VRNT - NASDAQ

Good day, and thank you for standing by. And welcome to the Verint Systems, Inc. Q4 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Frankel, Investor Relations and Corporate Development Director. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; Grant Highlander, Verint's CFO; and Alan Roden, Verint's Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a slide presentation. If you'd like to view these slides in real time during the call, please visit the IR section of our website at verint.com, click on the Investor Relations tab and click on the webcast link and select today's conference call. I'd also 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 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 these 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 these forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2024, when filed and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures as we believe investors focus on these measures comparing results between periods and among our peer companies. Please see today's slide presentation, our earnings release and 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?

Thank you, Matt. I'm pleased to report a strong finish for the year with Q4 revenue and non-GAAP diluted EPS coming in ahead of our expectations. Behind that momentum is the Verint's open platform we introduced last year, which enables Verint to deliver tangible AI business outcomes better than any other vendor in our market. The market today is looking to increase the ex-automation and Verint is leading the way. Throughout the last year, we built such momentum, driven by our AI differentiation, and we are raising current year outlook to reflect market demand for AI-powered CX automation. Today, I will start with our fourth quarter trends, then I will discuss our open platform differentiation. And finally, I will review our fiscal ‘25 outlook and three-year targets. In Q4, revenue grew 12% year-over-year a couple of million dollars above our guidance, driven by strong SaaS revenue growth of 28%. Non-GAAP diluted Q4 EPS came in at $1.07, up 42% year-over-year, $0.08 ahead of our guidance, driven by our revenue overachievement and strong margin expansion. At our Investor Day, we discussed how the Verint open platform and team of AI-powered bots drive bundled SaaS growth. We also discussed how we are tracking AI demand using the bundled SaaS booking metric. I'm pleased to report that in Q4, bundled SaaS new ACV bookings increased 16% year-over-year and the 12 months pipeline for bundled SaaS increased over 20% year-over-year. We expect demand for AI to not only drive bundled SaaS growth, but also free cash flow acceleration. For the current year, we expect over 40% growth in free cash flow and over the next three years, as AI continues to drive growth in bundled SaaS, free cash flow will grow faster than revenue. The customer engagement industry has been challenged for many years with a growing number of interactions and higher customer expectations. Today, brands realize that hiring more workers and increasing labor expenses is no longer a sustainable solution. CX automation provides brands with significant economic benefits and at the same time, increases the addressable market for Verint. For brands, the economic benefit come from the lower cost due to the higher workforce productivity and increased customer loyalty. For Verint, the addressable market increases over time as a portion of the large amount that labor saving by brands will shift to purchasing the AI platform. Today, we estimate there are tens of millions of people around the world involved in customer engagement across contact centers, back office and branches and the industry is ripe for CX automation platforms that can deliver AI business outcomes. We believe Verint is uniquely positioned to lead the emerging CX automation category due to three factors. First, our large customer base across many industries and geographies, which consists of 4 million agents currently using the Verint platform and looking to add AI-powered bots. Second, the customer data we have in the platform is critical to train the bots. And third, our open platform is designed to deliver AI business outcomes better than any other vendor in our market. Successfully delivering AI business outcomes requires much more than just Gen AI models. It requires the combination of three key ingredients: the latest commercial and proprietary AI technology, relevant customer data and business workflows. The Verint open platform and our team of 40 AI-powered bots help brands deliver tangible AI business outcomes across the enterprise. Let's look at what makes the Verint open platform highly differentiated in its ability to turn AI technology into measurable AI business outcomes. It starts with the Verint's DaVinci, which acts as a factory for our bots. Verint's DaVinci allows us to combine the latest commercial open source and proprietary AI and deliver it to all Verint bots from the core of the platform. As they emerge from the factory, Verint bots are training continuously on real-time behavioral data, available in the platform data hub. Finally, the Verint's open platform leverages the workflows customers use every day, enabling brands to benefit from AI business outcomes now. World is innovating at a fast pace and a large team of AI-powered bot is growing. The Verint bots augments not just the agents, but also the supervisor, analysts and other roles. Each Verint bot delivers specific AI business outcome and our customers may purchase one or a team of bots to drive greater ROI. Some of the Verint bots use Gen AI models, where other boards use proprietary models that are specifically designed for CX automation. An example of bots using Verint proprietary AI, customer and workforce data and workflows is the time flex bots, which we announced last week. The business problem this bot solves is the inability of agents to dynamically change their schedules. Today, if agents need to get out of their shift to take a child to the doctor or to watch the soccer game, very often, this request will be denied because of limited supervisory resources to modify the schedule in real time and find a suitable replacement. In other words, the scheduling process is just too manual to provide agents with the work-life balance they increasingly expect. The TimeFlex Bot delivers AI business outcome to solve this problem. Agents can make unlimited schedule changes with no additional supervisors needed. The bot augments the existing supervisors by automating their approval of schedule change requests. For example, a Verint customer using the TimeFlex Bots reported reduced employee attrition, higher employee engagement and millions of dollars in annual savings. Like other Verint bots, the Verint's TimeFlex Bots can be quickly deployed into existing customer ecosystems, reducing operating costs and elevating employee and customer experience. Let me now turn to our Q4 wins. In Q4, we continue to have significant wins across existing customers and new logos driven by our highly differentiated open platform and quick ROI we deliver to our customers. We had approximately 50 orders in the quarter with over $1 million TCV each, including from some of the world's leading brands, such as AT&T, HSBC, Goldman Sachs, Instacart and UPS. We had more than 100 new logos in the quarter, including the results company, Christian Dior and SanCor. And as I discussed earlier, our 12-month pipeline for bundled SaaS grew over 20% year-over-year, reflecting demand for AI innovation. I would like to double-click on one large Q4 order. In January, we announced a $49 million TCV order with a five-year term from a leading health care company. This large contract came from an existing Verint customer that was looking to add AI innovation now. Verint's open approach enabled the customer to deploy a hybrid cloud platform, so they could keep what they had on premises and at the same time, leap forward with AI innovation in the Verint Cloud. Let me share some additional details of this order. 50% of the revenue will be in bundled SaaS including more than 10 Verint bots hosted in the Verint Cloud. The other 50% of the revenue will be in unbundled SaaS. The order enables the customer to leverage the openness of the platform and import their own large language models into the Verint platform to future-proof their AI investments. Also, the order enables the customer to migrate their unbundled SaaS solutions to bundled SaaS at their own pace, anytime during the FIVE-year term. We believe this 8-digit order is a great example of our open platform and hybrid cloud approach deliver AI business outcomes now. We are pleased with the strong finish to fiscal '24 and are raising the outlook for the current year. We believe the perpetual license headwinds from the SaaS transition are now behind us. And going forward, we expect growing AI demand to provide tailwinds to a bundled SaaS growth driving overall revenue growth acceleration. Looking beyond this year, Verint is a CX automation category leader and we believe increasing demand for AI, coupled with our differentiated open platform, create a road map to achieve our targets for a Rule of 40 company in fiscal '27. And now I would like to turn the call over to Grant to discuss the financials in more detail. Grant?

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 Matt 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 and divestitures, including fair value revenue adjustments, amortization of acquisition-related intangibles, certain other acquisition and divestiture-related expenses, stock-based compensation expenses, separation-related expenses, accelerated lease costs, IT facilities and infrastructure realignment as well as certain other items that can vary significantly in amount and frequency from period to period. Let me start with an overview of our Q4 results. Revenue increased a very strong 12% year-over-year to $265 million, a couple of million dollars ahead of our guidance. The large increase was driven by approximately 28% increase in SaaS revenue from a combination of new business as well as the unbundled SaaS renewals that we discussed during our Q3 conference call. Non-GAAP gross margins came in strong at 74.7%, up 320 basis points year-over-year. We are pleased with our gross margin, which has steadily expanded since the spin of our security business three years ago. We believe our ability to increase gross margins reflects the strength of our AI innovation and the business outcomes we deliver to our customers. The combination of our revenue overachievement and strong gross margins drove non-GAAP diluted EPS of $1.07, $0.08 ahead of expectations. During our Investor Day, we discussed how we are innovating at a very fast pace in our bundled SaaS offerings, and that we expect bundled SaaS to be our main growth driver going forward. I am pleased to report that in Q4, bundled SaaS new ACV bookings increased 16% year-over-year. I'm also pleased to report that as of the end of Q4, our 12-month bundled SaaS pipeline increased more than 20% year-over-year, driven by demand for our AI innovation. Our pipeline growth is a leading indicator, and we expect bundled SaaS new ACV bookings to accelerate this year and the acceleration of bundled SaaS bookings is also expected to drive free cash flow acceleration and later, I will discuss our free cash flow outlook. Before turning to guidance, I would like to discuss Q4 highlights related to the AI investments we are making to support our road map for becoming a Rule of 40 company. First, we continued our investment in AI ending the year with 1,300 engineers in R&D and cloud operations. Second, we expanded our customer success team with additional resources to drive AI adoption. And third, we aligned our services catalog to our AI offerings, expanding our value realization service offerings and divesting a manual managed services offering. Regarding the services alignment to AI, in Q4, we decided to divest our manual quality managed service offering, which is being replaced by an AI-powered bot. The transaction closed on January 31, the last day of our fiscal year. To assist you in your modeling, the offering generated $25 million of revenue last year, and you can find the quarterly breakdown in our press release and on our website. Turning to our revenue outlook. We believe the AI momentum we experienced last year will continue and we expect our revenue growth to accelerate this year. There are two primary drivers for our faster growth. First, the customer engagement market is ripe for automation. AI adoption is driving strong demand for our bundled SaaS solutions, and we expect bundled SaaS new ACV bookings growth to accelerate from the 16% we delivered in Q4 to 20% this year. Second, we have completed our perpetual to SaaS transition and expect perpetual revenue to be flat in fiscal '25, eliminating prior headwinds from this transition. Our revenue outlook for fiscal '25 is approximately $930 million, reflecting 5% growth compared to fiscal '24 as adjusted for the divestiture we just discussed. Turning to our overall guidance for fiscal '25. On a non-GAAP basis, again for revenue, we expect approximately $930 million, plus or minus 2%. We expect gross margin to increase approximately 100 basis points following strong expansion we had last year. The combination of revenue growth and continued operating margin expansion is expected to drive operating income up approximately 7% year-over-year. And for diluted EPS, we expect $2.89 at the midpoint of our revenue guidance. Regarding below-the-line assumptions, we expect interest and other expense net to average around $500,000 per quarter. Net income from a noncontrolling interest of around $250,000 per quarter. And for the full-year, we expect a cash tax rate of around 11% and approximately 72.5 million fully diluted shares. Let me also discuss how we see the year progressing. Similar to last year, we expect bundled SaaS revenue to grow steadily throughout the year and the level of unbundled SaaS revenue each quarter to fluctuate driven by the timing of renewals. More specifically, adjusted for the divestiture, we expect double-digit revenue growth in Q4, again, similar to last year and low single-digit revenue growth in the first three quarters of the year. For Q1, we expect revenue in a range of $212 million to $216 million, up from an adjusted $210 million in Q1 of last year. At the midpoint of the revenue range, we expect diluted EPS to be $0.54. Turning to free cash flow. At this point in our SaaS journey, I am pleased to report that our free cash flow growth is accelerating. We define free cash flow as our GAAP cash from operations less our CapEx, which includes purchases of property and equipment and capitalized software development costs. Looking to fiscal '25, we are targeting a greater than 40% increase in free cash flow to approximately $180 million. Turning to our balance sheet. We continue to be in a very good financial position. Our net debt remains well under 1x last 12-month EBITDA and is further supported by our strong cash flow. Over the last few years, we have steadily repurchased shares at an increasing pace and have reduced our share count by 3 million shares. Over the next three years, we expect to generate about $600 million of free cash flow and expect our largest use of cash to be share buybacks, which will further reduce share count. In summary, we are pleased to have overachieved revenue and non-GAAP diluted EPS in Q4 and to be in a position to raise guidance for the current year. As we discussed today, Verint's AI-powered bots deliver economic benefits to both Verint and brands. These economic benefits drive our road map to become a Rule of 40 company in three years with revenue acceleration and margin expansion along the way. With that, operator, please open the line for questions.

And thank you. [Operator Instructions] And our first question comes from Shaul Eyal from TD Cowen. Your line is now open.

Thank you. Good afternoon, gentlemen, congrats on completing a successful year and raising guidance. Correct me if I'm wrong, I think it's been a while since you've raised your revenue guidance again, if I recollect and serves me well, so congrats. Dan, I wanted to ask what has been driving the recent momentum and what is likely to continue and drive what seems to be healthy demand trends? And also as my follow-up question, any changes within the competitive landscape, especially in light of the changing AI environment?

Sure. Thank you, Eyal. We completed the transition. So what's driving our momentum now is in one word is AI, but I'll give you an answer that is more than one word. So we believe the momentum that we had in Q3 and continued in Q4 is driven by the strong demand in the market for CX automation. Now -- we see now that the open platform that we announced last year, it was engaged in the summer. It is resonating very well with customers. And the success we see now is across new logos, customer expansions and also renewals. So we had more than 100 new logos in Q4, and they were primarily driven by AI differentiation. We're driving big expansion projects as some of our large customers are starting to move into AI, and we discussed the health care provider that was adding more than 10 bots in the Verint Cloud and that resulted in a $50 million approximately. And we also see a very strong renewal activity in Q4, and that's really what's driving the 28% SaaS revenue growth that we had in Q4. So as you kind of look into what is the CX automation demand and also your question about competitor, we believe that behind our differentiation is that we drive AI business outcomes now. And we do it better than any other vendor in the market. And the reason we can do it better is because our platform is designed to deliver AI business outcomes. So we saw some really good leading indicators in Q4, and we expect it to continue in the current year. So we mentioned SaaS -- bundled SaaS booking, which is basically what drive AI -- the way drive -- AI drives our growth has been up 16%. And the pipeline that we have for the next 12 months is over 20% growth. And based on where we are at now in Q1, we believe that we'll do 20% growth in Q1, and we expect it for the rest of the year, bundled SaaS bookings going at the ACV booking growing at 20%, driven by AI. So to answer your differentiation, I think the best way to do it is two examples. So let me give you a few, I'll start with this large order, the $49 million order and this customer have tens of thousands of employees. And other vendors in our market basically are all having the same story. They told these customers, hey, if you want to move forward, you have to move your entire infrastructure to the cloud first. And this customer realized that would take them several years and huge disruption, and it's a risky project. And they really more than something now, and Verint told them, you can have AI business outcomes now. And the result is that they are investing in AI, they will deploy 10 bots that they are deploying now 10 bots. They're avoiding this very long, risky and disruptive rip and replace projects. So we are very differentiated in that sense. The customer will move their telephony and other application that they have now on premises, they will move it to the cloud, but we aware, they can do it at their own pace. So the AI innovation is in the cloud, but because we have a hybrid cloud platform, AI innovation is connected to everything they have now, it's working. They like it. They don't see the urgency to do anything with what's working so they can look forward with AI business outcomes now. And another example, this one is from EMEA. This is a new logo for Verint, a little bit smaller, but several thousand’s -- pretty large customers, several thousand people in their workforce. And they originally issued an RSP and invited Verint and many other vendors in end market. Again, the RFP was very much at the beginning was for the entire contact center moving to the cloud. But after they learn from Verint about our open approach and our ability to support the hybrid cloud, they're really fell in love with this idea of AI business outcomes now, so they basically canceled the RFP and awarded the contract to Verint. And maybe the third example I'll give you one from Australia. This customer, again, a Q4 win competitive process against other competitors, the usual suspects. And this one has about 1,000 people -- close to 1,000 people. So again, a little smaller, but what's interesting about this customer is that part of their business priority was to provide personal customer service to their customers. So they did not really want to automate too many things in terms of bots answering the phones because they believe that people should talk to people. They also did not want to offshore their employees. They really have 100% Australian employees, which they know cost them more than offshoring and definitely cost them more than bots, but this was part of their business model. So they realize they have to pay more for those Australian employees, but they were looking for CX automation to reduce costs. And it was urgent for them. They need to do it now. So it became the key requirements in this competitive process. And the outcome was that they chose Verint. I was in Australia in Q4, so I met the customer face-to-face. And it was interesting because they were talking to me about the bots that they didn't purchase. So they purchased quite a few, but they were already so excited about deploying even more bots and we kind of went through this large portfolio of bots that Verint has in the platform and discussed what is the business outcome that each bot can deliver? What is their business priority, why they should do this one before the next one, what level of consumption is right for their more and so on and so on. So I think another example when customers really focusing on AI business outcomes now, Verint is very differentiated.

Thank you so much for that.

And thank you. [Operator Instructions] Our next question comes from Peter Levine from Evercore ISI. Your line is now open.

Great, thanks guys for taking my question. Maybe Dan or Grant, maybe help us understand the monetization of these bots. I think you have 40-plus bots. Walk us through what you're charging? Is it usage? Is it per seat? And if you can give us like some kind of uplift to ACV from the adoption of these bots?

Yes. So I'll start, Grant, and feel free to add anything that I miss. But the concept is very typical to how AI is being deployed. And especially where it's all about AI business outcomes. We are aligning the pricing of the bot to the outcomes that the customer is expecting. So they can see the ROI they can measure their ROI and they can increase the usage based on the results that they actually measure. So many of our customers that have bots AI in Q4 and I can say that with new logos, almost entirely all the SaaS ACV, the bundled SaaS ACV that we got from new logos was about AI and bots. So it's definitely resonating well with our customers that they are trying to expand with Verint, but also with how we win new logos. It's all about you can start applying those bots to your business model and any volume that is right for you to begin with. We're not dictating to the customer what is the initial consumption level. In some cases, we had minimum consumption because we're not going to do this for a $10,000 deal, but our customers also don't want to bother to deploy small projects. So to your question, how do we -- what's the unit of measure for the bots, it really depends on what the bots is doing. So in the case of the TimeFlex Bot that I discussed before, right, the biggest problem is it's employee engagement. Employees are not able to change the schedules. So sometimes this urgent things in their life, but it can change the schedule, so customers see attrition. Customer see some difficult relations with employees that just -- they don't show up. They asked for approval. The approval is denied, they don't show up because they have to go and do something personal. So there's a lot of issues so they can measure this in loss of attrition -- avoiding attrition, so that's kind of one measurement. The other thing is that there are customers who are trying to hire supervisors to measure a bit more flexible and do all these schedule changes in real time, really not practical, but if they try to do that, they can also measure how many supervisors they want to hire and how they can avoid this cost. And they compare that to the TimeFlex Bot, so if they weren't, if they have, let's say, 1,000 employees, they can decide, I'm just going to give TimeFlex to 200 employees, and I'm going to measure the ROI. And if I say that it's what I like, I will just increase the entitlement in the Verint Cloud and grow through as many as employees as I need. But everybody has its own business outcome. Of course, sometimes we deliver a team of bots because the business problem that customer trying to solve, requires several bots working together. So it's -- there obviously will be bigger. But more importantly, the way we design the platform is that the customer can measure on a very granular basis, the ROI. So AI is now a big buzzword. And our message to customers, which is very differentiated. You're not buying from Verint AI technology. You are buying from Verint AI business outcome, and you should be able to measure the ROI.

Sorry, I jumped on late, if you discussed it. But from your last question, you talked about 20% bookings growth throughout the year. look at the full year guide. Obviously, there was a $25 million headwind. Then what's the disconnect between, I think, the uptick you're seeing in bookings growth, ACV growth to the, call it, mid-single digits revenue growth number?

Yes. So what we discussed in Investor Day is that because of AI and because AI is only available in bundled SaaS, well, the best way to look at our AI momentum is to look at bundled SaaS growth. But what we had last year is the unbundled SaaS booking declines because the customers are shifting into the bundled SaaS. So the result is 16% bundles SaaS booking growth in Q4 and we're basically guiding to 20%. So we go from 16% in Q4, 20% we expect in Q1 and 20% we expect for the full year. But in unbundled SaaS, which does not include AI, we do not expect growth. So it became a small part of our booking, so it's about 20% of our booking, but the unbundled SaaS booking is not expected to grow. There is no AI involved there. But as I explained before, our customers that have unbundled SaaS solutions can renew in unbundled SaaS, and they can add bundle SaaS AI on top of it, and it's all working as one hybrid platform. So they don't have to do any migration in order to expand in bundled SaaS, but we expect that AI is going to drive bundled SaaS expansions.

Okay, so bundled SaaS as a percentage of bookings is how much, 80%, you said?

It's about 80%, yes. And it's also more than [Technical Difficulty] pipeline, and that's where the growth of the company, we explained at Investor Day that the growth in our journey to the Rule of 40 is based on bundled SaaS growth, and bundled SaaS is the best metric to measure AI production and bots attachment rates. All that is actually translated into bundled SaaS growth. So bundled SaaS booking is the metric that will demonstrate success in AI and also success toward that Rule of 40 target that we have.

Thank you.

And thank you. [Operator Instructions] And our next question comes from Joshua Reilly from Needham. Your line is now open.

All right, thanks for taking my questions, and nice job finishing out the fiscal year here. What, if anything, are you doing within the direct sales force to make them successful at selling the AI bots when the competitive landscape for some of these bots is a little more complex and different than the core workforce management solution that you've historically dominated in the enterprise market?

Yes. That's very interesting topic. So we launched the platform with the bots mid last year and at the time, we had 25 bots, now we have 40. So we are innovating at a very fast pace. Number of bots increasing, and I expect we'll continue to innovate throughout this year with more and more bots and having that many bots in the platform is differentiating because customer is an open platform. Customers can choose the one that is most compelling for them at any given time and they can expand and so on. But the -- what we did with the direct sales force last year is, first, we enabled them on this open platform so they can explain the benefits of being open and flexibility in a modular approach of bots, so you can buy any bots at any given time. But the other thing that we did is we shifted discussions from technology to business outcomes. And the sales force is pretty good because they have been an enterprise sales force always selling applications, not infrastructure. So they're very good at understanding business issues and solving problems. So I'll give you an example about again, a customer that we engaged with, they wanted AI business outcomes now, but their IT just made a big investment in Gen AI platform. So IT wanted to standardize AI in the company, and they were basically kind of not really very interested in any other AI. They just made a big investment. So what our Salesforce did is, again, we explained the open approach to explain to the business users, why they can solve some really business problems now, but more importantly, then engaged with IT and explain that, hey, if you have LLMs, if you have large language models that you develop, we can import your LLMs into our platform because we are totally open, Verint DaVinci will take any commercial open source proprietary as well as customer provided LLM. And when IT realized that they don't have to really develop contact center business outcomes, because their LLMs will be in the platform doing that for them in the Verint platform. This all discussion went away from let's compare whose AI technology is better, right? We just mutualized this all discussion. And it was about providing them ROI now and IP was really thrilled because it's a win, whatever they developed is being leveraged by Verint, combining the Verint data, so we can train their LLM with our data and a fresh 24/7 and embedding their LLMs into our workflows, so that it can be with no disruption provided to the agents at their fingertips. So all these things that we bring in the platform we're definitely saving them time and providing the value that they were expecting now. So I think that Salesforce is really focusing not on whose AI is better. But what are the business issues prioritize those issues and look at how do you solve these issues and this could be increasing capacity for the agents, increasing capacity for the supervisors, it could be elevating the employee experience, elevating customer experience. There's a lot of different priorities that companies have, but each company can find a box that we'll do something they really need now.

Got it. That's helpful. And then just on gross margin. Recurring gross margin was stronger than what we modeled in the quarter. Maybe can you give us some more color on what's driving that higher margin? And how do we think about the -- I think you mentioned the 100 basis point improvement in gross margin this year. How do we think about the mix there between the recurring and the nonrecurring gross margin?

Grant, that's for you.

Yes. So the recurring gross margin, obviously strong. And in the fourth quarter, specifically, that was on the back of the unbundled SaaS, the volume of the renewals. So that obviously drove the strong expansion that maybe you didn't have in your models for the fourth quarter. But going forward, obviously, we have, and I mentioned this, right, the revenue will once again have a similar combination of the steady bundled SaaS growing sequentially throughout the quarters in fiscal '25. And that large once again volume and it's a different -- it should make this clear. It's a different set of contracts that are coming up that will be weighted to the fourth quarter again and providing once again the strong expansion of the gross margin overall. So I think it will be, and you'll see it be kind of similar, but what's driving the expansion year-to-year, '24 going in '25 is, once again, we are expecting operational improvements in the bundled SaaS. And once again, given that, that is driving the bookings or driving the revenue growth and the revenue seeing some operational expansion within the bundled SaaS, all of that will help to drive the over 100 basis points that once again, we're looking for this year.

Got it. And then just a quick follow-up on that. How much of the Managed Services business? Is that factored into that 100 basis point improvement as well? Or did that all...

It is factored in, but it's -- the operational improvement of bundled SaaS is obviously driving a good portion of that.

Got it. Thanks, guys.

You bet.

And thank you. [Operator Instructions] And our next question comes from Timothy Horan.

Thanks, guys. Can you give us a sense of how big the bundled SaaS is and what percentage of revenue that is? Secondly, I think you have a guidance out there for 10% growth in a couple of years. It sounds like bookings are going a lot better. I mean can you maybe see that happen in more like 18 months or so? And then third, when you -- these chat bots from customers spend $1,000 on them. Do you have a sense of how much you're saving in labor or other expenses in total? Thank you.

Yes. Let me start and Grant you can give the SaaS percentage later. So I think that when customers are looking for AI, first, they're looking for the best solution that they can give them the best ROI, right? So it's not just bot I need to buy AI, but it's the ability to drive business outcomes. I think that the gross margin expansion is -- and we have it now steady, it's the result of really innovation. So when you're delivering strong ROI for customers, they are not really pressuring your pricing, so we're kind of sharing the benefits of the ROI between what the customer get from labor savings to what we get from innovation in bundled SaaS. Now how much ROI. So I gave in the Investor Day some examples that different bots create different savings. So the containment bots can reduce the cost of one interaction from $5.50 to just $0.50, so that's 1 to 10 ratio in terms of cost versus return. And this is a successful containment. This is not just deflection of the call, where the customer calls, talk to bot and then never calls back. This is where we measure that on basis of. We really replaced a person with a bot that gave a full answer to what the customers are trying to do. So again, the quality of the bots are very important. There's a lot of companies that talk about IVAs and how they can do self-service, but successful self-service meaning, successful containment, not just deflection. But on that basis, this bot is generating 1 to 10 ratio. When you look at the TimeFlex Bot, it depends on how much the customer is investing today in flexibility, but we also see customers that have 1 to 10 ratio of ROI, some have lower than that. But many customers today, if the employees want to change their shift once a day, they fire them. They just can't forward employee not adhering to the schedule every day they want to change. With the TimeFlex Bots, we have customer reporting that employees are changing schedule 5 times a day. They want a coffee break. They take 15 minutes of their schedule and they schedule themselves for coffee break. And they take 15 minutes later in somewhere else. So again, the ROI is going to be a little bit customized, and we are helping customers to generate their own ROI models so they can do their internal business justification. But it's always pretty big. This is why AI is so exciting. We're talking about the market has shifted completely from let's just move my telephony to the cloud to no, I need to increase the CX automation. This shift is because the ROI is huge, and because AI just makes it possible. It wasn't possible a year ago. Definitely not five years ago, but it is possible now. We architected the whole platform to do this. So it's open with data and DaVinci AI the core. And all these things are actually making these business outcomes possible now. And the ROI...

Pardon me, speakers.

Justin, it sounds like we lost Dan. I think, Grant, can you please finish this.

Yes. Let me go ahead and address the second part bundled SaaS. So you're exactly right. bundled SaaS is driving the acceleration of growth, what we laid out there in Investor Day, right, was the mid-single-digit growth and accelerating modestly at 26% and then getting the 10% growth in '27. And I highlighted, that's on the back of the bundled SaaS bookings, which then drives the revenue over time. Just to answer the question for perspective, the bundled SaaS in fiscal '24 and again, I'll adjust for the managed services divestiture. It made up 28%, $250 million, a little over $250 million of revenue for bundled SaaS was roughly 28% of our overall revenue, again, excluding divestiture. And as you look at this and what we have trajectory, it will grow about 4 points and make up 32% of the $930 million of revenue, right, around that ballpark. And we expect it to continue just on the pace that we had modeled is going to continue to increase towards 37% in '26. And it would be 40% of our overall revenue by the fiscal year. So then again, driving that 10% growth on the back of that line. So that's kind of the magnitude that we see. We'll still have unbundled SaaS, as Dan mentioned, we give the customers flexibility. They don't have to migrate all of that unbundled SaaS or term licenses. They can get AI without any disruption of the converged migration, and we expect that will come over time as well. So hopefully, that answers the question.

Very helpful. Thank you.

You bet.

And, thank you. Okay, thank you. And I would now like to turn the call back over to Matthew Frankel for closing remarks.

Great. Thank you, Justin, and thank you, everyone, for joining us today. Of course, feel free to reach out with any questions you have, and we look forward to speaking to you again soon. Have a good night.