Verint Systems Inc. (VRNT) Earnings Call Transcript & Summary

Good morning, and welcome to Verint's 2022 Investor Day. During last year's Investor Day in connection with the spin of our security business, we laid out a 3-year plan, including a blueprint to finalize our cloud transition that called for a 30% cloud revenue CAGR. I'm pleased to report that we're tracking well ahead of this plan. Last year, the first year of our plan, we significantly overachieved our targets. Just 2 days ago, we reported strong first quarter results and raised our outlook for the current year for cloud revenue growth to well above 30%. Behind our strong momentum is our cloud platform differentiation enabling Verint to deliver significant value to our customers, and we helped them close the winding engagement capacity gap. This year's Investor Day, we'll focus on what makes Verint platform differentiated and the key drivers behind our strong momentum. You will hear from several Verint executives. Let me introduce you Celia, our Chief Marketing Officer. Celia will discuss recent market trends, and our opportunity to help brands create value to greater workforce efficiencies, elevating the customer experience and increasing sales. Dan, our CEO, will discuss our strategy to increase differentiation and drive growth acceleration. Let me also introduce you to Jaime, our Chief Product Officer. Jaime will do a deep dive into our cloud platform and Verint Da Vinci AI at the core of the platform. And finally, Doug, our CFO, will discuss key financial modeling assumptions and our capital structure. At the end of the session, Matthew Frankel, our Investor Relations and Corporate Development Director, will host a Q&A session, and we will all be available for questions. Thank you for attending our 2022 Investor Day. It's a very exciting time at Verint, and we hope that you find today's session informative. Now let me turn it over to Celia.

Thanks, Alan. I'm pleased to be able to share some of our recent research. This spring, we published our second annual engagement capacity gap study that we conducted with more than 2,700 customer engagement professionals in 13 countries. The research provided us with insights into business challenges that they are seeing as they navigate the changes in the market and their budget priorities. We did the research to help develop a deeper understanding of the engagement capacity gap and refine our competitive positioning and go-to-market strategy so that we can ensure we are addressing the most pressing issues for brands. As a reminder, we've seen the engagement capacity gap widen as a result of market disruptions that have occurred with the pandemic and the continued acceleration of digital. During the last few years, there's been a significant increase in the number of interactions between consumers and brands and an increased variety of engagement channels they're using to communicate with brands. As we've seen, the number of channels and interactions increase, we've also seen consumer expectations of the experiences they're having with brands, elevate. Consumers expect brands to understand them. And more than ever, they're in the driver's seat. Unfortunately, many brands are still trying to solve for the increase in volume of digital interactions and the complexity of customer journeys with the same number of resources and the same technology. This approach isn't yielding success. And these brands experienced an engagement capacity gap, and it's widening. Next, I'll share a few of the key findings from this year's study. If you'd like the full study, we're happy to share it with you. One of the most surprising data points was that nearly 80% of leaders believe customer engagement challenges will increase in 2022. Given how difficult last year was, it was surprising to find that most respondents believe this year will be even more challenging. We think this is partially the result of the accelerated market shift to digital, something that not all brands are fully prepared for. It's also the result of the shift to remote work, which has disrupted the workforce. These dynamics are driving the need for new technology to address the capacity gap. There are a number of things that customer engagement professionals say are driving the challenges they see. Many are having challenges managing the remote workforce. 71% noted the difficulty in finding and retaining talent. The Great Resignation has been a headline for months. It's had a tremendous impact on contact centers which already had a history of battling high rates of attrition with industry averages in the 40% range. Customer engagement professionals also continue to face challenges managing remote workers. While some workers have returned to the office, many are not planning to return full time or at all. We saw nearly 70% of respondents say, they believe that supervising remote workers will create significant challenges during the coming year. There are also concerns with changing customer behaviors. Many consumers have become digital-first. The shift to digital may have been accelerated by the pandemic, but it's now become a preference for many customers. Many are starting their journey with a brand on digital channels. And while their journeys may start on a digital channel, the consumer may often use multiple channels, both self-service and assisted to resolve their needs. It's important to note this research was concluded before the recent increased concern about inflation and rising wages. Clearly, this year, brands will need to find ways to do more with the same resources and budget. Since we became a pure-play customer engagement software business in February 2021, we have been 100% focused on our mission to help brands close the engagement capacity gap. We have organized the company with that mission in mind. The solutions we provide, the services that surround them, they are designed to close the gap. The breadth of our platform differentiates Verint from other solutions in the market. Our platform includes applications for workforce engagement, managing digital channels and experience management. Brands can start anywhere with our platform and then expand. The platform is designed to be open so that it fits into the ecosystem that the brand already has in place. Dan and Jaime will dive deeper into the platform capabilities. But before that, I want to share some information about the momentum that we've generated in the market with our approach. Increasingly, brands are selecting Verint as their technology provider of choice for customer engagement. Over the last few years, we've consistently added more than 100 new logos each quarter, and we've continued to expand with our large base of customers. Customers such as Wayfair and FedEx chose Verint in a competitive selection process. Both organizations found the depth and breadth of our platform compelling. We've also seen a number of customers such as Costco and Humana expand the solutions that they have from Verint. In addition to looking at the individual companies that have selected Verint, it's also important to step back and look at the presence we have in key verticals. Leaders in each of these industries have chosen to partner with Verint, to help them provide their customers with differentiated experiences at scale. As you can see from the slide, we partner with 9 of the top 10 insurers, 8 of the top 10 health care companies and 10 of the top 10 banks in the world. We've worked with many of these companies for a number of years. They continue to grow and expand their partnerships with us because we continue to deliver innovation and enable them to create value. Now let me turn the call over to Dan to discuss our differentiated platform.

Thank you, Celia. As you just heard from Celia, Verint's mission is to help brands close the engagement capacity gap. Verint's growth momentum is driven by our platform differentiation and our ability to help brands close the gap better than our competitors. Recent increases in labor costs due to wage inflation, increasing workforce attrition and post-pandemic disruption in the work environment, make the capabilities of the Verint platform even more differentiated. Looking at the big picture, we know that the customer engagement industry is spending around $65 billion annually on software. This is a large investment as brands clearly recognize the important role of technology to drive customer engagement programs. But for every dollar spent on technology, there is more than 30x investments in labor. We estimate that more than $2 trillion is spent annually on the Customer Engagement workforce. This data suggests that 97% of this cost is attributable to investment in labor and only 3% to technology. So there is a tremendous opportunity for new technology to drive incremental ROI. As you know, in a recent total economic impact study published by Forrester on Verint, they reported that Verint customers had achieved a 391% ROI and a payback in less than 6 months utilizing our software. Today, brands feel the pressure to increase their investment in hiring more people, but they know that this approach is not sustainable. The good news is that with the recent advances in AI technology, brands can deploy new technology to do more with the same number of resources and budget. Verint is focused on helping brands avoid increasing the cost of their workforce, while at the same time, elevating the customer experience and increasing sales. Looking back at our history, 15 years ago, Verint pioneered the workforce optimization industry and ever since we've been helping thousands of customers to optimize workforce-related processes. Today, we leverage advanced AI technology to further help brands to deploy one workforce, a new approach that can significantly increase workforce capacity, flexibility and agility across the enterprise. Before we look deeper into one workforce, let's review a few aspects of the Verint platform differentiation. We believe the closing the capacity gap is top of mind for our customers. And today, many brands look for best-of-breed solutions that can help them do more with the same budget and resources. We designed the Verint platform to help customers close the gap, and our platform is highly differentiated across many areas. Here are a few examples. First, our open cloud architecture makes Verint applications fit seamlessly into brand's existing ecosystem and offers brands and our partners open access to data and APIs. Many of our competitors offer a closed platform, which limits brand's ability to respond to the ongoing changes in our industry. Second, the applications running in the Verint platform are best-of-breed and specifically designed to help brands close the capacity gap. Verint's focus on the capacity gap, coupled with our 2 decades of experience in workforce optimization, has resulted in industry-leading functionality. Our platform is modular and our customers can start anywhere and then expand. This means that brands can choose to deploy Verint applications from the platform based on the most pressing business priorities and regardless of which infrastructure they currently use. Third, Verint Da Vinci is at the core of our platform, powering the Verint applications with the best AI technology to support ever-increasing demand for automation of Customer Engagement business processes. And finally, our platform supports a consumption pricing model. This means our customers can pay for what they use based on applicable units of measure, and therefore, we can align the cost of the technology with the value created by closing their capacity gap. To close the capacity gap, brands are adopting a new approach we call one workforce. One workforce enables the entire customer engagement workforce across the enterprise to engage with customers at the right way, at the right time by eliminating work for siloeds and automating business processes. When we talk about one workforce, we address both people and bots working together as a unified workforce. We also address the entire customer engagement workforce across any touch points between the consumer and the enterprise. As you know, many consumers start their engagement journey via a self-service channel on the website. They may continue with a call to the contact center and then end their engagement when receiving the response from a back-office employee or with a face-to-face meeting at the branch. All these consumer touch points with different employees and bots need to be connected and orchestrated to achieve efficiency and positive customer sentiment. Today, most brands around the world have their workforce organized in many siloeds. The siloed approach was adequate when consumer interactions were carried predominantly through voice calls through the contact center. Let's take a closer look at how this siloed approach is working in today's environment and how it's causing brands a significant loss of capacity, flexibility and agility. In the last 3 years, the number of work for siloeds has increased across 3 areas. First, across the enterprise. Interactions are not limited just to the contact center, and there are more consumer touch points with different parts of the organization. With different tools and processes in the contact centers, back office, websites and branches, brands are unable to connect the siloeds for consistent customer journeys and to allocate their resources dynamically. Second, within the contact center, workforce siloeds are increasing due to resource being dedicated to the voice channel, digital channels, messaging channels, et cetera, because these communication channels are different in nature, many brands dedicate employees to specific channels and lose the flexibility to allocate resources dynamically based on demand. And third, many brands are deploying bots for specific self-service tasks with the objective of deflecting work of people to bots. Well, this is a good objective, in many cases, these bots are not an integral part of the workforce and therefore, create more siloeds. I'm sure that many of you experienced interactions with bots. Typically, you need to answer many questions to give the bot all the information they need to determine the reason for your interaction. And then when the bot is unable to help, you will need to place a call and speak to a human. In too many cases, the human is unaware of your prior bot contact or the information you already shared with the bot because the bot exists in a siloed. You asked to start over and provide the same information to the human. Siloeds create inefficiencies and also contribute to poor customer experience. Clearly, workforce siloeds driving efficiencies and the number of siloeds is growing rapidly. A few years ago, when customer engagement was primarily based on telephony, siloeds were minimal and the problem of lack of connection was not urgent. Today, adopting a one workforce approach is urgent and critical to closing the capacity gap. The Verint platform offers all the ingredients required for a brand to break down its siloeds and evolve to one workforce. There are 4 building blocks that brands can choose to deploy gradually or all at once based on their business priorities. These are orchestration and knowledge, quality and compliance, enterprise analytics and hiring, focusing and scheduling. Let's take a closer look at orchestration and knowledge. Orchestrating the workforce of humans and bots into one workforce allows the brand to respond contextually and consistently regardless of the communications channel. Let's look at an example I discussed earlier, where consumer first interacts with a bot on the website and only later places a call to speak with an agent. With orchestration, Verint empowers the agent to begin the discussion with the consumer with the full knowledge of the consumers' prior experience with the bot. The agent and the bot are no longer acting in siloeds and now working together. Orchestration can create more workforce capacity and elevate customer experience. Verint also delivers the right knowledge to help the workforce of humans and bots, provide consistent in the moment responses to best address consumer needs. Now let's review a customer case study. A North American leading industrial company has deployed the Verint platform to close their engagement capacity gap. Their objective was to deploy the Verint's workers engagement solution to increase capacity through greater workforce efficiency, and they also deployed Verint Experience Management. So they are able to continuously measure the Customer Experience and ensure that the increased efficiency is not causing degradation in consumer sentiment. They were able to achieve the objective with impressive customer satisfaction scores. Here's a quote from this customer. The sophisticated simplicity of this technology views our associates and supports our organization's goal to reduce cost and improve accuracy. The very customer reported customer satisfaction results that are best-in-class is a score of 4.5 out of 5. Their NPS score was 70, which is excellent compared to the industry benchmark, where any score of 50 is considered very high. This is an example of how brands can close the capacity gap and not only increase the capacity of the workforce with the same budget, but also improve employee satisfaction and elevate customer experiences. This case study and many other similar ones demonstrate the brands that adopt our best-of-breed approach can effectively close the engagement capacity gap and create tremendous ROI for their organization. I would like to conclude this section with a discussion of our platform go-to-market strategy across 3 areas. First, we're growing our partner ecosystem. Close to 50% of our revenue comes through several hundreds of reselling partners globally. Our partners include resellers, bars, system integrators and service partners. A global direct sales force is focused on mid-market and enterprise customers while we sell to the SMB market primarily through our partners. Second, we service a variety of vertical industries across B2B and B2C. As you heard from Celia earlier, we've partnered with the leading brands across all key industries. Our strong partnerships with leading brands allow us to develop solutions that address specific industry needs and to further differentiate Verint from our competition. The final area that I will discuss today is our flexible pricing models. In addition to traditional user-based pricing, we introduced the consumption-based model in our cloud platform. This allows our customers to pay for what they use and align their investments with their ROI. In fact, in many cases, a platform can help brands reduce or repurpose the number of people as a result of automation. Since pricing can be driven by automation consumption and not by people counts, the result is a win-win situation as customers can consume more automation to create workforce efficiencies. And Verint is paid more with increased consumption of automation. And now let me turn to Jaime for a review of our platform core and Verint Da Vinci AI. Jaime?

Thank you, Dan. As we've discussed throughout the day, the only way to close the engagement capacity gap is by applying AI and automation to make your workforce significantly more effective. We knew that was fundamental as we built out our cloud platform and build Verint Da Vinci AI and Analytics directly into the core. In this section, I'll discuss our cloud platform and Da Vinci in detail, how it differentiates Verint and allows us to deliver on the promise of closing engagement capacity gap. Verint offers all of our applications from our Customer Engagement Cloud platform, which was purpose-built to close the engagement capacity gap. The Platform Foundation is an open, native cloud architecture designed to run anywhere that our customers or partners need Verint applications. Platform applications are intended to fit into our customers' ecosystems and come ready to integrate with our customers' choice of communications infrastructure, CRM applications and enterprise data environments. The platform core is how we quickly add capabilities across all Verint applications. Everything available in the platform core is automatically accessible across all Verint applications on the platform. Hence, a new AI engine, for example, can be added once and used immediately by all the Verint applications purchased by a customer. This allows our development teams to innovate very quickly, delivering new capabilities that can reach all Verint customers regardless of the applications they consume. The platform core contains many capabilities, but today, we'll focus on 2 areas: Verint Da Vinci AI and Analytics; and our Engagement data hub. I talk to a lot of people about AI, and most conversations tend to focus on cool new algorithms, deep neural networks and the latest and greatest AI frameworks. While Verint Da Vinci is built on that same leading-edge technology, I'm here to tell you that those approaches to AI are missing the point. The most important ingredient to achieving AI success is access to the right data to fuel your AI initiatives and a thorough understanding of the use case. The data needs to be authentic, not simulated. It needs to cover a variety of use cases, not be narrow. And most importantly, it needs to be continuously updated to stay relevant as conditions change. Verint Da Vinci is built on 25 years of customer engagement data from thousands of customers, billions of interactions across every channel, experience data collected at every customer touch point, conversations with humans and bots. Our data asset spans every industry, every geography, and it's the real secret to keeping Verint Da Vinci delivering the most accurate predictions that brands need. And now that we've crossed the midpoint of our cloud transition, Da Vinci has been propelled forward in a vastly accelerated pace. Millions of data points are collected by our cloud platform every day and are used to continuously tune Da Vinci to help us maintain our market leadership. The data platform that fuels Da Vinci and the use case-specific customer engagement data we've amassed for 25 years are perhaps the largest barrier to entry facing competitors who are looking to enter the customer engagement market. AI without the ongoing stream of real-time, real-life data just falls short. As discussed, the Verint Cloud platform continuously supplies data flowing in from interactions across all modalities in interactions, survey responses, self-service experiences with bots and employee activities. From all of these diverse sources, it creates a single, highly secured data hub, which we call the Engagement data hub. Da Vinci AI and Analytics applies our market-leading machine learning infrastructure to the Data Hub continuously working to improve our AI models. These models are focused on supporting customer engagement business processes and providing analytics services to our applications, customers and partners. This approach has fundamentally changed the way we deliver innovation at Verint. The ability to quickly add AI services to the platform, making it available to all of our applications at once, coupled with the continuous improvement of our AI algorithm, the data flows to the engagement data hub allows Verint researchers and engineers to deliver and mature AI very rapidly. Most importantly, this platform-wide approach to AI that we delivered through Da Vinci is very difficult for any brand to achieve on its own. It requires highly specialized data sets, a deep knowledge of customer engagement use cases, an army of data scientists and engineers and the ability to deploy and scale leading edge AI capabilities. Da Vinci takes the pain of AI at scale away from our customers and partners, allowing them to apply them immediately to solve customer engagement problems. Da Vinci can drive tremendous value for customers. Our commercial approach is to deliver rapid innovation and monetize this innovation through both applications and API services. The most common way customers take advantage of the Da Vinci AI is through workflows within our applications. They benefit from Da Vinci as part of the overall application subscription. In every release, we add new modules, powered by Da Vinci that allow existing customers to expand and take advantage of these new capabilities in their existing deployments. This year, we launched a new commercial model, Da Vinci APIs. APIs allow developers to use Da Vinci programmatically and extend their own offerings with Verint's Customer Engagement AI. This offering is ideal for partners and customers trying to create unique IP built on the Verint AI. The primary use case is allowing partners to create new applications, for example, leverage our biometric identification API to create a new fraud solution that the partner will bring to market themselves. We're seeing great early traction with our recently launched Da Vinci API services. Verint Da Vinci is a key competitive differentiator and is contributing to our recent momentum. Let's now shift to look at a customer case study to understand the potential results that brands can enjoy when they take advantage of Verint Da Vinci embedded in Verint applications. A large international financial institution is one such Verint customer achieving stellar results with Verint Da Vinci AI and Analytics. They deliver a vast set of financial services to their 50 million customers, including account services, sales, portfolio management, collections, customer retention and investment services. Verint AI and Automation allows them to deliver this wide array of services from a very efficient workforce of 2,000 employees of which 90% are working remotely full time. The bank takes advantage of a number of Da Vinci capabilities to achieve efficiency in their workforce. Da Vinci allow them to automatically monitor all of their sales goals and achieve 100% compliance with local regulation through the automated quality program. They were also able to increase revenue from sales and collections business processes by allowing Da Vinci to help them identify the key moments during customer engagements that led to successful outcomes. While some brands are hesitant to apply AI oversight to employees to avoid a big brother reaction, this customer found the opposite was true. Application of Da Vinci improved efficiency so much that agent turnover was actually reduced by over 30%, absenteeism declined by 10% and employee engagement increased by 25%. These wins in employee experience are a great demonstration of how our customers are managing through The Great Resignation by giving employees the support they need to do their jobs with reduced effort and increase support with Verint Da Vinci AI and Automation. In conclusion, Da Vinci AI and Analytics delivers a differentiated approach that takes the pain out of customer engagement AI, allowing our customers to close the engagement capacity gap helping them to achieve tremendous ROI with an accelerated time to value. Thanks for your time today, and I'll hand it off to Doug to discuss our financial model.

Thanks, Jaime. That was a great overview of our technological differentiation. At last year's Investor Day in connection with the spin-off of our Security business, we laid out a 3-year plan. Today, I'll discuss how we're performing relative to this plan, discuss some of the assumptions and review our strong balance sheet, accelerating cash flow and our capital allocation strategy. Let me start with our cloud transition and cloud revenue growth. Last year, at our Investor Day, we layed out a plan targeting a 30% CAGR for cloud revenue. In the first year of our 3-year plan, fiscal '22, we delivered strong cloud revenue growth every quarter that came in well ahead of this 30% CAGR target. Just 2 days ago, we announced strong cloud growth in the first quarter of our current fiscal year, also well ahead of our 30% target and raised our outlook for cloud revenue growth to a range of 32% to 34% for the full year. Verint's cloud transition continues to progress well, and it presents many benefits to our customers as well as opportunity for Verint to increase recurring revenue and enjoy better economics over time. Last year, cloud revenue increased 37% year-over-year on a non-GAAP basis. We believe our cloud revenue growth is durable, and I'd now like to review the 2 sources of our cloud growth. The first source is related to maintenance contracts converting to cloud, which contributed approximately 1/3 of this growth in fiscal '22. The second source is related to new business booked in the cloud model, which contributed approximately 2/3 of this growth in fiscal '22. Let's take a closer look at the first source. At last year-end, we had approximately $250 million of annual revenue from maintenance contracts, and we expect a gradual conversion to our cloud over time. For modeling purposes, we assume around $50 million of maintenance converting to the cloud this year. Relative to the second source, we have new business coming in from new logos as well as from an expanding footprint with existing customers. Last year, we added more than 100 new logos every quarter. And this strong momentum continued in the first quarter of this year with an additional 100-plus new logos. We have a large white space opportunity, and our large base is a major source of growth for Verint as our cloud platform makes it easy for brands to add additional Verint applications. I'd like to take a minute to discuss where we are in our cloud journey. Last year, we crossed the midpoint of our cloud journey on a new PLE bookings basis. This year, we expect around 2/3 of our new PLE bookings to come from the cloud. Moving into the second half of our cloud transition provides Verint with 2 significant economic advantages: first, we expect our gross margin to expand over time; and second, we expect our cash flow to accelerate. Let me expand on these 2 points. Last year, our overall gross margins were around 69% on a non-GAAP basis. As we continue to shift to the cloud and more recurring revenue, longer term, we are targeting non-GAAP gross margins to reach the mid-70s. Here are some data points to help with modeling our gross margin expansion. Last year, 73% of our total revenue was recurring and 27% was non-recurring on a non-GAAP basis. Gross margins were 76% for recurring revenue and 50% for non-recurring revenue on a non-GAAP basis. As our revenue continues to shift recurring revenue, our overall non-GAAP gross margin will improve towards the mid-70s, closer to our recurring revenue gross margins. Looking forward, we expect our gross margins to increase modestly over the next few years and then increase faster as recurring revenue crosses 90% of our total revenue market. Higher gross margins will enable us to grow earnings faster than revenue while at the same time invest to sustain long-term growth. Turning to our balance sheet. Let me start with cash generation. In Q1, which we just reported, we generated $54 million of cash flow from operations, up 43% compared to $38 million of our operating cash flow from continuing operations in the prior year's Q1. Looking forward, we expect strong growth this year of more than 20% with cash from operations increasing from $118 million last year excluding non-recurring items to more than $200 million this year on the same basis. We expect our strong cash flow to drive our cash balance to around $400 million at year-end, resulting in close to 0 net debt position. Our strong balance sheet gives us a lot of strategic flexibility. And finally, with respect to capital allocation, since completing the spin-off of our Security business, we bought back the maximum amount of stock we have committed to repurchase due to the tax-free nature of the spin-off. Looking forward, the primary use of our cash will be additional buybacks and tuck-in acquisitions that will accelerate our road map and further improve our competitive differentiation. Overall, we believe we are very well positioned with our highly differentiated cloud platform, strong customer wins and double-digit PLE bookings growth, and we expect our strong momentum to continue. Now with that, let's open it up for questions.

All right. I hope everyone found the presentation informative. Now we'll move to the Q&A portion of the event. We'll take questions for about 30 minutes or so. So please feel free to e-mail me at [email protected], which some of you have already started doing, but also feel free to use the chat feature in the webcast. I should also mention that there's been some overlap in the questions we've gotten so far. I'll do my best and mesh them together. All right. Let's get going here. So first question, it says you're in the second half of the cloud transition now, what's left to do to complete your product transition to SaaS?

Okay. So this is about the product. And Jaime, why don't you take this question?

Thanks, Dan. So I would say the good news is the hard part, the tech part is largely complete. So we moved to micro services architecture. We've deployed in large-scale multi-tenant environments. We've deployed globally deployed across multiple clouds. So all the machinery and the infrastructure side of building out and transitioning to a cloud development model, we're through that. That's been where we've been focused over the last few years. So now going forward, a lot of our investment, a lot of our focus is really automation, driving increased scale, keeping up and keeping ahead of the momentum that our customer transition is really driving. And using that automation around operations and automation around provisioning to just drive more and more points back to gross margin.

Thanks, Jaime. Next one is you mentioned that about 70% of respondents say, supervising remote workers will be a significant challenge. What are the biggest parts of that challenge? How does Verint solve those issues for customers?

Yes. Celia, can you please take this?

Absolutely. It comes back to the engagement capacity gap. And one of the -- when we talked about that, one of the levers that companies and brands have to close that gap is to make their resources more effective, more efficient through increasing the capacity that they have, the flexibility, the agility of those teams. And when you think about the remote workforce, it just adds to that complexity. And the platform that we have enables brands to help in several areas. So from a forecasting and scheduling perspective, adding that flexibility that you need to deal with remote workers and providing flexibility to the employee for a better experience and how they schedule themselves. And then thinking about it from a quality, compliance and a coaching perspective. So our AI and our Analytics help brands understand the quality of what's going on in those engagements and what they need to do to improve and take action. And so they can automate personalized coaching for team members, they can even automate real-time coaching with AI in the moment in the interaction or the engagement. And then all of this is done through a lens on employee experience, so making sure that as companies are working with these remote workers that they are delivering a good experience with the help of our technology.

Thank you, Celia. Next one is so it's good performance in spin. You talked about focusing the company on helping customers close the capacity gap. With this vision, where do you see the business in 3 years?

Okay. So 3-year vision. I would say the first, I see Verint as a category leader. More and more companies are now focusing on helping brands close the capacity gap. There is a growing realization that this is a major challenge for the industry. As I discussed before, 97% of the investment is labor and the pressure on brands to increase the hiring and expenses on the workforce coming from a lot of different direction now. So closing that gap, it is an increasing important challenge. That's what Verint is focused on, and we will be the clear category leader here. The second part is our partner ecosystem. We already have a large one. But in 3 years, I see even bigger partner ecosystem expanding all the different types of partnerships we have with resellers and influence partners. The third element, I would say, in 3-year vision would be that we'll substantially complete a cloud transition. We've been shifting to the cloud, both in booking and revenue over the last few years about 10 points every year. So if I look 3 years from now, we'll be substantially complete. And then with that cloud transition, I would expect the margin expansion that Doug discussed as we shift to more recurring revenue, and our gross margin on recurring revenue is much higher. The whole mix shift will improve our gross margins to or the mid-70s. And in terms of growth, we're targeting growth, as you all know. And I see in 3 years that we'll continue to expand both with the base and the new logos, which is part of our strategy now because we see a lot of white space in the base as they shift to digital, they will need to partner with Verint to make that shift efficient, and we see a lot of new logos that start small and will be growing over time. So category leader, margin expansion, growth and putting the cloud transition behind us.

Thanks, Dan. I've got a question on M&A here. It say given the challenges we've seen in valuations, has Verint's approach to acquisitions changed?

I don't think the approach changed. But Alan, maybe you can expand on how we think about M&A.

Sure. So let me start off with the summary of how we think about M&A. We have 10,000 customers, very large installed base, a very large enterprise sales force. And that gives us really very good visibility into our customers' current challenges and evolving balances, and that really influences how we innovate. And we innovate 2 ways, innovate organically through a very large [indiscernible] of the organization as well as to tuck-in M&A. And at the end of the day, we use tuck-in M&A to accelerate our road map and to expand the capabilities of our platform. [indiscernible] you note that some ways, M&As got much easier for us over the last couple of years because when we acquire a company -- when the first thing we do is bring in to our platform very quickly and that gives the opportunity to offer it to our installed base and new customers. Regarding the question about valuation, we have seen some softening in the private market, usually higher market lags, the public market. So it hasn't pulled back as much as the public markets, but we have seen things soften a little bit.

Thanks, Alan. We've got a few questions that have come in on a consumption-based model. So I'm going to ask them at once and so we can address the whole topic at once. So since you mentioned offering customers a consumption model on the platform, do you think that will be more attractive to customers in a softer economy? There's also questions about the contracts consumption versus fee-based. Is there any uplift associated with those with the transition? How long have we been doing consumption-based pricing with customers as well is a question that's come in. So I think all those are related. So [indiscernible]

I'll take it. Yes, sure. Thank you. So first, we introduced the consumption model at the beginning of last year. Shortly after the spin, we introduced that into the market. As you know that historically, the market was pretty much buying applications on a seat-based, which is really more an infrastructure way of buying technology, but it was also for many years the way they bought applications. So the consumption model, it's very interesting for customers because this gives them the ability to align the value that they generate with the price they pay. And that alignment becomes more and more important as they think about the capacity gap, right? Because the whole idea is I won't be able to do more with the same resources and budget. And I need to consume more technology so I can optimize that 97% of the spend, which is the labor. I also want to improve customer experience, and I need technology that is directly related to benefits from better customer experience in terms of retention of customers, loyalty of customers and ability to upsell to customers. So revenue generation. So when we sell best-of-breed applications that are ROI-driven, our customers really are intrigued by the potential of the ROI, but they want to pay for their ROI when they realize it. And that what makes the consumption model very, very interesting to our customers. Why is it interesting for Verint? Obviously, because we know we deliver ROI. We have a lot of studies with customers over the years. So we are more than interested in helping customers generate more ROI and then get paid more. And we believe that over time, this will increase our revenue. We will drive growth in the bearing platform. So it's a win-win. It's a win-win situation, especially in an environment where customers are looking to have more certainty around their spend. So when you buy on a seat base, you don't know how many seats you need, you don't want to commit to telephonic seats, digital seats, messaging seats. You can take all that away from the equation by just presuming technology that helps you to achieve your business growth. And that's what we're trying to do. Now in terms of moving from seat-based to consumption based, we do have customers that have done it already. In some cases, what helps them is the fact that we provide reports in our platform in terms of usage, even if they pay on a seat base. So they can actually compare the usage that they have to the number of seats, and they can model themselves, whether it makes sense for them to move to a usage-based model. And of course, the benefit to Verint is usage increases over time. So we're not looking to raise the price when a customer moves from seat-based to consumption-based, but if the customers see benefits from doing that, we believe we'll see benefits over time.

Thank you, Dan. I've got a product-related question. It says, aside from the breadth of the portfolio, where do you think Verint has the biggest advantage versus competitors from a product perspective?

Jaime, that's yours.

Thanks, Dan. So I did cover, I'd say, a bit of it in my talk track before. But I'd say, first and foremost, there is that access to data, the volume and the uniqueness of the data asset that we have, our understanding of the actual customer use case, the actual business process from a holistic perspective, we really understand how engagement works inside an organization. We don't take a very siloed approach. We're proven at scale for 20 years. We've solved the hardest customer engagement problems in the world. And those 10,000 customers that Alan mentioned before, have benefited from that. And we knew all of this as we built the platform. We knew that AI and Automation were central to how people will close the gap. We knew that they needed customer experience capabilities, digital capabilities, workforce capabilities together. So we are very deliberate in bringing those together with a platform approach empowered by AI to close the engagement capacity gap. And we do so with the best knowledge in the industry of how customer engagement processes work and a data asset that no one else can touch. So I feel like, while breadth is extremely important, we can solve all your customer engagement problems with us and our partners. We can close the gap for you, understanding that going into it and being able to keep ahead of the market with our AI automation because of that data asset is really what keeps that competitive separation for us.

Got it. Thank you, Jaime. I'm going to ask 2 questions here, came from the same person. How does your average customer size for pure cloud deals differ from the average on-prem customer? And from a go-to-market perspective, any noticeable difference between the direct and indirect bookings between cloud and on-prem? Meaning is cloud more partner-heavy than your on-prem business?

Okay. Let me start with the average deal. So first, we just announced a quarter where we have 26 over $1 million cloud deals. So we do see very large deals from cloud. Actually, I would think that would differ on-prem from cloud today is just that we have a small number of customers that still want to buy on-prem. It's not about the size of the deal, just the customer needs. The customers that stay on-prem are typically large customers. So they have large needs, but they are not that many. And as you know, our sales force is only selling on-prem perpetual license by exception. So our entire sales force is selling cloud and for specific customers that we have identified as we want to be flexible, we're still selling on-prem. So in terms of size, I would definitely say we have very large cloud deals. We're talking about a $15 million cloud deal on our earnings call. And I don't think there is any limitation in terms of how big customers can go in the cloud. It is easier to deploy in the cloud for customers because they don't have to involve their IT department and run the project. So they may kind of buy more frequently and with smaller chunks. But at this point, I think they're buying large deals as well. Now in terms of our partner, we -- again, because the nature of our on-prem perpetual deal is really defined by the end user. We don't have any different approach with partners. They also are able to sell to a small number of customers on-prem and they predominantly focus on the cloud platform today. You also have to remember that a lot of the innovation over the last few years was only in cloud. So we're not introducing new modules on prem. We definitely are supporting and enhancing our legacy on-prem solutions. But a lot of innovation comes now in cloud, the partners really want to take advantage of that innovation. And as I said before, in terms of our strategy, we do allow customers that purchase on-prem perpetual historically to keep that without conversion while they can consume our new innovation in the cloud. So we have a hybrid -- many hybrid situations. So the net-net is perpetual module is going away. It's largely already gone, and it still exists concentrated on a small number of large customers, and we see that going away over the next few years as well.

Thank you, Dan. Next question is, you're targeting $400 million cash by year-end. What product gaps are you missing that you would go out and acquire versus build?

Yes. So we don't feel right now that we have any gaps in the platform. We would like to expand the platform because clearly, we have many customers that have something from the platform and having more will give us an opportunity to expand into our customer base. I think Alan explained before our M&A strategy. So we will be interested in acquiring tuck-ins where we have a quick integration into our platform. I would say, anything less than 6 months integration is attractive because we can quickly and without a lot of effort, expand the platform with additional functionality. But I don't see right now gaps, so it will be more opportunistic. And in terms of the cash generation, we basically have a very strong balance sheet and generating a lot of cash. And it's 2 usages, either we're going to use it for M&A or we're going to give it back to investors.

Okay. Thanks, Dan. We've got a few questions on our cloud revenue guidance. So I'm going to mesh them together here. Given that you've increased cloud guidance for the year, how do we think about that 30% CAGR we laid out last year? Management's tone has been positive and the platform's evolving. So how do we think about that 30% CAGR that we've laid out?

Yes. So we have -- post spin, we laid out targets, multiyear targets and discussed the 30% CAGR. Obviously, in the first year, we ended up with 38%. And we then gave guidance of 30%, but that was 30% over the 38%. So there was already an improved outlook. And then we -- since then, we increased our guidance for this year, which is now between 32% and 34%. So we are ahead of the plan in terms of growing our cloud revenue, and this includes moving our customer base to cloud consumption and also a lot of new logos that we introduced since we announced this 30% CAGR. And most of those new logos, predominantly the entire customers that buy new logos are buying in the cloud. So that's another source of cloud growth and getting ahead of the plan. So we feel that there's 2 things that we can look at as evidence and data points at this point: one is that the market is transitioning and not just the low end of the market, but definitely the mid-market, and we see also is 26 over $1 million deals, we see enterprise customers moving to the cloud. And there are still customers that are kind of considering and planning to do that over the next few years, but I think we have enough data points that the market is moving to the cloud. And the second, I think, pretty clear data point is that our cloud platform be successful, and Jaime talked a lot about what we did to create a native cloud platform that is offered across multiple geographies around the world that's offered across multiple public cloud infrastructure, AWS, Azure, GCP. So we created that cloud platform. And that's also, I think, an evidence that the cloud platform is adopted by the market. And basically the message is resonating well with the market.

Thanks, Dan. Some financial questions here around gross margins. The essence of them is basically how much margin expansion can we expect this year? What are the drivers behind the long-term improvement you talked about? And then specifically within recurring gross margins, do we have the opportunity to expand recurring gross margins?

Doug, please take it.

Yes. Sure, Dan. Yes. So we expect some modest gross margin expansion and operating margin expansion as well this year that's reflected in our guidance where we have a 10% EPS growth against our 7% revenue growth. You saw 20 bps of gross margin improvement in Q1. And for the year, we expect probably about 20 bps compared to last year. Over time, though, our gross margin expansion occurs as we progress through the cloud transition as our recurring margins, which are currently kind of in the mid-70s become a larger portion of the total compared to the non-recurring margins, which are about mid-50s. So it's kind of a mix change going forward as we get through the cloud transition as more of our revenue becomes recurring that naturally is going to give us higher margins. And then to the point of within the recurring margins is a room for expansion, probably in time just through economies and efficiencies of scale, et cetera. But right now, the margin expansion over time -- over the near term is going to come from just kind of a changing mix. The recurring revenues, gross margins being much higher, the non-recurring kind of dragging us down as that becomes a smaller piece of the total, obviously, the overall gross margins expand.

Got it. Thanks Doug. Next question is you've had a lot of success selling bolt-on cloud applications to customers still on legacy infrastructure. So how many cloud applications on average of those customers adopting today? What's the total opportunity over time? And how may that change if a customer migrates their core contact center infrastructure to the cloud, if at all?

Okay. There's multiple elements here. So first, I think it's important to recognize that we sell cloud applications regardless of the infrastructure. So many of our customers actually did not move their communication infrastructure to the cloud, but are moving applications to the cloud. And they know that when they're ready to move their infrastructure, there's not going to be any change in their applications because our cloud platform is networked to other clouds as well, as part of our multi-cloud architecture. So we can work cloud-to-cloud with any technology, including communication infrastructure as well as CRM technology. And CRM is predominantly already in the cloud, and we are integrated cloud-to-cloud with CRM as well. So this architecture where customers can consume applications at their own pace platform is modular. They can start anywhere they want. And it's based on business priority. It's not based on a certain recipe that Verint is dictating. And it's unrelated to where they are in -- with infrastructure. This really is very interesting for customers that depends where they are with closing the engagement capacity gap, right? Some customers feel that their urgency is to measure the customer experience and act on it. And they just want to get real-time responses, find out what makes customers unhappy and make changes in real time. And that -- and they can consume that piece from the platform. Others are really focusing on the siloeds. They feel like the number of siloeds is increasing. There's a lot of inefficiency from the siloeds. And all they want right now is consistent set of technology that helps them to unify the workforce and eliminate siloeds. These are 2 different problems that both contribute to a widening capacity gap, but customers can decide to deal with these 2 problems at their own pace. And it's really, as you can see, unrelated to the infrastructure. So that's our experience that customers really behave very differently. It's hard for us to kind of put a trend because we see customers act based on their very specific, unique business circumstances, and we definitely are happy to work with them at any type of sequencing that they choose. In terms of number of applications, I would say that most of our larger customers will have multiple applications, but very few really have most of the applications because we have a very rich functionality. They are close to around 40 different applications that are running in the platform, including 4 Da Vinci API services that Jaime discussed that we introduced just this year, which is another way to buy from Verint AI and then customers or partners can develop functionality around their APIs. So there's a lot of different functionality that they can buy from the platform. And I think what's really important for customers is they want to buy the functionality they need. But when they are ready to buy the next application, it's very important that they buy from the same platform because there's a lot of data sharing. Jaime talked about data being very differentiated. And in our platform, we have data that is collected from a lot of different communication touch points across many different channels, across many different type of surveying. So when you have that data hub in the Verint platform, and you buy the next application, obviously, it's all based on leveraging the same data. So I think that's what customers see as a big -- when we announced big wins and we talked in the earnings call, why we win, it's about the scalability, the AI architecture of the platform and their ability to buy over time, but they know that they're buying it from a unified platform. So that's, i think, the way we go to market. It's a very consultative selling. We talk to customers about what's your biggest pain point, where do you want to get your ROI next and then we help them to choose what they want to consume from the platform. Sometimes they go for multiple application in deal, sometimes they break it into multiple deals, and they consume different functionality at different times.

Thank you, Dan. We're a little over time. I'm going to sneak a final one in here. There are several other questions that have come in. We've touched on bits and pieces of all of them if -- so I'll be reaching out to you to confirm we've answered your question. I think we have, but if we haven't, we'll make sure we get you any answers that you're interested in learning more about. So for a final question here, we'll go with the financial one. It says, what drove the operating cash flow growth in Q1? What are the drivers behind guidance for greater than $215 million in fiscal '23?

Yes, Doug, please.

Yes, Thanks. Sure, sure. Yes, we had strong cash collections in the quarter, and we're getting the benefit of the cloud transition as compared to prior periods where some of the cash was deferred with the SaaS model, is now starting to come in. So that's what you're seeing some of the cash growth come from. As an example, like if we did a $1 million perpetual deal that resulted in $1 million in 60-some-odd days or something for us, right? That same $1 million deal in SaaS will result in a collection over 3 annual periods, right? So this suggests that in prior period, some of the cash was delayed and now that the perpetual is a smaller portion, we're getting the benefit of that kind of waterfall coming into the current periods. So that's why we're looking for cash, excluding non-recurring items of maybe north of $215 million this year, up from kind of the $180 million last year, which is much stronger cash growth versus revenue. And the principal reason is some of that waterfall in on the past delays of the cash.

So Doug, this is 20% year-over-year cash flow growth, could you also talk about what you expect in the out years?

Yes. I think we'll continue to see, as we go through continuing with this cloud transition, continuing to see this waterfall in. So the next few years, I certainly expect cash flows to outgrow revenue for the same reasons.

Okay. Yes. Thank you, Doug. Thank you, and thank you, everyone, for joining us today. Like I said, if your question wasn't specifically addressed, I think we addressed everything in bits and pieces here. But if we haven't, please reach out to me, [email protected]. I'll reach out to you otherwise. But thank you again for your time. We appreciate it, and I look forward to seeing you again soon. Have a good day, everybody.

Thank you.

Thanks, everyone.