Ladies and gentlemen, thank you for standing by and welcome to the Verint Third Quarter Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Alan Roden, Senior Vice President of Corporate Development. Thank you. Please go ahead, sir. .

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

Before getting started, I'd like to mention that accompanying our call today is a WebEx slides. If you would like to view these slides in real-time during the call, please visit the IR section of our website at verint.com, click the Investor Relations tab, 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, 2020, 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 peer companies.

Please see today's WebEx slides, 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.

The non-GAAP financial information should not be considered in isolation from, as a substitute to or superior to GAAP financial information, but 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. I'm pleased to report a strong third quarter with revenue coming in better-than-expected and strong year-over-year adjusted EBITDA growth of 17%. Cash from operations year-to-date was also strong, increasing 16% compared to the same period in the prior year..

Looking ahead, we believe our cloud momentum will continue. We see perpetual deals gradually coming back, and our visibility has improved from prior quarters. We are resuming guidance for the year with expectations for a strong Q4..

Also, I'm pleased to report that we are on track to complete our separation into 2 public companies shortly after fiscal year-end. We already made our initial confidential filing with the SEC and plan to file publicly within the next 2 weeks. Ahead of our separation, we will be holding investor days and management road shows in January..

Turning to Customer Engagement. In Q3, we experienced significant cloud momentum, and we believe the industry shift to the cloud is being accelerated by COVID.

During Q3, we continued to win new cloud customers and displace competitors due to the significant differentiation of our cloud platform, our artificial intelligence and analytics innovation and our partner agnostic strategy..

an $11 million cloud order from an existing insurance customer related to their decision to transition to SaaS; a $3 million cloud order from one of the largest pharmaceutical companies due to their rapid growth in self-service interactions; and a $2 million cloud order from one of the largest BPOs.

This competitive displacement was driven by our open and agnostic partner approach and our ability to easily integrate into their operations. In addition to these large cloud orders, we saw a gradual return of perpetual license orders in Q3, which we believe will continue in Q4..

Behind these large wins is our ability to address the following recent industry trends. First, customers are looking to address the lasting impact of COVID on the workforce.

We believe our recent cloud momentum is in part due to our ability to help our customers navigate the COVID environment, creating significant opportunity for Verint going forward..

Second, customers today are even more focused on addressing a key strategic problem, which is how to strike the right balance between cost efficiencies and exceptional customer experience. Verint has been a market leader in workforce engagement for over 2 decades, and we are uniquely positioned to help organizations address this strategic problem..

Third, the role of partners in our industry is increasing, and a strong partner ecosystem has become an important competitive differentiator. Unlike many competitors that offer closed solutions, Verint's open cloud platform increasingly makes us the partner of choice across the industry ecosystem..

And finally, we have a large customer base and are seeing an increasing number of customers express interest in converting their legacy deployments to SaaS. And we launched an attractive conversion program in Q3, which we expect will increase the pace and number of conversions..

To summarize, we believe we are uniquely positioned to address these recent industry growth trends with our focus on the evolving work environment, our open cloud platform and an expanding partner network..

Turning to our outlook for the current year. We expect $835 million of revenue for our Customer Engagement segment, at the midpoint of our guidance range..

Our guidance reflects a strong market shift to SaaS, and we expect to reach 2 important milestones this year, which I would like to highlight. First, this year, we expect approximately half of all the new software bookings to come from SaaS as compared to about 1/3 in the prior year and only 1/4 2 years ago.

We are pleased to be crossing over the 50% new bookings mark. And second, we expect 80% of our software revenue to be generated from recurring sources, up 400 bps from the prior year and up 900 bps from just 2 years ago. We expect these KPIs to improve further next year, which I will discuss next..

Looking ahead to next year, we expect our cloud revenue growth to accelerate to approximately 30%, driven by strong new software bookings and SaaS conversions. From a mix perspective, next year we expect 2/3 of our new software bookings coming from SaaS.

We also expect that the percentage of our software revenue that is recurring to increase to 85%, another 500 bps improvement from the current year..

Achieving the 85% level marks the substantial completion of a cloud transition, which will provide us many benefits, including improved visibility, better economics over the lifetime of the customer, and less revenue headwind associated with cloud transitions..

Today, we are introducing long-term targets for our Customer Engagement business ahead of our planned separation. We're targeting an approximate 30% CAGR for cloud revenue over the next 3 years. Like other cloud transitions, we expect our revenue growth and margins to gradually improve in fiscal ending '23 and '24.

We are targeting $1 billion of revenue in fiscal year ending '24, with approximately 90% of our software revenue generated from recurring sources..

We will provide more detail on our 3-year targets as well as review our growth strategy, TAM and competitive differentiation during our virtual Investor Day for customer engagement to be held on January '21..

Moving to our Cyber Intelligence business. Today, I'm excited to announce the new name for this company, which will become official upon the separation. Cognyte is coined from the world cognition and ignite to reflect the powerful analytical nature of our security software solutions.

Cognyte will be headquartered in Israel and will be listed on the NASDAQ under the symbol CGNT as a foreign private issuer..

Our security analytics software generates actionable intelligence for many government and enterprise security customers around the world. After some COVID-related impact earlier in the year, we experienced strong sequential revenue growth in Q3 and entered Q4 with improved visibility. .

Customers come to Verint for our mission-critical security software to help accelerate investigations of terror, crime and cyber threats. In Q3, we received multiple large orders, including one for approximately $15 million, one order for approximately $7.5 million and 4 orders for approximately $5 million each..

In addition, we continue to execute well on our software model strategy. During Q3, our non-GAAP estimated fully allocated gross margins came in at 74%, a 900 bps year-over-year increase and non-GAAP gross profit increased 21% year-over-year. We are very pleased with the progress we are making on our financial and strategic goals..

Looking over the last 3 years, you can see the positive impact of the software model transition is having on our financials. The percentage of our revenue that is generated from software has been steadily increasing as we reduce the amount of revenue we generate from services..

The percentage of our revenue that is recurring has also steadily increased. The biggest positive impact to our financial model has been on gross margins. Our estimated fully allocated gross margins have increased approximately 800 basis points over the last 3 years and are expected to reach 70% this year for the first time.

For revenue, we expect $445 million this year at the midpoint of our guidance..

Overall, our Cyber Intelligence management team is executing well and has built a solid foundation to be a successful independent public company..

Looking forward, we believe that Cognyte is well positioned for growth and market leadership. Cognyte is a market leader in security analytics software. We have developed trusted long-term relationships with our customers and have a very successful track record of profitable growth. Behind our leadership is our technology strength.

Cognyte is at the forefront of advanced artificial intelligence and machine learning technology, which are critical for addressing the security challenges our customers face..

We participate in a large $30 billion addressable market, which is growing as security challenges become more complex, and customers seeking innovative open security analytics software to meet those challenges. Overall, we believe that the market trends are favorable and can support sustained growth over the long run..

For next year, we expect 10% revenue growth for our Cyber Intelligence business. For fiscal year ending '23 and '24, we're targeting revenue growth to improve, driven by greater adoption of our open security software solutions..

We will provide more details on our 3-year targets as well as review our growth strategy, TAM and competitive differentiation during Cognyte's virtual Investor Day to be held on January 11..

And now I would like to summarize. I'm very pleased with the execution of our cloud strategy and customer engagement and our software model strategy in cyber intelligence.

I'm also very proud of the work we have done to prepare for the separation and believe that both businesses will continue to prosper and appeal to investors as 2 independent public companies..

Now let me turn over the call to Doug.

Doug?.

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, separation-related expenses as well as certain other items that can vary significantly in amount and frequency.

For certain metrics, it also includes adjustments related to foreign exchange rates..

Today, I'll cover 4 topics. First, I will review our Q3 results and fiscal '21 guidance. Second, I will review our initial outlook for next year on an as-is basis. What we mean by as is, is what Verint would look like if we remained as one company.

This is meant to help you update your models on a consolidated basis until the separation of our 2 businesses occurs. We plan to provide you additional information at our investor days that will enable you to start to build models separately for each business..

Third, I'll provide some additional detail regarding the separation, including the anticipated capital structures and the amount of dis-synergies we expect. And fourth, I'll take you through our long-term targets for each business..

We're pleased with our 6% sequential revenue growth, which, as Dan mentioned, came in ahead of expectations and drove a 17% year-over-year increase in adjusted EBITDA in Q3 and a 16% increase in GAAP cash from operations on a year-to-date basis..

We expect to finish the year strong. And given our improved visibility, we are providing guidance. We expect non-GAAP revenue of $1.28 billion with $330 million of adjusted EBITDA and $3.40 non-GAAP diluted EPS at the midpoint of our revenue guidance..

Overall, we're pleased with our performance this year. And despite COVID delaying some perpetual license orders, we expect to grow adjusted EBITDA by about $5 million year-over-year..

Looking ahead to next year, we believe the momentum we experienced this year will continue and are introducing our initial as-is outlook. We expect non-GAAP revenue to increase around 5% to $1.35 billion. We expect adjusted EBITDA to increase at a similar rate before separation dis-synergies, which I'll discuss in a minute..

Excluding the impact of the separation, we expect around $20 million of non-GAAP interest expense and a non-GAAP share count of 71.5 million shares. Again, we are providing this information to help you update your consolidated models pending the separation.

At our Investor Days in January, we'll provide more detail regarding the post-spin models of the 2 companies..

As Dan noted earlier, we plan to file our 20-F publicly in the next 2 weeks, and we expect to consummate the separation shortly after year-end..

Today, we'd like to provide some additional visibility into capital structures and dis-synergies. Both companies will have strong balance sheets, adequate working capital and strong cash generation post separation. Following the separation, Verint will have modest net leverage of about 1x adjusted EBITDA, excluding the preferred stock..

At this point, we expect each company to have about $15 million of separation dis-synergies. Most of dis-synergies are related to public company expense, IT and other shared business service expenses..

Now I'd like to provide further information for each business on a stand-alone basis, starting with customer engagement. As Dan discussed earlier, we think it's very helpful to analyze the customer engagement cloud and perpetual revenue stream separately..

On the cloud side, we expect the momentum we experienced this year to accelerate next year. New SaaS bookings, which is a leading indicator of cloud revenue growth, is expected to increase more than 40% this year and will help drive approximately 30% cloud revenue growth next year..

We expect our bookings mix to continue to shift to cloud, with about 2/3 of new software bookings coming from SaaS compared to about half this year. We are also expecting recurring revenue to reach 85% of our software revenue, up 500 bps from this year..

Regarding perpetual licenses, due to our cloud-first strategy, we expect a reduction to around $140 million of revenue this year. Next year, we expect a further decline as we approach the completion of our cloud transition..

Overall, for fiscal '22, for new bookings, we expect 10% growth in new perpetual license equivalent bookings. And for revenue and adjusted EBITDA, we expect low single-digit growth before dis-synergies..

We are targeting cloud revenue growth of approximately 30% CAGR over the next 3 years, driven by strong new SaaS bookings, healthy renewal rates and ongoing SaaS conversions. We expect our revenue growth to improve over time following the completion of our cloud transition in fiscal '22.

In fiscal '23, we expect our perpetual license revenue to level off at around $100 million as certain customers will continue to prefer perpetual licenses..

Regarding margins, we expect a onetime step-down in fiscal '22 due to the separation dis-synergies I discussed earlier, followed by ongoing margin expansion. In addition to margin expansion, the cloud model will provide us with better economics over the longer term.

Overall, we're targeting $1 billion of revenue in fiscal '24, with 90% of our software revenue being recurring..

Now let's turn to our Cyber Intelligence business, which will soon be named Cognyte. I'll start with a review of our historical performance.

Over the last 3 years, our EBITDA on an estimated fully allocated adjusted basis has increased at a 25% CAGR driven by our business transformation as part of our software strategy, where we have been steadily improving our software services mix and increasing our gross margins..

This trend continued in the current year, where we have experienced a 7% year-to-date increase in estimated fully allocated non-GAAP gross profit year-over-year and a 35% year-to-date increase in estimated fully allocated adjusted EBITDA versus last year..

Regarding revenue, we have seen strong sequential growth after the initial impact from COVID. For the year, despite this COVID impact, we are expecting another year of growth in estimated fully allocated adjusted EBITDA and to reach 70% estimated fully allocated gross margins for the full year for the first time..

Over the next 3 years, we are targeting Cognyte's revenue growth to improve, driven by greater adoption of our open software and expect margins to gradually expand after a onetime step-down next year due to the separation dis-synergies..

Overall, Cognyte will have a strong financial profile post separation, and we look forward to providing you more detail at our virtual Investor Day on January 11..

In summary, we had a strong Q3 and are expecting to finish the year strong, and look forward to providing more information regarding the separation at our upcoming virtual Investor Days..

So with that, operator, let's open up the lines for questions. .

[Operator Instructions] Our first question comes from Shaul Eyal with Oppenheimer & Company. .

Guys, congrats on the ongoing solid performance and guidance. Dan, really great cloud momentum yet again, if I may add. Can you talk to us about what is driving the strong momentum? And how do you see this momentum evolving over the next few years as you move through the cloud transition? And I have a follow-up. .

Okay. Sure. So thank you. Yes, we see strong cloud momentum, and we see it across all regions. We've built an open cloud platform, and this allows our customers to easily turn on new cloud applications so they can expand, and we have a broad portfolio, as you know.

It also allows our partners to easily integrate and add value, and I'll talk about partners part later. So that's on the cloud platform side..

From a sales force perspective, our sales force is leading with SaaS. And now we see great market adoption in our area -- in our business application area, and this is partially due to COVID.

So we're pleased to cross over the 50% mark of new bookings that's coming from SaaS and we, based on pipeline, expect to have 2/3 of our new booking next year to come from SaaS. We target 30% cloud revenue growth next year. So from $270 million, give or take, this year to $350 million next year. As well we're targeting 30% CAGR over the next 3 years..

So I think it's important to explain to your question of how the SaaS position is evolving because we mentioned on prior calls and today again that we expect to complete the SaaS transition next year..

So when you look at our perpetual license revenue, they declined. This year, we expect about $140 million, and it was $185 million last year, so a big decline in perpetual license. But next year, we expect further decline as we finish the transition, but then level off in fiscal '23.

And as we have certain customers that will continue to buy perpetual and expand, we expect some growth in perpetual license, but it will be around $100 million. So we expect it to be -- 90% of our software will be recurring..

So that's kind of the perpetual revenue. And what that does is basically the headwind from the perpetual revenue decline will be substantially over and the tailwind that we get from the cloud revenue growth will fully contribute to the top line growth..

And the margin perspective actually followed the same trend. Margin expand at the end of the cloud transition, and we'll see that during fiscal '23 and '24. And then over the long run, the economics of our cloud model are actually better than the economics of the perpetual license..

So we expect a lot of good positive outcome from the momentum we see now. We do need to finish the transition next year, which we feel we are very good with the metrics we shared. We are on our way to do that.

And for fiscal '24, we are targeting about $1 billion, which is a CAGR of mid- to high single digit revenue growth, obviously, with improving growth rates as we move towards the out years. .

Got it. Got it. And my follow-up is concerning Cognyte. So congrats on really being ready to bring it to the market and kind of the entire separation process. Over the course of the past 2 months, Palantir has gone public. We've been getting many questions on it from investors.

Maybe can you discuss how you, on one hand, similar to what they do, but maybe, on the other hand, differ in some other ways?.

Sure. So first, we are excited to have Cognyte starts the next chapter of their growth as a public company. We shared a lot of information today on the historical growth of Cognyte and margin expansion -- huge margin expansion. So we have great opportunity ahead. We'll share even more information, and we're going to file the 20-F document in 2 weeks.

And then 2 weeks later on January 11, we'll share more information on Cognyte..

But let me briefly touch on your Palantir question. We are pleased to have Palantir as a public comp. Cognyte and Palantir have similar capabilities, but historically had different go-to-market strategies, which is important to understand..

So first, in terms of the similarities, both companies share the vision of open analytics and delivery technology platforms that can help customers find the needles in the haystacks and to make the world safer. And there is a big opportunity. But historically, the companies approached the opportunity with different go-to-market strategy..

And I think best is to look at a couple of examples. So Cognyte had a strategy of profitable growth, as you all know, as part of Verint, while Palantir as a private company incurred losses for many years..

So one of this -- the impact of this is that, for example, Palantir is about 150 customers. And they have higher average revenue per customer. So they went deeper into their customers. Cognyte has more than 1,000 customers, but our strategy was to land and expand and grow these customers over time..

Another example is the difference in global coverage. Palantir is stronger in the U.S., while Cognyte is stronger in the rest of the world. And the reason that, historically, we at Verint believe that the investment in developing the U.S. government market takes significant time and resources, and we saw more attractive opportunities outside the U.S.

consistent with this profitable growth strategy that we were pursuing..

So these are 2 quick examples, and we will discuss the security landscape in more detail during the Investor Day. .

Our next question comes from Daniel Ives with Wedbush Securities. .

So maybe first, just talk about, Dan, your conversations with customers and what you're hearing from sales force? I mean, how things are changing in terms of the sort of cloud strategy? Do you think it's more just the product footprint or is it customers now adopting getting to that stage where they're looking for more significant deployments?.

I mean how do you sort of view where we are in terms of the sort of cloud build-out that we're seeing from the customer base?.

Yes, that's a good question. I think we're going through some interesting changing dynamics. Some of them are driven by COVID and the lasting impact of COVID on the workforce dynamics. And I think we have great solutions we are discussing with customers and already brought some new innovation in our cloud platform to address these changes..

There's more interest in automation, driven by AI. Again, COVID is also -- economic impact and people looking to create efficiencies to automation. And there is, I would say, an acceleration in the cloud transition, which started obviously a few years back, but we do see customers much more open to actually execute on it..

Now it's very important for customers, and you know that the majority of revenues come from mid- to large enterprises. And they have complex needs and infrastructure. So they are looking for a bridge. They're not just going to move overnight, and they need to preserve the processes. They need to preserve data.

And they cannot disrupt themselves, definitely not through COVID when people are working from home..

So they're looking for a partner that can help them navigate through the cloud transition and help them move to the cloud in a more orderly fashion.

And what's interesting about that is when you look at a 20% cloud revenue growth that we are expecting this year by the end of Q4, and that 20% we mentioned, excluding ForeSee, 15% of that came from new bookings, and only 5% came from conversion of legacy solutions..

So that tells you that while they're moving to the cloud, they're not as fast moving their legacy because it's working, it's there. They've got their data centers and there's no reason to disrupt, but they're buying new functionality, they're comfortable buying into the cloud..

And we saw some really great accounts this year, some of the -- one of the leading food delivery service companies, one of the leading grocery delivery, one of the leading cloud infrastructure companies. These are -- the new economy, companies doing very well with COVID and expanding, and they chose Verint in the cloud..

So it is easy for new customers to buy in the cloud. It's easy for existing customers to buy new functionality in the cloud. And they are looking at Verint to help them to migrate their legacy solutions to the cloud over time. And we're ready to help them in all these different scenarios. .

Great. And then maybe you can just sort of address in terms of cost structure. And obviously, this -- strategically, this has been well mapped out for many, many months. But just maybe stranded costs and -- as well as just plans in place to hit the ground running as soon as this thing gets the green light.

Just maybe talk about that and the sort of preparation from a cost structure perspective?.

Yes. So I think we kind of figured out the cost structure. We discussed earlier, and clearly, we'll provide more details over the next few weeks about the capital structure, how that's going to be allocated, and also in terms of the dis-synergies. We do expect approximately $15 million of separation dis-synergies in each company.

We expect that to be a onetime step-down, which we can grow out of, but there is obviously certain inefficiency with breaking a public company into 2 public companies and certainly out of the gate..

So a lot of that has been already in place as we were growing into the separation. We do expect to have a TSA, transitional services agreement, between the 2 companies and the reverse TSA as well. So both companies will provide for some time services to each other, but these are relatively small.

A lot of the resource has already been identified as which one is going to which company, and there is a few million dollars of TSA services that will go back and forth. And of course, will -- that will kind of decline over time..

So we think that we are prepared. We expect to file the document publicly for Cognyte in 2 weeks. And then in January, we'll be out there with the management teams for both companies to discuss with investors. I think investors will meet a lot of new people. Certainly, we have the management team for Cognyte ready as the management team of the division.

We're going to have a new Board for Cognyte. Three directors from Verint will continue with the Cognyte Board. We're targeting 7 directors. So there will be 3 continuing from Verint. The new CEO, Elad Sharon, will join the Board, and we are looking for 3 new directors to join the company. So all that will be kind of folding in January. .

Our next question comes from Ryan MacDonald with Needham. .

Congrats on a nice quarter, and appreciate all of the future outlook disclosures as we're looking at these 2 businesses.

I guess, as we look into next year and sort of the 30% cloud growth CAGR, what's your expectation in terms of mix of that coming from existing customers versus net new?.

And how does this program -- conversion program that you started in third quarter, how do you expect that to sort of accelerate that transition as we look into next year?.

Yes. So I mentioned before that the 20% this year is 15% from new bookings and 5% from conversion. The 30% next year actually is also 15% from new booking. So we're are not dialing in a huge growth in new booking relative to what we just did in the COVID year. But the conversion, we expect to be 15%. So that's up from 5% to 15%..

We launched the new program in Q3. We already saw a pickup in Q3 and the beginning of Q4. So based on the conversion pipeline, I think in the early days of COVID, customers hesitated to convert because they were more sensitive to disruption..

The new program we introduced in August is basically no disruption. So we allow them -- we created some technology that they can continue to work on-premises and test the new product in the cloud in parallel and then just overnight switch over, which was very -- obviously very appealing for anyone who's concerning about operational disruption..

So we think the conversion program will pick up next year, and that's about 50-50 between new booking and conversion. .

Excellent. That's very helpful. And just curious to get your thoughts on, as you look over the past month, as we've seen throughout EMEA and a little bit in the U.S. here, obviously, some shutdowns and lockdowns again.

How does the environment compare as you're going out and selling to what we saw earlier this year? Would you say that businesses are better suited or better prepared, I guess, this time around to kind of continue business as usual and sort of sales cycles as usual?.

I think so. I think -- look, we have very little exposure to travel industry, entertainment, industries that were -- that are still suffering from the COVID impact. Our exposure is really, really minimal. So in the main verticals that we're addressing, this was mostly about on-premises deals being affected by travel and just workforce at home..

And some of the perpetual deals that we had in the pipeline this year moved to cloud, but some actually pushed to next year. So they're still in the plan. We do see some on-premises deals, so it's getting better. It got better in Q3, and we feel like it's getting better in Q4..

But we also see that some of these perpetual deals will come back next year as cloud deals. So I would say that it's not business as usual, but companies are focusing on their priorities. And I think customer engagement is a priority. Having the tools to manage the workforce remotely and increased automation is a priority..

So I think COVID is actually providing us some good tailwind into next year. .

Great. And then just one final one for me. I'll hop back in the queue. Great to see that you had some nice competitive wins that you announced during the quarter.

I'm just curious to see how that competitive environment is evolving? And I guess, what your thoughts are on the recent announcement of Salesforce with their own workforce engagement management.

I imagine that's likely more of a competitive dynamic down-market, but love your thoughts there?.

Yes. Yes. So we're not very competitive with Salesforce, and we also -- which is a very small part of our portfolio, and we also partner with Salesforce, and we have some products in their marketplace. So it's a competition with the CRM guys and the CCaS guys.

And we clearly see interest from the CCaS and CRM vendors to offer business applications like we do. Advanced business applications are critical to our customers and -- as they're looking to address the workforce dynamics and automation, as I mentioned before..

So some vendors have some capabilities, but many already partnered with Verint and many are looking to partner with Verint due to the strength that we bring with our leading applications and our open platform and our partner agnostic strategy.

So -- for example, you can -- we find ourself in RFPs where there could be multiple vendors bidding, and we are in all the bids. And that's great because we don't really care who's going to win..

So the dynamic is such that we think partners are going to be more important. And we're not only partnering with CCaS and collaboration vendors, but we also have regional resellers and they can resell another vendor and Verint and add value..

And very important about this is -- in the competitive landscape is we saw this year, the system integrators actually are increasing their role as more customers are seeking advice and integration services. And that's obviously good for Verint because we have the open approach, and our open platform is an ideal choice for system integrators.

So just last example, and we'll talk more in Investor Day about the competitive landscape..

But when you look at the social security administration deal that we won, this is a Verizon deal where Verizon is the system integrator for the social security. Avaya was chosen as the collaboration platform, and we are the partner for choice for the business applications..

Well, I think that's the dynamics. I think customers want to get what they need, and they do it in many different ways. And we think that there's a strong opportunity for growth with our partner agnostic strategy. .

Our next question comes from Brian Essex with Goldman Sachs. .

Congrats from me as well on the quarter. It's nice reacceleration. I was wondering if maybe you could give us a little bit more color on the Cognyte team. I think you mentioned that Elad Sharon would be the new CEO.

But how well established is the management team for that business? And is it just personnel just moving over underneath that umbrella that are already working at the company? Or is there a lot of new hiring and reorganization that's going to take place once that spins off?.

Yes. So in preparation for this, and as you know, we've been preparing for a long time, we had 2 objectives. One is we wanted to complete the software model transition and get to the 70% gross margin and position this company to really focus on growth as a software company.

So a lot of effort in strengthening the management team to bring that experience and change the business model..

And the second thing is to prepare the company to be an independent public company. And we did it through a combination of promoting people from within and hiring people. I'll just give one example, which we hired -- this year, we hired our Chief Product Officer, who is really going to be responsible for the product and go-to-market.

And he was -- some years back, he was the President of NICE, not in the Cognyte space, in the customer engagement space, but clearly, a strong addition to the management team..

So I feel like it's a strong team. You're going to meet them on January 11. Unfortunately, it's going to be a virtual day. So we're all going to get together virtually, but you definitely get a chance to see the new management team.

And we'll -- part of what we want to do is also introduce the spirit of the company and obviously, their passion of growing and becoming a very successful pure-play security analytics company. .

Okay.

But is that all established at this point? Or is there additional transition that needs to happen? I mean, the whole sales organization, is that already in place and you're ready to go? Or is there more that needs to happen there?.

It's all in place, sales, services, R&D, management, all in place. The only thing, as I mentioned before, there are some transitional services that they will get from Verint, and it's really in the area of some financial advice on public company readiness, legal advice, IR advice. These are functions that will be continued to build during next year.

But in terms of the business functions, they're all in place. .

Got it. And maybe just a follow-up, any update on Apax and where they stand with regard to the second tranche after the spin. It looks like we're above -- I think it was a $50 floor on the collar here.

Any expectations around that in particular with regard to your capital structure expectations going forward?.

Yes. Yes, I believe from memory that the threshold was $48, but -- so pleased to have Apax joining the company. They have one designated Board member. As part of tranche 2, we agreed that we will add another Board member that is jointly agreeable to Apax and Verint, an independent board member..

And in terms of the capital structure, maybe I'll turn it over to Doug just to say a few words on capital allocation.

Doug?.

Yes, sure. Brian, yes, so we expect the Apax second tranche, provided, makes that threshold to be funded some time in Q1, and it's just subject to the closing conditions that we previously had shared with folks..

In terms of use of that cash, general corporate purposes or perhaps supplying to the outstanding debt, we will outline better for you at the Investor Days the capital structures.

But Cognyte is being spun debt free, [indiscernible] them with adequate working capital, apply excess cash to bring the debt down and try to be sensitive to not too much leverage on the CES [indiscernible], if you will, side of the business. So we'd expect debt-to-EBITDA ratio of 1-ish or so on that business..

So we just have some cash to move around. We're doing that as part of the spin structure aligning the legal entities. But we'll take you through all that in a little bit more detail when we have their Investor Days. .

Our next question comes from Paul Coster with JPMorgan. .

So it sounds like you have some TSA arrangements in place for a period as the 2 companies go through the separation.

But are there any other relationships that will last beyond the separation date, meaning, for instance, is there any commonality in the Board? Is there any cross-licensing? Or is the separation otherwise completely clear?.

There shouldn't be any other relationship other than TSA. In terms of Board crossover, we expect 2 people to be on both Boards. That's 2 out of 7 from Cognyte. So that, I think, is important for continuity. But that's the end of it. .

There won't be any constraints imposed on Cognyte from the perspective of selling the business, for instance, the obligations that are due to Verint in the future?.

No. No. Verint [indiscernible] any obligations or restrictions on the Cognyte business. .

Okay. Great. Your cloud business is accelerating, which is very welcome. It is accelerating a little bit after some of your peers.

Why did that -- why is it that you're experiencing this strength, but a little bit later than everyone else? And what's the cause of the phasing here, Dan?.

Yes. So I think we're actually ahead of our peers. So it depends on what you would refer to as peers. And there are the collaboration and communication platforms, right? And we know that there are about 100 companies now that have CCaS, UCaaS or some sort of collaboration platform in the cloud.

And I think the space of [indiscernible] is accelerated in its transition to the cloud. It's very much an IT infrastructure change from collaboration platform or what used to be a unified communication platform right now. Now it's called collaboration. It's pretty much an IT change to the cloud, which was accelerated for a lot of good reasons..

But the business applications that we sell, we feel like we are ahead -- even ahead of a close competitor in terms of how much we move to the cloud. It's really worth the market adoption. Again, the business applications require companies to change more than IT, to change processes and so on. And they were slow in adoption..

We talked before about the fact that we sell across the enterprise, not just contact center. We saw, for example, in our branch business, there was a lot of adoption to cloud adoption. Solutions we sell to the marketing department almost entirely cloud..

And then back office and some contact center, we saw that the market was slower. But all that I think is history because whether it's COVID or whether it was just natural evolution, it looks like this year, the market was ready and we are ready. So we're moving from 1/3 to -- last year to 1/2 this year to 2/3, which we feel we can achieve next year.

I think that's the pace that we were hoping to get before, but we get it now. .

Got it. And my last question. On the Cyber Intel front, you had 3 deals.

Did these deals have similar characteristics? Or were they diverse from the perspective of geography and application?.

No. I don't see anything unusual. The large deal usually represents customers that buy more than one functionality. That's why it becomes larger. So they kind of bundled several things they need into a bigger contrast..

But I think what we see across the deals, including the large deals is the trends that we were hoping to see, which is less hardware. I think hardware was less than $5 million in Q3, very small, less services. So it was not just hardware decline, but the services declined because of the investment we did in productizing.

And we also -- customers can do more of the services themselves..

So the mix is changing across the big deals as well toward the software mix. We had 74% gross margin in Q3, but that was probably a little bit of an anomaly. So we only expect 70% for the full year, but this was 66% last year and 62% the year before. So very quick shift, and we will continue to improve the gross margin beyond 70%.

But obviously, the big acceleration is behind us. And I think from now, we'll see some more modest margin expansion..

So when we talk about 10% growth for next year, we expect some margin expansion as well. And we hope to target growth rates in subsequent years as an independent public company. .

Our next question comes from Dan Bergstrom with RBC Capital Markets. .

So Doug, you mentioned some COVID-delayed federal license orders, obviously not impacting the numbers or outlook.

But could you expand on those comments, maybe quantify the impact what you're seeing in federal or status of those deals?.

Yes, sure. I mean, so all year, we've seen impact from COVID. As you know, in the beginning of the year, we felt we couldn't provide guidance because of that. But as we've gone through the year, I think everyone's learned to kind of work remotely. Our customers are functioning better.

They're getting more, I think, comfortable with ongoing nature of their business and making better commitments. We're hoping perpetual licenses start to get a little bit more on track into next year. I think that was a large impact..

But largely, it's -- the plans haven't changed. Our customers have a lot to do. They know they have to do it. I think, as Dan mentioned several times, COVID certainly has kind of woken people up as to the need to get to more of an infrastructure in the cloud that's more straightforward and accessible, et cetera..

So it's hard to quantify it, right, because deals slide and they're smaller and COVID behind a lot of that. But we do see just continual improvement in the overall business environment as people are coping with COVID better. And that's the reason for getting back to guidance and providing some outlook for next year and longer term. .

And our next question comes from Jeffrey Kessler with Imperial Capital..

I'm not showing any further questions at this time. I would now like to turn the call back over to Alan Roden for closing remarks. .

Thank you, operator, and thank everyone for joining us today. We will be quite active in the next 6 weeks. And we look forward to seeing you at our 2 Investor Days and also on our road show in January. Have a great evening. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..