Verint Systems Inc. (NASDAQ:VRNT) Q4 2024 Earnings Call Transcript

Verint Systems Inc. (NASDAQ:VRNT) Q4 2024 Earnings Call Transcript March 27, 2024

Verint Systems Inc. beats earnings expectations. Reported EPS is $1.07, expectations were $0.99. Verint Systems Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Matthew Frankel: Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; Grant Highlander, Verint's CFO; and Alan Roden, Verint's Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a slide presentation. If you'd like to view these slides in real time during the call, please visit the IR section of our website at verint.com, click on the Investor Relations tab and click on the webcast link and select today's conference call. I'd also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws.

These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call, and except as required by law, Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in these forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2024, when filed and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures as we believe investors focus on these measures comparing results between periods and among our peer companies. Please see today's slide presentation, our earnings release and the Investor Relations section of our website at verint.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information but is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies.

Now I'd like to turn the call over to Dan. Dan?

Dan Bodner: Thank you, Matt. I'm pleased to report a strong finish for the year with Q4 revenue and non-GAAP diluted EPS coming in ahead of our expectations. Behind that momentum is the Verint's open platform we introduced last year, which enables Verint to deliver tangible AI business outcomes better than any other vendor in our market. The market today is looking to increase the ex-automation and Verint is leading the way. Throughout the last year, we built such momentum, driven by our AI differentiation, and we are raising current year outlook to reflect market demand for AI-powered CX automation. Today, I will start with our fourth quarter trends, then I will discuss our open platform differentiation. And finally, I will review our fiscal ‘25 outlook and three-year targets.

In Q4, revenue grew 12% year-over-year a couple of million dollars above our guidance, driven by strong SaaS revenue growth of 28%. Non-GAAP diluted Q4 EPS came in at $1.07, up 42% year-over-year, $0.08 ahead of our guidance, driven by our revenue overachievement and strong margin expansion. At our Investor Day, we discussed how the Verint open platform and team of AI-powered bots drive bundled SaaS growth. We also discussed how we are tracking AI demand using the bundled SaaS booking metric. I'm pleased to report that in Q4, bundled SaaS new ACV bookings increased 16% year-over-year and the 12 months pipeline for bundled SaaS increased over 20% year-over-year. We expect demand for AI to not only drive bundled SaaS growth, but also free cash flow acceleration.

For the current year, we expect over 40% growth in free cash flow and over the next three years, as AI continues to drive growth in bundled SaaS, free cash flow will grow faster than revenue. The customer engagement industry has been challenged for many years with a growing number of interactions and higher customer expectations. Today, brands realize that hiring more workers and increasing labor expenses is no longer a sustainable solution. CX automation provides brands with significant economic benefits and at the same time, increases the addressable market for Verint. For brands, the economic benefit come from the lower cost due to the higher workforce productivity and increased customer loyalty. For Verint, the addressable market increases over time as a portion of the large amount that labor saving by brands will shift to purchasing the AI platform.

Today, we estimate there are tens of millions of people around the world involved in customer engagement across contact centers, back office and branches and the industry is ripe for CX automation platforms that can deliver AI business outcomes. We believe Verint is uniquely positioned to lead the emerging CX automation category due to three factors. First, our large customer base across many industries and geographies, which consists of 4 million agents currently using the Verint platform and looking to add AI-powered bots. Second, the customer data we have in the platform is critical to train the bots. And third, our open platform is designed to deliver AI business outcomes better than any other vendor in our market. Successfully delivering AI business outcomes requires much more than just Gen AI models.

It requires the combination of three key ingredients: the latest commercial and proprietary AI technology, relevant customer data and business workflows. The Verint open platform and our team of 40 AI-powered bots help brands deliver tangible AI business outcomes across the enterprise. Let's look at what makes the Verint open platform highly differentiated in its ability to turn AI technology into measurable AI business outcomes. It starts with the Verint's DaVinci, which acts as a factory for our bots. Verint's DaVinci allows us to combine the latest commercial open source and proprietary AI and deliver it to all Verint bots from the core of the platform. As they emerge from the factory, Verint bots are training continuously on real-time behavioral data, available in the platform data hub.

Finally, the Verint's open platform leverages the workflows customers use every day, enabling brands to benefit from AI business outcomes now. World is innovating at a fast pace and a large team of AI-powered bot is growing. The Verint bots augments not just the agents, but also the supervisor, analysts and other roles. Each Verint bot delivers specific AI business outcome and our customers may purchase one or a team of bots to drive greater ROI. Some of the Verint bots use Gen AI models, where other boards use proprietary models that are specifically designed for CX automation. An example of bots using Verint proprietary AI, customer and workforce data and workflows is the time flex bots, which we announced last week. The business problem this bot solves is the inability of agents to dynamically change their schedules.

Today, if agents need to get out of their shift to take a child to the doctor or to watch the soccer game, very often, this request will be denied because of limited supervisory resources to modify the schedule in real time and find a suitable replacement. In other words, the scheduling process is just too manual to provide agents with the work-life balance they increasingly expect. The TimeFlex Bot delivers AI business outcome to solve this problem. Agents can make unlimited schedule changes with no additional supervisors needed. The bot augments the existing supervisors by automating their approval of schedule change requests. For example, a Verint customer using the TimeFlex Bots reported reduced employee attrition, higher employee engagement and millions of dollars in annual savings.

A remotely located customer service desk acting as the frontline in the software industry.

Like other Verint bots, the Verint's TimeFlex Bots can be quickly deployed into existing customer ecosystems, reducing operating costs and elevating employee and customer experience. Let me now turn to our Q4 wins. In Q4, we continue to have significant wins across existing customers and new logos driven by our highly differentiated open platform and quick ROI we deliver to our customers. We had approximately 50 orders in the quarter with over $1 million TCV each, including from some of the world's leading brands, such as AT&T, HSBC, Goldman Sachs, Instacart and UPS. We had more than 100 new logos in the quarter, including the results company, Christian Dior and SanCor. And as I discussed earlier, our 12-month pipeline for bundled SaaS grew over 20% year-over-year, reflecting demand for AI innovation.

I would like to double-click on one large Q4 order. In January, we announced a $49 million TCV order with a five-year term from a leading health care company. This large contract came from an existing Verint customer that was looking to add AI innovation now. Verint's open approach enabled the customer to deploy a hybrid cloud platform, so they could keep what they had on premises and at the same time, leap forward with AI innovation in the Verint Cloud. Let me share some additional details of this order. 50% of the revenue will be in bundled SaaS including more than 10 Verint bots hosted in the Verint Cloud. The other 50% of the revenue will be in unbundled SaaS. The order enables the customer to leverage the openness of the platform and import their own large language models into the Verint platform to future-proof their AI investments.

Also, the order enables the customer to migrate their unbundled SaaS solutions to bundled SaaS at their own pace, anytime during the FIVE-year term. We believe this 8-digit order is a great example of our open platform and hybrid cloud approach deliver AI business outcomes now. We are pleased with the strong finish to fiscal '24 and are raising the outlook for the current year. We believe the perpetual license headwinds from the SaaS transition are now behind us. And going forward, we expect growing AI demand to provide tailwinds to a bundled SaaS growth driving overall revenue growth acceleration. Looking beyond this year, Verint is a CX automation category leader and we believe increasing demand for AI, coupled with our differentiated open platform, create a road map to achieve our targets for a Rule of 40 company in fiscal '27.

And now I would like to turn the call over to Grant to discuss the financials in more detail. Grant?

Grant Highlander: Thanks, Dan. Good afternoon, everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Matt mentioned, in our earnings release and in the IR section of our website. Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions and divestitures, including fair value revenue adjustments, amortization of acquisition-related intangibles, certain other acquisition and divestiture-related expenses, stock-based compensation expenses, separation-related expenses, accelerated lease costs, IT facilities and infrastructure realignment as well as certain other items that can vary significantly in amount and frequency from period to period.

Let me start with an overview of our Q4 results. Revenue increased a very strong 12% year-over-year to $265 million, a couple of million dollars ahead of our guidance. The large increase was driven by approximately 28% increase in SaaS revenue from a combination of new business as well as the unbundled SaaS renewals that we discussed during our Q3 conference call. Non-GAAP gross margins came in strong at 74.7%, up 320 basis points year-over-year. We are pleased with our gross margin, which has steadily expanded since the spin of our security business three years ago. We believe our ability to increase gross margins reflects the strength of our AI innovation and the business outcomes we deliver to our customers. The combination of our revenue overachievement and strong gross margins drove non-GAAP diluted EPS of $1.07, $0.08 ahead of expectations.

During our Investor Day, we discussed how we are innovating at a very fast pace in our bundled SaaS offerings, and that we expect bundled SaaS to be our main growth driver going forward. I am pleased to report that in Q4, bundled SaaS new ACV bookings increased 16% year-over-year. I'm also pleased to report that as of the end of Q4, our 12-month bundled SaaS pipeline increased more than 20% year-over-year, driven by demand for our AI innovation. Our pipeline growth is a leading indicator, and we expect bundled SaaS new ACV bookings to accelerate this year and the acceleration of bundled SaaS bookings is also expected to drive free cash flow acceleration and later, I will discuss our free cash flow outlook. Before turning to guidance, I would like to discuss Q4 highlights related to the AI investments we are making to support our road map for becoming a Rule of 40 company.

First, we continued our investment in AI ending the year with 1,300 engineers in R&D and cloud operations. Second, we expanded our customer success team with additional resources to drive AI adoption. And third, we aligned our services catalog to our AI offerings, expanding our value realization service offerings and divesting a manual managed services offering. Regarding the services alignment to AI, in Q4, we decided to divest our manual quality managed service offering, which is being replaced by an AI-powered bot. The transaction closed on January 31, the last day of our fiscal year. To assist you in your modeling, the offering generated $25 million of revenue last year, and you can find the quarterly breakdown in our press release and on our website.

Turning to our revenue outlook. We believe the AI momentum we experienced last year will continue and we expect our revenue growth to accelerate this year. There are two primary drivers for our faster growth. First, the customer engagement market is ripe for automation. AI adoption is driving strong demand for our bundled SaaS solutions, and we expect bundled SaaS new ACV bookings growth to accelerate from the 16% we delivered in Q4 to 20% this year. Second, we have completed our perpetual to SaaS transition and expect perpetual revenue to be flat in fiscal '25, eliminating prior headwinds from this transition. Our revenue outlook for fiscal '25 is approximately $930 million, reflecting 5% growth compared to fiscal '24 as adjusted for the divestiture we just discussed.

Turning to our overall guidance for fiscal '25. On a non-GAAP basis, again for revenue, we expect approximately $930 million, plus or minus 2%. We expect gross margin to increase approximately 100 basis points following strong expansion we had last year. The combination of revenue growth and continued operating margin expansion is expected to drive operating income up approximately 7% year-over-year. And for diluted EPS, we expect $2.89 at the midpoint of our revenue guidance. Regarding below-the-line assumptions, we expect interest and other expense net to average around $500,000 per quarter. Net income from a noncontrolling interest of around $250,000 per quarter. And for the full-year, we expect a cash tax rate of around 11% and approximately 72.5 million fully diluted shares.

Let me also discuss how we see the year progressing. Similar to last year, we expect bundled SaaS revenue to grow steadily throughout the year and the level of unbundled SaaS revenue each quarter to fluctuate driven by the timing of renewals. More specifically, adjusted for the divestiture, we expect double-digit revenue growth in Q4, again, similar to last year and low single-digit revenue growth in the first three quarters of the year. For Q1, we expect revenue in a range of $212 million to $216 million, up from an adjusted $210 million in Q1 of last year. At the midpoint of the revenue range, we expect diluted EPS to be $0.54. Turning to free cash flow. At this point in our SaaS journey, I am pleased to report that our free cash flow growth is accelerating.

We define free cash flow as our GAAP cash from operations less our CapEx, which includes purchases of property and equipment and capitalized software development costs. Looking to fiscal '25, we are targeting a greater than 40% increase in free cash flow to approximately $180 million. Turning to our balance sheet. We continue to be in a very good financial position. Our net debt remains well under 1x last 12-month EBITDA and is further supported by our strong cash flow. Over the last few years, we have steadily repurchased shares at an increasing pace and have reduced our share count by 3 million shares. Over the next three years, we expect to generate about $600 million of free cash flow and expect our largest use of cash to be share buybacks, which will further reduce share count.

In summary, we are pleased to have overachieved revenue and non-GAAP diluted EPS in Q4 and to be in a position to raise guidance for the current year. As we discussed today, Verint's AI-powered bots deliver economic benefits to both Verint and brands. These economic benefits drive our road map to become a Rule of 40 company in three years with revenue acceleration and margin expansion along the way. With that, operator, please open the line for questions.

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