Verint Systems Inc.
Q3 2020 Earnings Call Transcript

Published: 9 Dec 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Verint's Third Quarter Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. 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.

[Alan Roden:]

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.

[Dan Bodner:]

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.

[Doug Robinson:]

Thanks, Dan. Good afternoon, everyone. Our discussion today will include non-GAAP financial measures. Reconciliation between our GAAP and non-GAAP financial measures is available as Alan mentioned in earnings release and in the IR section of our Web site. Differences between our GAAP, 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 of frequency. For certain metrics, it also has adjustments related to foreign exchange rates. Today, I'll cover four topics. First, I'll review our Q3 results in 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 two businesses occurs. We plan to provide you additional information on our Investor Day, so that will enable you to start to build model separately for each business. Third, I'll provide some additional detail regarding the separation, including the anticipated capital structures and the amount of the dissynergies 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.

[Operator:]

Thank you. Our first question comes from Shaul Eyal with Oppenheimer & Company. Your line is now open.

[Shaul Eyal:]

Thank you. Good afternoon, guys. Congrats on the ongoing solid performance and guidance. Dan, really great cloud momentum yet again. If I may ask, can you talk to us about what is driving this 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.

[Dan Bodner:]

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 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 two-thirds 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 three years. So, I think it's important to explain to your question of how the SaaS transition is evolving because we mentioned on prior calls, and today again 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, and it was at 185 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, 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 toward the out years.

[Shaul Eyal:]

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 two 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?

[Dan Bodner:]

Sure. So, first, we are excited to have Cognyte start 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, a 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 two weeks, and then two weeks later on January 11 we're 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 have 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 has about 150 customers, and they have higher average revenue per customer, so they went deeper into their customers. Cognyte has more than a thousand 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 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 two quick examples, and we will discuss the security landscape in more detail during the investor day.

[Shaul Eyal:]

Got it. Thank you so much for that. Good luck, good job.

[Dan Bodner:]

Thank you.

[Operator:]

Thank you. Our next question comes from Daniel Ives with Wedbush Securities. Your line is now open.

[Daniel Ives:]

Thanks. 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 cloud build-out that we're seeing from the customer base?

[Dan Bodner:]

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 interesting automation driven by AI, again COVID is also an economic impact, and people are looking to create efficiencies through 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 their processes, they need to preserve data. And they cannot disrupt themselves, definitely not through COVID when people are working from home. So they are 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 the 20% cloud revenue growth that we are expecting this year by the end of Q4, and that 20% we mentioned excluding for fee. 15% of that came from new bookings, and only 5% came from conversion of legacy solutions. So that tells you that while they are moving to the cloud, they're not as such moving their legacy because it's working, it's there. They got their datacenters, and there's no reason to disrupt. But they're buying new functionality; they're comfortable buying it in 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 all looking at Verint to help them to migrate their legacy solutions to the cloud over time, and we are ready to help them in all these different scenarios.

[Daniel Ives:]

Great. And then maybe you can just sort of address in terms of cost structure, and obviously about 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 to sort of preparation from a cost structure perspective.

[Dan Bodner:]

Yes, so I think we kind of figured out the cost structure we discussed earlier. And clearly, we're 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 synergies. We do expect approximately $15 million of separation dissynergies in each company. We expect there to be a one-time step-down which we can grow out of, but there is obviously certain inefficiency with breaking a public company into two public companies, and certainly out of the gate. So, a lot of that has been already I place as we were growing into the separation. We do expect to have a TSA, a transitional services agreement between the two 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 resources 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, we will -- that will decline over time. So we think that we are prepared. We expect to file the document publicly for Cognyte in two weeks. And then, in January, we'll be out there with the management teams of both companies to discuss with investors. I think the 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 are targeting seven directors, so there will be three continuing from Verint, the new CEO, Elad Sharon, will join the Board, and we are looking for three new directors to join the company. So, all that will be kind of folding in January.

[Daniel Ives:]

Thanks, that's great.

[Operator:]

Thank you. Our next question comes from Ryan MacDonald with Needham. Your line is now open.

[Ryan MacDonald:]

Hi, good evening. Thanks for taking my questions, and congrats on a nice quarter. And appreciate all of the future outlook disclosures as we're looking at these two 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 expect that sort of accelerate that transition as we look into next year?

[Dan Bodner:]

Yes, so imagine before that the 20% this year is 15% from new booking, 5% from conversion. The 30% next year actually is also 15% from new booking, so we're 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 this new program in Q3. We already saw 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 the technology that they could continue to work on premises and test the new product in the cloud , and then just overnight switch over, which was obviously very appealing for anyone that'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.

[Ryan MacDonald:]

Excellent, that's very helpful. And just curious to get your thoughts on as you've looked over the past month, as we've seen throughout EMEA and a little bit in the U.S., you know, obviously some shutdowns and lockdowns again. How is the environment compared 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? Thanks.

[Dan Bodner:]

I think so. I think, look, we have very little exposure to travel industry entertainment, industries that are still suffering from the COVID. In fact our exposure is really, really minimal. So, in the main verticals that we are 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 move to cloud, but some actually pushed to next year, so they're still in the plan. We do see some on premises deal, 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 cloudy. 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 increase automation is a priority, so I think COVID is actually providing us some good tailwind into next year.

[Ryan MacDonald:]

Okay. And then, just one final one for me, I'll hop back in the queue. So 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 sales force with their own workforce engagement management. I imagine that's likely more of a competitive dynamic down market, but love your thoughts there. Thanks.

[Dan Bodner:]

Yes. So, we're not very competitive with sales force and we also -- which is very powerful, and we also partner with sales force, and we have some products in their marketplace. So, it's a competition with the CRM guys and the guys, and we clearly see interest from the CCAS vendors to offer business applications like we do. Advanced business applications are critical to our customers and if they're looking to address the workforce dynamics and automation as I mentioned before, some mentors are FM capabilities, but many already partnered with Verint, and many are looking to partner with Verint, due to the strengths that we bring with our leading applications and open platform and apart diagnostic strategy. So, for example, you can -- we find ourself in RFPs, where there could be multiple vendors leading and we are in all of these. 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 the CCAS and collaboration vendors, but we also have regional resellers, and they can resell another vendor in Verint and add value, and very important about 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 an open approach and open platform is an ideal choice for system integrators. So just last -- third point one and we'll talk more in Investor Day about the competitive landscape. But when you look at the Social Security Administration deal that we that we want, this is a Verizon deal, where Verizon is a system integrator for the Social Security. Avaya was chosen as the collaboration platform, and we have the party for choice for the business applications. So 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 they did a strong opportunity for growth with a partner agnostic strategy.

[Ryan MacDonald:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from Brian Essex with Goldman Sachs. Your line is now open.

[Brian Essex:]

Hi, good afternoon. Thanks for taking the question, and congrats from me as well in 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?

[Dan Bodner:]

Yes, so in preparation for this, and as you know, we've been preparing for a long time. We had two objectives. One is we wanted to complete the software model transition and get to the 70% gross margin and positions 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 year 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, you all going to get a visually, but you definitely get a chance to see the new management team, and part of we want to do is often introduce the spirit of the company and obviously their passion of growing and becoming a very successful pure grace -- company.

[Brian Essex:]

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?

[Dan Bodner:]

So it's on place, sales, services, R&D, management are in place. The only thing is I mentioned before there are some transitional services that they will get from Verint, and it's really an area of some financial advice on public company, readiness, legal advice, IR advice, data function that will be continued to build, during next year, but in terms of the business functions they already in place.

[Brian Essex:]

Got it. And, and maybe just to 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, and we don't particularly with regard to your capital structure expectations going forward?

[Dan Bodner:]

Yes, I believe from memory that the threshold was $48, but -- so please to have them joining the company, they have a 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 and 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?

[Doug Robinson:]

Yes, sure. Hi, Brian. Yes, so we expect the Apax second tranche provided makes a threshold to be funded sometime 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 applying it to the outstanding debt, we'll outline better for you at the Investor Day, the capital structures, but Cognyte is being spun debt free, we keep 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 if you will side of the business. So we would expect debt-to-EBITDA ratio was one-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 or lying the legal entities. We'll take you through all that in a little more detail when we have our Investor Days.

[Brian Essex:]

Got it, super helpful. Thank you very much.

[Dan Bodner:]

Sure, Brian.

[Operator:]

Thank you. Our next question comes from Paul Coster with J.P. Morgan. Your line is now open.

[Paul Coster:]

Yes, thanks for taking my question. So, it sounds like it has some TSA arrangements in place for a period as the two 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?

[Doug Robinson:]

There shouldn't be any other relationship, other than TSA in terms of board's crossover, we expect two people to be on both boards. That's two out of seven from Cognyte. So that that's I think is important for continuity. But that's the end of it.

[Paul Coster:]

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

[Doug Robinson:]

No.

[Paul Coster:]

Okay, got it.

[Doug Robinson:]

Verint imposed any obligations or restrictions on the Cognyte business.

[Paul Coster:]

Okay, great. Your cloud business is accelerating, which is very welcome. It's accelerating a little bit after some of your peers? Why did that happen? Why is it that you're experiencing this strength a little bit later than everyone else? What's the cause of the phasing here, Dan?

[Dan Bodner:]

Yes, so I think we actually had the peers. So it depends on what you would refer to as peers. And they are the collaboration and communication platforms, right. And we know that there are about 100 companies now that have CCAS or UCAS or so some sort of collaboration platform in the cloud. And I think the space of vision has accelerated in its transition to the cloud. It's very much an IT infrastructure change from collaboration platform or what used to be 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're ahead, even and of close to better in terms of how much we move to the cloud. It's really worth the market adoption. Again, this application requires companies to change more than IT to change processes and so on and they were slowing, slowing adoption. We talked before about the fact that we know we sell across the enterprise, not just enter. We saw for example, in our branch business, there was a lot of adoption to cloud adoption solution, we sell to the marketing department, almost entirely cloud, and then back office and some contact center, we saw that the market was lower. But all that is, I think is history because whether it was COVID, or whether it was just natural evolution, it looks like this year, the market was ready and we're ready. So we're moving from one-third mix to last year to half this year to two-thirds, which we feel we can achieve next year. I think that's the face that we were hoping to get before, but we get it now.

[Paul Coster:]

Got it and my last question and on the Cyber Intel front, you had three deals. Do these deals have similar characteristics or were they diverse from the perspective of geography and application?

[Dan Bodner:]

No, I don't see anything unusual. Largely usually represent customers by more than one functionality. That's why it becomes larger. So they can bundle several things they need into a bigger contract. 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 a hardware was less than $5 million in Q3. Very small, less services with not just hardware declined, but services declined because of the investment we did in productizing. And we also, customers can do more the services themselves. So the mix is changing across the big deals as well, towards the softer mix. We had a 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'll 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. When we talk about growth for next year, we expect some margin expansion as well. And we hope to target growth rates in subsequent years as an independent company.

[Paul Coster:]

Okay, got it. Thank you.

[Operator:]

Thank you. Our next question comes from Dan Bergstrom with RBC Capital Markets. Your line is now open.

[Dan Bergstrom:]

Yes, thanks for taking my questions. So, Doug, you mentioned some COVID delayed federal license orders, obviously not impacting the numbers or outlook, but could you expand on those comments? Now maybe quantify the impact, what you're seeing in federal or status of those steals?

[Doug Robinson:]

Yes, sure. I mean, so all year, we've seen impacts 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 functioning better, we're getting more, I think comfortable with ongoing nature of the 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, the plans haven't changed, or 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, 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 in longer-term.

[Dan Bergstrom:]

Great, thanks.

[Doug Robinson:]

Sure.

[Operator:]

Thank you. And our next question comes from Jeff Kessler with Imperial Capital. Your line is now open. Jeff, if your line is muted, please unmute. 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.

[Alan Roden:]

Thank you, Operator, and thank everyone for joining us today. We will be quite active next six weeks. We look forward to seeing you at our two Investor Days, and also on our roadshow in January. Have a great evening.

[Operator:]

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