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Edited Transcript of VRNT earnings conference call or presentation 5-Sep-18 8:30pm GMT

Q2 2019 Verint Systems Inc Earnings Call

MELVILLE Sep 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Verint Systems Inc earnings conference call or presentation Wednesday, September 5, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Roden

Verint Systems Inc. - SVP of Corporate Development & IR

* Dan Bodner

Verint Systems Inc. - Chairman, CEO & President

* Douglas E. Robinson

Verint Systems Inc. - CFO

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Conference Call Participants

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* Daniel Robert Bergstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Gabriela Borges

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies

* Shaul Eyal

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Verint Systems Q2 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

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Alan Roden, Verint Systems Inc. - SVP of Corporate Development & IR [2]

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Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; and Doug Robinson, Verint's CFO.

Prior to the call, we issued a press release that includes financial information for our first fiscal quarter ended April 30, 2018. Our Form 10-Q will be filed shortly. Each of our SEC filings and earnings press releases is available under the Investor Relations link on our website at verint.com 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 under federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed or implied by 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 a more detailed discussion of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2018, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures as we believe investors focus on those measures in comparing results between periods and among our peer companies. 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 at verint.com for a 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 is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies.

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

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [3]

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Thank you, Alan. Good afternoon, everyone, and thank you for joining us to review our first quarter results.

The momentum we experienced through last year continued in Q2, and we are pleased to have started the year strong.

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Alan Roden, Verint Systems Inc. - SVP of Corporate Development & IR [4]

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Operator, we're having some technical problems. Could you put the call on hold for a minute?

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Operator [5]

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Of course.

(technical difficulty)

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Alan Roden, Verint Systems Inc. - SVP of Corporate Development & IR [6]

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Operator, we're back. And we're going to restart. Thank you.

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [7]

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Okay, I apologize for that. Let me start over. So good afternoon, everyone, and thank you for joining us to review our second quarter results.

In Q2, our positive momentum continued, and we delivered very strong results, driven by strong execution and our focus on innovation. Verint is a leader in Actionable Intelligence solutions that help customers capture and analyze massive amounts of data and derive insights that are actionable. Our market leadership is being driven by innovative analytics, artificial intelligence and automation technologies across many Actionable Intelligence use cases in both of our business segments.

I'm pleased to report that in Q2, our revenue increased 11% year-over-year. Revenue also increased 11% in each of our 2 segments. Our strong Q2 results reflect the same double-digit revenue growth in Cyber Intelligence and positive momentum in Customer Engagement due to strong demand for analytics and automation across the enterprise and the successful execution of our growth strategy, which I will discuss later.

In addition to strong revenue growth, we expanded our margin, driving further earnings leverage. On a GAAP basis, we delivered net income -- diluted net income per share of $0.33. On a non-GAAP basis, we delivered diluted net income per share of $0.76, representing 25% year-over-year EPS growth.

As discussed on prior calls, we are targeting sustained margin expansion over the long run, and we are very pleased with our Q2 and first half performance and execution. Given our strong results and the continued strength of our pipeline, we are raising our annual guidance again. Doug will discuss our new guidance in more detail later on. Now I'd like to review our second quarter results by segment.

Starting with Customer Engagement. Revenue increased 11% year-over-year, with non-GAAP revenue increasing to $203 million. Verint is a leader in Customer Engagement enterprise software, with a reputation for strong innovation and deep customer relationships. Our innovation has been focused on helping customers simplify, modernize and automate their Customer Engagement operations, and this strategy has resonated well with customers. This created strong momentum in the business.

Let me expand on how we help customers simplify, modernize and automate. First, we help customers simplify by offering an open architecture that makes it easy to integrate our software into existing environments. We've invested in hundreds of APIs, pre-integrated packages and easy access to data, creating a significant differentiation against vendors that have chosen a proprietary approach.

Second, we help customers modernize with a hybrid cloud approach that allows customers many choices in their transition to the cloud. We have invested to create feature parity between our cloud and on-premises software to make their modernization program seamless for business users. We believe that our flexible hybrid cloud approach creates significant differentiation against vendors who choose to offer more limited cloud options. We currently power more than 3 billion cloud customer interactions per year and I'm very pleased with the cloud progress we have made.

And third, we help customers automate with advanced artificial intelligence technology to achieve elevated customer experience while reducing costs. We've invested in sophisticated analytics, machine learning and automation capabilities to deliver advanced virtual assistance automation, quality monitoring automation and robotics process automation. Today, Verint is differentiating from competitors with automation software that can drive strong ROI across the enterprise, including contact centers, back-office, IT and compliance.

During Q2, we continued to expand our footprint with existing customers and win new customers with many competitive displacements, for example, a $6 million cloud order from a leading home furnishing company looking to modernize Customer Engagement. This was a competitive process, and Verint was selected due to our hybrid cloud approach and our ability to scale reliably in the cloud across many countries. Another key differentiator was our innovation in mobility, which empowers the workforce with tools on their mobile devices.

A $6 million order from a leading health care company. This customer was looking for highly scalable, omnichannel analytical software that would provide Actionable Intelligence insights. We believe we were selected following a competitive process due to our analytics innovation and our open architecture and rich APIs.

A $4 million subscription order from a leading consumer product company. This global company was looking to ensure a consistent, exceptional customer experience worldwide and expanded the scope of our contract as part of their subscription renewal.

A $4 million order from a leading telecommunications company. This was a competitive displacement, and we believe we were selected due to our automation innovation such as our ability to automate high volumes of interaction analytics. We believe our automation capabilities have become a competitive differentiator.

We also continue to win new customers due to our ACD neutrality approach and our broad set of partnerships with many ACD vendors and resellers. As a reminder, Verint's approach is to provide enterprise software applications that are pre-integrated with the ACD communication infrastructure, a very attractive proposition for enterprises looking for innovative Actionable Intelligence software.

A good example of the success of our ACD-agnostic approach is an over $1 million cloud order we recently received from a leading investment bank. This new customer for Verint decided to modernize its communication infrastructure with a cloud ACD vendor of their choice, at the same time, modernize its Customer Engagement software by implementing the Verint cloud. We believe our ACD neutrality strategy was key to winning this new customer and provides us strong competitive differentiation.

Verint's focus on innovation is also being recognized by industry analysts. For example, one of our main areas of innovation is cloud self-service, and we have recently received many industry honors in this area, including Best Overall Artificial Intelligence Award from AI Breakthrough, which recognized achievements in our AI-driven self-service. In addition, Opus Research report ranked Verint among the top intelligence assistance vendors due to our ability to support both voice and digital channels. Our open API platform enables our solution to be integrated across a wide range of channels, including IVR, web, live chat, mobile, SMS, the Amazon Alexa, Facebook Messenger, Slack, Skype and Twilio. Verint also received the highest overall ranking for product satisfaction in DMG's report on Intelligent Virtual Agent Solutions.

Overall, we believe our focus on innovation and our strategy to help organizations simplify, modernize and automate has contributed to our strong results and positive momentum, and we are raising our outlook for Customer Engagement segment.

Now turning to Cyber Intelligence. I'm very pleased with our 11% year-over-year revenue growth, achieving $105 million in the quarter. Our strong Q2 follows double-digit revenue growth last year and in Q1, and we believe that demand for our data mining software remains strong. We continue to win many deals around the world, including recently receiving a $15 million order, a $10 million order and 2 $5 million orders. We believe our success in winning large deals is due to our ability to anticipate market trends and bring innovative solutions to market that help our customers address their evolving security challenges.

As we have discussed on prior calls, we currently see 3 market trends that could potentially benefit our Cyber Intelligence segment over time. First, security threats are becoming more complex. As a result, security intelligence organizations find it more difficult to detect, investigate and neutralize threats and are seeking new data mining solutions.

Second, there is a shortage of data scientists and cyber analysts, and security organizations are seeking advanced automation capabilities to perform functions previously performed by humans. 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, identify suspicious behaviors and predict future events.

Verint is uniquely positioned to address these trends as our security and intelligence data mining software is already deployed in 100 countries, and our customer relationships provide us deep insights into their current and future challenges.

In addition to focusing on revenue growth, our goal is to expand both gross margins and operating margins as we continue to scale. We are very pleased with the progress we made in the first half of the year and expect the margins in Cyber Intelligence to be more in line with the pure software model over time.

Overall, we believe demand for our innovative Cyber Intelligence solutions is strong, and as a market leader, we are well positioned for another year of double-digit revenue growth with improving margins.

Before turning the call over to Doug, I would like to summarize as follows. We believe demand for Actionable Intelligence solutions remains strong and that we can sustain long-term growth by continuing to focus on innovation in both Customer Engagement and Cyber Intelligence. We believe we have the opportunity to expand margins in both segments as we continue to build scale. We expect that the combination of revenue growth and margin expansion will enable us to grow earnings faster than revenue. This year, we now expect approximately 8% non-GAAP revenue growth and 12% non-GAAP earnings growth.

And now let me turn the call over to Doug to further discuss our financial results and updated guidance. Doug?

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Douglas E. Robinson, Verint Systems Inc. - CFO [8]

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Yes. Thanks, Dan. Good afternoon, everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and our 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.

I'll start my discussion today with the areas of revenue, gross margin and operating margin. In the second quarter, we generated $308 million of non-GAAP revenue. Non-GAAP segment revenues were $203 million in Customer Engagement and $105 million in Cyber Intelligence. This compares to $278 million of non-GAAP revenue in the second quarter of the prior year with $183 million in Customer Engagement and $95 million in Cyber Intelligence.

In terms of geography, in Q2, we generated non-GAAP revenue of $168 million in the Americas, $77 million in EMEA and $63 million in APAC. This compares to $144 million in Americas, $85 million in EMEA and $49 million in APAC in the second quarter of the prior year.

Turning to gross margins. Our Q2 non-GAAP gross margins were approximately 66%, up from 64.5% in Q2 last year. As we've discussed in the past, due to product, services and revenue mix within or across segments, overall gross margins can fluctuate significantly from period-to-period. Nonetheless, we are pleased with our gross margin expansion across both our segments in Q2 and expect gross margins to be higher this year compared to the prior year.

Turning to operating income. During the second quarter, we generated non-GAAP operating income of $63.4 million with an operating margin of 20.6%, 4 points higher than Q2 last year. We're also pleased with our strong operating margin improvement in Q2, both year-over-year and sequentially. Our adjusted EBITDA for the quarter came in at $70.7 million or 22.9% of non-GAAP revenue.

Now let's turn to other income and interest expense. In the second quarter, non-GAAP other expense net totaled $6.4 million, reflecting $5.9 million of interest and other expense and $0.5 million of foreign exchange charges, primarily related to balance sheet translations. Our non-GAAP tax rate was 10.5% for the second quarter. As we've discussed previously, we expect to enjoy low non-GAAP tax rates for several years due to our NOLs and the amount of income we generate in low tax rate jurisdictions.

For the quarter, we had 65.8 million average diluted shares outstanding. These results drove diluted non-GAAP EPS of $0.76 for the quarter compared to $0.61 in the prior year, a 25% year-over-year increase.

Now turning to the balance sheet. At the end of Q2, we had $444 million of cash and short-term investments, including short-term and long-term restricted cash and investments. Cash flow from operations on a GAAP basis in Q2 came in strong at $44 million, bringing first half to more than $100 million.

We ended the quarter with net debt of $377 million, including long-term restricted cash and investments, and excluding discounts and issuance costs primarily associated with our convertible debt.

Before moving to Q&A, I'd like to review our guidance for the year ending January 31, 2019. As Dan mentioned, we are raising our annual guidance for both revenue and earnings.

Starting with revenue. In Customer Engagement, based on the momentum in the business, including first half revenue growth, order activity and pipeline strength, we now expect improved annual revenue growth of about 7%. In Cyber Intelligence, consistent with our first half results, we continue to expect annual revenue growth of around 10%. Overall, we are increasing our revenue guidance and now expect revenue of $1.24 billion, with a range of plus or minus 2%.

We expect our non-GAAP quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $5.7 million. Given volatility in foreign 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.

Based on these assumptions and assuming approximately 66 million average diluted shares outstanding for the year, we are raising our earnings guidance as well, and we now expect non-GAAP diluted EPS at the midpoint of our revenue guidance to be approximately $3.15, representing 12% year-over-year earnings growth.

In addition to our annual guidance, we'd like to provide you some color on the expected progression of the year for modeling purposes. After a strong second quarter, we expect Q3 revenue to be around $305 million and expect to finish the year with our typically strong Q4. Relative to margins, we expect Q3 gross margins to be at a similar level to Q2 and operating expenses to be a bit higher than Q2.

In conclusion, we're pleased with our strong second quarter and first half results and believe we are well positioned for sustained long-term growth in both of our segments.

So with that, operator, can we please open up the lines for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Shaul Eyal with Oppenheimer.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2]

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Congrats on ongoing improved results and guidance. Dan, we continue to see the transition of Verint towards a pure software model. I know we've been discussing that over the course of the past few quarters. You touched on it during your Cyber Intelligence comments. Can you recap for us the view -- your view on the model transition? What's the longer-term view here? Those of us covering the name for double-digit years now recall periods of mid-, even high 20s from an operating margin perspective. With more cloud being part of the mix, with the agility process behind you guys over the course of the past few quarters, what do you see as restraining Verint from gradually getting back to those levels longer term? And I have a follow-up.

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [3]

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Yes, so specifically, let's discuss the Cyber Intelligence and what we call our transition to the software model. So we do -- in Cyber Intelligence, we offer data mining software. And as we discussed on prior calls, some of our customers prefer to purchase turnkey projects that include our data mining software, together with the hardware that is required to run the software. We refer to such hardware as pass-through as it's typically comprised of servers and storage and network components, which we resell, but obviously, at a very low margin as part of delivering the project.

Today, such pass-through hardware represents approximately 10% of our Cyber Intelligence business, give or take, $40 million. And we discussed that reducing the level of pass-through, however, over time, will result in higher gross margins similar to what is expected in a pure software model. So you can do the math. And if you pro forma the pass-through hardware from our results, we're getting our Cyber Intelligence gross margins to start to approach 70%. And we believe that's one thing that will improve the software model. The value is in the data mining software and the hardware, we're providing that as part of the project requirements and as a service to our customers. But we believe that customers are getting more and more comfortable to deliver these standard hardware components themselves.

In terms of improving the operating margins, we discussed an ongoing improvement in Cyber Intelligence operating margins. We expect that this year, what's baked into our guidance is, overall, Verint will achieve about 21% operating margin, which is more than 25% in Customer Engagement and around 12% in Cyber Intelligence. That's more than 1-point improvement that we expect in Cyber Intelligence. And that's following an improvement of about 1 point we had last year. So we see a steady ongoing margin expansion in Cyber Intelligence that is based on increasing the mix of software in our revenue. Gross margin will be approaching 70%, and we expect our operating margins to increase as we build scale.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [4]

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Understood. Understood. My follow-up, Dan, so Avaya is solvent again. How do you see their, in a way, reappearance impacting the landscape from your perspective?

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [5]

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Yes, we believe that when you look at Customer Engagement, there is a number of trends that we believe customers have very clear needs, and we have invested in the creative strengths. One of the trends is expanding Customer Engagement across the enterprise. If, historically, Customer Engagement was very much focused inside the contact center, now Customer Engagement is more of an enterprise-wide strategy to increase customer satisfaction and to elevate the customer experience while reducing costs. And it's across the contact center. It's across back-office, branches, voice of the customer teams, marketing, IT and compliance.

Our approach is to provide software applications across all those areas of the enterprise. And our software application is primarily focused on analytics and automation to help elevate the customer experience and reduce costs. The communication infrastructure, which is what Avaya and other similar companies offer, is an important component of the contact center. And in that market, we believe that the ability to decouple, or what we call ACD-agnostic approach or ACD neutrality, which is basically helping customers to decouple their decision on communication infrastructure in the contact center and their analytics and automation software decisions across the enterprise.

And in that regard, we're developing very strong relationship with the communications infrastructure providers so that we are pre-integrated and can provide together a strong offering. And we think that gives -- one of the examples I gave before, this was a $1 million cloud order where the customer decided to move to the cloud, but their decision to move their communication infrastructure to the cloud and the decision to move to -- with their software applications was obviously decisions they wanted to make to optimize their specific situation. And they chose one vendor for -- among the many ACD vendors to move to the cloud, and they chose the Verint cloud as their going-forward enterprise software applications. So we think this is a trend that we benefit from. We develop strength around our ACD neutrality approach. And playing Switzerland and working with many of the ACD vendors is benefiting our results. And I clearly believe it's part of what we see as the momentum we have in the business.

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Operator [6]

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And our next question comes from the line of Gabriela Borges from Goldman Sachs.

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Gabriela Borges, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Congrats on the quarter. For Dan, when you engage with a customer on some of the automation applications that you were talking about in the prepared remarks, things like AI assistance, automated quality control, could you comment for us, how does that change the size of the deal or the customer opportunity that's in front of you? And I know this isn't in your base case model, but given that we're pretty early on in the automation trend, do you think there's a scenario where Customer Engagement growth could actually be closer to 10% than the mid-single-digit base case assumption for the next few quarters?

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [8]

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Yes, I believe that automation is one of the growth drivers in our business. When you look at the customer engagement operation of any enterprise, it's more than 95% labor and less than 5% technology. So the opportunity to elevate the customer experience while reducing costs is very much focused on the software applications that are driving the workforce. Now what automation does, it's actually increasing the size of the workforce dramatically. Not necessarily by people, but the combination of people bots is growing.

And the ability of enterprises to do more for their customers perhaps with the same number of people but by adding a lot of automation and robots that are helping do some of the work allows customers to improve. So looking at kind of the number of interactions between enterprises and their customers is growing. The voice interactions are not necessarily growing much, but there's a lot of growth in digital and social interactions. And with the growth in interactions, our customers want to keep the workforce, the human workforce, at the same level so they don't have to increase costs, but they have to be able to drive all of this growth in interactions with more software and automation.

So first, we know -- we feel like we've been very early into automation, which provides us a very good starting point in an early-stage market. But also, because we -- our history was very much focused on providing tools and optimization of the workforce, our legacy is in software applications that improve efficiency optimization and now automation. And it's very easy for us to add machine learning and artificial technology to make our solutions more powerful. In a nutshell, I think it's a growth driver, and we're investing in technology and we are launching almost every quarter new capabilities in this area of automation into the market.

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Gabriela Borges, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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That's helpful. And the follow-up I have is on the gross margin side as well, specifically, on your opportunities for gross margin expansion in the cloud business. Could you comment on the runway that you may have there to optimize your cost structure to support cloud, specifically as you're getting to greater scale in the cloud business?

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [10]

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Yes. We actually are very pleased with the gross margin expansion, which was in both areas, and you're correct to point out that in Customer Engagement, it's driven much by cloud as we created scale. We are currently around 70% gross margin overall for our Customer Engagement business, and we believe that with the cloud multitenant solution, we can achieve 80% and more than 80% margin. So as we shift more into this multitenant customer base, we do see an opportunity to continue to improve gross margin.

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Operator [11]

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And our next question comes from the line of Paul Coster from JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [12]

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First on Cyber Intelligence. Dan, can you give us some sense of where this business is coming from? Is it primarily emerging markets? And how firm a commitment is it -- is that region or those regions of the world from which the business is coming?

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [13]

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Yes. So it's very diversified, it's coming from about 100 countries. And it has been diversified for many years, as you know. We've stated in the past that because we are in so many countries, some of them are obviously referred to as emerging markets, and that we believe that about half of our business is from the developed countries and about half is from emerging countries, but it's across many different countries.

We -- the security challenges that our customers have are very similar in emerging and developed countries. We don't really see any difference in the requirements, so it's universal. And it's around the same things we discussed. It's the complexity of investigation and the need for being able to sort out massive amount of data that is available to them, but they need the tools to make sense of it. It's the shortage of the data scientists and the need for automation there, and it's the desire for predictive intelligence as a force multiplier. We see these trends very much across our entire customer base. And security continues to be a priority, and our pipeline is growing. So we see healthy demand. And regarding emerging markets, we currently see a strong pipeline. We do not see signs of weakness in demand from emerging markets.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [14]

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Do you think the nature of the application has changed such that you won't see a -- in the event that we see some kind of downturn in emerging markets in the next several years, do you think it's as sensitive to that cycle now as it was 2 years ago?

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [15]

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I think there's a lot of differences. The bottom line is that the priority for security has always been high, and it's really about the economic situation in a country. And in every year, we see some countries that go through some crisis, and they have budget difficulties and go to austerity. But there are other countries that find the budgets. But it always is a high priority. And as we discussed, even when we see some budget pressure, it's usually very short-lived, and within the next budget cycle, they are able to fund security because it's just a high priority for every government. But right now, I don't see any signs that we are facing an issue across emerging markets. There are a few countries that are facing issues, and there are many, many countries that you would consider as emerging markets that are actually spending money, and we're getting orders.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [16]

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Last question here. In terms of industry verticals, which verticals do you feel you are over-indexed to and under-indexed against? So for instance, you didn't mention any financial services deals in the CE segment this last -- this quarter. So perhaps, you can just address the verticals for a moment?

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [17]

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Yes. Financial services is a large -- largest vertical, actually. The next one is government. So we did not mention any multimillion dollar. There was a $1 million order, actually, we mentioned from a new customer that is a new customer to Verint, an investment bank. But we have a lot of ongoing business where they expand. And we have 90% of the Fortune 500 companies, and a lot of them are just expanding over time, not necessarily with big orders but just ongoing renewal and expansion.

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Operator [18]

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And our next question will be from Dan Bergstrom from RBC Capital Markets.

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Daniel Robert Bergstrom, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Staying on the hybrid strategy, just curious if you've seen any change in the customer preference for cloud over the first half of the year or any more demand for the cloud upmarket.

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [20]

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Yes. We do see some very clear -- I don't know if it's changes, but we see clear asks from customers. They basically are looking for having -- to have many cloud choices as they transition to the cloud. We call it hybrid cloud. But what we hear from customers that some vendors offer them very limited cloud choices, sometimes only just one cloud choice despite what they tell us is a clear preference for greater flexibility. So today, the Verint portfolio, the entire portfolio developed in the cloud and the way we design our cloud offering is to help customers modernize in -- with many different choices so they can modernize based on their needs and priorities.

So let me give you an example of what are the choices. With Verint, customers, for example, can choose to rent the software and also purchase the hosting from Verint in a multitenant fashion, but they can also choose to just rent the software from Verint but host it themselves. And there's a lot of different ways that they want to do it. One of the things that I mentioned before and we feel is very important to customers is feature parity between the on-prem and the cloud version because with some vendors, when customers moved from enterprise to cloud, they found different version with different functionality. And that makes it different -- difficult because they need to change their processes, they need to retrain their users.

Part of the flexibility that we feel is very important is that this will be transparent to business users. So with Verint, you can -- again, you can start on-prem. You can decide to just buy the software or rent the software, host with Verint, host yourself. The versions will be practically similar, and it will be transparent to the business user. It's more of an IT preference. And it's a preference that enterprises, again, want to move to the cloud in a different pace.

So I would say, bottom line, I think that the preference to go to the cloud is very clear, and Verint is -- we believe that the market will eventually move primarily to the cloud. But the pace and the model, the cloud model that customer choose will be different for different customers. And part of our competitive differentiation is to be very flexible and work with our customers.

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Daniel Robert Bergstrom, RBC Capital Markets, LLC, Research Division - Analyst [21]

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And then are there any additional details on the large cyber wins you called out? Are these -- are they renewals, new deals, contract lengths? Any additional color there would be helpful.

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [22]

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I would say that we highlighted 4 large deals. It's -- we work with customers for many years. And it typically is a project-based business. So when they buy the software, it's a renewal and expansion at the same time. So they usually will move to the next generation by expanding capabilities. And in one case, it's just a much larger volume of data that they collect. So they need tools that are able to deal with larger volume and also a new type of data and new analytics.

For government, generally, the challenge is that there's just too much information that they can access, but they don't have the manpower to go through it. So they need tools that help them to focus on insights that can really help the investigation. And time to result is very important. So they are expanding with more analytics and more automation to be able to make sense out of the data. And that's really, I would say, the biggest driver to expanding and renewing projects.

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Daniel Robert Bergstrom, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Great. Maybe one for Doug. Doug, you've been quiet here. It's good to have you back on the call. Just on the transition to 606, the reconciliations and explanations in the Q were helpful. Are there any high-level thoughts on how 606 is kind of impacting revenue? It seemed like in Customer Engagement, the change was benefiting product and were neutral to services, where on the cyber side, it was benefiting services and support and seemed like a headwind to product revenue. Any additional or high-level thoughts here would be helpful.

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Dan Bodner, Verint Systems Inc. - Chairman, CEO & President [24]

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Yes, before -- Doug, before I -- before Doug will answer the technical accounting of 606, I actually want to just say something about how I look at the new accounting standard. So it's a revenue standard that we adopted at the beginning of the year. But what's driving the business is, obviously, the underlying business strengths and not an accounting standard. So when we spoke earlier about big deals and new customer wins and competitive displacements, this all is a testament to our strength in new orders. And actually, the new orders in Q2 grew more than 11%. So we reported revenue under 606 of 11%, but order activity grew faster. And that's also true for Q1 where, overall, in the first half, we had order activity or new order activity growing more than revenue.

So the 606 standard is obviously -- it's a revenue recognition standard. And this whole shift in accounting standards is creating new ways to accounting, which we are reporting. But at the end of the day, I think it's quite immaterial, whether it was 605 and now 606. And actually, we believe that had we stayed under the 605 revenue guidelines, our results will be quite similar. But with that, I will turn it over to Doug maybe to explain and give some example.

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Douglas E. Robinson, Verint Systems Inc. - CFO [25]

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Yes. Hey, Dan. Thanks for the question. Yes, it's important to understand that when we compare our revenue growth under 606 to what it would have been under the prior 605 guidance, it can be a very misleading comparison. As we've discussed in the call, and you've seen the results, our business in Q1, the first half has been very strong, and we do believe we'd have similar results under 605. There are differences now in the way that we operate under 606 that leads to some of this kind of misleading comparison. And one example is in the professional services area.

Under 605, oftentimes, we needed to get customer sign-offs to be able to recognize the revenue for the work we'd done in the period. And under 606, we don't have to do that anymore. So therefore, when we look at the revenue that we would have had under 605, we can't count that revenue anywhere anymore. But there really wouldn't have been any difference, but there is from this kind of accounting the old way when we've operated differently. So that's what really most of it's about. And as we've said, we do expect our results would have been very similar had we stayed on 605.

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Operator [26]

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And that concludes our Q&A session. I'll now turn the call back to Alan Roden for any further remarks.

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Alan Roden, Verint Systems Inc. - SVP of Corporate Development & IR [27]

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Thanks, everyone, for participating in today's call. Have a great evening. We look forward to seeing you at investor meetings and our next call. Take care.

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Operator [28]

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