Verint Systems Inc. (NASDAQ:VRNT) Q3 2024 Earnings Call Transcript
Verint Systems Inc. (NASDAQ:VRNT) Q3 2024 Earnings Call Transcript December 6, 2023
Verint Systems Inc. beats earnings expectations. Reported EPS is $0.65, expectations were $0.54.
Operator: Good day, and thank you for standing by. Welcome to the Verint Systems Third Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first 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, 2023, our Form 10-Q for the quarter ended October 31, 2023, 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 that our Q3 revenue and non-GAAP diluted EPS came in ahead of our expectations, and we are on track to finish the year strong with double-digit revenue growth in the fourth quarter. Today, I will start with a review of our third quarter results. Then I will discuss our key wins, AI trends and Verint's platform differentiation. And finally, I will provide a preview of our agenda for our Investor Day next week. In Q3, revenue came in at $219 million, and non-GAAP diluted EPS came in at $0.65. In addition to our results coming in ahead of our expectations, we saw several positive trends driven by our AI platform innovation. First, in Q3, more than 50% of our SaaS bookings included AI-powered bots, which is a significant increase from the prior year.
Second, the vast majority of our new SaaS ACV bookings came in as bundled SaaS. This significant improvement from last year reflects demand for Verint's AI, which is offered only in the Verint Cloud. We're pleased to see our bookings shifting to more bundled SaaS as brands seek to leverage AI to increase CX automation and adopt more AI from the Verint's platform. At our Investor Day next week, we'll discuss in much more detail how the Verint Platform enables brands to build a workforce of people and bots working together and the positive impact that customer AI adoption is expected to have on our growth. Let me turn to Q3 wins and pipeline growth. In Q3, we continue to have significant wins across existing customers and new logos. We received more than 30 orders in excess of $1 million TCV as large enterprises across the globe continue to expand and adopt more applications and AI for our platform.
These orders included a large order in excess of $20 million TCV from a leading entertainment services company in Europe, a $6 million TCV order from a leading telecom company in North America and a $4 million TCV order from a leading health care company in the U.S. I'm pleased that each of these 3 large orders included AI-powered bots. In fact, 9 of our 10 largest bundled SaaS deals in Q3 included Verint bots. With respect to new logos, in Q3, we again added more than 100 new logos, including large brands such as CarMax, Louis Vuitton and Sky. Our objective with new logos is to have them expand in our cloud platform and purchase more bots over time. In addition to these orders, I'm pleased to report that as of the end of Q3, our 12-month SaaS pipeline increased more than 20% year-over-year.
While we've seen elongated sales cycles this year due to the macroeconomic environment, the demand for CX automation is strong, and customers' growing interest in AI is reflected by our expanding SaaS pipeline. Regarding fiscal '24, we expect to finish the year with double-digit revenue growth in Q4. And later, Grant will discuss our Q4 outlook in more detail. Next week at Investor Day, we will review the completion of our SaaS transition over the last 3 years and discuss the next 3 years with our next chapter focused on CX automation leadership and growth acceleration. Here's a quick review of the agenda we plan to cover at the Investor Day. First, we will review the last 3 years following the spin of our cybersecurity business. During this period, our total revenue increased every year while executing a complex SaaS transition with large enterprise customers.
Also, as part of this SaaS transition, we invested in building a highly differentiated CX automation platform, which was launched earlier this year, and we can now shift our focus to execute our next chapter. The second topic of the agenda will focus on the AI opportunity driving our next chapter over the next 3 years. We will review our CX automation platform and provide a deep dive into our AI differentiation, including the 35 AI-powered bots available in the platform today. We will discuss our go-to-market and the AI opportunity with our large customer base. Verint has a large customer base of enterprise customers, and we support 4 million agents worldwide, helping them to process 30 billion interactions annually. We believe we are well positioned to augment this 4 million agent workforce in our base with our open platform and AI-powered bots.
As the market shifts to a workforce of people and bots working together, we have a significant opportunity in our large customer base and with new logos. The third topic on the agenda is the positive economic impact of increased AI adoption. Going forward, Verint is well positioned for the market shift to more bots and fewer people. Verint deploying more bot licenses with fewer agent licenses will increase our TAM overall and provide us the opportunity to accelerate SaaS revenue growth. To bring this to life, we will provide specific examples of how we monetize our AI capabilities and the resulting positive impact to our long-term financial model. In summary, we're pleased to have overachieved revenue and non-GAAP diluted EPS in Q3 and are on track to finish the year with strong double-digit revenue growth in Q4.
We are also encouraged by the increase in our pipeline, the addition of new logos and the increase in customer adoption of Verint bots. We're excited about our next chapter of growth driven by customer AI adoption and look forward to seeing you at our Investor Day. And now let me hand the call over to Grant. 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, 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, IT facilities and infrastructure realignment as well as certain other items that can vary significantly in amount and frequency from period to period.
Now let me start with an overview of our Q3 results. Revenue came in at $219 million, $4 million ahead of our guidance. Non-GAAP gross margins came in strong at 71%, slightly above the prior year and up 180 basis points from Q2. We continue to be pleased with our gross margin expansion progress this year. The combination of our revenue overachievement and strong gross margins drove non-GAAP diluted EPS of $0.65, $0.08 ahead of expectations. For Q4, at the midpoint of our annual guidance, we expect around $264 million of revenue, representing 11% year-over-year growth, another quarter of sequential gross margin expansion and about $0.99 of non-GAAP diluted EPS. As we discussed last quarter, our large sequential revenue increase in Q4 is driven by significant expected growth of our unbundled SaaS revenue stream.
For full year fiscal '24, our guidance for revenue is $910 million, plus or minus 2%, and $2.65 for non-GAAP diluted EPS at the midpoint of our revenue guidance. I will discuss our guidance in more detail later. But first, I would like to provide additional color on our Q3 performance. Starting with SaaS metrics, several important leading indicators came in very positive. The first indicator is bookings mix. New SaaS ACV bookings came in at $25 million or an annual run rate of around $100 million, consistent with our expectations. Looking at the SaaS bookings mix in Q3. Nearly 90% of our new SaaS ACV bookings were for bundled SaaS compared to 65% in the prior year. Also, more than 50% of our new SaaS ACV bookings included bots, representing a large increase in customer AI adoption from the prior year.
Since today our bots are only offered in the Verint Cloud, which we report as bundled SaaS revenue, we expect our bot innovation to drive growth in our bundled SaaS revenue stream going forward. The second indicator is pipeline. We continue to see strong growth in our 12-month SaaS pipeline, which was up more than 20% year-over-year driven by our open AI platform and bots. Similar to the bookings mix trend, our SaaS pipeline has also trended to bundled SaaS, which now represents nearly 90% of our SaaS pipeline and reflects the strength of our AI platform and bots. Turning to SaaS revenue. As we have discussed in the past, the revenue recognition for bundled SaaS and unbundled SaaS under ASC 606 are very different. Bundled SaaS revenue is recognized ratably over the term of the contract, whereas unbundled SaaS revenue is recognized predominantly upfront.
Due to this difference in accounting treatment, unbundled SaaS revenue as well as the year-to-year growth rates can fluctuate significantly from quarter-to-quarter. Therefore, I will discuss the unbundled and bundled revenue stream separately and also share SaaS ARR that normalizes these accounting differences. As you can see from the table on the left, bundled SaaS revenue has been trending up quarterly, and we had another quarter of sequential revenue growth in Q3. We expect bundled SaaS revenue to increase sequentially again in the fourth quarter, and for the year, we expect double-digit revenue growth in bundled SaaS. From the table on the right, you can see our unbundled SaaS revenue has fluctuated quarter-to-quarter, and we expect a significant increase in Q4 and to around $100 million of revenue.
While year-over-year growth in unbundled SaaS revenue can fluctuate quarterly, for the full year, we also expect double-digit revenue growth for unbundled SaaS. Let me provide some more detail on what is driving the large sequential increase in unbundled SaaS revenue in Q4. Three years ago, we started a new program under which we offered our customers multiyear SaaS contracts that were recognized as part of our unbundled SaaS revenue. This program is ongoing, and when these contracts come up for renewal, the value is predominantly recognized upfront in the quarter in which the contract is renewed. With respect to Q4, we have a significant amount of unbundled SaaS contracts coming up for renewals. In fact, when analyzing the $48 million sequential increase in Q4 unbundled SaaS revenue, $40 million of the $48 million increase is driven by these renewals.
Overall, it's important to note that quarterly fluctuations of unbundled SaaS revenue also drives quarterly fluctuations in our total SaaS revenue. Looking forward, we expect total SaaS revenue to increase around 25% in Q4, which brings our full year to about 15% year-over-year growth. Let me now turn to SaaS ARR, which is a way to look through the unbundled quarterly fluctuations. As a reminder, SaaS ARR normalizes all SaaS contracts to reflect a consistent and annualized ratable view and is becoming an important metric to understand our SaaS growth trends as customers shift to the Verint Cloud and our revenue shifts to bundled SaaS. Q3 SaaS ARR growth came in at 11% year-over-year, reflecting our new SaaS ACV bookings and solid SaaS renewal rates.
We just covered the unbundled and bundled revenue streams. And now I'd like to briefly discuss the other 2 software product-related revenue streams, perpetual and support. Our perpetual revenue came in at $25 million in Q3, and as we have completed our perpetual license to SaaS transition, we expect it to remain at around $25 million in Q4 and going forward. In Q3, our support revenue continued to gradually decline as our support base shifts to SaaS over time. For Q4, we expect a decrease of approximately $1 million. At Investor Day next week, we will discuss trends for our 4 software product-related revenue streams over the next 3 years. Turning to gross profit. I am pleased to report that our non-GAAP gross margins continued to expand in the quarter, both sequentially and year-over-year, to 71.3%.
Year-to-date, our non-GAAP gross margin came in at 70.2%, up 100 basis points compared to the same period last year. For Q4, we expect non-GAAP gross margin to be around 73%, also up more than 100 basis points year-over-year. We believe our ability to increase gross margins reflects the strength of our AI innovation. CX automation creates significant ROI for brands as it enables them to reduce costs while at the same time elevating customer experience. Verint is able to capture a portion of these customer savings in the way we price our solutions, which benefits our gross margins. We will also discuss our improved economics due to AI adoption further at our Investor Day next week. Turning to our annual guidance. On a non-GAAP basis, for revenue, we expect $910 million, plus or minus 2%.
At the midpoint of our guidance in Q4, we expect $264 million of revenue. We expect both gross margin and operating margin to increase around 100 basis points year-over-year. And for diluted EPS, we expect $2.65 at the midpoint of our revenue guidance. Regarding below-the-line assumptions for Q4, we expect interest and other expense of around $1.9 million, net income from a noncontrolling interest of around $250,000. And for the full year, we expect around a 9.5% cash tax rate and around 74 million fully diluted shares outstanding. 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. I'm pleased to report that GAAP cash from operations is up 19% year-over-year through the first 9 months.
Regarding our previously announced $200 million stock buyback program, to date, we have repurchased close to $150 million worth of shares. This program was announced in Q4 last year as a 2-year program, but we now expect to complete it faster than planned. And looking forward, we expect to announce a new program once the current one is completed. In summary, we are pleased to have overachieved our revenue and non-GAAP diluted EPS expectations in Q3. We are encouraged by the positive leading indicators in bundled SaaS bookings and SaaS pipeline mix and are on track to finish the year strong with double-digit revenue growth in the fourth quarter. Next week at our Investor Day, we will provide a deep dive into our AI differentiation, review our financial model and discuss our next chapter of growth driven by AI adoption.
With that, operator, please open the line for questions.
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