Good day, ladies and gentlemen, and welcome to the Verint Systems Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Alan Roden, Senior Vice President, Corporate Development. You may begin. .

Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint CEO; and Doug Robinson, Verint CFO..

Before getting started, I'd like to mention that accompanying our call today is a WebEx with slides. If you'd like to view these slides real time during the call, please visit the IR portion 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 mention that in addition to reviewing our fourth quarter and annual results and updating our guidance for the current year, we will be reviewing market trends and discussing our actual intelligence growth strategy..

Prior to the call, we issued a press release that includes financial information for our fourth quarter and fiscal year ended January 31, 2019. Our Form 10-K will be filed shortly. Each of our SEC filings and earnings press releases is available on the Investor Relations link on our website at verint.com and also on the SEC website..

I'd 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 forward-looking statements.

The forward-looking statements are made as of the date of this call, and except as required by law, Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements.

For more detailed discussion on how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2019, on file 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. Our financial outlook is provided only on a non-GAAP basis.

Please see today's earnings release in 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, Alan. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full year results as well as our increased guidance for the current year..

The momentum we experienced throughout the year continued in Q4, and we're pleased to have finished the year strong. Our financial results and other achievements was met a successful execution of the growth strategy we implemented approximately 2 years ago, which we have discussed on prior calls.

This was another year of accelerating revenue growth and expanding margins with earnings growing faster than revenue..

Our annual results on a GAAP basis were $1.23 billion of revenue and $1 diluted net income per share. On a non-GAAP basis, we achieved revenue of $1.245 billion and diluted net income per share of $3.21..

We delivered a 14% increase in non-GAAP earnings with nearly 2 points of operating margin expansion. Cash from operations also came in very strong at $250 million, a 22 % increase year-over-year..

As our momentum continues, we are raising guidance once again for the current year. Our guidance for the non-GAAP revenue is increasing by $25 million to $1.37 billion, representing 10% growth and acceleration from the prior year. We're also increasing our guidance for non-GAAP EPS by $0.10 to $3.60, representing 12% year-over-year growth..

Let me take a step back and discuss how we have created such strong momentum. Over the last several years, our customers and the market at large have expressed mounting business and security challenges, and we responded by infusing more automation innovation into our Actionable Intelligence platform.

We believe that increasing our pace of automation and cloud innovation has further differentiated Verint as the vendor of choice in our market. We now estimate the size of the Actionable Intelligence market to be at approximately $10 billion and growing at a double-digit rate..

Verint is one of the industry's strongest research and development teams focused on Actionable Intelligence. We have about 2,000 in R&D out of total 6,000 professionals, we are innovating at an increasingly rapid pace.

Our intellectual property is backed by close to 1,000 patents and applications worldwide across data capture, unstructured data analytics, artificial intelligence and automation. .

Demonstrating our increased focus on automation, just over the last 24 months, we filed for 150 patents related to automation. Our Actionable Intelligence platform served as the technology foundation for a broad portfolio across Customer Engagement and Cyber Intelligence.

We believe the strength of our platform, and the investments we've made in automation and cloud are behind our momentum, and part of it, our outlook..

Now I would like to review our results by segment. Starting with Customer Engagement. Total revenue for the year was $811 million on a non-GAAP basis, representing a 7.5% increase year-over-year. We are pleased with our Customer Engagement momentum and expect revenue growth to accelerate again in the current year to 10%..

Our strategy is to help organizations simplify, modernize and automate Customer Engagement to address 2 important business challenges. We believe these challenges have escalated and have become increasingly critical over the last couple of years, emerging as top priorities for organizations to address.

The first challenge is that today, people demand better customer engagement and expect organizations to make improvements to elevate their customer experience. Increasingly, organizations are recognizing these needs and are looking for cost-effective ways to respond.

A recent poll shows that 71% of boardrooms consider customer experience to be their top metric. Another poll shows that 81% of CMOs expect to compete and differentiate based on customer experience, a much larger percentage than just a few years ago..

The second challenge is that digital transformation is driving an increase in the number of customer interactions, causing organizations to hire and expand their workforce, leading to unsustainable cost increases. According to industry research, the number of interactions is currently growing by more than 60% per year.

And there are already tens of millions of people employed globally in capital service functions with workforce costs exceeding $1 trillion annually..

Historically, initiatives that were focused primarily on customer experience often resulted in increased operating costs. An initiative that were focused primarily on efficiency often resulted in full customer experience.

More than ever before, organizations are focused on balancing these challenges, elevating customer experience, and at the same time, reducing operating costs. We believe the market is at an inflection point looking for new technology to address these escalating challenges..

Based on our customers' inputs, we identified his critical industry challenges early and started to infuse automation throughout our portfolio in response. We leveraged our Actionable Intelligence platform combined with our strong Customer Engagement expertise, and today, we deliver significant ROI for our customers across the enterprise.

Our portfolio helps organizations elevate customer experience while reducing operating costs and bring automation across the enterprise to many functions including, contact centers, back office operations, digital and mobile, marketing as well as security and compliance.

Our software makes employees more productive, enable an emerging hybrid workforce in which humans and robots work together, supports more interactions to be handled via self-service, capture the voice of the customer, distilling it into actionable insights, and automates fraud and compliance functions.

Overall, we believe that our simplified, modernized and automated strategy is differentiated and can drive double-digit revenue growth in Customer Engagement over the long run..

Turning to cloud. I'm pleased to report that our cloud growth rates have accelerated. We ended the fourth quarter with $200 million of cloud ARR on a non-GAAP basis, representing a year-over-year increase of approximately 40%. Based on this strong momentum, we expect cloud revenue in the current year to increase more than 40%.

This will drive our cloud revenue to nearly $250 million for the year..

Behind this acceleration is increased market cloud adoption and the strength of the Verint cloud. Our cloud strategy is to help customers transition to the cloud at their own pace. Our entire Customer Engagement portfolio is offered in a hybrid cloud model for maximum customer flexibility and scale from SMB to very large enterprise customers..

It's important to note that the $250 million of cloud revenue we expect this year will be generated predominantly from new customers or new cloud deployments. Just recently, our customers have begun to explore the conversion of their Verint Customer Engagement on-premise solution to the cloud.

SaaS conversion could result in a significant revenue uplift for Verint as the door of maintenance revenue can convert to cloud revenue at a 2x rate. We currently generate over $300 million of maintenance revenue per year, and future conversions to cloud present a significant opportunity for increased revenue and profitability..

Based on our cloud leadership, increased market cloud adoption, the level of growth we have recently achieved and the potential for our installed base to migrate to the cloud, we're targeting strong cloud growth over the next 3 years with a CAGR of 30% to 40%..

Turning to our customer base. We have more than 10,000 customers, including more than 85% of the Fortune 100. Our strong customer relationships drives high renewal rates and the opportunity to land and expand with our broad and growing portfolio.

During the quarter, we received many large orders from existing customers and new customers, including many competitive displacements, reflecting our strategy to help customers simplify, modernize and automate..

a $6 million cloud order from a leading travel management company looking to modernize customer engagement by moving from several on-premises point solutions to the Verint cloud. This large order was a competitive displacement, and we believe we were selected due to the strength of our cloud solution and strong automation innovation.

A $6 million order from a leading utilities company. This customer decided to deploy [ software ] solutions on-premises and some in the cloud, taking advantage of our flexible hybrid cloud mode. A $5 million order from a leading financial services company looking to infuse more automation into its operations.

This was another competitive displacement, and we believe we were selected due to our automation differentiation. A $2 million cloud order from a leading rideshare company looking to manage its rapidly growing workforce.

We believe we were selected due to our ability to address business challenges across the enterprise, including call centers, back office operations and branches with a global cloud deployment. A $2 million cloud order from a leading financial services company looking to gain customer experience insights.

This was another competitive displacement, and we believe we were selected due to our ability to capture and analyze most of the customers across many channels. And finally, I would like to highlight another Q4 win which reflects our strong customer relationship and the success of our land and expand strategy.

This leading telecommunications company gave us a total of $20 million in order in the year, of which, a $7 million order came in, in Q4..

In addition to our success in the enterprise market, today, we generate around 15% of our Customer Engagement revenue from SMB customers. Over the last several years, we invested in our SMB portfolio. And today, we offer SMB customers appropriate deals, cloud solutions designed to address their preferences for ease of deployment and ease of use.

In addition, we expanded our partner program with a growing set of cloud partners that sell our product to both SMB and enterprise customers. Verint partners benefit from our communication infrastructure neutrality, open system approach and our strong domain expertise..

Overall, we are pleased with our strong finish to the year, particularly with our cloud acceleration. We're also pleased to be in a position to raise guidance in the current year as well as provide a 3-year outlook for strong cloud growth..

Turning to Cyber Intelligence. Total non-GAAP revenue for the year was $434 million, representing a 10% increase year-over-year. We're pleased with our continued momentum and expect to deliver another year of 10% growth.

We're also pleased with a 2% margin expansion we achieved last year, and we'll discuss a long-term target for Cyber Intelligence margin expansion later in the call..

We live in a world where security threats are becoming more pervasive and complex. At the same time, data volumes are growing rapidly, making legacy data mining tools less effective. As a result, security organizations are seeking more advanced data mining software to better detect, investigate and neutralize threats.

We believe the cyber intelligence addressable market size is about $4 billion, and the ongoing demand for advanced data mining software provides sustained double-digit growth opportunity.

Our strategy is to introduce advanced data mining software that can further automate the intelligence and shorten the investigative processes for our customers while reducing dependency on large numbers of intelligence analyst and data scientists. .

Cyber Intelligence, cyber security and situational intelligence..

In Cyber Intelligence, we help law enforcement and national security organizations capture large amounts of data from a variety of sources and turn it into Actionable Intelligence to help prevent crime and terror.

In cyber security, we help government cyber authorities and enterprise people capture network and endpoint data and identify malware and cyber effects. And in situational intelligence, we help government and enterprises capture a large amount of data from devices and databases and deliver actionable insights to protect people and assets..

Our customer base in Cyber Intelligence is growing. Last year, we added 100 new customers, and we now have more than 1,000 customers globally across government and enterprise. Today, government customers represents approximately 80% of our Cyber Intelligence revenue.

We provide a data mining software to diversify a set of 400 government agencies across more than 100 countries. We have long-standing relationship with customers around the world, and a significant portion of our Cyber Intelligence revenue comes from repeat business..

The remaining 20% of our revenue comes from enterprise customers, where 600 enterprise customers across many verticals such as telecom service providers, financial services, retail and critical infrastructure, including many large companies who are leaders in their industries..

In Q4, we continue to win many large deals around the world, including recently receiving an order of close to $20 million; 2 orders around $15 million each; and 3 orders in excess of $5 million each.

We believe our success in winning these large deals in Q4 is due to our ability to anticipate market trends and quickly bring innovative solutions to market..

We believe the combination of our leadership position and strong market demand for advanced data mining software will enable us to continue to grow revenue at a double-digit rate, supporting our outlook in an expanding customer base across governments and enterprises, providing us strong visibility.

As previously discussed, we're executing a plan for significant margin expansion in our Cyber Intelligence segment, and I'm pleased to report on our progress and outlook. Over the last 2 years, we've invested to transition the business to a more software model.

We have already achieved 3% margin improvement over the last 2 years and expect our margin to continue to expand this year as our revenues shifts to more software and less pass-through hardware. Over the next 3 years, we're targeting an additional 5% margin expansion, driving our Cyber Intelligence adjusted EBITDA margins to more than 20%.

Overall, we are pleased with execution of our Cyber Intelligence strategy, driving strong revenue growth and ongoing margin expansion..

Before turning the call over to Doug, I would like to summarize as follows. We believe our strong results and overachievements reflect the successful execution of their growth strategy we launched approximately 2 years ago.

With this strategy, we are accelerating our pace of innovation to further differentiate Verint in a market that is increasingly embracing Actionable Intelligence solutions. We are experiencing strong momentum, driven by automation and cloud adoption.

And finally, we believe that our addressable market is growing at a double-digit rate, and that we are well positioned for sustained growth and market leadership..

And now let me turn the call over to Doug. .

Yes. Thanks, Dan. Good afternoon, everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Alan mentioned, in our earnings release and in the IR section of our website.

Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including fair value revenue adjustments, amortization of acquisition-related intangibles, certain other acquisition-related expenses, stock-based compensation as well as certain other items that can vary significantly in amount and frequency..

I'll start my discussion today reviewing our fiscal 2019 performance and then talk about what we're expecting for fiscal 2020..

We finished the year with solid momentum and had strength across the business. Each of the quarters built upon one before, and we're well positioned going into the new year. For the full year, we generated $1.245 billion of non-GAAP revenue, up 8% from the prior year.

We experienced strong growth in both of our segments with $811 million of non-GAAP revenue in Customer Engagement, up approximately 7.5% year-over-year; and $434 million of non-GAAP revenue in Cyber Intelligence, up approximately 10% from last year..

We achieved expansion of our gross margins with full year non-GAAP gross margins of 66.6%, about 1 point higher compared to last year. We experienced an expansion in both segments, with Cyber Intelligence full year gross margins expanding 2 points..

For the year, our non-GAAP operating income increased 18% year-over-year to $267 million, driving an operating margin of 21.4%, an approximate 2-point expansion. Our objective has been to grow earnings at a rate greater than revenue, and we're very pleased with the operating margin improvement we experienced for the year.

Our adjusted EBITDA for the year was almost $300 million, up 16% from last year. .

This performance drove diluted non-GAAP EPS of $3.21 for the year compared to $2.81 in the prior year, a 14% year-over-year increase. We are pleased with the earnings leverage we are achieving as we work to extend our gross margins in both segments and also in achieving some cost efficiencies with our operating expenses..

With respect to the balance sheet, at the end of Q4, we had $468 million of cash and short-term investments, including short-term and long-term restricted cash and investments.

We had very strong cash flow from operations on a GAAP basis in Q4 of $84 million, resulting in $215 million of GAAP cash from operations for the full year, a 22% increase from last year.

The strong year-over-year increase in GAAP cash flow from operations also demonstrate the positive business and earnings momentum we're achieving and speaks to the overall health of the business..

We ended the quarter with net debt of $351 million, including long-term cash and investments and excluding discounts and issuance costs primarily associated with our convertible debt..

When we look at our fiscal ended 2019 results, you can see the tremendous progress we've made over the last 3 years in terms of revenue and earnings growth.

Looking to fiscal year ending 2020, we see that momentum continuing and are raising guidance to $1.37 billion of revenue, plus or minus 2%; and $3.60 earnings per share at the midpoint, both on a non-GAAP basis. .

cloud, maintenance and contracts already in place as of the beginning of the year. These 3 components represent about 70% of the annual revenue we expect to achieve and provide us a good visibility into the year.

With respect to margins, we believe margins will continue to expand in Customer Engagement and expecting adjusted EBITDA margin of approximately 28.5% for the year..

In Cyber Intelligence, in fiscal 2020, we expect revenue growth of around 10% with continuing margin expansion as we continue the shift to more of a software model.

Overall, we expect to run $475 million of revenue, with a majority of our revenue coming from contracts we already had in place at the beginning of the year, maintenance and some subscription. These 3 components also represent about 70% of the annual revenue we expect to achieve, providing us good visibility into the year.

At this guidance level, we expect an adjusted EBITDA margin of approximately 16.5%..

Before I go into Q&A, I'd like to provide some additional input for your fiscal 2020 models. We expect our non-GAAP quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $5.7 million.

Given the volatility in foreign exchange rates, there could be future gains or losses related to balance sheet translations in our future results which are not included in our guidance. We expect our non-GAAP tax rate to be approximately 11% for the year, reflecting the amount of cash taxes we expect to pay this year.

And for share count, we expect to have approximately 67.5 million average diluted shares outstanding for the full year..

In addition to our annual guidance, we'd like to provide some color on the progression of the year for modeling purposes. For non-GAAP revenue in Q1, we expect revenue to increase around 8% year-over-year to $315 million. We expect sequential increases in Q2 and Q3, followed by our usual seasonally strong Q4.

Relative to margins, we expect earnings per share to increase approximately 14% year-over-year to around $0.60 in the first quarter, driven by continued margin expansion..

When we look beyond the current year, we are targeting sustained double-digit revenue growth and margin expansion over the next 3 years. In Customer Engagement, growth will be fueled by growing our cloud revenue, which we are targeting at a 30% to 40% CAGR, which will enable us to double our cloud business in less than 3 years.

And in Cyber Intelligence, growth will be driven by demand for data mining solutions and a transition to a software model, which we are targeting will take our Cyber Intelligence adjusted EBITDA margins to above 20%..

In conclusion, we believe demand for Actionable Intelligence solutions remains strong, and we continue to execute well on our growth strategy with a focus on automation and cloud.

With the momentum of our Customer Engagement cloud business and the need for innovative data mining software in our cyber security business, we feel we are well positioned and are pleased to be raising revenue guidance to 10% growth with another year of expanding margins..

To that, operator, can we please open up the lines for questions?.

[Operator Instructions] And our first question comes [indiscernible] of Jefferies. .

This is actually Samad Samana from Jefferies. I think we were most impressed by the cloud revenue size and the growth forecast that the company you gave there. And again, I was just wondering if maybe you could help us understand what the drivers of that cloud revenue growth are, first, for new customer additions versus maintenance conversion.

And how we should think about the cadence of that opportunity? And I'm also just curious if there's any incentives or any sales -- with the sales organization to drive that very impressive cloud growth. And then I have a follow-up question. .

Yes. I'll be happy to expand on cloud. So as we discussed in prior calls, enterprise customers have been interested in the move to the cloud. And what we've seen lately is that they've accelerated their cloud adoption and cloud purchases.

So what we expect this year, $250 million in cloud revenue, is predominantly from new deployments, so either new customers or deployments to existing customers. But the maintenance conversion basically has not started yet. We have a handful of customers that convert maintenance revenues into cloud.

And we expect -- our maintenance revenue grew last year and we actually expect maintenance revenue to grow this year as well, but we think that the conversion is about to begin. But our growth this year, we expect more than 40%, with very little maintenance conversion, so it's all new deployments.

And it's really fueled by our readiness and the market readiness. So I think the SMB market has obviously adapted cloud faster. And I spoke about what we're doing for SMB customers, and we see that as a growth opportunity. But we see more adoption also at the high end of the market for larger enterprise customers.

So let me explain more why we feel very strong about our ability to address the customer needs and to help them move to the customer at their own pace. We have a differentiated offering in cloud that is based on 4 factors. One is very broad portfolio that is all available in the cloud, and the sales force is leading with SaaS first.

At the same time, we have a hybrid cloud model to give customers maximum flexibility.

And as I mentioned in some of the large wins that I discussed today, we have customers that clearly prefer to deploy some of our solutions in the cloud and some on-prem, and that can actually deploy Verint solutions on the Verint cloud, that can deploy it on a partner cloud, that can deploy it on their own cloud or on-prem or any combination, and that's a great strength.

We also offer a very strong feature parity between on-prem and cloud, which make it easier for customers to move on-prem to cloud, and all of these are really, really strong differentiated cloud capabilities. In addition, I mentioned a few customer wins where we have global deployments.

So we're able to deliver cloud in many countries, dealing with all the data privacy and the need to have data centers in different geographies. And we have deployed across the globe, and our offering also scale from SMB all the way up to the enterprise. So I think that's a very strong cloud offering.

We believe that we are, today, the largest cloud vendor in our market. And remember, we don't sell communication infrastructure for that. So we've built scale to be the largest, and we also believe that we are the best vendor to provide customers cloud at the pace of our customer needs. .

I was going to ask maybe just one follow up. As you mentioned, the company has a really broad cloud portfolio, and we think that's one of the things that's driving new business and new wins.

I'm curious if there's -- which areas within that portfolio of cloud are particularly in the hybrid environment? Which ones are the most popular to put in the cloud versus the ones that are being kept on-premise?.

So I think it's really more by enterprise function. Again, we sell across the enterprise, contact center, back office, digital mobile, marketing and so on. Marketing, the solution we felt to marketing, usually, we have very, very high cloud adoption already. Well, the solution in the operation, typically, large customers tend to do it slower.

So it's not so much by product, it's more by adoption of the market. Depends more on their market function and also how much IT really wants to move and modernize the organization. But we are ready across our portfolio, and we see good traction with basically all our products moving to the cloud.

I want to mention also just one more thing, just to have a complete response on the cloud dynamics.

The maintenance conversion that is still ahead of us, we've seen opportunities to get a great revenue uplift because conversion could be typically at the 2x rate because we basically are helping our customers not just to move the license from on-prem to cloud but also to host the software for our clients, and we have a very efficient hosting infrastructure that is more efficient to clients, which creates a great opportunity for them to save money while moving to the cloud.

And at the same time, we get a revenue uplift and also increased profitability. .

Our next question comes from Gabriela Borges from Goldman Sachs. .

Thanks for taking the question and for the incremental detail on the cloud opportunity. I have a sit-down off for Doug.

Maybe help us understand the implications for your typical perpetual license sale, I'm just wondering how we gauge the dynamic where if incremental growth is coming on via cloud, how do we avoid the [ sorrow ] if perpetual license falls off more rapidly and you get a little bit more of air pocket in the P&L?.

Yes, sure. We see this as being migration. We expect a lot of customers will continue along with some perpetual licenses, at the same time, other customers are doing more in the cloud, but we modeled that in.

We have some scenarios which we look at in terms of conversion rates, and we feel comfortable we can absorb any fall off in perpetual license with the work that we have in the cloud going forward. .

Yes. At the same time, we have better margins on cloud than on-prem. So we have built that scale to what we expect this year of $250 million. Actually, with margin expansion, if you look at the last couple of years, while we're building our cloud business, we also are improving our gross margins.

And we talked in the past about the fact that -- and on-premise limitation id software license and professional services, and that SaaS implementation, multi-tentant SaaS comes with a margin of 80%. So the more our customers move to the cloud, we will expect to see continued margin expansion. .

That's very helpful. And the follow-up is on the Cyber Intelligence business.

Maybe just give us a little bit of a sense of how customers are thinking about spending over the course of the year and the type of visibility that you have into that business relative to prior years?.

Yes. So our visibility is strong. We entered the year with approximately 70% of the expected revenue that we have visibility, and that's pretty similar to last year. But of course, we're expecting another 10% growth this year.

So visibility of 70% is strong and has been our experience over the last couple of years where we were driving double-digit growth. I think that currently, the market at large is clearly demanding more advanced data mining software. We have customers that are invaded with data and they need data mining software to be able to make sense of the data.

I can give you an example of a cyber security customer that reported to us after they implemented our software in their stock, just give you an operating sense here, that they were able to cut the investigation time from 1 week to 4 hours in average.

And you know that probably in the stock today, there's a lot of alerts that require cyber analysts to follow-up on these alerts, investigate and find out if these are just false alarms or real malware.

And the ability to use data mining software and accelerate the investigation and achieve acceleration of 1 week to 4 hours obviously leads to being able to make the cyber analysts much more effective in protecting the organization. So there's an ongoing demand. We believe it's a double-digit growth opportunity.

The market is growing double-digit, and we are well positioned with a strong portfolio to grow at that pace. .

And our next question comes from Daniel Ives of Wedbush Securities. .

So maybe just talk about the cloud transition in terms of call center, what you're seeing, how the conversations change with customers, especially over the last, call it, 3 to 6 months, versus where you were a year ago. .

I think the sales force is still giving our customers the flexibility to choose the deployment that they prefer. So from that perspective, I think we continue to be neutral to customer preferences. But we just see acceleration in customer adoption, in the enterprise area and in SMB.

I think what changed is that we invested in creating more purpose-built solution for SMB. So we took our product downstream. We made it easier to deploy and easier to use and leveraging a growing ecosystem of partners, cloud partners.

I think we are better positioned to address the strong demand for cloud in the SMB space, so acceleration for us in both areas.

And with our own strengths and the ability to be very efficient with delivering these solutions, we're also very competitive in terms of price, in terms of features, security, quality, all the cloud features that are important to our customers in addition to the functionality of the application. .

Got it. Okay.

And when you were thinking given some of the recurring revenue from visibility, just given what's going on in the model, how should we think about that from like an ARR perspective and use increased visibility maybe in the model that we're seeing over the next 12 to 18 months? Is there a way to measure that? Or at least you're thinking about the business from a high level in terms of that visibility stream?.

So yes, you can certainly measure that. We have recurring revenue of approximately 60% and improving from last year. And with the cloud acceleration that we see and we get a CAGR of 30% to 40% over the next 3 years, our recurring revenue will be approaching 70%.

So we believe that some enterprise customers will still prefer on-prem deployments, but we clearly think that we're moving with much faster growth in cloud over the next few years that will improve recurring revenue. And again, we think that this growth will partially come from maintenance conversion, but that's going to take some time.

And we certainly see a lot of new deployments as we saw so far that will be cloud deployments. And of course, if the maintenance conversion is going to happen faster, then we have an upside opportunity. .

And our next question comes from Hugh Cunningham of OpCo. .

I don't want to beat this to death, but on the cloud side, it seems like the -- what we considered a concern about security on the cloud, that concern, on the part of your customers has gone away.

And I'm wondering, is there anything else that's holding customers back? And then on your side, it seems like you're maintaining sort of a neutral stance for your customers, giving them what they want.

But are you going to maybe shift or tilt your approach a little bit in the future towards maybe pushing cloud more? And then finally, on the cyber side, you've seem so much more confident on Cyber Intelligence now, and I think Doug mentioned margins above 20%. Well, I think it's 3 years out, but margins openly above 20%.

Did I hear that right? And one, I think that's higher than you used to talk about.

And then specifically on the cyber side, what are you seeing in emerging markets? Are the emerging markets showing on continued signs of strength? Are there any concerns or what's happening there?.

So yes, you heard right, the number 20%. And of course, those of you who are able to see the slides on the WebEx, I think we make it also very clear there. But let me start with the cloud question, and then we'll give some more details on Cyber Intelligence.

So in terms of market adoption and security, there are -- as I mentioned before, there are customers that we believe for many, many years to come will feel with our own solutions into their own data centers but because of security and other reasons. So we don't think that 100% of our customers will transition to the cloud.

But we see, obviously, a growing number of customers that are comfortable with the security that we're offering. And yes, we have invested quite a bit in providing a higher level of security to our customers over time.

So I think that pushing our customers is not a good idea, but I think the customers don't want to be pushed, they want to be led to understand the benefits of cloud. I think that we are able to show them that some of the concerns they have are no longer their concern.

At the same time, some of the quality and cost efficiencies that we've introduced as we create more scale, we're able to pass some of these savings also to our customers. So I think we can help customers to get more comfortable in their journey to the cloud and do it faster, but we don't really need to push them there.

These are very large companies and long-standing customers. We still have land and expand opportunity. They're buying more from our portfolio, and I think they really value that we are a trusted partner overall.

We -- just to kind of summarize all these points, our projection for this year for more than 40% cloud growth, does not require assertive pushing of the customers. It's really based on the strong ARR that we finished the year and based on projection of continue to behave the same way. And we believe that our cloud adoption will get better overtime.

So hopefully, that answers your cloud question. So now let's get some more details on Cyber Intelligence.

We are discussing today with more confidence the margin expansion because we've made investments over the last few years to transition our products to software model and make it easier for our customers to buy the software and to buy the hardware themselves or through integrators.

We mentioned before that this is both an investment that we need to make in our products, but also its market adoption. And by now, we spoke to a lot of our customers and explain to them the benefits, and we see that they really like the direction. We also have 3% margin expansion over the last 3 years.

And that's why we're comfortable to give today 3-year target for additional margin expansion of 5% over the next 3 years. So the number 20 here, 20%, we have finished the year with 15.5% EBITDA margin in Cyber Intelligence, and we expect to be over 20% within the next 3 years. So that's the margin expansion.

It's really -- it's consistent with what we explained before that we used to sell hardware that the customers prefer to buy the software and the hardware together from Verint, and that we are in a transition to shift these past 2 hardware that really we don't make and we don't really in the business of selling hardware.

So we are shifting that away, and that -- replacing that with obviously higher margin software revenue that overall increase our gross margin and EBITDA margin. .

And you successfully executed a similar transaction, I think, or process on CE. My final question, Dan, was on the emerging markets. .

Yes. So we have a very diversified customer base now. We mentioned that we added 100 customers last year, more than 1,000 customers. About 400 government agencies, different government agencies. So on average, 4 agencies per country. Obviously, sometimes there's more, some less.

But on the government side, we see it's quite diversified across many agencies and many countries. And then we have 600 customers in enterprise, and enterprise is growing faster. So we are getting more scale and more diversification in our Cyber Intelligence business.

We do not see any issues with emerging markets right now that cause us to being concerned. And we feel strong demand and strong pipeline across the world. .

And our next question comes from Jeff Kessler of Imperial Capital. .

I have a question here, and I'm going to get it out slowly because it's kind of complicated.

With the amount of new sensors that are out there, either that range from highly sophisticated sensors at the high end down to do-it-yourself centers at the residential level, the amount of information and data that is going to responders as well as those who are out there to analyze this data, it's just growing at an exponential rate, overwhelming the ability at the home level, police departments to respond, and at the larger level, obviously, discussions with regard to civil public-private partnerships and how much they can handle.

What are you doing? And what opportunities do you see in the ability to provide responders with Actionable Intelligence, whether it's at very low level or at -- obviously, at the high level where there's been some backup in civil security types of programs simply because they don't have either the people or they don't have the budgets to handle the amount of data that they're dealing with.

.

Yes, we refer to this as data mining software for the IoT, Internet of Things, because there are more and more, like you said, sensors, devices. There's more and more devices connected to the Internet that generates data.

And the ability to collect the IoT data and apply data mining software, which is basically analytics and automation, is really at the core of trying to bring insights and do more security with fewer people.

So we have, for example, a global semiconductor company with facilities over the world that recently became a customer for situational intelligence.

And in this case, we are helping them to collect data from the IoT and also fuse that data with their own databases that they have about their employees, their vendors, their access authorities into different parts of the facility and try to bring those insights to identify issues related to either people safety or protection of assets.

So the whole situational intelligence business, I think, is also an early-stage opportunity for Actionable Intelligence and one that I think, at this point, just the leading companies in their industries are starting really to adopt it.

And again, for those of you who look at the slides that we have in conjunction with this call and they will obviously be posted, you can see that we list some of our Cyber Intelligence enterprise customers, and they are very large companies and leaders in their industries. .

A follow-up to that is that in the ability -- what is -- right now, we see that there's probably about 13%, 14% hiring going on just for IT personnel.

How are you, particularly on the what I would call your cyber security, I want to call it cyber physical capabilities, what are you doing to get more revenues out of larger customers, in particularly in areas like critical infrastructure, to involve them in the, you want to call it the physical nature of making sure that compliance is dealt with in HIPAA rules, financial regs regarding protecting the cyber side of it? How do you get extra revenues from helping them on the, if you want to call it the quasi physical area of making sure that, that data is secure?.

Yes. I think that a lot of these companies are building stock for physical securities that are kind of more and more similar to the cyber security stock because they can have -- as we've said, they can hire people and have business people all over the place. They want to bring the data into a centralized operating center.

And in that center, they want to make the data into actionable insights and a force multiplier so they can do more with fewer people. This is exactly the sweet spot of our Actionable Intelligence offering. And the adoption of this technology, I believe, is still in the early stage in the physical security market.

But with our Cyber Intelligence business, I mentioned that we are operating in 3 domains, the cyber intelligence, the cyber security and the situational intelligence. And this opportunity that you're describing, Jeff, is around situational intelligence for physical security and quicker infrastructure, and we have strong solutions in this area.

And I think with market adoption, we'll see also acceleration of our growth rate in this domain. .

So you're seeing this as the infancy of this area?.

I think this area was more focused on deploying people in sensors and devices and much less interested in advanced data mining software.

I think that governments and cyber security authorities were more advanced in understanding the power of intelligence, and yet this is infancy in terms of intelligence situation, bringing intelligence into situations that worry this market, what we call situational intelligence, it's still in an early stage. .

And ladies and gentlemen, this does conclude our question-and-answer section. I would now like to turn the call back over to Alan Roden for any closing remarks. .

Thank you, operator. Before ending the call, I'd like to discuss multiple upcoming investor events. On April 2 and April 3, we're doing investor meetings in the Mid-Atlantic region and the Midwest region, hosted by Goldman Sachs. On April 8 and April 9, we'll be doing investor meetings in Denver, and Kansas City, hosted by Wedbush.

On April 9 and April 10, we'll do investor meetings in San Francisco and Los Angeles, hosted by Jefferies. And in May, we'll be participating in the Jefferies Software Conference in Los Angeles and the JPMorgan Technology Conference in Boston. We look forward to seeing you at these and other investor events.

Thanks for joining our call today, and have a great evening. .

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect..