Verint Systems, Inc. Q4 FY2023 earnings call

• Strong SaaS momentum: SaaS revenue grew 38% in fiscal '23 on a non-GAAP constant currency basis, driving recurring revenue growth and total revenue ahead of guidance.
• Platform differentiation: Verint's platform is open, with Verint Da Vinci AI at the core, providing CX automation. It is partner-friendly and supports cloud-to-cloud connectivity.
• Q4 results: Non-GAAP revenue and diluted EPS came in ahead of expectations with record high gross margin. Had many large SaaS orders and new logos, including Barclays, DIRECTV, easyJet, Juniper Networks, and Farmers & Merchants Bank.
• SaaS transition: Multiyear SaaS transition is tracking ahead of plan, with recurring revenue growing close to 10% each year on a constant currency basis over the last two years. Targeting substantial completion of SaaS position next year and introduced SaaS ARR as a new operating metric.
• Partnerships: Announced new reselling partnerships with Google, Carahsoft, and Tech Mahindra, enabling their sales forces to sell Verint platform.

SaaS revenue, the key growth driver, increased 38% in fiscal '23 on a non-GAAP constant currency basis. Total non-GAAP revenue came in $5 million ahead of guidance. Recurring revenue grew steadily, and SaaS ARR reached approximately $500 million. SaaS revenue growth drove strong recurring revenue growth, and gross margin expanded approximately 100 bps in fiscal '23. Non-GAAP revenue for Q4 was $237 million, $5 million above prior guidance. For the year, non-GAAP revenue was $905 million, up 5% year-over-year on a constant currency basis. Non-GAAP recurring revenue was $186 million for Q4 and $689 million for the year, up 10% year-over-year on a constant currency basis.

• Fiscal '24 guidance: Expect 25%-30% SaaS revenue growth, double-digit recurring revenue growth (around 10%), gross margin expansion, and diluted EPS of $2.65 midpoint. SaaS ARR has been growing at over 30% CAGR and reached $500 million in Q4. Guidance for revenue is $935 million plus or minus 2%. Recurring revenue expected to be ~$755 million, non-recurring revenue ~$180 million. Gross margin expected to expand by about 50 basis points. OpEx expected to be maintained at current level with no headcount increase. Q1 recurring revenue expected to be ~$170 million, non-recurring revenue ~$45 million.

• Buying behavior changes: Some buyers slowing down conversion deals, taking more time to move forward. Deals coming in with reduced scope as customers push out budgets.
• Market dynamics: Potential impacts on conversions and deals due to macroeconomic environment, budget constraints, and competitive dynamics.

Q: Can we talk about AI in more detail? How does ChatGPT compare to legacy AI and what new opportunities and risks does it represent?

A: AI is important in customer engagement. Verint focuses on CX automation with AI. Verint Da Vinci is the AI engine at the core of the platform, including Verint-developed models and embedded ChatGPT. It's architected as an open framework, providing access to all applications. Embedding ChatGPT in a customer's call summary automation was a successful example. Unique data hub helps train AI models effectively based on real customer data.

Q: What's the level of confidence in the current guidance given the macro environment?

A: Guidance is consistent with SaaS processes. Growth drivers intact: conversion and expansion. SaaS revenue guidance 25%-30% with margin expansion. Q1 guidance reflects strong SaaS growth with continued decline in perpetual. Introduced $500 million SaaS ARR metric, targeting completion of SaaS transition next year.

Q: Why would contracts come ahead of time versus some slipping? How to characterize that phenomenon?

A: Some deals came ahead as customers had needs. Slipped deals were mostly conversions as customers took more time with security reviews or other internal processes. Expansion deals sometimes had smaller scope or were pushed. None of the deals lost to competitors, just timing issues.

Q: Can you quantify the dollar number that got pulled forward into Q4 and on-prem conversion side pushed out?

A: $5 million of deals expected in Q1 came in Q4. Majority was perpetual deals. Half of the $12 million difference in expected New SaaS ACV was conversions delayed and half was expansions pushed or smaller scope. None of the deals lost to competitors.

Q: Talk about willingness and appetite for remaining customers to convert to SaaS. Any reevaluation or change in pricing/competitive dynamics?

A: Desire to kick the tire again. For example, a large bank had a security review delay but still intends to go SaaS. Desire to go SaaS is due to better TCO and faster innovation in cloud. Pipeline for conversion is growing, not related to Verint's offering but internal timelines of customers.

Q: Do you expect future SaaS growth to come more from direct sales model or CCaaS partners?

A: SaaS growth expects more from partners than direct. Partners include CCaaS vendors, resellers, and customers continuing direct journey. Verint's open platform allows CCaaS partners to add value, resellers to connect cloud-to-cloud, and customers to continue direct. The conversion opportunity to move legacy to cloud is still significant.