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Good day, ladies and gentlemen, and thank you for your patience. You've joined Verint's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference maybe recorded.
I would now like to turn the call over to your host, Senior Vice President of Corporate Development, Mr. Alan Roden. Sir, you may begin.
Thank you, Operator. Good afternoon and thank you for joining our conference call today. I am here with Dan Bodner, Verint's CEO and Doug Robinson, Verint's CFO. Prior to this 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 Web site at verint.com, and also on the SEC Web site.
Prior turning the call, I'd like draw your attention to 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 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 from periods and among 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 Web site at Verint.com 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 provides meaningful supplemental information regarding 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 to Dan. Dan.
Thank you, Alan. Good afternoon, everyone and thank you for joining us to review our first quarter results. The momentum we experienced throughout last year continued in Q1, and we are pleased to have started the year strong. In the first quarter, on a GAAP basis, we delivered $289 million of revenue and a net loss per share of $0.03.
On a non-GAAP basis, we delivered $292 million of revenue and diluted net income per share of $0.53. Revenue increased about 10% year-over-year on both GAAP non-GAAP basis with strong year-over-year growth in both customer engagement and cyber intelligence. Our first quarter results reflect a successful execution of our growth strategy and our strong competitive position in both of our segments. We believe our strong Q1 lays a solid foundation for another successful year of revenue growth, expanding margins and double-digit earnings growth.
Now, I would like to review our first quarter results by segment. Starting with customer engagement, we're pleased with our first quarter results with non-GAAP revenue increasing 8% year-over-year to $189 million. Our strong quarter follows 11% year-over-year revenue growth in the prior quarter, continuing our positive momentum. Following the completion of our first quarter, we hosted our annual Engage Customer Conference with approximately 1,400 attendees where we discussed our strategy to simplify, modernize and automate customer engagement.
We demonstrated many of the new solutions we recently added to our growing portfolio and the feedback from our customers on our strategy and latest solutions was very positive. During the conference, we had many conversations with customers and partners, and these discussions reinforce three trends that could potentially accelerate our growth over time.
The first trend is that customer engagement has become an enterprise wide initiative, and organizations are looking to help vendors that can help them connect the dots across the enterprise, including contact center, back office and branch operations, self-service, marketing and compliance function. With the industry's broadest portfolio of enterprise solutions and with an open API approach and communication infrastructure and neutrality, we believe Verint is well positioned to help organizations simplify customer engagement across the enterprise.
A good example of how we are addressing this trend is an order we recently received from a leading financial services company. This $4 million order for multiple components of our portfolio address the customer's initiative to improve its contact center branch back-office and self-service operation.
We believe our strategy to simplify operations across the enterprise, including our ability to address both assisted service and self-service were the strong differentiator for Verint in winning this order. The second trend is that organizations are looking to modernize and to migrate to the cloud, while preserving their prior investments. They are seeking vendors that can help them evolve efficiently with a hybrid approach.
We are helping organizations modernize operations at their own pace with flexible public, private and hybrid cloud options. A good example of our cloud strategy is $3 million order we received recently from a new financial services customer for our cloud self-service solution with a three year subscription. We believe our ability to help organizations modernize with a combination of on premises and cloud deployment model is also a strong differentiator.
The third trend is that organizations are looking for automation to help elevate the customer experience, while at the same time reducing costs. Organizations are seeking solutions that can help them automate manual tasks and empower their customers with self-serving capabilities. Verint strategy is to infuse automation throughout our portfolio to help organizations reduce cost and elevate customer experience. A good automation example is an order we recently received from a leading healthcare company. This $5 million order is for multiple components of our portfolio, including our depth of guidance, analytics and automation solution, designed to help automate many tasks that were historically performed manually.
Our ability to successfully address these market trends is driving expansion with existing customers and wins with new customers. During the quarter, we continue to displace other vendors and win new customers based on the breadth and openness of our portfolio, as well as our cloud and automation capabilities. Overall, we are pleased with our first quarter results, and believe we are well-positioned for another year of growth.
Turning to cyber intelligence. Q1 revenue increased 13% year-over-year to $103 million. Our strong first quarter follows 11% growth we delivered last year, and reflects ongoing demands for security and intelligence data mining software. During Q1, we continue to win many deals around the world, including five large deals each worth between $5 million and $15 million. 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 evolving challenges. As we have discussed on prior calls, we currently see three market trends that could potentially accelerate our growth over time.
First, security threats are becoming more complex. As a result, security and 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 to identify suspicious behaviors and to predict future events. Verint is uniquely positioned to address these trends as our security and intelligence data mining software is already deployed in over 100 countries and our customer relationship provide us deep insights into the current and future challenges.
Our solutions are based on over two decades of cyber intelligence experience, combining data mining software, deep domain expertise and advanced intelligence methodologies, positioning Verint at the forefront of the market for security and intelligence data mining software. In addition to focusing on revenue growth, as discussed on prior calls, we’re evolving our business to a more for software model, providing our customers the additional option to source the hardware needed to run our solutions themselves, or through a third party. We believe these initiatives will give our customers more flexibility, while driving higher gross margins and operating margins overtime, more in line with the software model.
Overall, we believe demand for our innovative cyber intelligent solutions is strong. And as a market leader, we are well position for sustained growth. Before turning to guidance, I would like to summarize our overall strategy as follows. We see growth opportunities in both segments, and believe the best way to create shareholder value is to execute on specific growth plans for each segment. The customer engagements, our plan of focused on improving growth rates driven by our expanding portfolio and strong competitive position.
We also expect margin expansion through the shift to public cloud deployments, and by efficiencies of scale. In cyber intelligence, our plan is focused on sustaining double-digit revenue growth, driven by data mining software innovation, while at the same time, evolving to a software business model with higher margin. Following the strong Q1, we have greater confidence in our focus, and expect another year of revenue growth and margin expansion, driving 10% earnings growth for the year.
And now, let me turn the call over to Doug to further discuss our financial results and guidance. Doug?
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 in the IR section of our Web site. 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 in frequency.
I'll start my discussion today with the areas of revenue, gross margin and operating margin. In the first quarter, we generated $292 million of non-GAAP revenue. Non-GAAP segment revenues were $189 million in customer engagement and $103 million in cyber intelligence. This compares to $266 million of non-GAAP revenue in the first quarter of the prior year with $175 million in customer engagement, and $91 million in cyber intelligence. In terms of geography, in Q1, we generated non-GAAP revenue of $148 million in Americas, $82 million in EMEA and $62 million in APAC. This compares to $148 million in Americas, $81 million in EMEA and $37 million in APAC in the first quarter of the prior year.
Turning to gross margins, our Q1 non-GAAP gross margins were approximately 64%, up from 62.8% in Q1 last year. As we’ve discussed in the past due to product, services and revenue mix within our across segments, overall gross margins can fluctuate significantly from period-to-period. Turning to operating income, during the quarter, we generated non-GAAP operating income of $46.1 million with an operating margin of 15.8%. Our adjusted EBITDA for the quarter came in at $54.3 million or 18.6% of non-GAAP revenue.
Now, let's turn to other income and interest expense. In the first quarter, non-GAAP other expense net totaled $6.3 million, reflecting $5.4 million of interest and other expense, and $900,000 of foreign exchange charges, primarily related to balance sheet translations. Our non-GAAP tax rate was 10.7% for the first quarter. As we 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. These results drove diluted non-GAAP EPS of $0.53 for the quarter.
Now turning to the balance sheet, at the end of Q1, we had $450 million of cash and short term investments, including short-term and long-term restricted cash. Cash flow from operations on a GAAP basis in Q1 came in strong at $60 million. We ended the quarter with net debt of $372 million, including long-term restricted cash, and excluding discounts and issuance costs, primarily associated with our convertible debt.
In Q1, we adapted the new revenue recognition guidance, known as Topic 606, on a modified retrospective basis. This means that results for the reporting periods, beginning on February 1, 2018, are presented under the new revenue recognition standard, while prior period amounts before February 1, 2018 have not been adjusted. With the 606 implementation, you may notice some changes to our balance sheet. We now have contract liabilities instead of deferred revenue, a change in terminology. And we have differences in our accounts receivable amounts and other balance sheet presentation changes.
As we started the fiscal year, we made certain changes in our business practices to anticipate and take advantage of the operational flexibility afforded under the new revenue recognition standard. The new standard change to have the components of a bundled solution are recognized, which enables us to provide more flexibility on pricing and terms to better meet the needs of our customers. These business practices were already reflected in the guidance we had provided for the year.
Before moving on to Q&A, I'd like to review our guidance 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 continue to expect revenue of $1.23 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 $5.5 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. As mentioned in our last earnings call, with respect to the new tax reform act, given our large amounts of U.S. NOLs, we do not expect much of a change to our cash taxes going forward.
Based on these assumptions and assuming approximately $65.9 million average diluted shares outstanding for the year, we are expecting non- GAAP diluted EPS in the midpoint of our revenue guidance to be approximately $3.09, representing 10% year-over-year earnings growth. In addition to our annual guidance, we’d like to provide you with some color on the expected progression of the year for modeling purposes.
After a strong first quarter, we expect Q2 to have a several million dollar increase in revenue and a few cents increase in EPS. In Q3, we expect a similar sequential increase in revenue and EPS. And as in prior years, we expect to finish the year with our typically strong Q4. In conclusion, we are pleased with our strong first quarter and believe we are well-positioned for sustained long-term growth in both of our segments.
This concludes my prepared remarks. With that, operator, can we open up the lines for questions?
Operator, before we take questions -- this is Alan Roden again. I just want to mention to everyone that the remarks you just heard were pre-recorded since Dan -- Doug was traveling today. And we expected Doug to be available to Q&A, because he’s plane got delayed. So Doug will not be participating in Q&A today. Obviously, if you got any follow up questions, we’ll available later evening or tomorrow morning, and I will be available as well. So with that operator, we’ll take questions.
[Operator Instructions] Our first question comes from the line of Shaul Eyal of Oppenheimer. Your line is open.
Dan, I think I believe the message of ongoing stability year and to an extent reacceleration is unequivocally loud and clear. I wanted to try and dice slightly more into the reason behind this ongoing improved result. Can you share with us what's driving this momentum over the course of the past few quarters? And then I have a follow-up.
We have good momentum with a strong Q1 following a strong Q4, and our strategy is highly focused on addressing the recent market trends that I discussed. And we have teams that are executing well on the plan. So just to recap in customer engagement, our strategy is to help customers to simplifying, modernize and automate customer engagement, and this resonates well with customers. As I discussed before, we recently had user conference, and we do have the product, the brand recognition and the team to execute on this strategy.
So we are pleased to achieve 8% growth in Q1, and we have many competitive displacements in the quarter. In cyber intelligence, our strategy is to deliver innovative data mining software to help make the world a safer place. Customers are, in this area, very demanding for innovation and they are -- they do appreciate the unique capabilities of Verint. The combination we offer of innovative technology and domain expertise make us very competitive in winning large projects, both with existing and with new customers. And historically, we achieved double-digit growth for many years, very pleased to achieve 13% growth in Q1. This is summary of what's behind our momentum.
And my follow-up, I know Doug is not around, so maybe just from a color perspective. So you've also mentioned this ongoing shift to a software model. How do you think about the longer term direction of Verint's recurring revenue or could that be say in two to three year time?
So to recap on the software model, in our customer engagement business, we have a software model basically with healthy margins. We’re expecting this year 25% operating income, which translates to about 28% EBITDA. So these are healthy margin and represents margin expansion from last year. Now there is further margin expansion in the segment in customer engagement that is driven by the mix shift to public cloud. As we indicated in the public cloud, we have higher gross margins of about 80% and the market is clearly shifting to more and more SaaS. And we also have further margin expansion opportunity from efficiencies of scale.
Turning to our cyber intelligence segment, our margins there right now are not consistent with the software model. We have 12% operating income expected this year, which translates to about 15% EBITDA. And this is also representing margin improvement from last year. But of course as we discussed many times before, there is about 10% of our revenue in this segment come from hardware reselling. And we see the opportunity overtime for customers to source the hardware themselves or through third-party.
So there is margin expansion opportunity over the next few years as our customers shift to more software model and also obviously as we scale the cyber intelligence business will get also efficiencies from scale.
Thank you. Our next question comes from the line of Gabriela Borges of Goldman Sachs.
Congrats on the quarter. Dan, I was hoping if you can give us an update on your M&A strategy. And to that extent we can explicitly comment on the Wall Street Journal Article on a potential acquisition that was published last week that would be very helpful? Thank you.
So we do not comment on rumors. And of course there is nothing to announce in this regard, but I would be happy to talk to you about our M&A strategy. So let me start with cyber intelligence, and then I'll make some comments also on customer engagements. So we believe there is demand for data mining software. It's strong demand. And as we discussed earlier, there are three market trends to drive growth opportunity. There is a complexity of investigation of threat, the shortage of data scientist and the demand for predictive intelligence.
So in addition to organic growth, we see the cyber intelligence market is very fragmented. And there are many opportunities for inorganic growth. Now, historically, in this area, we were not highly acquisitive, but we always look for good opportunities to build scale, to improve margin, and of course at a reasonable valuation. So this is also the same guidelines we have for customer engagement business. We're also looking in the same way for good M&A opportunities in customer engagements.
And relative to our long-term strategy, we believe that the best way to create shareholder value is to continue to focus on top line growth and margin expansion, and we can augment that with M&A opportunities as they come along.
One follow up to that, how do you think about the maximum amount of leverage that you would feel comfortable raising in an M&A? In other words, what you think is the appropriate capital structure in the company?
So our leverage right now is less than 2 times EBITDA, which we feel very comfortable with. We could potentially lever up higher temporarily, we've done it before within acquisition, and levered down pretty quickly as we increased the scale of the business. So obviously, we are very focused on growing our business, happy to generate cash. Our cash flow for operation in Q1 was $60 million, and we believe that we can use the cash to create more shareholder value with accretive acquisitions. If we have an opportunity that we need to lever up temporarily, we're willing to do that.
I'll ask one question on the fundamentals, if I could, and nice to see the high incremental margin on the outperformance on the revenue side. To the extent you're able to outperform on revenue in subsequent quarters this year. How should we be thinking about the incremental margin on the outperformance? Should we expect to see a similar amount of [adoption] [ph] to bottom line? Thanks.
So, yes, in terms of guidance for the year, we are expecting margin expansion, and we're driving the margin expansion as I discussed before, through the clouds transition to SaaS in customer engagement, and the evolution to software model in cyber intelligence. So these drivers for margin expansion are not dependent on growth, on revenue growth. And as we accelerate revenue growth over time, we expect also to continue to drive margin expansion.
Thank you. Our next question comes from the line of Dan Bergstrom of RBC Capital Markets. Your question please.
So in customer engagement on the call today and at the Analyst Day, you were talking a lot about the strategy to help organizations simplify, modernize and automate. You've done a good job outlining those. Just curious out of those three, is there one that's resonating more with the customers currently or driving more action than the others, or if you had to rank order the impact on your business here, what would the order be?
I think that customers really appreciate our approach to modernizing their investments, the fact that we offer them hybrid cloud options. And I can say that in Q1 almost in every situation, we're quoting to our customers the option to deliver in the cloud. They end up choosing cloud or on-prem based on their business priorities, which vary from customer-to-customer. But the feedback that we’re getting is very strong with customers really appreciates the flexibility, as they know that even if they chose on-prem for now, they could easily upgrade with Verint to the cloud at a later time. So I think that's a very strong differentiator. And we’re in very strong position with cloud.
In terms of automation, there is a lot interest right now in the markets with automation. One thing is that if you were in our Engage Conference, you heard it from customers repeatedly is they say that with Verint they get great ROI. This is not just investment in technology, this creates return on investment quickly. And that’s something we’re proud of. We generate solutions that help customers to both elevate the customer experience, which is obviously very important for the brand strength, but also the same time reduce operating costs.
And we bring that through both the simplifying of the customer engagement operations, as well as automating the customer engagement operations. So both are, I would say, equally important in terms of driving more ROI, and we’ll continue to demonstrate that that our solutions are working and helping customers to deal with increased costs that comes with complexity and customer engagement. There are more channels, more customer options, and customers are struggling to achieve both at the same time help the customers get the service they expect, but also keep their costs under control and that's where we focus.
And then maybe some thoughts around the geographies. America is flattish year-over-year, but it always seems to be flattish in the first quarter. And then APAC was up quite markedly year-over-year, and it was even up from the fourth quarter level. So maybe just any additional color on geographies in Japan specifically?
We think that there is strong demand globally right now. We’ll see fluctuation from quarter-to-quarter but we look at pipeline, we don't see any trends. We believe that our customers around the world that are investing in Actionable Intelligence, lot of customers are looking for analytics automation as driver of the cloud, is a little bit of stronger driver in the U.S. but it’s catching up also and in Europe and APAC. So at this point, we generally predict similar growth in different regions, and we're investing accordingly.
Thank you. Our next question comes from William Fitzsimmons of MorningStar. Your line is now open.
Dan, you talked a little about the tailwinds in cyber intelligence, some of those margin expansion opportunities, and then the shift towards customers beginning to source their own hardware. I know in the past some of the margin compression and weakness in that segment has been attributed to weak oil prices, I think some of the discretionary spending of government clients in certain markets. I know it's been talked about how clients had to dial back some of that spending or up sell opportunities were limited in the past. Today we’re seeing prices rise as we have this year. How can think of the long-term sales growth for that segment? Or I guess have you seen this shift as you’ve got in front of some of your clients where discretionary spending increases are allowing your marketing team to have certain conversations that they might not have had two years ago? Thank you.
I think the current environment is representing strong opportunity. If we look at the last decade, we have growth in this segment every year except one year. And when we had a decline in that year, we predicted it to be very short and temporary. And the reason is that there is ongoing demand for security. Security challenges are growing and growing in complexity. So customers need to modernize and use new data mining capabilities in order to uncover the intelligence, and drive the security that they need, we sell in 100 countries so we are like spread across many geographies.
And at this point, we think that what's driving the demand is those three trends that I discussed before; it's a complexity of threat; it's the shortage of data scientist; and it's the need for predictive intelligence as a fourth multiplier. And that's what we’re focused, we focused on delivering innovative solutions to address those requirements by customers. And I think that's what driving the improved growth rate of 13%. Again, we had double-digit growth in this market for many years, and we believe that we can continue to sustain double-digit growth. And with all the other margin improvements initiative that I discussed, as we grow the business, the margin expansion will come overtime.
Thank you [Operator Instructions]. Our next question comes from the line of Jeff Kessler of Imperial Capital. Your line is open.
Dan, could you explain a little bit about the strategy in cyber team to get third parties or the channel to take on more responsibility in dealing with the hardware. How are they taking it? In other words, you've given them essentially an assignment effectively, and they have to deal with the end user. How are they talking to and how are they going about doing it? Is this something that’s going to be a process of learning to match with your knowledge basis against their knowledge base, so that when you do put in the entire solutions, it will close in sync?
Yes, so you’re right. Part of the evolution in the market has to do with customers, and part has to do with partners. And we are helping partners by making it easier and investing in a product to be more productized and open and allow customers to easily -- customers or partners to easily bring the hardware and software together through a working solution. As I said many times on prior calls, we are data mining software company. The only reason we sell -- we resell hardware is because in some contract our customers prefer that we source the hardware, we integrate the hardware and the software and will become a system integrator.
And the goal here is to shift that business into the system integrator or as customers do it themselves, and we are making it easier and simpler for customers to chose this option. We’re continuing to offer our customers this as an option, and we expect them to over time to choose do it themselves.
As a follow up to that, you have mentioned on past calls a growing business in fraud. I am wondering if you could talk about what areas in cyber. Are your customers asking you do much more of than you have been doing in the past, effectively, you’ve talked about areas that -- you've talked about the three main areas that are driving you, but what about the demands in the part of the clients. What are you being has to do more of that you hadn’t been asked before last year to make these get more -- this more consistent growth in your pipeline?
So one thing that is common to most of the customers is their desire to have more automated solutions. There is a shortage in data scientist, cyber analysts. And whether they are investigating frauds, investing crimes, investigating terror or cyber security breaches, that trend is consistent. Customers feel like there’s lot of data, they can gather data from a lot of different sources. But putting it all together and applying analytics and at the end of the day, they need a data scientist to make sense of it and come up with insights that are actionable.
So one area, which is in common to all these type of security challenges, is how do they automate, how do they create more insights automatically, how do they actually be able to even take bigger amount of data but still not create a chaos but create insights that are actionable again, whether it’s a fraud investigation or a terror investigation.
Thank you. And at this time, I’d like to turn the call over for closing remarks.
Thank you, Operator. Thank you, everyone for joining us tonight. As I mentioned, if anyone has any follow up calls, please do reach out to myself or Doug Robinson after the call. Have a great evening. Take care.
Thank you sir and thank you, ladies and gentlemen. This does conclude today’s conference. You may disconnect at this time. Have a wonderful day.