 million in APAC in the fourth quarter of the prior year. For the full year we generated point $1.15 billion of non-GAAP revenue. Non-GAAP segment revenues were $755 million in customer engagement and $395 million in cyber intelligence.

This compares to $1.073 billion of non-GAAP revenue in the prior year with $716 million in customer engagement and $357 million in cyber intelligence. In terms of geography we generated non-GAAP revenue of $610 million in America's, $356 million in EMEA and $184 million in APAC.

This compared to $582 million in America's, $323 million in EMEA and $168 million in APAC in the prior yea. Turning to gross margins, we believe we have an opportunity to expand our non-GAAP gross margins over time. And I'd like to share with you some additional data that explains what's driving our margin expansion in each of our segments.

In customer engagement, our business model is primarily software and services and our non-GAAP gross margin in that segment were close to 70% [ph] percent for the year, similar to other software companies with same products services mix. We offer our solutions on-premises, in the cloud and in a hybrid fashion.

For the year close to 60% of our revenue came from recurring sources of which two thirds was for maintenance and one third from cloud. Product generated 24% and professional services generated 17% of our revenue. Our maintenance renewal rates in this segment are more than 90%.

We believe that our gross margins have the opportunity expand over time, as we scale our cloud business and gain further efficiencies in professional services. In Cyber Intelligence, we offer our solutions on-premises or as turnkey projects which can include hardware.

Our Cyber Intelligence non-GAAP gross margins are lower than Verint’s overall gross margins due to the mix of software and services and also the hardware we resell from third party vendors.

For the year 33% of our revenue came from recurring sources, primarily maintenance, 54% came from product, including software and hardware and 13% came from services. Last year approximately 10% of our cyber intelligence revenue was generated from pass-through hardware.

Excluding this pass-through hardware, our gross margins in this segment would be similar to our customer engagement business, and we see an opportunity to get there over time. Turning to operating income, during the fourth quarter we generated non-GAAP operating income on a consolidated basis of $82 million, with strong operating margins of 25.4%.

For the year, our non-GAAP operating income was $226.1 million with an operating margin of 19.7%. On a fully allocated basis, our customer engagement non-GAAP operating margins were 24.2% and our cyber intelligence non-GAAP operating margins were 11% for the year.

You can approximate our non-GAAP fully allocated segment operating margins by distributing our shared service expenses which are shown in our 10-K segmentation footnote, proportionately to our non-GAAP segment revenue. We also present how we estimate non-GAAP fully allocated operating margins in the tables of our earnings release.

Our adjusted EBITDA for the quarter came in at $89.8 million or 27.8% of non-GAAP revenue. For the full year, our adjusted EBITDA came in at $256.6 million or 22.3% of non-GAAP revenue. Now let's turn to other income and interest expense.

In the fourth quarter non-GAAP other expense net totaled $2.7 million, reflecting $5.4 million of interest and other expense, net of $2.7 million of foreign exchange gains, primarily related to balance sheet translations.

For the full year non-GAAP other expense net totaled $18 million, reflecting $21.5 million of interest and other expense net of offsets, including $3.5 million of foreign exchange gains, again primarily related to balance sheet translations. Our non-GAAP tax rate was 11.9% for the fourth quarter and 11.5% for the full year.

As we've discussed previously, we expect to enjoy a low non-GAAP tax rate for several years due to our NOLs and the amount of income we generate in low tax rate jurisdictions. For the quarter, we had $65.1 million average diluted shares outstanding. For the full year, we have $64.4 million average diluted shares outstanding.

These results drove diluted non-GAAP EPS of a $1.5 for Q4 and 281 for the full year. Now turning to the balance sheet. As of January 31, 2018 we had $406 million of cash and short term investments, including short term and long-term restricted cash. Cash flow from operations on a GAAP basis for the year was $176 million.

We ended the quarter with net debt of $417 million, including long-term restricted cash and excluding discounts and issuance costs, primarily associated with our convertible debt. Before moving to Q&A, I'd like to discuss our non-GAAP guidance, which we are raising for both revenue and earnings for the year ending January 31, 2019.

Starting with revenue. In customer engagement, we expect mid single digit revenue growth of around 6%. In cyber intelligence, we expect approximately 10% revenue growth. Overall we expect revenue of $1.23 billion with a range of plus or minus 2%.

From an operating margin perspective, we expect operating margins in the current year to improve more than 1% compared to 0.6% of margin expansion last year. The acceleration in our margin expansion is a result of what we've discussed earlier.

We expect our non-GAAP quarterly interest and other expense, excluding the potential impact of foreign exchange to be approximately $5.5 million. Given volatility and for exchange rates, there could be future gains or losses related to balance sheet translations in our future results which are not included in our guidance.

We expect our non-GAAP tax rate to be approximately 11% for the year, reflecting the amount of cash taxes we expect to pay this year. With respect to the new tax reform act, given our large amounts of US NOLs, we do not expect much of a change in our cash taxes going forward.

With regard to the new 606 revenue accounting pronouncement which is effective for us at the beginning of the current year, we do not see an overall material impact to our results and our guidance already reflects the changes required under 606.

Based on these assumptions and assuming approximate $65.9 million average diluted shares outstanding for the year, we are expecting non-GAAP diluted EPS at the midpoint of our revenue guidance to be approximately $3.09, a $0.06 increase from our prior guidance.

In addition to our annual guidance, we'd like to provide you some color on the progression of the year for modeling purposes. For non-GAAP revenue, in Q1 we expect revenue in the range of $280 million to 285 million. We expect sequential increases in Q2 and Q3 followed by our usual seasonally strong Q4.

Relative to margins given our recent momentum, we continue to invest for growth and expect Q1 operating expenses to increase a few million dollars than Q4 levels. In conclusion, we're pleased to finish the year strong and we believe we are well positioned for sustained growth in both customer engagement and cyber intelligence.

This concludes my prepared remarks. With that, operator, can we open up the lines for questions..

Certainly. [Operator Instructions] Thank you. And our first question comes from the line of Shaul Eyal with Oppenheimer. Your line is open..

Thank you. Good afternoon. Dan, Doug, Alan, congratulations on the quarterly beat, more so when the improved guidance for the fiscal year second quarter in a row we didn't have that in some time, so again congratulations.

Dan, on the heels of the quarterly beat and elevated guidance, what are the underlying drivers that provide you with the confidence to raise the guidance for the second time in a row?.

Yeah. Thank you, Shaul. So I would say first its growth drivers in the market. I think we overall see more favorable demand for actionable intelligence, especially unstructured data analytics and automation, and that demand is across all the markets we serve.

We discussed the growth drivers in customer engagement, simplifying, modernize and automate and moving to the cloud and automation are certainly driving - spending for customers. And in cyber, it’s the complexity of threats, the shortage of data scientists and predictive intelligence being a force multiplier.

These are all growth drivers that we've been preparing the company for the last two years, making investments in analytics and automation to be prepared to address them well. And I think we started to see the fruits of this investment last year and we believe we'll continue into this year.

Secondly, I think the spending environment that we see is positive both from government and enterprises and globally and customer engagement and cyber intelligence are two areas where we are market leaders and we see customers willing to spend and moving into the future.

And thirdly, it's our execution; with the completion of our operation agility initiative that we had last year and the momentum we saw in the business, we feel like we are starting the year in a positive way and ready to execute well on these growth drivers and positive spending environment.

So it's really a good place to be right now, where we have a combination of strong driver, good spending and strong execution..

Got it. Got it. And a follow if I may. Dan, it appears you know, cloud is coming along very well.

Any fresh thoughts of maybe accelerating or allocating more investments towards that specific activity?.

Yeah. Cloud is definitely a growth driver in the market, customers are more and more interested in moving to the cloud and spending. And usually while they are spending on cloud transition, they also are looking to expand the capabilities of their solution and modernizing.

So when we talk about simplify, modernize and automate, modernization is generally – customers moving into the future, addressing new requirements or customer engagements such as omnichannel, but also the same time moving to the cloud. We are well positioned with a hybrid cloud strategy to help customers to have a smooth transition.

We talked about some examples before the $5 million contract where customers moved to the cloud and with our communication neutrality they were able to choose the communication vendor of their choice that was best for them and at the same time move with Verint and expand business application into the cloud.

In some other examples, customers like to keep some of the solution on prem and move others to the cloud. So the hybrid cloud is a great strategy differentiator and we hear a lot of positive comments from our customers of how we really help them to move at the pace that they feel is right for them. So we grew 25% in cloud, now second year in a row.

So it's clearly a growth driver. It may accelerate, it's hard for us to predict, but it may very well accelerate, it's certainly something where we are ready with our entire portfolio in the cloud. And also from a margin perspective, we have developed a scale that allows to be very efficient.

We have now - we completed an agreement with a cloud infrastructure provider that is a global agreement. So we are well positioned for global customers to give them cloud infrastructure anywhere they need. And also in a very efficient and cost effective way. So on any level we feel that cloud acceleration is the right thing for Verint..

Thank you, Dan..

Thank you. Our next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open..

Good afternoon. Congrats on the quarter. Dan, a little more detail on the cyber intelligence business if I could, you gave some qualitative comments earlier.

But specifically as it pertains to backlog, when you look at 4Q, how did the deal activity translate relative to your expectations? And then when you talk to customer’s year-to-date in 2018, maybe you could just shed some light on what are the projects and what are the types of technologies that are catalyzing the spending in cyber intelligence? Thanks..

Yes. So the growth trends that I discussed in cyber also contributed to backlog. We actually started the year on February 1st with more than two thirds of the year already in backlog which is a good place to be obviously and give us confidence about the year and the spending environment overall.

And we also had a very healthy pipeline and pipeline grew quite a bit in cyber intelligence. So that's another data point that you know, customers really see the data mining solutions that we have within ROI.

So while typically you think about security organizations looking to buy technology, to improve security, at the same time they also have to be cost-effective in how they spend the money, and data mining solutions, as we've said before come with you know, a lot of cyber analysts and data scientists that are needed to operate the technology.

And part of what we have been doing is preparing for more automation in our solution to automate some of the functions that were previously performed by humans. That makes data mining much more effective.

They can leverage - the capture of data from many different sources, analyzing the data and make it actionable, but making it also very practical in terms of the type of operation they run and how many data scientists they need to employ.

And predictive intelligence is another very strong driver and we invested - and we believe we have the best solution in the market for predictive intelligence, which is a great force multiplier because it really allows security organizations to prioritize and deploy their resources based on you know, where it's really needed.

So there is also great ROI, not just in the security intelligence operation, but also applying their resources overall.

So we think that you know that the cyber intelligence market is one that obviously is always been interested in new technology and as new technology become available, our customers are very motivated to spend and use that technology to improve their intelligence collection and security that they provide to – in the country to the citizens..

That's helpful. And a follow up if I could on the gross margin profile of the company, if I look historically the ceiling for gross margin has been right on the 70% [ph] level.

Is that a way to think about longer term where margins could go or what that ceiling might look like with the positive mix benefit that you are seeing?.

Part of operational agility initiative last year was to create the modeling and we discussed this last year several times, create a modeling for ongoing margin expansion. We have completed this initiative now. So we're driving now to where the model. Let me give you some numbers.

So last year we improved the margin - operating margin by 60 bps in customer engagement and 90 bps in cyber intelligence. This year we're going to accelerate and we expect to prove more than that in each of the segments.

Where we have a lot of margin expansion is in cyber intelligence, where we can drive growth margins to about 70, while having OpEx leverage. So we are looking to accelerate the margin expansion to point, point and a half in the cyber intelligence this year and continue to accelerate over time.

In cyber intelligence, we really are you know, developed - delivering data mining software and if you look at our R&D organization it's basically 99% software engineers. But because of the turnkey model software customers preferred that Verint deliver also hardware and that obviously is reducing the gross margin.

We see the trend that customers are getting more comfortable to source the hardware themselves. We also have invested last year in productizing and making it easier for our customers to source the hardware themselves. So as the hardware components comes down and diminishes we'll see growth margin improvement.

And in addition to the OpEx leverage we can we can drive some margin expansion acceleration over time.

In cyber engagement – sorry, customer engagement, our margin is 24%, 24.2 last year and we will continue to improve gross margin, which is around 70% based on cloud efficiencies that we still have - efficiencies that we were looking to drive, as well as professional services component which will drive efficiencies.

The growth margin expansion and OpEx leverage also in customer engagements. The margin expansion has been the focus for us and we were looking this year to continue and grow earnings faster than revenue..

I appreciate the detail. Thank you..

Sure..

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Your line is open..

Yeah. Thanks for taking my questions. Dan, also we've sort of been here before on the cyber intelligence side with the desire and intense move towards more of a products orientation, more of a software sale.

So what's different this time?.

I think two things are different Paul. One is to think the market is readier and we see customers are more interested in doing that. And the second is we made investments over the last two years to make it easier for customers to move to software models.

That that investment was in productization in making it easier for the customer to integrate the hardware into software, if they source the hardware themselves.

So I'm not - you know I am not suggesting that I can predict the pace that it's going to happen, but you may remember that we had the same situation with our customer engagement business where we had about 10% hardware and now it's close to nothing. And we believe that you know, time is right also for the cyber intelligence market to expand margins..

More on the cyber intelligence side are those customers now able to dispense with the need for the pass-through hardware.

Is it because they're moving to hybrid cloud and it's just sort of easiest to deploy or is there something else going on?.

So first, some of our products we already sell - in cyber intelligence we already sell software model and the customers are comfortable sourcing the hardware and then using either their own IT organization or a third party to integrate software and hardware in the same way we do in the enterprise sector.

So I think with some products we made - we made more progress because of the nature of the product and investment we made. And other products I think we need to complete that investment to just make it easier because the hardware at the end of the day, these are servers, storage and network components.

And it's really the desire that customers sometimes have to - have one throat to choke. So they prefer a turnkey model. And I think over time they just either do themselves or they use a local integrator to do this integration, but they don't expect the software vendor to do it..

Okay. My last question is you separated these two businesses, recognize that there is limited synergies between the two of them, two different executives leading them and so on.

What is the latest thinking on a complete separation of these two businesses to create shareholder value?.

So last year we were going through our agility initiatives and you know, the main purpose of this was to create better execution in our in our business.

And you know, some of the things we did and we discussed for this improved execution was to strengthen the management teams, to align the compensation plan for the management you know, each management team is focused on you know, the performance, to develop more distinctive brand identities for customers, but mostly to be more laser focused on the unique customer needs of these segments.

But the underlying technology that is behind our actual intelligence vision is always been analytics and automation and that technology is really not different in those markets. It's about you know, capturing data, analyzing data, getting insights and automating the functions that - in that process.

So where we are right now is you know, we completed the separation of agility and we are focused on creating shareholder value through growing both businesses and at the same time expanding margins..

Well, okay. Thank you very much..

Thank you. And our next question comes from the line of Jonathan Ho with William Blair. Your line is open..

Good afternoon. I just wanted to start out with maybe asking for a little bit more color in terms of what you're actually seeing in the cloud transition among your customer base today.

Are you actually seeing your customers shut down any of their on-premise infrastructure and move that to the cloud or is this for overflow? How should we be thinking about the trends in that space?.

So most of our growth today comes from new solutions, not so much shutting down on-prem, moving to the cloud. I did give a couple examples before about customers that we had on prem, that as part of expansion. They moved also on prem solutions, but usually they would do it as part of a bigger initiative when they are buying more capabilities.

So it's still not common to see customers just you know, having something working and one day they just say we want it to move it. It does happen but it's not very frequent.

Because there is so much customers are looking to do with the budget that in most cases they want to expand and add new capabilities around automation and at that point you know, if they decide to move to the cloud they will drag along on prem solution.

So the majority of the growth when we talk about 25% growth in our business is from customers expanding with new solutions in the cloud..

Got it. And then you know, just in terms of the 10% of revenue that's maybe pass-through hardware. You know, what should we assume is in the guidance over you know, the percentage that maybe goes away on the side.

I know it's relatively low margin, but is there any way you can maybe help us understand you know what component is already embedded in your guidance?.

Yes. So what we said is that the operating margin for cyber intelligence improved from 10% to 11% and we expect more than a point – to more than 12% operating margin in the current year. And that reflects the - you know margin improvement that is partially resulting from the change in hardware.

So it's already built into the cloud - into the model that we guided..

Thank you..

Sure..

Thank you. And our next question comes from the line of Jeff Kessler with Imperial Capital. Your line is open..

Thank you. Two questions.

First, there seems to be a race - a race out there in the predictive analysis area, a lot of companies particularly who are involved in cyber and actually cyber and physical convergence, a lot of companies looking at trying to provide - trying to provide I would say a value – a value added product as you would describe its a force multiplier.

To what extent you believe you have a product that gets you to a point which is still effective, but doesn't reach the point of let say, minority - Tom Cruise in Minority Report, so that some people pulled back from it.

There has to be a – is there a balance here that you've been working on?.

Yeah. Looks its - you're right. It's a hot market, but also there is a lot of companies that are trying to participate in this market. I think that we have great technology.

We have 1500 engineers in our - you know, close 1500 engineers across the company that you know, obviously some are more focused on use cases of cyber, some are more focused on use cases of customer engagement, but it's a very high concentration of technology that is focused on predictive intelligence and machine learning.

So in terms of technology I think that Verint has the intellectual property needed to solve this problem effectively.

But also as you pointed out and I agree, in many cases it's not about technology, it's about how the technology is being applied and whether a company has a good understanding of what the customer really needs to solve and what's practical.

And that's why you know, part of operational agility was not so much to create more technology synergies around a company, but operational agility was more about the use cases, about making sure that we have the domain expertise that we leverage, the relationship and we've done it over the last two years.

We had a lot of discussions with customers about what do they really expect, not just from a technology, but what are business problems that are trying to solve. And I think we're getting very - we got much better, we got much better in it.

So the ability to accelerate growth and margin is really what you suggest, which is you know, how well can we apply our technology to solve the customer problems and you know, we certainly are getting better there..

Okay. Second question, you've won a couple of awards this past year for your Situational Awareness Platforms, which are – which fall somewhat into fiscal area. And I'm wondering as you say you're going to be moving to it more and more software based – software based platforms in cyber.

Does that imply that the hardware that is going to be bought or hopefully bought by the customers that you are working with integrators or some types of consultants, while also helping them - your customers to be more comfortable in buying their own hardware?.

Absolutely. Part of this is education of the integrators and involving them in delivering the hardware, and you know, that's where we going. And in some cases the customer - the end user will choose the integrator and in other cases they expect us to bring integrator along, but that's our model.

Our value added in the software and our integrators who knows how to integrate software and hardware, that’s their market and that's where we're going..

Okay, great. Thank you very much..

Okay..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Alan Roden for closing remarks..

Thank you, operator. Before ending the call I would like to provide some details regarding our upcoming Investor Day, our Investor Day will take place on Monday May 14th in Dallas, in connection with our annual user event for Customer Engagement business.

The event will include presentations from management, product demos and an opportunity to interact directly with our own customers. For planning purposes the event will start at 2 P.M. on 14th and will end around 6 P.M.

For those investors that are interested in staying an additional day, you're welcome to participate in our user conference on Tuesday, May 15. To register, please see the Investor Relations portion of our website. Thank you for joining us today and we'll look forward to seeing you at our Investor Day and other investor events. Have a great evening..

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