Verint Systems Inc.

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Verint Systems Inc.

330 S. Service Road
Melville, New York 11747
U.S.A.
Telephone: (631) 962-9600
Fax: (631) (62-9300
Web site: http://www.verint.com

Public Company
Incorporated: 1994 as Interactive Information Systems Corporation
Employees: 1,200
Sales: $249.8 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: VRNT
NAIC: 541512 Computer Systems Design Services

Melville, New York-based Verint Systems Inc. portrays itself as a provider of analytic software-based solutions for both law enforcement and the business community. In essence the company sells software that helps customers to collect, store, and sift through voice, video, fax, e-mail, Internet, and data transmissions for security purposes—to turn raw data into "actionable intelligence." Verint's Star-Gate product line is aimed at communications service providers such as wired and cellular telephone companies and Internet service providers, and is used to set up a communications intercept for law enforcement organizations and other government agencies as authorized. The Reliant and Vantage products are sold to law enforcement and government agencies, used to collect, store, and analyze intercepted communications. Verint's Network Video Solutions business segment is represented by the Nextiva platform and suite of software applications, which identifies unusual activity and then sends notification to security personnel for review. Finally Verint offers contact center business intelligence solutions through the Ultra product line, used by call centers to record and analyze customer interactions with call center employees, whether they be by phone, e-mail, online chat, or co-browsing sessions on the Internet. Verint maintains operations across the United States and Canada, as well as in Europe, Africa, the Middle East, Asia, and the Pacific Rim. Verint is a public company, listed on the NASDAQ.

Chairman Launching Business Career: 1980s

Verint grew out of Comverse Technology, a company founded by Verint's chairman, Kobi Alexander, in 1984. Born in Israel, he graduated with honors from the Hebrew University of Jerusalem, receiving a degree in economics. After serving in the Israeli military and intelligence services, he moved to New York to continue his education, earning an M.B.A. at night while working as a full-time investment banker at Shearson Lehman during the day. An aspiring entrepreneur, Alexander was quick to seize a chance to strike out on his own. In 1982 he met Israeli engineer Boaz Misholi, who had had an idea for a voice and fax messaging system that was far more advanced than anything available at the time. Alexander quit his job and moved back to Israel to take advantage of government subsidies for high-tech start-ups, and together with Misholi founded Efrat Future Technology Ltd. to develop the messaging system, aided in large measure by Alexander's brother-in-law, Yechiam Yemini, who became Efrat's chief scientist. When the product was just about ready for the market, the three men returned to New York in 1984 to set up a U.S. company, based in Woodbury, New York, called Comverse, which was coined to play off the words "communication" and "versatility."

Comverse became Efrat's parent and went public in 1986 with Misholi initially acting as chief executive. After he left in 1988, Alexander stepped in to lead the company. There was no doubt that Comverse offered an innovative product, perhaps the first to integrate voice, fax, and call processing into a single unit, but it also had to contend with such giant competitors as AT&T. As a result, Alexander focused on international markets, especially Europe, and enjoyed great success with the Trilogue product, which allowed cell phone callers who failed to reach a party to leave a message in a mailbox. Trilogue could also serve as virtual telephone service for individuals without phone service—especially people in undeveloped countries where the telecommunications infrastructure was rudimentary—they could rent an electronic mailbox and use a public telephone to retrieve messages.

Alexander was also eager to develop new niche products, encouraging employees to pursue ideas, which if they showed promise formed the basis of a new business unit. In the late 1980s Comverse began working on a product that would one day lead to the creation of Verint. It was called AudioDisk, a digital surveillance product intended to be used by police and intelligence agencies in the recording and storing of wiretap material. AudioDisk offered vast improvements over the old reel-to-reel tape recording systems. Not only could the product monitor hundreds of telephone and fax machine lines simultaneously, the information could be stored in "jukeboxes" and was available immediately. Moreover, instant search functions replaced the tedious chore of winding and rewinding tape to locate a key passage of an intercepted communication. Aside from law enforcement and intelligence agencies, AudioDisk also found customers in the private sector, as companies used the Ultra product, launched in April 1996, for internal uses, such as monitoring incoming calls and the activities of call center representatives.

AudioDisk: Early 1990s

Comverse began marketing AudioDisk in the early 1990s. Sales were strong and accounted for half of Comverse's revenues in 1993. Because of the discreet nature of the product, AudioDisk was not as well known as Trilogue, and in February 1994 that entire surveillance business was broken off and housed in a new subsidiary called Interactive Information Systems Corporation. Two years later, the company changed its name to Comverse Information Systems Corporation. In 1999 Comverse Technology reorganized its operations, which were now split into two divisions. Comverse Information Systems merged with Comverse InfoMedia Systems to create Comverse Infosys. In addition, some Efrat assets were also included in the new division.

Because Comverse Infosys did business with the U.S. Department of Defense, which used the intercept products in a classified manner, the unit had to be insulated from foreign ownership. As a result, control of the unit—other than the right to sell or liquidate the business—was placed in the hands of three U.S. citizens possessing the required security clearances, as specified in a proxy agreement sign with the Department of Defense in January 1999, superseded by another such agreement in 2001. Acting as the government's security committee, these three individuals oversaw Verint's efforts to prevent unauthorized disclosure or export of controlled information, and provided an annual report to the Department of Defense, which also conducted periodic inspections to make sure Verint was in compliance with the proxy agreement.

While Comverse Information Systems quietly sold its AudioDisk systems under the new Reliant (launched in August 1999) and Star-Gate (launched in May 2000) names, Comverse Technology's other division, Comverse Network Systems Inc., was thriving with its wireless voice messaging systems, spurred by the tremendous popularity of cell phones in the late 1990s. But with nearly three-quarters of its $1.2 billion in revenues coming from the sale of Mobile mailboxes, and the cell phone market reaching saturation, Comverse Technology was in danger of having too many eggs in one basket, voice mail. As a result, management began to aggressively pursue acquisitions in order to add promising technologies in the hopes of developing new products and achieving some diversity. In the process it also added assets to Comverse Infosys. Acquired in July 2000 was Loronix Information Systems, Inc., a company that developed software-based digital video recording, networking, and live Internet video streaming technology. From Loronix came a digital video monitoring system that was used by government agencies, such as the U.S. Department of the Treasury, as well as commercial customers including Mohegan Sun Casino and FedEx.

Comverse Technology completed several other acquisitions, prompting management in 2001 to reorganize the company again, this time splitting it into five divisions, one of which remained Comverse Infosys. In many respects Comverse Infosys did not fit in with the rest of the company, given that it sold to an entirely different market than the telecommunications companies that bought Comverse's voice and data messaging services. It was not surprising, therefore, that management would begin looking for a way to split off the security unit.

Demand in Wake of 9/11 Attacks

An opportunity arose following the terrorist attacks against the United States on September 11, 2001, when the need for all manner of security products increased dramatically. Although the demand for initial public offerings was weak due to a struggling economy and depressed stock market, Alexander felt the time was right to sell shares of Comverse Infosys in a "carveout" arrangement that would leave Comverse Technology with a majority stake in the company while unlocking shareholder value. Thus, in February 2002, Comverse Infosys was renamed Verint Systems, Inc. and prepared to be taken public. Media assets housed under Comverse Media Holding Inc. were sold back to the parent company, while at the same time Verint, through Lorinix, beefed up its video surveillance business with the acquisition of the digital video recording business of Lanex, LLC. Alexander assumed the chairmanship of Verint, while Dan Bodner served as president and CEO, positions he had held since Comverse Technology established Interactive Information Systems in 1994. An electrical engineer with degrees from the Technion, Israel Institute of Technology and Tel Aviv University, he joined Comverse in 1987.

Company Perspectives:

Today, over 1000 organizations in more than 50 countries deploy Verint's actionable intelligence solutions as an integral part of their security and business intelligence initiatives.

One drawback to the offering, however, was Verint's lack of profitability. Like many high-tech companies it spent a great deal of money on research and development and needed time for sales to catch up with investments. Although the unit was narrowing its losses, it still lost $4.6 million on $131.2 million in revenues in 2002, which ended on January 31 of that year. When the stock offering, led by Lehman Brothers Holdings Inc., was finally made in May 2002, investors focused on the financials rather than Verint's prospects, and as a result the company was only able to price its shares at the low end of the $16 to $18 a share range touted by the underwriters and the company. In addition, the shares quickly lost $1.51 on the first day of trading on the NASDAQ, making it the secondworst launch of a stock in 2002. After a week the stock lost about a third of its value.

Before the year was out, however, Verint changed some minds on Wall Street, as the increased demand for surveillance products in the fight against terrorism finally began to factor in Verint's favor. The company's stock regained lost ground and began creeping upward. Then, an industry newsletter in late December 2002 predicted higher demand for Verint's dataanalysis programs, leading to a bump of about 20 percent to well over $21. The company used some of its higher-price stock in a $10 million deal to purchase Montreal-based SmartSight Networks Inc. in May 2003, in keeping with a strategy to acquire companies possessing complementary technologies that would broaden Verint's product offerings. SmartSight produced Internet Protocol-based systems for wireless video transmission, the addition of which permitted the Verint digital video system to cover remote locations of large complexes, such as airports, oil refineries, ports, or military bases, as well as borders and critical infrastructure including power systems and pipelines. The Verint video surveillance system software would then track motion and identify unusual activity, prompting security personnel with an on-screen message or audible alarm.

When Verint made a secondary stock offering in June 2003, it was met with a far more enthusiastic response from investors. The company priced five million shares at $23 per share, raising more than $100 million for Verint and about $3.5 million for insiders whose 150,000 shares were part of the offering. After recording sales of $157.8 million and net income of $10.1 million in 2003, Verint saw revenues improve to $192.8 million and net income to $18 million in 2004. More strategic acquisitions followed in 2004. Verint bought the government surveillance business of ECtel Ltd., a subsidiary of Israeli company ECI Telecom. Like Verint, ECtel was involved in the monitoring of telephone calls, e-mail, and Internet usage. The addition of ECtel was helpful in moving Verint into new markets, expanding on its North American and European base of customers, which accounted for 85 percent of all sales, to gain a presence in the Middle East and South America. Later in 2004 Verint added to its technology by acquiring RPO Sicherheitssysteme GmbH, a German company that developed mobile video security products used in mass-transit systems, which were likely to receive greater attention given terrorist mass transit bombings in Spain and London.

Sales continued to build, approaching $250 million in 2005, while net income improved to $19 million. Given the state of the world and the need for advanced security systems, there was every reason to believe that Verint was well positioned to enjoy sustained growth for the foreseeable future.

Principal Subsidiaries

Verint Technology Inc.; Lorinx Information Systems, Inc.

Principal Competitors

ADC Telecommunications, Inc.; ECtel Ltd.; NICE Systems Inc.

Key Dates:

1984:: Comverse Technology is founded.
1990:: Comverse begins selling AudioDisk wiretapping product.
1994:: Subsidiary Interactive Information Systems is created for AudioDisk product.
1996:: Interactive Information Systems is renamed Com-verse Information Systems Corporation.
1999:: Comverse Information Systems is renamed Com-verse Infosys, Inc.
2002:: Comverse Infosys is taken public as Verint Systems, Inc.