Q2 2021 Verint Systems Inc Earnings Call
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It is now my pleasure to introduce senior VP corporate development Alan Roden.
Thank you operator, good afternoon, and thank you for during our conference call today.
I'm here again, bodner variants, CEO and Doug Robinson Barents Sea of though.
Before getting started like dimension that company our call today is a webex the slides, we'd like to beauty slide in real time during the call. Please visit the IR section on our website and Darren Dot com.
Click on the Investor Relations tab.
Second the webcast link and slept today's conference call.
No I like to draw your attention. The fact that certain matters discussed on this call may contain forward looking statements within the meeting of the private Securities Litigation Reform Act of 995, and other divisions of the federal Securities laws.
These forward looking statements are based on management's current expectations are not guarantees of future performance.
Actual results could differ materially from those expressed in or implied by these forward looking statements.
But looking statements were made as of today this call and except as required by law burn 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 and how these and other risks and uncertainties could cause barron's actual results to differ materially from those indicated these forward looking statements. Please see our form 10-K for the fiscal year ended January 30, Onest 2020, and other filings we make the FCC.
The financial measures discussed today include non-GAAP measures as you believe investors focus on those measures and comparing results between periods and among our peer companies.
Please see today's webex slides are earning release and the Investor Relations section of our web site at Baron Dotcom 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 was included because management believes that provides meaningful supplemental information regarding our operating results when assessing our business and useful to investors for informational and comparative purposes.
The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies.
Now I'd like to turn the call over to Dan Dan.
Thank you Alan.
I'm pleased to report strong second quarter.
The sequential revenue growth coming in better than expected.
Cash from operations were also strong in Q2.
And for the first six months increased nearly 40% year over year.
Looking ahead.
Our view of the year has improved.
And we believe the Q2 cloud momentum will continue in the second homes a year.
The sequential non-GAAP revenue growth.
In both Q3 and Q4.
Also.
I'm pleased to report.
Should we expect to make an initial confidential submission to the FCC.
Later this month.
And on track to complete the separation.
Shortly after fiscal year and.
Turning to customer engagement.
Thank you two.
We experienced significant cloud momentum.
Driven by demand on the link workforce productivity and compliance solutions in the cloud.
We delivered strong performance across cloud revenue and bookings metric as follows.
Cloud revenue excluding foresee.
28% year over year on a non-GAAP basis.
You saw us ACB bookings increased 65% year over year.
And also accelerated sequentially.
You too.
80% of our non-GAAP softer revenue.
<unk> for recurring sources.
Perky, 74% in the same quarter in the prior year.
As previously discussed.
We believe that transition to the cloud will be substantially complete.
When 85% of our software revenue.
Recurring sources.
We're pleased with our progress.
And are targeting completion of our cloud transition within two years.
Which Doug will discuss in more detail later.
Finally, I'm pleased to report.
Despite the called to keep up on our on premise is deal.
New perpetual licenses to people in booking.
Quick 3% year over year in Q2, driven by club.
Based on what we see no.
We believe on premises deals will come back gradually.
Remainder of the year.
Combined we sustain cloud momentum.
Hi Tech new perpetual licenses equivalent booking.
Probably the second half of the year.
And grow mid to high single digit.
During Q2.
We continue to win new cloud customers and displayed competitors.
Each of our strong differentiation artificial intelligence and automation.
And our communication infrastructure neutrality.
We won many seven figure deals across the financial services government technology and healthcare industry.
And here a few examples.
A 7 million dark cloud order for new global technology customer.
That made very its cloud platform of choice.
Placing several points solutions providers.
We want this large deal.
Because of our best of breed cloud platform.
Scale to support the growing contact center and back office operations.
The $3 million club order.
Well, I mean longstanding varying banking customer.
It is adopting a cloud platform.
Benefits for foster innovation and lower total cost of ownership.
And the tumor in adult club order from a leading food delivery company.
Support their rapid growth.
This customer chose variance.
Due to our differentiated workforce management functionality.
And the open cloud platform that makes it easy to integrate and scale.
In addition to the large cloud orders.
I'm pleased to report that in Q2.
We received an initial multimillion dollar order.
For the social Security administration.
Totaling appeal process, we discussed in prior quarters.
We are not delivering on this initial older.
And we expect varying to receive additional orders for the social security administration.
As the project advances overtime.
I would like you take a few minutes.
We provide a corporate update.
And discuss the trends, we're currently seeing into customer engagement market.
In Q2, we so certain customers moving forward with on premises deployment.
That were previously slow down due to coffee.
In the second half the year, we expect on premises deal to continue to pick up gradually.
We believe that certain trends that were already underway.
Prior to calibrate what.
I would accelerate as a result or different Debbie.
The first one is cloud adoption.
In that regard.
Looking at our product line.
We see a noticeable shift towards cloud.
Since the beginning of the year.
The second trends, if the adoption of AI and automation.
The drive efficiencies and to deliver superior customer experience.
Since our last call.
We launched several new AI based application.
Including real time agent to see.
This new AI based tool provides the workforce.
With real time guidance during cold.
To help improve their productivity and show compliance.
And drive better customer experience.
If you will time capability is of particular importance green coffee.
Where employees working from home neat tool.
To guide them through the changing environment.
The third trend.
These increases role of partners in our industry.
Our partner agnostic strategy.
And open cloud platform.
Make variants and unique strategic partner.
We are investing in expanding our strong partner network.
Across the college event doors reseller and system integrators.
And believe this strategy will deliver incremental cloud growth overtime.
Overall.
We believe we are uniquely positioned to address these trends with the cloud platform.
Hey, I automation fast innovation.
And then extending partner network.
In summary.
We're on track with our cloud strategy.
And expects to complete the cloud transition within two years.
As part of our strategy, we will continue to expand a partner program.
Drive incremental growth.
We expect sequential increase in non-GAAP revenue in Q3 in Q4.
As a cloud momentum continues on premise is deal gradually return.
We also expect.
New perpetual license equivalent booking.
To improve and growing the second half.
Me too high single digits year over year.
Turning to our cyber business.
And then analytical security software.
Generate actionable intelligence.
So many governments and enterprise customers around the world.
In Q2.
We received multiple large orders.
Including two orders for approximately $15 billion each.
One order for approximately $10 million.
And for orders for approximately 4 million dog eats.
Customers come to varying.
Our mission critical security software.
Well help prevent terrell crime in cyber threats.
And to accelerate investigations.
In Q2, we continue to experience demand.
Well analytical security software.
And we're working closely with our customers around the world.
Navigate the current environment.
Minimize the impact.
Travel restrictions.
Behind these large orders is a broad portfolio of analytical security software.
Our investigative analytics and power national security agencies around the world.
Supply data science.
To find the needles into haystack.
Celebrating complex investigations.
Oh operational intelligence and analytics.
And powered these agencies, we need real time actionable insights.
A critical factor for field operations.
We achieved successful missions.
And our threat intelligence and analytics.
And power government and enterprise security customers.
Actionable intelligence to detect respond and mitigate physical and cyber security threats.
We continue to win large deals every quarter.
Due to our innovation in big data fusion.
Hey, I in analytics engines.
Data visualization and data governance.
And we continue to invest in an open platform.
The drive Downs professional services.
And to allow customers and third parties to manage and enhance the solution.
On their own.
Over the last few years.
Trip ambition from a system integrator tomorrow.
In which we performed integration professional services.
It was softer model.
In which we sell open software solution.
We believe our software model is resonating well with customers.
Because they benefit.
Process also refresh cycle quickly a threat security threats.
It also provides very competitive advantage.
In Q2, a softer model continues to drive gross margin expansion.
Of approximately 500 bps year over year.
I'm pleased to report to 71% non-GAAP gross margin.
On an estimated fully allocated basis.
Consistent with the trends of ongoing margin expansion.
Over the last few years.
In summary.
We continue to see demand for our solution a threat are becoming more complex.
And government and enterprise organizations.
So team to six new analytical security software.
Looking forward, we expect the gradual lifting of travel restrictions.
To drive sequential non-GAAP revenue growth in Q3.
And in Q4.
And overall, we believe our cyber business is a category leader.
And well positioned to be successful independent software company.
We continue we continue to make good progress, creating two strong independent public companies.
And I would like to share some key milestones.
We expect to make our initial confidential submission to Debbie to the FTC later this month.
During the Q3 conference call.
We will provide additional details on the separation.
In January.
Well, then to conduct Israel roadshow for analysts and investors.
And finally, as we discussed we expect to complete the separation.
Totally after fiscal year ends.
Now, let me turn the call over to Doug discussed our financial results in more detail.
Doug.
Thanks, Dan Good afternoon, everyone.
Our discussion today will include non-GAAP financial measures a reconciliation between GAAP and non-GAAP financial measures is available as Alan mentioned in our earnings release and in the IR section of our website.
Differences between 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.
Operation related expenses.
As well as certain other items that can vary significantly in amount frequency.
For certain metrics. It also includes adjustments related to foreign exchange rates.
As Dan mentioned earlier, the combination of strong sequential revenue growth combined with coated related expense controls.
Resulted in strong year over year growth in non-GAAP diluted EPS and a nearly 40% increase in cash from operations in the first half.
We're pleased with our Q2 performance and believe we are well positioned for a successful second half of the year.
Today I'll review results for each of our two segments.
Provided an outlook for the rest of the year.
And provide an update tenor separation plan.
This is our customer engagement dashboard that can be found on our IR website.
It shows the key metrics for our customer engagement business, which we believe are helpful to understand the performance of our business.
Let me highlight some key customer engagement metrics for Q2.
As discussed earlier, we had a solid cloud quarter.
New SAS HCV was up 65% year over year.
Non-GAAP cloud revenue, excluding foresee was up 28% year over year.
The strong cloud growth, partially offset by the covert impact perpetual licenses resulted in a 3% increase in perpetual license equivalent bookings.
Looking forward, we expect continued cloud momentum.
It's on premises deals to gradually come back driving mid to high single digit growth in perpetual license equivalent bookings in the second half.
Overall revenue increase sequentially from Q1, however, due to closing was down year over year.
Looking forward given our strong momentum, we expect sequential non-GAAP revenue growth in both Q3 in Q4.
We're pleased with the continued growth of our recurring revenue in Q2.
We believe recurring revenue provide stability and predictability toward business and is it useful metric to measure where we are in our cloud transition.
I'd now like to discuss our recurring revenue expectations going forward.
In Q2, non-GAAP recurring revenue as a percentage of software revenue reached 80% of 600 bips year over year.
Given the strong momentum of our cloud business, we expect 85% of our software revenue to be recurring within two years.
We believe 85% signify the substantial completion of our cloud transition as we expect a small number of very large customers to continue to purchase perpetual software as they've done in the past.
In Q2, non-GAAP estimated fully allocated operating margin for customer engagement came in around 31%.
Reflecting the improving business conditions with respect to our revenue and the cost controls we began to put in place at the end of Q1.
Overall, we're pleased with their cloud momentum in Q2, and expect continued kinda momentum in the second half of the year.
Now I'll provide a few comments on our cyber intelligence segment.
This is our cyber intelligence dashboard that can be found on our IR website.
It includes key metrics. We believe are helpful to understand the performance of the business. Let me highlight some key cyber intelligence metrics for Q2.
In Q2 as Dan mentioned, we received many large multimillion dollar deals which will be converted to revenue over time.
Well on premises deals and revenue were impacted from coated gross profit was particularly strong as we continue to execute on or software model transition.
Non cap estimated fully allocated gross margins came in at 71% and approximate 500 bips increase year over year.
Non-GAAP non-GAAP estimated to fully allocated operating margins came in at 20% up 600 bits year over year.
Overall demand for our cyber solutions continues and we expect sequential non cap revenue growth in Q3 in Q4.
Now turning to our balance sheet.
We have nearly 850 million of cash and short term investments.
Net debt 131 million and leverage ratio of less than one times net debt to adjusted EBITDA.
Our cash flow from operations on a GAAP basis was strong in Q2.
Coming in at 61 million and was 137 million for the first half up 39% year over year.
Overall, we have a strong balance sheet to support the separation of virent into two public companies.
During the quarter, we made good progress preparing for the separation as Dan mentioned earlier, we expect to make or initial confidential submission with the FCC. Later this month and are on track to complete the separation shortly after fiscal year end.
Before taking questions I'd like to summarize.
We are pleased with our Q2 results in our view of the year has improved and we now expect non-GAAP revenue to increase sequentially in both Q3 in Q4.
Typical of past years, we expect to small sequential revenue increase in Q3 into finished the year with her normal seasonally strong Q4.
With the market conditions, improving in Q3, we tend to return to Opex level similar to last year's Q3 to support our long term growth plans.
We expect adjusted EBITDA for the full year to be flat year over year to spike of it impacting our top line this year.
Overall, we're pleased to their performance during covis, including strong execution of our cloud strategy in customer engagement and our software model strategy and cyber intelligence.
We're also pleased their progress on the separation and look forward to creating two strong independent public company shortly after fiscal year end.
That concludes my prepared remarks, operator can we now open up the call for questions.
Certainly as reminder, ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question first the penalty.
Well no first question comes from the line of Shaw with.
With Oppenheimer.
Thank you good afternoon kind of minimum congrats on the quarterly performance very solid.
So I want to start Dan with cloud business really showing strong quarterly performance saw strong momenta too.
What do you think going forward and that could lead to typically the cloud business I know that you've provided some directional qualitative commentary but.
We think it takes another will be highly appreciate it and I have a follow up.
Yes sure. Thank you show for the question so yes.
Tony mentioned in Q2, no. We also see noticeable shift in our pipeline toward cloud.
So that's clearly and we discussed last.
Last time in cups of coffee.
And cloud adoption is improving but by the markets.
So we now expect that we will.
Complete a cloud transition.
Within the next six to eight quarters.
As we progressed through that transition, obviously, you perpetual Cleveland booking is useful metric to understand a growth.
Despite covered impacting slowing down perpetual deals.
We did have 3% growth in they are perpetual equivalent booking.
And that's driven by the strong 65% of Neusoft ACB growth.
We expect to continue to see improvement in H. too in a new perpetual booking.
And improved to the mid to high single digits.
Yes over the next two quarters as the business environment continue to improve.
And I think also it's important to highlight that we see now almost half of our new perpetually people in booking in H. one.
Came from the cloud.
And that's compared to only one quarter.
That came in from the cloud in each one last year.
Ah. So this is major progress in the mix in our booking growth.
That is now almost half from from cloud and obviously.
We expect that also to continue to improve as we complete the cloud transition.
Though but bottom line is a lot of momentum now I think it started last year.
And definitely carve it at the positive impact on the market in terms of customers interest in moving to the Cogs were expected than they thought before.
Got it got it and switching to the cyber intelligence business I'm also very encouraging trend, taking shape or whatever that the fishing.
We think about it from it killed graphics perspective, and as they start looking into the second half and later on in India. The separation.
Anything different.
Quarter as as we're beginning to see some stability emerging markets.
Me a U.S. any any like you can shed will be greatly appreciated.
Yeah.
So they are just the demand.
Still see very strong demand even doing coffee age.
Security challenges that where I'm, sorry evolving there some you want to customers really.
Our in in having discussions related to new needs and how Oh I need to come software can help them to address the needs I think the biggest impact can copy it is a travel restrictions.
This is true primarily in the government side is from early on premises business.
And you know the our inability to travel and in some cases, you know the customers the inability to from on premises deployments as basically had some impact on the business this year.
I can say that we are working very well with customers.
Through all of your Joel Communications were doing more remote work that we've done before so customer or more compensating remote works because of the urgency.
To deploy mission critical softer.
But you know we believe that as the travel restrictions, we eat all over the world.
That will create the positive impact.
On on growth rates.
And the other thing is obviously, the the mix shift toward more softer and lets services.
Continue we had 71% gross margin in this business will we.
Pretty much where we wanted to be.
And as we continue to reduce the amount of hardware and services.
Which is a multiyear trend.
We expect gross margin to continue to expand over the next few years.
To the mid Seventys. So it's it's been a very positive trend over the last few years, which we expect to continue.
And of course in addition to providing better more James.
It does provide the customer.
Benefits in terms of faster access to innovation and Boston refresh a softer.
Which is in you know a very important in this dynamic environment work security challenges are evolving very quickly.
Got it congrats.
Thank you.
Next question comes from the line Ryan Macdonald with Needham.
Hi, good afternoon, gentlemen, thanks for taking my questions and congrats on solid quarter, but Dan can you talk a little bit about I can put in customer engagement, obviously seeing some nice momentum for cloud determine what the mix of that is between sort of net new business that is cloud focus versus maybe more of a willingness of your existing on prem customer.
That are looking to accelerate their shifts or migrate more cloud. Thanks.
[laughter].
Yeah I you know what do you see is interesting because where customers are starting to see the cloud and they buy new business in the cloud.
There's been a little bit of a pause in terms of converting the legacy.
Especially in Q1, it's been a little bit better in Q2, because it's working and right now you have hard for you already they're trying to obviously deals with the workforce at home.
Initially it was all about just making them work at home, but now they strength you see all day consequences of no, losing productivity and sure and compliance having analytics to ensure that they can integrate the right efficiencies coaching and real time guidance to a workforce at home so all.
This is come to play and we definitely see customers that are willing to buy new stuff in the cloud while they're not seeing that is urging them to convert their legacy on prem softer to the cloud.
But we do have a lot of conversation with many customers around conversions.
And you know one you know this environments will become more stable I think we'll see pickup in conversions as well.
Obviously customers that are already buying something to the cloud. It's just a matter of time before they will pick up the conversion.
So I'd say the discussions they.
Concerns that customers had with cloud as being a diminishing in many cases.
You know, we still have a small number very large customers that.
Express preference to continue to buy perpetual.
This is you know relative to our targets of customers. This is very small number but they gain.
Important customers to variant then we will continue to support perpetual gives as well.
Excellent and then as a follow up you talked about working in really investing to expand the partner network can you talk about where you're at right now in terms of bookings or percentage mix percentage of deals that are coming direct versus the partner network and ideally where you'd like to see that Mexico over the next 12 24 months.
Yes, so the partner strategy is not a new one and yogi generating above 50% of business through partners.
We've been discussing our partner neutrality and abroad partisan networks.
Or have you over the last couple of years.
We believe that especially as I look forward, we're uniquely positioned as a strategic partner.
Because of this agnostic strategy and also because of the open cloud platform.
It makes it easier for Parker to deliver customer value.
With the cloud to cloud to cloud connectivity to divert cloud.
So we now investing in helping existing partners to sell more of our cloud portfolio. In some cases, we have many park is it's the only a portion of the portfolio.
So that that's obviously.
You know.
Engaging with partners and enabling them on more solutions.
And we also recruiting new partners and in that regard I'm happy to welcome.
By eight two apartment program as we recently signed a new agreements with a with eight.
So.
Hi, I'm not gonna give specific guidance.
Guidance on the mix, but obviously with our investment partners.
And we believe also parkers makes even more important role for customers.
In terms of delivering services and and helping them to use of technology more effectively.
So altogether, we expect they.
The next to be more than 50% partners.
Oh partners over the years.
Got it and just US one last follow up I guess to that question are you seeing no as we in this shift to the cloud that does the decision or the purchase decision on Unsay workforce engagement management is being linked in.
More often with a a cloud you see or cloud contact center transition. Thanks.
Yes, we definitely see that in the SMB market, and that's where we still exclusively through partner.
But what's interesting about the SMB market, even our SMB partners when they try to win a bigger bigger deal.
They tend to work with the very itself was to help them too.
Differentiates and obviously you differentiate with functionality.
So there is a small and at the market.
The van Gogh stem to package everything.
The sweet and customers tend to.
Prefer to buy different street, but as you start to move upstream.
Looking more functionality and they're trying to.
Make sure that they get best value.
Because obviously functionality affect their business.
It's not just because the infrastructure costs, but he felt today opportunity.
To improve the efficiency is cut cost and they depend time elevate the customer experience.
So we we certainly play exclusively and SMB market with partners and work to partner, but.
At the mid to high end of the market.
We see customers that are choosing.
So colocation infrastructure certain components, some form of indoor and four.
Business applications. They they choose what is the best value that they can get and higher ROI. They believe that can they can generate.
Excellent. Thanks again.
[noise] [noise]. Thank you.
Question comes from lineup, Paul Coster with JP Morgan.
Thanks for taking my question quick ones, So first off.
Turning to commonality in the demand just seeing across the cyber.
Secure cyber intelligence sector, but it seems so you can.
Quintiles gross.
I think commonality is into Oreo.
Linux.
I mean, both businesses as a legacy off.
We're working very you know data intense environments and.
You know our claim to fame is the ability to apply data sciences.
And whether its machine learning or predictive analytics cognitive analytics.
And there is demand for this type of inside.
Regardless of the markets.
Obviously for different purposes, but.
There is a exponential growth in in data people working from home actually increased them on a beta is more digital connection.
And people have more time.
So beta is growing and obviously the ability to get inside and usage.
Insight in real time will need real time.
Our big competitive advantages that aircraft with a looking to have.
Because we as we explained Paul and you know that very well, while the core technology.
It's been very similar use cases the market. The go to market has been discussed and Thats why we are committed to.
So the separation, we are actually less than five months away from the separation. So it feels like it's a it's just around the corner.
Yes, I think it's kind of agent transparency and I'm spending very well.
The other question or cold is the social security engagements can you give us some sense of the magnitude deterioration.
End of engagement is is it primarily cloud.
Just anything that helps us sort of understand started projects roll.
Peter Robertson earnings.
Sure so.
Very pleased to be selected it's a it's a large scale projects.
Let me give you details for those that Didnt follow up in the history and then I'll go through this size of the opportunity.
So it's a it's a project was awarded in July 2019, and and there was a an appeal process it took over a year.
At this point Unfortunately has been awarded by the SSLP.
And delivery milestones are currently under discussions so.
We still under discussion on milestones. Therefore today, we're not getting that position to share affirmed delivery schedule.
But I can confirm did in Q2.
We already received initial order it was a perpetual license order.
And we delivered a less than $5 million revenue that is into Q2 number.
Now in terms of overall for the full scale of the project across all the spaces and including software and services.
This is an opportunity for bearing that is well over $60 million.
Oh sure brings me to one last question <unk> most customers are sticking with perpetual licenses why are they turn so.
So many customers a building their own clouds.
And.
These are softer is cloud ready and we support multiple clouds and that was investments we made over several years now.
Obviously, we support several public clouds and give a we have number.
Because we do you deployed but we also build a softer to support customer clouds.
So that these very large customer who invested into on cloud the ability to basically look at.
If they want to use the software for five seven years.
Are they getting better economics owning the softer than than than leasing the software.
These are.
Typically when it when we get the analysis will you know what's in our base.
These are large companies that have been buying expansions home variants almost every year and it's a multi million dollar extension.
On average annually.
So they haven't almost every carrying type of behavior, but ah well now be skew.
Oh prefer the perpetual model.
And you know what we'll see what happened over over time, but.
The vast majority of our customers.
We believe a will move.
Recurring moral and that's why we target.
85% for softer being the carrying.
Because our goal for the end of the.
Cloud transition.
And the remaining customers will be a small number of customers that will continue for a number of years would be perpetual.
And I can get today, 5% in about six to eight quarters.
Thank you.
Yeah.
Thank you.
As a reminder, ladies and gentlemen, if your question. Please press star one on yourself.
Our next question comes a lot of Daniel Ives with Wedbush.
Yeah, Thanks, and great bounce back order.
So she was going to walk through let's say when will the rest of the year I mean, what where do your thoughts in terms of just how it plays out obviously.
You know a nice uptick this quarter seems like close rates increasing pipeline can you just maybe give some commentary on your next few quarters.
Yeah.
So let me maybe turn it over to Doug to approaching some of the internal model Oh, we have Doug. It's always does that gets to hard questions [laughter], Yeah, Yeah, Hey, Dan Yeah. As we wish you just talked about you know Q2 was strong for us and we see sequential improvement in.
Q3 in Q4 is normally a pretty good quarter off of Q3.
We see that are also this year, but you know given a covidien Q first half a you know being down off last years levels, even with a good second half and despite strong cloud bookings will probably still be down around 5% year over year in terms of total revenue.
Our gross margins, we expect to Ah to continue to.
Increase a bit given the first half or they were around 69% Q3, probably similar but then Q4, probably up a point or so you know based on the higher revenue some of that or you know cost to sales is fixed and that will pop the margin up a bit.
We do expect to kind of get back to some operating expense growth in the second half a we clamped things down a in the first half and particularly in Q2 as you saw.
But that's really not sustainable if we want to get back to a growth trajectory.
So you know Q3 operating expenses were probably get up to a last years level and then sequentially, probably another 10 million or so into Q4.
All in all that you. Your models are probably there already because you know we had talked about a flat EBITDA year over year. Despite the revenue being down and that's where we're still headed how should we expect to it to achieve that.
And then kind of below the line just to help you guys out.
Some of the modeling a you know interest expense is probably you know kind of net with interest income and probably about six and a happening in a quarter. A we have some FX translation or the pop that down a little bit.
In Q2, but you know six and a half is probably a steady state rate absent kinda translation gains or losses, which are impossible to predict a.
A tax rate you know probably continues around 7.5% and with the Apacs investment you saw in Q2 the share count jump. So the way that's accounted for is a its extra shares instead of the dividend as an expense.
Or shares will be probably just under 70 million in the second half as you know similar to what we had in in Q2.
And then you know continuing on we expect some growth in into next year and continue to make investments and Ah you know driving all you know performance and had income.
Great and.
Yes, no really does.
And for you Dan.
You know obviously a lot of questions about talent here.
Can you just maybe talk about just the view that like how do you guys compare and contrast, you know in sales cycles.
I'm sure.
It's actually give you the short answer there's a lot to talk about volunteer because they now.
You know opened its mono and we see more about to performance anyway. We are we believe that we operate in the same market, we provide customers analytics and actionable intelligence.
And there are some similarities and some differences between the two companies. So I'll just go over a couple of dimensions.
So firstly the market the market for I mean, I think a softer her.
Most companies believe her highly scalable softer.
And open data growth and really strong big data analytics.
Volunteer targets $119 billion Tam according to their filing.
Well, we're targeting at this point success of this market was about 25 billion dog Tam.
We plan to expand our target Sam overtime as we scale.
But you just one example, their time includes a government agencies across the many different type of agency as well our team is focused on the national security agencies.
In in our cyber business.
In terms of the margin profile, it's another they mentioned.
The gross margin is very similar into seventies.
And we both are providing open software platform to help customers you know use in minutes.
And then has to softer by himself.
But despite the similar.
Gross margin on the operating margin is very different.
Our strategic priorities to remain profitable was positive cash flow.
And we've been successful in that all along.
While tenant hearing cured big losses in cash burn.
So in line with the strategic focus on profitable growth.
We chose to focus on initial Tam.
And this allows us to control our operating expenses.
And over time, a as we scale, we plan to expand uptime well at the same time course margins and operating margin.
So.
I would say that each of the competition.
We generally we generally see palantir in limited number of customers.
They are more concentrated in about 160 customers, while we have a thousand customers.
But I think what's interesting that overall, we believe it panties approach upsetting open analytical platform is really good for the market and validates the variance approach.
You know that we've been educating the market for many years about the power actionable intelligence and the benefit took off the moral.
But the reality that you know 10 years ago, we used to compete with large system integrators.
We had to offer system integration services, because the way the market wanted to consume these type of solutions, but now we're glad to see the market the shifting.
And you know more to the open soccer moral.
And overall this is a very big potential head and I'm in a very large Tom.
Thank you.
Now I'll turn the call back over to Alan Roden for closing remarks.
Thanks, operator, and thanks, everyone for joining us Tonight I have three eatingwell.
Again, our next call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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