Hello. Thank you for standing by, and welcome to the Verint Systems Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Matthew Frankel, Investor Relations and Corporate Development Director..

Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; Doug Robinson, Verint's CFO; and Alan Roden, Verint’s Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a WebEx slides.

If you'd like to view these slides in real-time during the call, please use the IR section of our website at verint.com, click on the Investor Relations tab and click on the Webcast link and select today's conference call.

I'd also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal securities laws.

These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements.

The forward-looking statements are made as of the date of this call, and as except as required by law, fairness 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 these forward-looking statements, please see our Form 10-K for the fiscal year ended Jan 31, 2022.

Our Form 10-Q for the quarter ended April 30, 2022, when filed and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures as we believe investors focus on those measures in comparing results between periods and among our peer companies.

Please see today's WebEx slides, our earnings release in the Investor Relations section of our website 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?.

recent market trends and the Verint opportunity to help brands close the engagement capacity gap; our strategy to increase differentiation and deliver even more ROI to customers; a cloud platform and a deep dive into Da Vinci AI; and finally, our financial model. We think it will be a very informative session and hope that you can attend this event.

Next week, we will hold our Annual Engage Customer Conference, which is also open for investors. At Engage, we will unveil numerous innovations across the platform. And I would like to briefly touch on 2 examples of our recent innovation to help brands close the engagement capacity gap. The first one, we call One workforce.

One Workforce enables the entire customer engagement workforce across the enterprise to engage with customers in the right way at the right time by connecting workforce silos and automating business processes. With One Workforce, we are helping people and bots work together as a unified workforce to increase efficiency and elevate customer sentiment.

The second one is very in Da Vinci AI, which is at the core of the Verint platform. We are introducing Verint Da Vinci AI capabilities as API services. This means our developer community consisting of customers and partners can now leverage Verint to develop unique functionality.

With our cloud platform, we are able to accelerate our pace of innovation, which we will showcase at Engage. Before concluding my prepared remarks, I would like to briefly discuss our approach to guidance and investments in the current environment. We are pleased with our strong start to the year with strength across all key cloud metrics.

We expect the cloud momentum to continue throughout the year and are pleased to be raising our annual outlook for cloud revenue growth. Behind our guidance is our strong start to the year, combined with our cloud momentum and our recurring revenue visibility.

We plan to continue hiring and investing for the remaining of the year to support this growth guidance. Beyond this year, we believe we are uniquely positioned to grow long term as we help brands close the engagement capacity gap and deliver strong ROI. Now, let me turn the call over to Doug to discuss our financial results in more detail.

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 Matt mentioned in our earnings release and in the IR section of our website.

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

For certain metrics, it also includes adjustments related to foreign exchange rates. As Dan mentioned, our Q1 results came in ahead of expectations. Revenue growth came in around 8.5% or $218 million on a GAAP basis and $219 million on a non-GAAP basis. Non-GAAP diluted EPS came in at $0.52, up 18% year-over-year.

We generated $54 million of cash from operations during the quarter, up 43% year-over-year.

Regarding our stock buyback, I'd like to mention that we completed our previously announced approximately $100 million buyback program, repurchasing 2 million shares, the maximum amount we’re permitted to repurchase this year due to the tax-free nature of the spin-off. In Q1, our cloud metrics came in strong across the board.

Cloud revenue increased 38% year-over-year. We saw strength in both customers buying new cloud solutions as well as maintenance customers converting to the cloud. New PLE bookings increased 27% year-over-year, well above our 10% to 12% target for the year.

58% of our new PLE bookings came from SaaS compared to 51% in Q1 last year as our customers continue to shift to the cloud. And the percentage of our software revenue that was recurring came in at 83% in Q1. Turning to guidance for the current year ending January 31, 2023, let me start with 3 key metrics. We're raising our cloud revenue guidance again.

We now expect cloud revenue growth of 32% to 34%, up from our initial guidance of 30%. We expect $940 million of revenue for the year, reflecting 7% growth year-over-year at the midpoint of our guidance. And we expect non-GAAP diluted EPS of $2.50, reflecting 10% year-over-year growth at the midpoint of our revenue guidance.

I'd also like to mention that while the dollar has been strengthening, we've been able to absorb this within our guidance. Now let me provide you with some additional information for modeling purposes for the year. Starting with bookings. We expect double-digit new PLE bookings growth in the range of 10% to 12%, with approximately 65% coming from SaaS.

With respect to perpetual revenue, as we transition to the cloud, we expect it to decline to around $120 million this year compared to $138 million last year. And with respect to or approximately $250 million maintenance base, we assume 15% to 20% will convert to the cloud this year.

Relative to margins, we see some modest growth margin and operating margin expansion for the full year. Additionally, we expect our cash flow from operations to grow more than 20% this year. Last year, cash flow from operations was $180 million, excluding nonrecurring items. And this year, we expect more than $215 million on the same basis.

This should drive our cash balance to around $400 million at year-end and a net debt position close to 0. As a reminder, we have $415 million of debt comprised of $350 million of convertible notes at a fixed 0.25% interest rate and a $100 million term loan, which is our only floating interest rate exposure.

In a rising interest rate environment, based on our current cash position, we expect the incremental interest income from our cash balances will be more than the increased cost of our floating rate debt. Now let's discuss some below-the-line assumptions.

For the remainder of the year, we expect around $1.5 million per quarter of interest and other expense. We expect about $300,000 per quarter of net income from the non-controlling interest we have in a small joint venture. We expect an approximately 11.5% cash tax rate for each quarter and for the year.

And we expect around $76 million of fully diluted shares, flat with last year, reflecting the effect of our stock buyback program. For modeling purposes, in Q2, we assumed $225 million of revenue and $0.52 of diluted EPS. Our Q2 outlook reflects a gradual increase in gross margin and operating expenses.

We believe that our Q2 outlook, combined with our strong Q1 results give us a great start to the year. Looking beyond this year, we believe we are well positioned for long-term growth, and at our Investor Day on Thursday, we'll discuss some of our assumptions our long-term financial model. Let me give you a summary of what we'll discuss.

First, we'll discuss our opportunity to gradually improve gross margins over time. We'll review how we're targeting non-GAAP gross margins to reach the mid-70s. This is driven by an increase in recurring revenue, which in fiscal '22 carried a 76% gross margin compared to 50% for nonrecurring revenue.

We'll discuss our expectation that gross margins will increase modestly over the next few years and then increase faster as recurring revenue crosses 90% of total revenue. And we'll also discuss cash flow from operations and why we expect strong cash flow generation over the next few years. In summary, we're pleased with our strong cloud momentum.

We're tracking ahead of our 3-year plan we laid out last year, and we're raising our annual outlook for cloud revenue growth. We expect total revenue growth to accelerate. We expect our margins to gradually expand, and we're generating strong cash flow and have a strong balance sheet.

Most importantly, we believe our cloud and AI differentiation positions us well for long-term growth. And with that, operator, let's open up the lines for questions..

[Operator Instructions] Our first question comes from Peter Levine with Evercore..

This is actually Peter Burkly on for Peter Levine. You guys mentioned a couple of nice wins, I think for an insurance company and a healthcare company. So there might be actually some overlap here. But just curious, Five9 on their last call highlighted that Verint was a part of one of their largest deals to date with an insurance company.

So just curious specific to -- I wonder if you could share with us how long it took to close that deal, whether you gave away any concessions with that and how many of those seats that you end up getting?.

Okay. Sure. Regarding the Five9, $40 million announced deal, so none of this was booked by Verint in Q1. So the numbers we reported do not include that deal, and this is not the win that we discussed. We expect to book this deal over time. I'm unable to discuss the specific scope and timeline of the deal.

But I can say that this particular customer is already a Verint customer and with the Five9 win, Verint is expanding also the application relationship with the customer, consolidating a number of different Verint competitors into the Verint platform..

That's really helpful. I appreciate that color. Maybe if I could just sneak in 1 more. Just given the stronger USD, just curious how much of an impact FX is having on your guide.

And then maybe if you can just remind us how you price your contracts for customers outside the U.S.?.

Yes. So I'll start and Doug, if you want to give some more data. But the guidance we gave today basically absorbs the FX changes that we saw in Q1. So it reflects everything that we know today. And we are predominantly doing business in U.S.

dollars, but we do have some exposure to revenue, but also we have a hedge because where a lot of our resources are outside of the U.S. as well.

Doug, would you want to -- would you like to give more data on the mix of our currencies?.

Yes, sure. About 3/4 of our revenue is in U.S. dollars. So that leaves a quarter in other currencies, primarily euro, pound, Australian dollar are the big ones. So as the dollar strengthened from a translation purposes, it's going to hurt our top line.

And at current rates, it's probably about close to $15 million of headwind, which we've absorbed it into our guidance from a currency perspective. But as Dan mentioned, since we operate internationally, we have a lot of expenses in those currencies as well.

So that $15 million of headwind translates to between $0.5 million and $1 million maybe of op income in the year if things were to play out at current rates. So I think from an earnings perspective, we're okay with respect to the foreign exchange movements, but it just creates a little bit of a kind of a top line reporting headwind for us..

Our next question comes from Samad Samana with Jefferies..

It's good to see the solid results. Maybe first one, just, Doug, I think you mentioned in terms of the outlook for conversions being 15% to 20%.

Can you maybe just help us understand how much visibility you have into that? Is that based on the company's efforts? Is that based on interest -- or indications from customers? Just how should we think about that range that you gave?.

Yes. Let me give the strategy for conversion and then you can give the numbers. Because I think it's important to understand how we drive conversions with our customer base. So our strategy is to provide our customers the flexibility to move to the Verint cloud regardless of the conversion of the legacy solution.

So what does it mean? It means basically that customers can buy new functionality that we have in the Verint platform they can buy that in the cloud, regardless of whether they want to maintain the legacy solutions on-prem or they are ready to move their legacy solutions to the cloud.

So the architecture of the platform allows them to consume a new functionality. And obviously, everyone is interested in moving up. So they can consume new functionality already in cloud.

And when you look at our 38% growth in cloud revenue last year, 2/3 came from selling new functionality, but also some of it to customers that didn't want to move to the cloud with their legacy.

And so 1/3 came from customers actually are taking legacy solutions and moving them to be hosted by Verint to the cloud and 2/3 came from expansions, new logos, anything to do with innovation and not worried about whether the legacy is on-prem.

Anything you want to add?.

Yes. No, I think you covered it. I'll just say that through last year, about 20% of our maintenance base had converted. And this year, we're kind of dialing in maybe another 15% or so in our numbers..

Yes.

I mean I guess just the follow-up again is that when you -- of the 15% that you're dialing up, is that because the customers have -- like I guess, why that number, right? Are the customers indicating that they're willing to move? Or is that just kind of the estimate based on what you've already seen?.

It's -- based on discussions with customers that some of them are indicating that they're going to move this year, some are looking for next year or even the year after. Some of our customers have a multiyear strategy that is based on a strategy that is bigger than what Verint deliver, what's their overall strategy to move to the cloud in phases.

So we are part of their strategy, and we're able to kind of dial that into our outlook. But you can see that for what Doug said, we have 65% of our new bookings will be in SaaS this year. That's our projection. 55% of our revenue will be in SaaS, in cloud. And only 35% will be as a result of conversion.

The 20%, as Doug mentioned, we already have last year and the 15% we expect this year. So that lagging effect that customers don't really feel like they need to rush with Verint because they're not dependent on the conversion in order to benefit from innovation.

We have the modules that they're buying the cloud and the modules they keep on-prem are networked and they have all the integrations they need to run them as one platform. So I guess in the way you would need to understand that our strategy is not to put pressure on customers to convert something that already works.

But to offer them innovation so they can move into the future with Verint and obviously, the future is more AI automation of business processes..

Great. And then maybe just a follow-up, building on the prior analyst.

I know you guys talked about the guidance reflects what you're currently seeing, but I'm curious, are you seeing any change in deal cycles or the number of people involved in approvals? Just anything in real time that reflects maybe the greater volatility that at least that we're hearing about in the world.

Just curious what customer feedback is, and what you're seeing?.

Yes. I don't think we see any change at this point. We saw more than 100 new logos also in Q1. So there's clearly customers that are buying something that they need. And it's very -- obviously, new logos are competitive. So we're able to win, not any material change in terms of the buying pattern.

But clearly, focus when it comes to our category, which is business applications, the focus has been a steady ROI. And that's how we sell.

And I want to remind you that we did talk -- I think it was a couple of quarters ago, we had a Forrester study on Verint customers that they interviewed our customers and concluded that the ROI was 391% and the payback was less than 6 months. So we've always been kind of focusing on our ROI-driven sale process.

And I think now, perhaps customers are even more focused on ROI, but it's not a major change from our perspective..

Our next question comes from Ryan MacDonald with Needham..

Dan, I'd be curious as you're looking at the environment currently. You talked about expectation for 15% to 20% migration.

But when you talk to customers, are you seeing a sort of a shift in demand or a preference for full migration given the current state of the market versus just a continuation of bolting on additional cloud applications onto their existing legacy infrastructure?.

I think what customers tell us that, look, what we have is working. And as long as our data centers are not fully depreciated, we don't have to invest in building a new data center. This is not a priority. We're not going to get tremendous ROI. There’s some ROI sometimes when they move to the cloud with legacy, just saving their IT personnel and so on.

But there's not a big ROI such as what they're looking to get from innovation. So usually focus is, we've been disrupted -- the customers say, look, we've been disrupted by digital. There's clearly more interactions. We can't hire because the labor spend is huge.

And also, it's hard to find people and train them and then there's attrition and remote and hybrid workforce dynamics. So everything is kind of getting very challenging for our customers in managing this very large labor. So they definitely want to increase automation by introducing more bots. But then they define that the bots are operating as a silo.

So they really need one workforce of people and bots working together. So that's more automation in terms of the business processes to get knowledge shared between people and bots and get in-channel automation so that when the bot gets stuck, the person can take over and continue. All these things, we didn't have in our legacy solutions.

So for customers to benefit from all this innovation that we offer to the market today, they know they have to go to the cloud because we don't offer it on prem. We only offer the new innovation in SaaS.

But as long as we are able to connect what they have on-prem with what they buy is new, we take the pressure off, I need a big project, I need to disrupt myself and I have to move everything or else, I can't move forward. So this is a big plus, especially for very large customers.

And they want innovation, but they also cannot afford to disrupt their operations. And we allow them to do that in a more organized and planned way -- so it's been working well for us. I don't know if there's going to be acceleration in conversion.

I don't see a reason because there's no pressure, but we do see acceleration in cloud overall, both in terms of booking in Q1, we had tremendous 27% growth in new booking and shift to SaaS. So clearly, there is a strong demand for SaaS solutions, but not necessarily take the legacy into SaaS with urgency..

That's really helpful color. And then maybe as a follow-up, great to see another quarter of 100 new logos onto the platform.

Can you talk about what modules are driving the continued strong new logo adoption and whether they weight towards sort of some of the WFO solutions versus the CX solutions?.

Yes. No, that's very interesting. And we are obviously monitoring that very carefully because what we see, and we talk about it as the engagement capacity gap. So let me just kind of quickly explain why the important to respond to your question.

The capacity gap is based on the fact that with the increase in the number of channels and the number of interactions and the complexity around the workforce. Clearly, they need more capacity. And the capacity can be either in terms of hiring people, or in terms of buying new AI-based solutions. Those are the 2 options that customers have.

If they don't increase capacity, they're going to start to lose customers because of poor customer experience and very low customer sentiment. So our CX portfolio is very much integrated with our WFE portfolio into 1 platform, which means you have to continuously measure the customer experience.

Because as you make changes in operation, it affects the customer experience, and you need to really in real time, figure out what was the good changes and what were the bad changes and make adjustments. And that's the only way you can introduce changes, which will reduce costs, but at the same time, ensure that your customer experience stay high.

So both are very much together, and we see new logos are very excited about our ability to connect the 2 things.

Because, as you know, mostly we compete with port solutions that are not connected into 1 platform and there are solutions that measure customer experience and provide you indication of customers spend went up or NPS score went up, but why is it going up? Why is it going down? And how you can affect the change and how can you change things in real time in your workforce processes that's not connected to the workforce solutions? So new logos are interested in that combination that we have in the platform because that's the best way to actually close the capacity gap, which is reduced cost, but also, at the same time, elevate the customer experience..

Our next question comes from Tim Horan with Oppenheimer..

Two qualitative questions, I know that you won't have definitive answers.

But can you just talk about the quality of the product and the AI and ability to implement AI and your customers', I guess, ability to take advantage of it now versus maybe where you were a year ago or 2 years ago? Like how much of an improvement have we seen? And then secondly, on the bookings front, can you just characterize your overall demand environment? I know the bookings are up really, really strong.

But have you seen this type of growth before? And maybe is that continuing into the quarter -- this quarter?.

Yes. So AI is clearly, in our view, the future of customer engagement. When you think about the technology spend and customer engagement, it's $65 billion a year. That's a big number. Clearly, customer engagement industry technology is critical. But in addition to the $65 billion that spend on technology, the industry is spending $2 trillion on labor.

So now when you think about that, 97% of the investment is in labor and 3% is in technology. And with incremental AI, that can obviously reduce the 97% of cost. That's a tremendous opportunity for the industry. And that's why Verint is very passionate about closing the capacity gaps.

And this is our very-focused objective after the spin is really we are focusing on this one thing, introducing an AI-powered platform to help customers close this gap and not have to deal with the 97% of the cost keep increasing because industry -- the industry needs to hire more people. So that's the role of AI and why it's important.

Now what's the state of AI? I think that what many brands are trying to do now is to deploy in a very poor way. And it's not to blame the AI, it's really how it's deployed and how it's connected or not connected to the rest of the workforce because AI cannot be a silo.

My own personal experience, I tried to call a vendor and I got a bot and the bot asked me 20 different questions, which I answered very patiently. And then bot got stuck. So I tried to ask for an agent, which I didn't get.

And after several attempts to bot basically responded, this service is now available in this channel, which means that the bot doesn't even want to acknowledge that they are not able to respond and connect me to a person. That's not a good implementation of AI. The bot may be as smart as they wanted the bot to be, but I will need to call an agent.

And I will need to answer the same 20 questions again, which will be a waste of time and definitely a source of frustration. So the real issue with AI, it cannot be deployed in silos.

And what we did with the platform -- and I mentioned that as One Workforce, and we'll go through more details, obviously, on Thursday in our Investor Day and also during the Engage next week, our customer conference and introduce what is One Workforce, how we actually break down the silos and create a unified workforce, which is a huge source for increased capacity, flexibility and agility.

And that's the correct way to implement AI, which is to infuse AI through the business processes to automate business processes. And companies need to really focus on this as customer engagement specific AI.

It's not a generic AI that can be implemented in finance or in HR, RPA type of solution, because the customer engagement industry has very unique processes that need to be automated.

And we're able to do that by putting Da Vinci, which is our AI engine at the core of the platform, so we can infuse AI through every application that we sell and customers can actually benefit from AI, not just when they implement the bot.

But in any business process, when they schedule, when they hire, when they do quality monitoring, any of the business processes needs to be infused with AI and that's what they have in the Verint platform..

Great. I'm looking forward to Thursday.

And then just qualitatively on the overall demand environment?.

So at this point, we definitely are looking and monitoring the macro environment to see if there is an impact on the customer engagement industry. We haven't seen any impact that we can report at this point. We -- at Verint, we lived through recessions before. We definitely have the experience how to manage the company recession.

We know we have very sticky software. So renewal rates are pretty high during recessions. And customers continue to focus on ROI and sometimes even more. So we definitely already are very focused on ROI and using AI to automate.

But we haven't seen any signs, other than what Doug reported as FX moves in Q1, but we absorbed that into our guidance and our guidance reflecting the current spot rates. We haven't seen anything that we can report today..

[Operator Instructions] Our next question comes from Brian Essex with Goldman Sachs..

This is Charlotte Bedick on for Brian.

I was hoping you can talk about spending patterns across your verticals? What are -- where are you seeing the most traction?.

So we don't have a vertical strategy, but because we have the leading vendors in almost in every vertical that has customer service, we have developed over time all kind of specific offering for verticals.

So just to recap for everyone, Verint has 10 of -- the top 10 banks as customers, 9 of the top 10 insurance companies with customers, 8 of the top healthcare companies as our customers and so on in retail. And so we are the leaders in each vertical.

And the reason why this is important to your question is, a lot of the AI -- to my previous AI discussion AI is as good as the data that you have to develop AI models. And we have been working with these customers for 2 decades and have been enjoying. We have access to that data and in developing AI models.

And those AI models are perfected ongoing in our cloud. As we get more data and new data, we have machine learning that learn those patterns and improve the AI. And what we noticed is that in different verticals, there is some differences in AI -- sorry, in the data that drives different AI models.

So -- and that's interesting because you would think that customer service is customer service, it doesn't really matter which industry. But in each industry, there are nuances. There is some difference in language models, in terminology and sometimes in service offering.

So we are able -- working with the leading companies in each industry and using that data, we're able to continuously refine our offering to the different industries..

Great. Thanks.

And then have you seen any impact from wage inflation? Are people looking to you all to try to bridge that capacity gap? Or do you think it's more a future capacity gap that you could ultimately fill?.

Yes. Our customers really are struggling now with wage inflation, combined with high attrition, difficulty to hire. They really are looking for hiring tools. And we introduced last quarter a new hiring -- AI-based hiring tool to improve the hiring process.

And also people working from home in the new hybrid environment and they need coaching, they need real-time assistance at home. So there's a lot of changes that the pandemic and now the wage inflation combined are causing to our customers, where wage inflation is one of them.

And that's what causing people to want to deploy more bots, right, because they feel like they can deal with the growth in interaction by hiring more people. It's expensive, and it's hard. So bots are really very much in favor. But as I mentioned before, as some of our customers deploy many bots, they start to see that they are working in silos.

And now they're looking for tools to connect the bots and people into one workforce..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Matthew Frankel for any closing remarks..

Thank you, operator, and thank you to everyone for joining us today. As a reminder, we'll hold our virtual Investor Day on Thursday and then next week on the 14th we invite you to come down to Orlando, Florida for our Engage Conference. For more information on that, please feel free to reach out to me, and I'll get you the information you need.

Thanks again for joining us, and have a good night..

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..