Verint Systems Inc.

Q4 2021 Earnings Conference Call

3/31/2021

spk10: Ladies and gentlemen, thank you for standing by and welcome to the Verit Systems, Inc. 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Matt Frankel, with Verit Investor Relations. Please go ahead, sir.
spk09: Thank you, operator. Good afternoon. Thank you for joining our conference call today. I'm here with Dan Bodnar, Varon CEO, Doug Robinson, Varon CFO, and Alan Roden, Varon Chief Corporate Development Officer. Before getting started, I would like to mention that accompanying our call today is a WebEx with slides. If you'd like to view these slides in real time during the call, please visit the IR section of our website at Varon.com, click on the Investor Relations tab, 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, except as required by law. VARIN assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For more detailed discussion of how these and other risks and uncertainties could cause VARIN'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 31st, 2021, 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 those measures in comparing results between periods and among our peer companies. Please see today's WebEx slides, 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 and supplemental information regarding our operating results. when assessing our business and is useful to investors for informational and imperative 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?
spk04: Thank you, Matt. I'm pleased to report a strong fourth quarter for both customer engagement and cyber intelligence, with revenue and non-GAAP EPS coming in ahead of our expectations. Cashmere Operations was also strong at $254 million for the year, increasing 7% compared to the prior year. On February 1st, we completed the spin of our cyber intelligence business and are now a pure play customer engagement company. Today, we will discuss a long-term growth strategy for the new variant. As brands are facing a widening engagement capacity gap, Variant is well positioned with a differentiated cloud platform and extensive resources, including approximately 4,300 professionals worldwide, focused on helping brands provide boundless customer engagement. Looking at the current year, we expect strong cloud momentum, consistent with the acceleration we experienced in the second half of last year, and we are raising guidance for cloud revenue growth, which we will discuss later. I would like to start today's call by reviewing the fourth quarter results for customer engagement. We had a strong finish to the year and are very pleased with successfully executing the Cognite spin and accelerating our cloud strategy. Revenue in Q4 came in at more than $225 million ahead of expectations, and key cloud metrics accelerated. Bookings in Q4 were also very strong, and we exited the year with a record backlog. Behind the strong bookings is our strategy to target a larger $65 billion TAM and our competitive differentiations. We continue to win new cloud customers and displaced competitors due to our open cloud platform innovations. Here are three examples of large cloud deals from the quarter. A $7 million cloud order from a leading global food delivery service company. This win was driven by our open and agnostic partner approach and our ability to scale in the cloud. This is a new customer for Variant and a competitive win. An $8 million cloud order from one of the largest insurance companies in the US. This competitive displacement was due to the strength of our open cloud platform. And a $13 million cloud order from an existing financial services customer. This large win is driven by the customer's decision to transition to SaaS and expand relationships. We believe these large orders reflect our differentiated technology and execution of our cloud-first strategy. We're very pleased with our Q4 cloud performance across all key cloud metrics. Cloud bookings were up significantly. Q4 new SaaS HCV increased 39% year-over-year, and new PLE bookings, or perpetual license equivalents, increased 15% year-over-year, with half of our PLE bookings coming from SaaS. Q4 cloud revenue grew more than 30% year-over-year, following strong growth in each of the prior quarters. And we exited the year with the remaining performance obligations, or RPO, of $636 million, representing backlog growth of 29% year-over-year, This significant increase of year end backlog is being driven by cloud and provides us good visibility for the current year. Overall, we're very pleased with our strong finish to the year and the significant momentum we have going into fiscal 22. We estimate our customer engagement time at $65 billion. With recent trends of accelerating cloud transition and digital transformation, customer engagement has become a top priority for many brands. In preparation for the spin, we worked during Q4 with a third party to survey more than 2,000 business leaders from 12 countries and across 10 industries about customer engagement priorities, trends, pandemic impacts, and future plans. The findings of this research validate a go-to-market strategy. The four key findings include, first, there is a widening engagement capacity gap. New workforce dynamics, ever-expanding customer engagement channels, and exponentially more customer interactions all must be managed with limited budgets and resources. Second, Business leaders are concerned with rapid changes. 94% report being worried about understanding and acting on rapidly changing customer behaviors. Third, business leaders have high hopes for AI, but they want to see results. 78% have made AI investments, but only 18% say it helped them manage rising interaction volumes. And finally, data and departmental silos hamper the effectiveness of analytics efforts. Companies need a unified approach and view of data in order to realize the potential of AI and analytics. Let me discuss how Variant's go-to-market strategy addresses the findings of this recent research. Our Open Cloud Platform helps brands to provide boundless customer engagement in the Connect Center as well as across the enterprise. Platform use cases are enterprise-wide, going well beyond the Connect Center to back office, branches, digital marketing, and compliance. The Varian Cloud Platform was designed to connect the Connect Center to other parts of the organization involved in customer engagement activities, a trend that has become increasingly important with the acceleration of digital transformation. From a technology perspective, the platform is designed with a native cloud architecture, supporting multi-clouds with open access to data, making it easier for customers and partners to quickly integrate with their environments. Variant DaVinci AI and Analytics is in the center of the platform, as it powers all platform applications with the latest machine learning models and advanced analytics. We believe that our commitment to open access and our API strategy differentiates our platform and will drive further growth. In Q4, we launched several innovative solutions, including a new data management solution to help brands build a unified approach to aggregating interaction data across silos and unlocking the value in their data. This highly innovative cloud solution helps break down data silos and manage all modalities of data across unified communications, CCAS, and enterprise collaboration solutions. A new workforce scheduling solution to help brands optimize their customer engagement workforce across the contact center, back office, and the branch. And the new real-time agent assist solution to help brands provide their agents with in-the-moment guidance to increase efficiency and elevate customer experience. This innovative solution is based on the state-of-the-art linguistic and acoustic models and it's especially effective for the agents working at home. Regarding partners, we have a large partner ecosystem that we have developed over many years. There's never been a better time to partner with Variant with our focus on delivering a world-class, partner-friendly experience. In addition to supporting existing partners, This year, we launched a new partner program with a focus on system integrators. We believe that digital transformation is providing system integrators new opportunities to help brands with their customer engagement initiatives. Our open cloud platform is well-suited for system integrators focused on data management, workforce efficiency, and customer experience. Turning to our outlook for the current year, we expect another year of strong cloud growth with 10% new booking growth on a PLE basis. Given the cloud momentum experienced in the second half of last year, we are raising our outlook for cloud revenue growth to a range of 30% to 35% for the current year. Our guidance reflects a continued market shift to SAS. This year, we expect a percentage of new software bookings that come from SAS to approach 60%, reflecting a steady increase over the last three years. We also expect, on a non-GAAP basis, the percentage of software revenue from recurring sources to approach 85%, up from 81% last year and 71% three years ago. Now before I turn it over to Doug, I would like to briefly discuss cyber intelligence. Cognite, our former cyber intelligence business, is now listed on NASDAQ under the ticker CGNT. While cyber intelligence is no longer part of Variant, its results for last year are included in our 10K, and I would like to provide a brief review. Cyber intelligence also had a strong finish to the year, with revenue coming in at $124 million, and estimated fully allocated adjusted EBITDA coming in at $24 million for Q4. Cognite will publish their results on Form 20F at a later time. and they announced today that they will review the fourth quarter results on a conference call in the second half of April. As noted in Cognite's press release, their results may be slightly different than those we published due to the applications of varying allocation methodologies. Cognite is in a very exciting market, and we wish them good luck as an independent public company. Now let me turn the call over to Doug.
spk03: Yeah, 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, separation-related expenses, as well as certain other items that can vary significantly in amount and frequency. For certain metrics, it also includes adjustments related to foreign exchange rates. As Dan mentioned, we finished the year strong with results that came in ahead of our expectations. For Verint overall, including cyber intelligence, non-GAAP revenue came in at $1.29 billion, adjusted EBITDA came in at $338 million, and EPS came in very strong at $3.60 on a non-GAAP basis. Our operating cash flow for the quarter was also strong, and for the full year was $254 million. For customer engagement, non-GAAP revenue came in at $841 million, and estimated fully allocated adjusted EBITDA came in at $249 million. And as Dan highlighted, our cloud metrics were strong across the board. This is our dashboard that can be found on our IRR website. It contains KPIs for customer engagement, including revenue, bookings, bookings mix, and profit metrics. I'd like to highlight that following the spin of Cognite, we'll be reporting revenue in two components, recurring revenue and non-recurring revenue, versus our historical presentation of product and service, which became obsolete with our move to the cloud. Our dashboard now reflects that breakdown. Given our cloud-first strategy, we expect recurring revenue to become a larger portion of our total revenue over time. Turning to our outlook for fiscal 22, as we shift to the cloud, we believe new PLE growth is a useful metric as it normalizes our bookings growth for perpetual and SaaS. For fiscal 22, we expect 10% new PLE growth with a percentage of new bookings coming from SaaS approaching 60%. We expect Our double-digit new bookings growth will translate to low single-digit revenue growth in fiscal 22, with higher revenue growth in the following years. Underlying our outlook is an expectation for strong cloud growth, and as Dan mentioned earlier, we are raising our outlook for cloud revenue growth to a range of 30 to 35%. We also expect in fiscal 22 nearly 85% of our software will come from recurring sources. As we've discussed in the past, We will have a one-time step-down in adjusted EBITDA due primarily to separation dissynergies, and we expect $225 million of adjusted EBITDA for fiscal 22, driving $2.20 of non-GAAP EPS at the midpoint. Our EPS outlook assumes around $19 million of interest expense, approximately a 10% tax rate, and $73 million fully diluted shares outstanding. This excludes the second tranche of the APEX investment, which we expect to close in Q1, and any share buybacks that we may do this year. Let me also discuss how we're seeing the year progressing. We expect to start the year strong, with more than 10% year-over-year of PLE growth in Q1. With respect to total revenue, we expect nearly $200 million of revenue in Q1, with more than 30% cloud revenue growth. From an expense perspective, given our strong Q4 and in anticipation of double digit new PLE growth in fiscal 22, we increased our hiring in Q4 and our first quarter expense run rate will be higher than Q4 and will increase sequentially throughout the year. And now I'd like to review our fiscal 22 cloud revenue growth in more detail. Our cloud revenue has steadily been increasing and we expect 380 million of cloud revenue at the midpoint of our guidance. There are two sources of our cloud revenue growth, new deployments and support conversions. We expect around half of our cloud revenue growth to come from new bookings and half to come from support conversion. This mix reflects strong momentum for our cloud solutions, including the success of transitioning our existing base to the cloud. We ended last year with a $300 million base of support revenue, and we expect our support revenue to migrate to cloud over time. Finally, I'd like to review our capital structure following the cognite spin. We have a very strong balance sheet with $2.5 billion of assets, approximately $660 million of cash, and expect to get another $200 million of cash from the Apex investment in April. We now have a current net debt to adjusted EBITDA leverage ratio of less than one times. Going forward, our excess cash will primarily be used to support our growth. In addition, I'm pleased to announce that we're putting in place a new annual stock repurchase program in which we'll use part of our strong cash flow generation to buy back stock. We plan to buy back up to the number of shares to be issued under our annual incentive equity program. So in summary, we had a strong Q4, including double-digit new bookings growth and a record backlog. We enter fiscal 22 with strong momentum, driven by our differentiated cloud platform, and our focus as a pure play customer engagement company. So with that, operator, let's open up the line for questions.
spk10: Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Daniel Ives from Wedbush. Your question, please.
spk02: Yeah, thanks. And a great quarter. So, Dan, can you maybe just talk about the cloud deals? I mean, are the size of the deals overall starting at large? Obviously, a lot of big deals in the quarter. Can you just talk about that in terms of some of those dynamics from a pipeline perspective?
spk04: Yeah. So, I think one area to look at is the increase in backlog in Q4 quarter. that you can see the RPO level increased 29% over the year. And this definitely reflects more cloud deals and more large cloud deals that contributes very little to the current quarter, but obviously create backlogs for multi-years. So we've always been very strong with enterprise customers. and got large deals, but with the recent introduction of the cloud platform, where we put a lot of different applications on the platform that customers can consume as cloud services, it is getting easier for customers and partners to consume more of the platform, which will contribute, obviously, to bigger deals. But what's obviously the way we position the platform is Whether the customer buys up front multiple applications in a big deal or they buy over time, that makes no difference to us. This is basically just turning on cloud services in the platform, so we have customers that have different behaviors. Some tend to concentrate their purchases into larger opportunities, and some will do it over time. In terms of the terms, it's pretty steady. Our average cloud deal is about two and a half years term. So no major change there. But definitely more cloud deals and more large deals and a big change in our backlog.
spk02: Great. And then just for you as well, Doug, now that the split successfully has happened with Cognite, can you just talk about I mean, obviously there's a year and a half in the making, but how things are different internally. Is it just now more sales and marketing all focused on one area, even from a customer feedback perspective? Can you just talk about that anecdotally?
spk04: Sure. Happy to. So we actually see a lot of changes, and many people internally refer to ourselves as the new variants. we became a pure-play customer engagement company at the right time, where the cloud transition and the digital transformations are presenting enormous growth opportunities. So there is a lot of buzz internally, and there's a growing buzz also externally as we tell the story more and more over time. Definitely post-spin from a board and management team perspective, we are 100% focused on a single mission, And that is to accelerate the growth and position variance as a category leader. And we've already aligned our compensation plans with our strategic objectives. From a balance sheet perspective, Doug mentioned a strong balance sheet, strong cash flow generation. So we feel like we have the balance sheet that can support any investment we want to make in growing the business. We talked about launching a new partner expansion program. We are being recognized in the market as a partner-friendly company, and we believe partners are becoming more important with the changes we see in the industry. So definitely a focus for us. We're also accelerating the pace of the innovation in our cloud platform, and we plan to launch many new innovations in our upcoming customer-engaged conference that will It will be announced shortly. And then internally, I think it's very interesting that our employees clearly understand the opportunity that we have ahead of us. We had a fantastic Q4 with strength across all key cloud metrics, and we expect to start the year very strong in Q1.
spk08: Great. Thanks.
spk10: Thank you. Our next question comes from the line of Ryan McDonald from Needham & Company. Your question, please.
spk07: Hi, good afternoon. Thanks for taking my questions. At the analyst day, you highlighted some pretty healthy conversion bookings that were trending strongly. Obviously, it seems like you're pretty optimistic with the increased guide for cloud revenue growth. Can you just talk a bit about the mix of bookings activity between the conversions versus net new customers, and that's how that's being reflected in the higher outlook for fiscal 22?
spk04: Yeah, so the cloud revenue growth trend 30 to 35%, approximately $100 million of growth in cloud revenue that we expect this year. About 50%, Doug mentioned, will come from our conversion program, which definitely has kicked off in the second half of last year. So we saw more conversions than before. And 50% of that cloud revenue growth will come actually from new cloud deals. And this is a healthy mix that we see between the two trends. Also important to mention that we estimate that the transition from a customer base to the cloud will be over time. So currently we have about $300 million of support revenue. And we mentioned in our investor day that we expect this to be half of that will be converting by fiscal 24. So we definitely have seen that pick up in Q3 and Q4 last year that we expect to continue in the current year. And a lot of that cloud growth, whether it's coming from the conversion or the new deals, is already reflected in the RPO. So we increased RPO by $150 million year over year. And a lot of that is obviously multi-year cloud deals that will contribute to revenue in the current year. So it's pretty good visibility into how we're gonna achieve the 30 plus percent cloud revenue growth.
spk07: Got it, very helpful. When you think about the mix of new bookings pipeline and new opportunities, new customers, Can you talk about the mix you're seeing between contact center versus opportunities outside the contact center and perhaps touch on how the VARENT platform is resonating, the messaging around that is resonating outside of that core contact center base from that perspective? Thanks.
spk04: Yeah, that's a very good point. So the platform basically helps our customers to connect the contact center with other parts of the organization. So it's not that we need to sell to other parts of the organization. We just help them to connect, which is a trend that we definitely see, not just in our area, but also in the communication infrastructure. We see more customers asking for UCaaS and CCaaS and CPaaS all to be connected through a single vendor. And obviously we're very well positioned to help connect the enterprise. So let me give you a few examples how we connect with our platform. Um, so we, we got a request from customers that have, uh, branches, uh, for example, banks that have connect center and branches. And that's scheduling employees for their contact center. That's getting employees for their branches, but it's different scheduling because they're, they're obviously different, uh, focusing on different needs in the, in the COVID day, uh, year where, uh, they got a lot of people working from home. Even people in the branch had a lot of downtime, and there was a pickup in interest in having Variant help them schedule people in the Connect Center, in the back office, and in the branch so they can have the flexibility to use the workforce to their needs, based on pick times and based on resource availability. So that's connection. Another example is customer journeys. In the digital world, which we are all going into digital transformation, a lot of the consumers actually start the journey on the website. And when they can't accomplish what they are trying to accomplish on the website, they will call the Connect Center. But the Connect Center needs visibility to the customer journey 360 so they can continue that journey in the most efficient way. As you know, most... Connect Center solutions have no visibility into websites and Variant platform is able to provide them the journey in the website, the reasons why customers left the website, identify when customers call into the Connect Center and they mention we were just on your website and could accomplish something, so we'll analyze that data and make the connection between their journey in the website and the journey in the Connect Center. So I think two examples to basically explain that we're not trying to sell to other type of buyers, but we're trying to help the buyers connect so they can optimize the customer journey or optimize the resources they have to achieve better customer journeys.
spk07: Very helpful. Thanks for the color. I'll hop back in the queue.
spk10: Thank you. Our next question comes from the line of Brian Ethics from Goldman Sachs. Your question, please.
spk05: Hi, good afternoon. Thank you for taking the question. Nice results. Dan, I was wondering if you'd talk a little bit about, you know, the margins, you know, great performance in the quarter, you know, stronger than expected EBITDA margins. And I understand we have a step down this year. Can you talk a little bit about, you know, what you might anticipate in terms of recovery after that step down and when it might, you know, how long it might take to get to or return to, like, you know, the kind of 29% operating or EBITDA margin level?
spk04: Sure. We had 30% EBITDA margin last year, ahead of our expectations for customer engagement. Doug can actually take you through the steps we're taking to improve margin over time and the bridge. Doug?
spk03: Yeah, sure, Dan. Yeah, hey, Brian. Yeah, so as Dan mentioned, you know, we had a really strong performance in Q4 and then for the year. We ended up with, you know, about 30% EBITDA margins. You know, it was a strange year for all of us, right? But we did a lot of, you know, cost restraints as we kind of went through feeling out the period, and then towards the end of the year started to get back to things. So that kind of with that tough compare in terms of kind of abnormal cost reduction last year, kind of drove higher EBITDA margins, and then the synergies this year. So the full fiscal year will be post-spin. So kind of a more normalized margin is probably around 28%, not to 30%. I think that was just kind of unusual cost reduction. And then with the synergies of kind of the burden of part of the company taking on the full company corporate infrastructure, You know, that steps us down to probably around 26 that you'll see in our guidance. You know, then after that, we do expect as we scale and the business grows over the next couple of years, we'll have kind of more typical margin expansion off of that.
spk05: Okay, that's helpful. And then maybe if I can circle back on conversions again. Could you help us understand, you know, that install base of customers you know, maintenance that you have and how that might convert to cloud. Is that on the one-for-one basis? And if we see an acceleration, does that mean, you know, you kind of need to, I guess, what is the longer-term mix, I guess, after this year that you might anticipate would come from conversion versus new business, I guess, is what I'm getting at.
spk04: Yeah, so we definitely – you know, expect the PLE, which is the best way to measure the booking growth, to be, so new booking growth, right, that's a perpetual license equivalent, and that is expected to be double digits, and we get guidance for double digits this year, and targeting double digits for the next three years. And we also gave the mix within the PLE So we achieved in Q4, half of that PLE came from Perpetual and half came from cloud. And we also guided that this year we expect 60% of the PLE to come from SaaS. So definitely as we encourage our customers to move their support and convert it to cloud, also anything they buy new, more likely they're going to buy in cloud, right? Because they already are on that journey to move perpetual to cloud. And you see that very well in our journey and how we move the mix of the PLE over the last three years to what we expect of 60%, approaching 60% in the current year. So a double-digit, to answer your question now, a double-digit cloud revenue growth from new deals is definitely part of our moral. And for this year, we see 50-50 between conversion and new deals in our cloud revenue growth. And conversion could accelerate. That's something we also saw during COVID. There was very little conversion in the first half of the year, and then a big pickup in the second half, more than we saw in the entire year before. So there is now a change in the industry. Customers are adopting cloud. Obviously, the very large customers are slower. The mid-market is moving faster. Hard to project the pace of conversion, but we believe that the goal to convert at least 50% of that support in three years is a very reasonable goal based on what we see now.
spk05: Okay, that's helpful. I guess if I were to ask another way, I mean, do your assumptions, I think at the analyst day, we talked about maybe a longer-term 30% cloud growth rate. And within that assumption, are you kind of assuming that your mix between conversions and new stays consistent?
spk04: Well, our cloud revenue growth grew also more than 15% without conversion last year. So based on the historical conversion, sorry, historical revenue growth from new deals, and the RPO that we already have that gives us deals we closed in Q4 that will be contributing to revenue in the current year, we see this year half of that revenue growth will come from new deals. That is a reasonable assumption. Conversion can pick up, but if conversions pick up, it's not going to affect the growth that comes from new deals as well. So that's good. So conversions pick up should actually contribute to higher growth rates over time.
spk10: Okay.
spk04: Got it.
spk10: Thank you. Thank you. Our next question comes from the line of Paul Koster from J.P. Morgan. Your question, please.
spk01: Yeah, a couple of quick questions. Doug, you talked of the cloud revenue will sort of technically accelerate in fiscal year 23. Can you just talk us through the mechanism that causes that to happen?
spk03: Doug, are you going to take it? Yeah. Oh, I'm sorry. I thought he said Dan. Yeah, you want to take that, Dan? Because it just kind of depends on what you're just talking about in terms of the components of the cloud.
spk04: Right. So the question is for the mechanism that causes the revenue growth to improve in fiscal 23 and 24. And that's basically the result of perpetual decline starting to diminish. Our perpetual business went down from 180 to 140 last year, million dollars. So it was a big decline in perpetual. We expect the decline to be about 10% this year, so it's a much more moderate decline. And then we expect basically the perpetual decline to stop at $100 million plus as some of our customers will continue to buy perpetual. And we discussed some of the very large customers that that's the way they prefer. So steady cloud revenue growth and a steady PLE growth of double digits with less decline, less headwind from the perpetual decline is basically the mix change that causes the revenue growth to go up and also the EBITDA to go up because all the expenses that we have now to bring that backlog and sign up the deals, multi-year deals, we don't have to increase the expense in order to get the revenue in the next period. So we talked in the investor day, we gave a three-year model, we talked about how we see that mixed shift moving our revenue growth rates to be up and eventually should be similar to our PLE growth rates.
spk01: Okay, so I kind of got you to repackage prior answers there, but that was helpful. And then I guess the other question is the capital allocation sounds a bit unexciting. I mean, you've got an absolute boatload of cash. Well, I mean, your balance sheet presents you with the opportunity to lever up. and do something. But instead, it sounds like you're investing in yourselves, which is fine, except that it feels like you can do more than that. Are you just simply keeping your balance sheet in solid shape so you can do something transformational, or is this it? Are you just going to be a very conservative user of the balance sheet? Buying back shares just to cover the cost of dilution from share issuance is not going to get folks very excited. So why should we be excited about the capital allocations as defined here?
spk04: Yeah, no, no, you're absolutely right. I agree. We wanted to come out of this spin with a strong balance sheet. But in terms of buybacks, we have a near-time restriction from the spin. So we can't buy back more shares than the new shares we grant because we just need a big dividend to and you cannot get a tax-free spin and then go buy back shares. So that restriction is going to be for some time, but not forever, and then we'll have more flexibility in terms of doing buybacks. But at this point, we're limited to the shares that we issue, and we intend to buy back that dilution.
spk01: Okay, gotcha. And then what's the duration for that, Dan?
spk04: So, you know, it's... It depends on many other circumstances. It's not a hard fact, but it could be a couple years.
spk01: Okay.
spk03: It just has to do more with the tax-free spin regulations. The fact that we spun it out the cognite division tax-free, there's a tax law that prohibits us from then going and kind of recapitalizing that with the stock market.
spk01: Right, got you. I think I interrupted Dan, and I think you were going to talk about the investing in the business versus acquisitions sort of part of my question.
spk04: Yeah, so I think that we're always looking for acquisitions that make sense, but the three targets we laid out in Invest Today are organic acquisitions, We definitely think we have a strong platform today. So we're not looking to close any specific big gaps that we need to close. But, you know, we'll definitely make further decisions what we want to do with our balance sheet. But we're really happy that we, you know, in April we expect the APOC's second tranche. And at that point, we'll have more cash than debt, and that gives us a lot of flexibility.
spk01: Okay, gotcha. Thank you so much.
spk10: Yeah, sure, Paul. Thank you. Our next question comes from the line of Samad Samaya from Jefferies. Your question, please.
spk00: Hi, good afternoon, and thanks for taking my question. It's good to connect with you guys again. So maybe first one, Dan, for you, when you think about the conversion activity that you guys have seen and that you're baking in for fiscal 22, is there any particular consistent characteristics of the customers that are converting early, whether it's defined by size or end market or maybe what they're using for their core ECD, just any characteristics that we can triangulate upon?
spk04: I think the journey is quite individual in nature. It's really where they sit in their decision to move to the cloud generally. And then sometimes IT actually drives the shift to the cloud because they want to focus on something else and they want to move their responsibilities to us, and sometimes IT is actually the obstacle because they want to continue to manage the infrastructure. And I don't think that there is a general characteristic other than, you know, very large customers probably are just moving slowly forward. perhaps because of security reasons. Some large customers actually are buying, are building, sorry, are building cloud architecture, internal clouds, and we are in discussion that they'll host themselves the solution in their entire clouds. So, you know, we are very strong in the mid to high end of the market, and we see a lot of customers that you know, want to work with us on how to optimize their individual journey to the cloud.
spk00: Great. And then maybe a follow-up. When I think about the new deployments contribution to the cloud growth in fiscal 22, how should we think about maybe the contribution of new deployments from direct deals that Varent is selling versus partners such as like the Avayas and the Five Nines of the world. Was there a change kind of within those two buckets when you think about the guidance increase?
spk04: We definitely are investing in being a partner-friendly company. So we don't really care whether we get the order on our paper, on a partner paper. We try to work with partners where it makes sense to customers and the way they want to transact. And in many cases when we work with partners, our direct sales force is involved in actually selling the products because we have the domain expertise and the partner needs to help from variant. And we compensate the sales force accordingly. So the focus that I have is on expansion and growth and whether we do it on our paper or on a partner paper, Much less important to us.
spk00: Understood. I'll pass it along just for the sake of time, but congrats on completing the spin successfully and on the strong cloud growth. Thank you.
spk03: Thank you.
spk10: Thank you. Our next question comes from the line of Dan Brooks from RBC Capital Markets. Your question, please.
spk06: Hey, thanks for taking my question. Nice to see the conversion, the base, and commentary around it. You talked about the decline in perpetual and Q&A here in response to Paul, but What are the thoughts around a perpetual tail, what assumes some customers want to remain on-premise? Is that $100 million mark you talked to or kind of the fiscal year 23 number, is that the good proxy for it?
spk04: Yeah, I think it could be a little bit more than $100 million at this point, but we definitely see – a decline this year, which is baked into our guidance, and we see these levels off sometimes next year. So that's a good model. I think that over time, perhaps in the very kind of longer than three years horizon, I think that very large customers will also convert. Perhaps they'll convert into their own internal clouds, but it's pretty clear the whole industry is going to cloud. But there are certain customers that definitely at this point told us they're not interested.
spk06: Great. And then you mentioned increased innovations with the cloud platform and talked to the addition of engagement, data management, workforce scheduling, real-time agent assist. How should we think about those products ramping? Are you seeing initial interest here? How should we expect the pace of innovation, I guess, more generally with the sole focus on customer engagement in the cloud platform now?
spk04: We are innovating and will continue to innovate faster in our cloud platform. It is the nature of the technology and our control over the cloud environment that allow us to release more innovation faster than when you work with a very large on-premise environment and you have to invest a lot of the technology stack to be compatible with different data centers that customers have. So that's one benefit of the cloud platform is just being able to focus more on innovation and bringing new capabilities to the market. I think that another benefit to the platform is we concentrated our AI and analytics engines into what we call the very DaVinci AI analytics, which is part of the platform. And you know that we had a lot of strength in this area for many years. This is a heritage we also shared with Cognite when they were part of Variant, very deep analytics for security and for customer engagement. And building this AI modeling into the platform basically allows us to share the technology across all applications that are running in the platform. And that's another way to accelerate innovation is having access to the latest AI. And we think our AI is differentiated because we manage a lot of data. There's a lot of interaction data and experience data that goes through our platform with our strength in data management and experience management. And out of the data, there's a lot of machine learning that helps to bring new innovation into all the different applications around what we call the work of the future, changing workforce, putting more automation into workflows to make the workflows more efficient. So if you look at real-time agent assist, which I discussed earlier, Definitely with employees working at home, there's increase in demand for real-time assistance or in-the-moment assistance and guidance to employees. And this is all based on AI, based on the ability to do acoustic and linguistic modeling and alert agents that, look, you speak too fast and the customer is frustrated, or you're pausing for too long, or you're over-talking the customer. Or here's the customer intent and you're not really answering to the point. And the ability to do this in the moment, of course, not just voice channel, but also chat and messaging and text channels, is really part of that innovation that we're now accelerating. So we're excited about, you know, the cloud platform is not just a business model, but it's really an opportunity for us to address some of this customer urgent needs for help because of the digital transformation, the number of interactions going up exponentially. There's more digital channels, there's more digital interactions, but there's only limited people and resources to address that growth in interactions, and there's a clear engagement capacity gap that I mentioned before, and the answer is obviously automation, which is the focus of our cloud platform.
spk06: That's great. Thanks, Dan.
spk10: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Matt Frankl for any further remarks.
spk08: Great. Thank you, everybody. Thank you for joining us. We look forward to speaking to you again soon. Have a good night.
spk10: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Disclaimer

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