VRNT - NASDAQ

Good day, and thank you for standing by. Welcome to the Verint Systems Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be question-and-answer session. [Operator Instructions] Also be advised that today's conference is being recorded. I would now like to turn the conference over to Matthew Frankel, CFA, 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, look 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 as 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 Jan 31, 2024, and our 10-Q for the quarter ended April 30, 2024, and our Form 10-Q for the quarter ended July 31, 2024, and our Form 10-Q for the quarter ended October 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 those measures in 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 comparative purposes. The non-GAAP financial measures the company uses have meditations and may differ from those used by other companies. Now I'd like to turn the call over to Dan. Dan?

Thank you, Matt. In Q3, revenue and non-GAAP diluted EPS came in ahead of our expectations and we continue to benefit from strong AI momentum. Today, I will start with a review of our third quarter results. Then I will discuss key wins driven by our AI innovation and share some customer reported AI business outcomes. Finally, I will review the agenda for our Investor Day on January 14. In Q3, revenue came in at $224 million, around $14 million ahead of our guidance, representing approximately 5% year-over-year growth adjusted for last year's divestiture. Our revenue overachievement was driven by unbundled SaaS renewal revenue coming in Q4 that we previously expected coming in Q4. We are pleased with the progress we've made year-to-date and we maintained our full year guidance or 5% adjusted revenue growth. Revenue growth in Q3 was driven by strong SaaS momentum across bundled and unbundled deals. Bundle SaaS revenue increased 19% year-over-year, an acceleration from both Q1 and Q2, driven by AI momentum. Unbundled SaaS revenue also increased year-over-year, driven by the timing of deals and the nature of the 606 accounting standard. Gross margin expanded year-over-year, reflecting the ongoing mix shift towards recurring revenue. The revenue overachievement and gross margin expansion drove Q3 non-GAAP diluted EPS to $0.54, approximately $0.11 ahead of our guidance. In Q3, we continued to win large contracts, driven by our AI innovation and our unique hybrid cloud model. Some of the large wins included an $11 million order for a financial services company for a single box to augment 6,500 contact center agents. The customer conducted a long pilot before awarding the deal and is expecting the Verint bot to provide agents with real-time coaching that will increase agent capacity and elevate their customer experience. $7 million in orders for an insurance company for renewal and expansion of one bot across 6,000 agents which is a good example of a customer taking advantage of various hybrid cloud model by adding AI innovations quickly without converting its existing solutions to the Verint cloud today. And $6 million in orders for a health care company for renewal and expansion across multiple platform applications, including an expansion of two bots across nearly 12,000 agents in hybrid cloud. As a reminder, the Verint platform was designed with a completely open architecture in a hybrid cloud model, which supports cloud-to-cloud integration as well as cloud to on-prem integrations. This differentiated open architecture enables customers and partners to quickly move forward with AI innovation without a prerequisite of long disruptive and expensive cloud infrastructure projects. With respect to partners, in Q3, we had three of our CCaaS partners announcing cloud-to-cloud integration with Verint, enabling them to offer various AI powered bots to their customer base for the first time. With respect to end customers, our hybrid cloud platform, we now offer an on-prem customers the ability to maintain existing solutions on-prem and look forward with a broad range of AI powered bots, so they can start to benefit with our delay from strong tangible AI business outcomes. Let's look at some AI business outcomes reported by customers using the Verint platform. The first example is a top telecommunication company, reporting annual savings of more than $10 million by using the Verint Intelligent Virtual Assistant to power their contact center self-service. The telecom company replaced their telephony driven IVR technology with Verint's AI powered IVA to deliver tangible business outcomes, including improving its self-service containment rates and elevating the service experience for consumers. The company responds to more than 7 million customer calls each year on a variety of topics, including billing, payments, appointment management and tech support. By using Verint, they achieved more than 50% containment for all inquiries and 80% for billing specific inquiries. The second example is for a financial services company, reporting annual savings equivalent to $9 million by using Verint's AI powered bots to automate agent access to enterprise knowledge. With the Verint's bots automating contextual knowledge delivery in real time, their agents require fewer time consuming searches and the financial services company was able to reduce average call duration by 20 seconds. We are very pleased with the strong outcomes our customers are reporting from their initial Verint AI deployments and believe that their AI consumption from Verint will grow over time due to the dramatic benefits they are achieving. The contact center market is in early stages of AI adoption and customers have been mitigating significant AI noise and height. More and more customers realize they need a CX automation platform such as Verint that can quickly deliver tangible AI business outcomes in their existing ecosystem. We continue to innovate and lead the market with new AI powered bots. The CX/EX scoring box, which we announced earlier today is the latest addition to the agent copilot both category of the Verint open platform. Each of our Asian co-pilot bot is designed to perform a specific task in real time, which augments human agents and make them more efficient. The new scoring bots, augment agents and managers with unique real-time insights into customer experience and employee experience, which are not possible with traditional surveys. We believe that using AI to accurately score each call in real time is unique to Verint today. And the market will be looking to augment surveys with AI-powered real-time scoring. The technology behind the new scoring boss goes beyond Gen AI, and includes sophisticated AI models for acoustic analysis that came to Verint through a tuck-in acquisition we closed during Q3. We are pleased with our ability to quickly integrate acquired technology, enabling rapid innovation in our platform and quickly offering new boats to our large customer base. On January 14, we will be holding our Investor Day. Similar to last year's Investor Day, we will provide our outlook for next year discussed our strong momentum and explain how we will benefit from AI in the long-term. Key topics we'll cover include a showcase of our open platform and go-to-market differentiation. You will hear directly from customers about the strong AI business outcomes they are achieving with the Verint open platform, and we will review our financial model, including fiscal '26 guidance as well as ARR and cash flow metrics and a long-term strategy for monetizing AI. To recap, we are pleased with our Q3 results and expect to finish the year strong. We expect bundle SaaS revenue to continue to accelerate in Q4. The key driver behind our SaaS momentum is the proven AI business outcomes reported by our customers. We believe that our ability to deliver measurable AI business outcomes in a hybrid cloud model is a unique and sustainable differentiator. And with that, I'll turn it over to Grant to discuss our financial results 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, 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. Now, let me start with an overview of our Q3 results. Revenue increased approximately 5% year-over-year to $224 million, adjusted for our divestiture. This was around $14 million above our guidance of approximately $210 million. And as Dan mentioned earlier, this was due to unbundled SaaS revenue that we expected in Q4 shifting forward into Q3. All other revenue streams came in as expected. Gross margins came in strong with non-GAAP margin at 72%, up approximately 70 basis points year-over-year. We have expanded our gross margins in each of the last nine quarters on a year-over-year basis, reflecting the continued favorable mix shift to higher margin recurring revenue and the AI innovation we deliver to our customers. Non-GAAP diluted EPS came in at $0.54, also ahead of our guidance of $0.43. Next, let's look at our SaaS revenue streams in more detail. Starting with bundled SaaS revenue stream. As we have discussed in past calls, 100% of our AI innovation is deployed only in bundled SaaS. In Q3, we bundled task revenue growth accelerated to 19% year-over-year, up nicely from 15% in Q2 and over 9% in Q1. The technology tuck-in acquisition that Dan discussed earlier contributed about $1 million of bundled SaaS revenue in Q3. We expect an acceleration in Q4 to more than 20% year-over-year growth to around $80 million of bundled SaaS revenue. Turning to unbundled SaaS revenue stream. During Q3, we reported $73 million of unbundled SaaS revenue ahead of our expectations driven by renewal revenue coming in Q3 that we previously expected to come in during Q4. In Q4, similar to last year, we expect our fourth quarter to be our largest unbundled SaaS revenue quarter of the year with around $100 million due to the large pool of renewals we have in our fourth quarter. We are pleased with our bundled SaaS growth acceleration throughout the year driven by customer demand for AI innovation. As Dan mentioned earlier, through the customer examples he provided, our hybrid cloud model makes AI available in bundled SaaS to all our customers and partners even when they maintain their existing solutions on-premise. Turning to our guidance for fiscal year-end '25, we are maintaining our revenue and non-GAAP diluted EPS guidance for the full year. On a non-GAAP basis, our revenue outlook is $933 million, plus/minus 2% and reflecting a bit more than 5% growth compared to FY'24 adjusted revenue. We can continue to expect our gross margin to increase this year and expect at least 150 basis points of expansion year-over-year. And for diluted EPS, we expect $2.90 at the midpoint of our revenue guidance. Regarding below-the-line assumptions for the full year, we now expect interest and other expense net of approximately $7 million, net income from a non-controlling interest of around $1 million, a cash's tax rate of around 10.5% and approximately 72.2 million fully diluted shares. I'd like to give you a bit more color on our revenue outlook for Q4. For non-GAAP modeling purposes, you can assume $213 million of recurring revenue in Q4 and resulting in approximately 8% recurring revenue growth for the full year adjusted for the divestiture. And for nonrecurring revenue, you can assume $64 million of revenue in Q4. Let me provide you some additional color on our bookings and ARR trends. Starting with new SaaS ACV bookings. As discussed on our prior call, we see trends that are different between new deals and conversion deals. As a reminder, new deals include expansions and new functionality in both unbundled SaaS and bundled SaaS solutions. Conversion deals on the other hand, include like-to-like conversions of existing on-premise deployments to the Verint cloud platform in bundled SaaS. Bookings for new deals in Q3 increased a strong 37% year-over-year. We are pleased with our new deal momentum year-to-date and expect to finish the year with another strong quarter. Bookings from conversion deals were minimal due to the success of our hybrid cloud model. Customers know they can add AI now and convert the rest of their Verint Solutions later when they are ready. We expect this dynamic to continue in Q4. Shifting to ARR. For Q3, SaaS ARR increased 11% year-over-year, driven by AI adoption and we expect double-digit SaaS ARR growth in Q4. As we have discussed in the past, we believe that SaaS ARR is a useful metric as it provides a consistent and normalized view of our recurring SaaS revenue streams on an annualized basis. Turning to our balance sheet. We continue to be in a very good financial position. Our net debt remains under 1x last 12 month EBITDA and is further supported by our strong cash flow. With regard to cash flow, year-to-date, we've generated 25% more free cash flow than last year and we are targeting strong cash generation in the fourth quarter and more than 30% growth for the full year. With regard to stock buybacks, we are executing on our previously announced $200 million share repurchase program and we'll expand on our capital allocation strategy with more detail during our Investor Day. In summary, we are pleased with our Q3 results and expect to finish the year strong. We delivered approximately 4.5% adjusted revenue growth year-to-date. And with a strong fourth quarter, we expect to deliver around 5% adjusted growth for the full year. We are also pleased with new SaaS ACV bookings from new deals growing 37% in Q3, and expect to finish the year strong. We look forward to speaking with you at our upcoming Investor Day on January 14, when we will showcase our differentiation, you will hear directly from our customers on AI business outcomes and we will review our financial model. With that, operator, please open the line for questions.

[Operator Instructions] And our first question is let be coming from Shaul Eyal of TD Cowen.

Congrats on the healthy performance. Dan, I'm looking at Verint's results, listening to your commentary as well as looking at some of the industry participants’ recent results and their market commentary. And I wanted to ask if you currently view Verint as gaining market share within the contact center arena, which you've indicated is ripe for the upcoming AI cycle?

Yes. I think we do, but we have to be clear, we are leading the CX automation market. So there's all kinds of different solutions that kind of send us need. And of course, we are not delivering CRM. We're not delivering communication platforms, but we do deliver CX automation platforms. And we believe that we are the market leader and that we're taking share. We believe that because first, we report -- we see customer reported a business outcomes that we don't hear from anyone else. And when we talk to customers, we see two types of competitors who are trying to sell into this CX automation needs. Clearly, everybody thinks this is a market that has huge potential because the dramatic outcomes that are being now generated in CX automation. It's not insignificant. These are tens of millions of dollars that companies can save in labor costs and also elevate the customer experience at the same time. And the competition really is coming, and CX formation is coming from two directions. We have competitors with port solutions, where they have specific bots that is automating a specific test. And that can come from small startups or large, more established companies but they have very specific AI for specific -- automating a specific workflow. And of course, we have best-of-breed performance in all our bots and we compete very well on -- with anybody in the market. But at the same time, we are a CX platform. We have Da Vinci AI, the core, we have the behavioral data at the core and we have all these ports working in one platform. And as customers start to think more strategically about CX automation, they're really looking for an open platforms where they can consume maybe initially just on bot and at a low level of consumption, but they want to be able to, as they see the results, to grow consumption and to expand into mobile. So we have clear differentiation from those point solution vendors. The other competitor is actually internal IT development. We see a lot of our enterprise customers buying AI tools and trying to develop AI, of course, many use cases across the enterprise. And they are reporting that they're not very successful in the contact center was the FX automation use case. It's not as simple. So we -- very often, we see this kind of we call it science projects, lab experiments that customers do. But we tell them, look, you can do a lot of things with yourself but you can also buy from Verint and we give you very strong outcomes. And we also give you those strong outcomes now because you can actually deploy it into your existing ecosystem. And customer love that message because a lot of the other options they have would require long and disruptive projects that can take a year or two, and who knows what kind of outcomes they they've been achieved. So that's another very strong differentiator that we can actually deliver with an open platform into an existing ecosystem.

Got it. Maybe just a housekeeping for Grant. I know you've mentioned that tiny tuck-in that you guys have made during the third quarter. Any light you can share with us some info about whatever contribution you've seen from that little asset?

Yes, I'll take that. So we talked about a tuck-in acquisition in Q3. It's a start-up company that actually invested $150 million in developing AI technology. So they have a very strong AI team and very strong technology and we're very excited to welcome the AI team into Variant. And also, as I mentioned earlier, we've already integrated some of their technology into our platform. And this morning, we introduced the new CX/EX scoring bot and this is a very unique but that doesn't exist in the market and the ability to create real-time scoring of each call and understand what the CX trends during the call. And of course, the employee experience trend as well. It's -- we believe it's very important. So we're very excited about the acquisition. Relative to the revenue perspective, the company is small and focused on technology. They have a very small customer base, about 10 customers. And like many other start-ups, their contracts give customers the right to terminate any time. So while we have no indications that the customers will terminate -- we will need to wait and see over time how much revenue these 10 customers will generate annually. For now, I'll tell you that we recognized about $1 million in Q3, so that's included in our results. And this could be several million dollars in Q4.

[Operator Instructions] Our next question will be coming from the line of Joshua Reilly of Needham.

Yes. If you look at customers renewing here, are you seeing any change in seat counts and what the customers are actually buying in terms of the net spend actually being higher as a result of everybody's concerns about what's going on with contact center seats in the market?

Yes, we started to see the change. We started to discuss this change actually in the beginning of the year. We talked about how AI is going to replace agents at least give the customers opportunity to replace agents and they give direct agents into different tasks. But since then, we do see every quarter more and more customers deploying AI and getting those very strong business outcomes that we are discussing. And we have about 50 different AI business outcomes, use cases on our website. So as the pool that those outcomes are not just lab experiments, but they really work in the field. We do see customers leverage this increased edge capacity. I would say that some customers choose to actually reduce the workforce. Other customers choose to use agents to spend more time to build customer relationship and to upsell and cross-sell and increase revenue. So obviously, that's a choice that each company have. I spoke recently to a large executive from a large insurance company. And while they are investing in self-service and they want to automate some very simple request of questions from customers, they actually have a goal to spend more time, an agent get spend more time talking to customers. So in that specific instance, when you're in self-service, even after the box will satisfy what you need, it will actually offer you to transfer you to an agent. So you can continue the conversation with a human being because they actually want to create more loyalty and deeper relationships. So the choice will vary but we do see customers to your question that actually are starting to reduce sales or agent count. And I would say that we have about 4 million agents that we currently deploy software against these. This is WFE software than we sold for many years. And across these 4 million agents, we generate about $200 per agent annually. So delivering AI business outcomes is actually very accretive for Verint because for the customers to eliminate the seats, they reduce the agent, they would need to purchase bots. And those bots to replace the agent, they will spend $1,200 for the AI. So that's a 6x opportunity for Verint to -- we're going to lose $200 per seat but we're going to gain $1,200 by delivering the bots that will automate that function.

And then I think if we look overall at the market , what I found over kind of the last year, you're talking to customers is with all the AI solutions that have come out from the various vendors there's been a digestion period where they kind of need to understand what all the vendors in the space are doing. Do you think now that customers have had maybe over a year in terms of evaluating all the different solutions out there that sales cycles can actually improve? And calendar 2025 with a better understanding of what AI is doing in the contact center?

So yes, I think you're referring to some sort of AI paralysis. And that's clearly the result of the noise and hikes that honestly, most vendors create in the market, but also internal IT organizations that play around with AI tools and they are kind of experimenting for different type of automation with use cases across the enterprise. So AI created obviously largest excitement about the opportunity but also certain policies, which is not unexpected in an early stage market. But again, the best tool we have, and it's working very effectively is to -- we go to an insurance company and say, look at your peers. They are already generating AI business outcomes now. What about you? And the more we can point customers to -- this is real and maybe it's time to invest. And you don't have to invest with Verint in a big way because we're not -- again, we're hybrid cloud model, meaning you do not need to convert anything you have to the cloud first. You can use the existing ecosystem the way it is. And you can now start to deploy AI, and you can start at a very low consumption because, again, it's very flexible. And the investment is not big. So when customers realize that they can do it in an existing ecosystem with relatively small investment and now they can prove the results not in the lab, but in a real environment, that starts to undo the paralysis. And it is getting better. I would say every quarter is getting better.

[Operator Instructions] And our next question will be coming from the line of Samad Samana from Jeffries.

This is Billy Fitzsimmons on for Samad Samana. About a month ago, you and RingCentral jointly announced a new partnership, Dan, it would be helpful if you could discuss how that deal came together? And just help frame for us how we should think about that partnership and opportunity going forward as we enter 2025.

Sure. So well, it came together because Ring announced that they have a plan to grow in the contact center market and that's the new initiative. They're not new to the contact center market, but they have a new initiative to grow in that market. And as a result, we invested both companies invested in cloud-to-cloud integration. So that now Ring is able to offer their customers all the capabilities that we have in the Verint platform. So I think that when you look at the industry overall, we believe that integrations between CCaaS platforms and CX automation platforms such as we have really provide customers a seamless way to purchase the communication infrastructure that they choose and also to benefit from the strong AI business outcomes that they need and they can get through a six automation platform. So it's -- in terms of the partnership, as you said, it was announced last month. So it's early, and we expect minimal contribution from that in Q4, but this will be another growth engine next year.

Got it. And then intra-quarter, you hosted investors at your annual user conference there to engage multiple new product announcements there. Your bot count expanded to 50 plus. But beyond the new products, it seems like there is a greater focus on bundling some of those bots together. So Dan, would be helpful if you could kind of recap some of the key announcements from Engage. And then obviously, it's early, but maybe speak to what customers' feedback has been like since the event.

Yes. Engage was an amazing conference for us this year, again, because it was not just about technology, it was about customers, talking to customers about the business outcomes that actually already generated. And that's the best way we like to see customers getting together, not just to hear what the vendor is to say, but it's an open conference when there's a lot of sessions where customers actually speak. And other customer can hear and ask some questions about their experiences. So as we gain more and more customer reported AI business outcomes, obviously, we leverage that for customers to hear from customers, and I think it created more confidence that AI is not just noise, it's actually driving real dramatic business outcomes. For me, obviously, from a platform perspective, because we designed the platform with the behavioral data hub at the core and the ability to bring any AI, Gen AI or other AI model into the platform quickly. We're also able to innovate very quickly with new bots. And as we create more and more bots, you mentioned we have more than 50. Obviously, we are trying also to help customers to consume those bots in bundles. But I would say we're not getting away from everybody is designed to do just 1 single thing because a bot is basically just automating one workflow. And customers have a lot of different workflows that they run in their business and they can choose to automate one workflow at a time, and especially the early-stage market that gives them a lot of flexibility to start small and to prove the results. But as they get more and more confident, obviously, bundling is another way to get them to increase consumption faster. And we started to offer some bundles, especially around the agent copilot bots. There are five different bots that we cover under that copilot category. All of them have the same common benefits of working in real time and helping the agent in real time, but each one of them is doing something different in real time. Like one is automating the knowledge search. So agents don't have to search for knowledge, and knowledge is just being delivered to them. That can save 30 seconds. Another copilot bot is helping the agent in terms of real time coaching. Reminding them of some compliance messages they have to say or suggesting next best action in terms of -- now it's a good time to sell something. So each of these copilot bots have a different function and they can be purchased separately, but we're also providing more bundles for customers who want to move faster. And you will see that typically, when you have a platform with many capabilities that works. You offer a la carte but you also offer bundles for those who want to move faster.

Thank you. And that does conclude today's Q&A session. I would like to go ahead and turn the call back over to Matthew Frankel for closing remarks. Please go ahead.

Thanks, Lisa, and thanks, everyone, for joining us today. Of course, as usual, please feel free to reach out with any questions you have. And we look forward to speaking with you on the 14th of January at the Investor Day. Have a good night.