Verint Systems Inc.

Ladies and gentlemen, thank you for standing by and welcome to Variant's first quarter conference call. At this time, all participants are in a listen-only mode. After the speaker 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. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Matthew Frankel. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodnar, Varon's CEO, Doug Robinson, Varon's CFO, and Alan Roden, Varon's Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a WebEx of slides. If you'd like to view these slides in real time during the call, please visit the IR section of our website at varons.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 Security 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 to the date of this call and as except as required by law. Barron assumes no obligation to update or revise them. investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion on how these and other risks and uncertainties could cause variance in actual results to differ materially from those indicated in these forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2021, 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 of comparing results between periods and among peer companies. Please see today's WebEx slides and earnings release in the investor relations section of our website at barron.com for reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from and as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Now, I'd like to turn the call over to Dan. Dan?

Thank you, Matt. I'm pleased to report a strong first quarter with both revenue and diluted earnings per share coming in ahead of our expectations. Over the last few quarters, we discussed our expectation the cloud revenue would accelerate this year, and I'm pleased to report that in Q1, we delivered 39% year-over-year growth in non-GAAP cloud revenue. UPLE, or perpetual license equivalence bookings, which measures our new software bookings on a perpetual license equivalent basis, also came in strong with 28% year-over-year growth. Overall, our cloud metrics were strong across the board, including new SAS HCV, recurring revenue, and PLE mix. We expect the cloud momentum to continue and are raising our annual outlook for PLE booking growth. Our strategy is to help brands navigate digital transformation with an open cloud platform that connects work, data, and experience across the enterprise. To help explain and bring this strategy to life, I would like to review several recent large customer cloud wins. Our differentiated platform positioned us well to win new customers and also to capture wide space within our customer base. We have thousands of customers globally, many of which are looking to Variant to help them expand their customer engagement strategies and connect the contact center with their office, branch, and digital marketing. Here are a few examples. In Q1, we received a $10 million order from one of the largest financial services companies. This is an existing variant customer transitioning from our on-premises solution to our open cloud platform, while at the same time closing gaps in their white space by adding new variant applications. This customer is using variants across the enterprise to connect the content center, back office, and customer experience operations. This is a good example of a customer using the Varian Cloud platform to eliminate silos, drive more efficiency, and elevate customer experience. Another example is a $17 million cloud order we received in early Q2 from one of the largest healthcare providers in the United States. This is also an existing Varian customer they decided to transition their variant application platform to the cloud, and at the same time, transition their communications platform to the cloud with a new vendor. Because of our open platform and its broad set of pre-built integrations with leading communications platforms, the customer was able to select their communication vendor with the peace of mind that the variant application platform could be seamlessly integrated regardless of who they choose. This is a good example of how the Varen platform gives customers the openness and flexibility they need. In addition to these eight-digit orders from existing customers, we continue to win new customers and displaced competitors. In Q1, we received a $4 million cloud order from one of the world's largest logistics companies, a new customer for Variant. This is a good example of Variant working together with a partner to package the Variant platform with the communication platform and offer the customer a pre-integrated offering. This competitive displacement was due to the best-of-brain functionality of our open platform and our strategy of working closely with partners. We believe these large orders reflect our differentiated technology and the successful execution of our open cloud platform strategy. We recently had the opportunity to showcase our innovation at our annual engage user conference, where we had more than 5,000 registrants up nearly 40% year over year. At the conference, we unveiled many innovations, including real-time work, which I would like to discuss today. Real-time work is growing in importance in the post-COVID world of remote work and increasing demands on the workforce. Brands need new technology to help customer engagement employees respond better in real time and increase workforce productivity. Our new real-time work innovation includes several cloud platform applications as follows. First, real-time agent assist, which automatically detects unique moments of truth, such as customer complaints, escalations, positive and negative sentiments, long silences, compliance risks, and coaching opportunities. Agents and managers receive real-time guidance alerts, and coaching with next best action and insights on how to improve interactions. Second, contextual knowledge, which uses advanced AI to create a more automated, natural, and effective way to connect people to knowledge. AI-infused contextual knowledge can be surfaced automatically and in real time so that agents and managers can respond with the right answers, and avoid long searches and customer frustration. And finally, Variant Intelligence Virtual Assist for the Workforce, which provides human agents with AI-powered continuous support during calls and chats, and allows agents to improve response accuracy, compliance, training ramp time, and customer experience. Overall, I'm happy to report that post the spin of our security business, the new variant is increasing the pace of our innovation and building more platform differentiation to accelerate growth. As discussed on prior calls, our platform is open and designed with a native cloud architecture, supporting multiple clouds, making it easier for customers and partners to quickly innovate and integrate with their environments of choice. The value of the Variant platform comes not only for its own features, but for its ability to easily connect external tools, teams, data, and processes. This is critical today, as customer engagement is no longer solely a contact center function. With digital transformation, it's an enterprise function that requires the connection of data and workflows across many departments and silos. We designed a platform to integrate seamlessly with other key enterprise platforms, including communication platforms, CRM solutions, and enterprise business intelligence and analytics tools. For communications platforms, we are Gnostic and enable our customers to quickly integrate with the vendor of their choice as illustrated by the large wins we discussed earlier. For CRM, we enable our customers to easily export and import data between their CRM systems and the Varian platform. And lastly, for business intelligence and analytics tools, we provide free access to the wealth of data managed by the Varian platform. Overall, we are pleased with our Q1 results the increased pace of our platform innovation, and the strong cloud momentum. Now let me turn the call over to Doug. Doug?

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 from period to period. For certain metrics, it also includes adjustments related to foreign exchange rates. I would also like to mention that our first quarter results exclude our cyber intelligence business which was spun off on February 1st as Cognite. So now it's a standalone company and shown as a discontinued operation in our prior period results. As Dan mentioned, we started the year strong with results that came in ahead of our expectations. Non-GAAP revenue came in at $202 million. Adjusted EBITDA came in at $49 million. And non-GAAP diluted EPS came in at $0.44. Our cloud metrics were strong across the board. Non-GAAP cloud revenue increased 39% year-over-year, consistent with our objective to accelerate our cloud growth. New PLE bookings increased 28% year-over-year, and, for the first time, more than 50% of our new software bookings were from SAS. We're pleased to cross the 50% mark for new bookings in Q1. New SAS ACV growth increased a strong 58% year-over-year, reflecting demand for our cloud solutions. And this bookings growth will contribute to our revenue growth in future periods. The percentage of our software revenue that was recurring increased to 83%, approximately 100 basis points year over year. And RPO was 619 million, up 30% year over year, reflecting the multi-year commitments from our cloud customers. Turning to our outlook, we are pleased with our strong start to the year, particularly with our cloud momentum. And we are increasing our annual outlook for due PLE bookings to more than 10% for the full year. As a reminder, last quarter we increased our annual outlook for cloud revenue growth to a range of 30% to 35%. Regarding PLE bookings mix, this is an important metric to measure the progress of our new booking transition to SaaS. As our customers continue shifting to the cloud, we expect a greater portion of our software bookings to come from SaaS this year, following a steady increase over the last three years. One of the major financial benefits of our cloud transition is the increase in our recurring revenue. Following steady increases in recurring revenue over the last three years, for this year, we expect to again increase the percentage of our software revenue coming from recurring sources. Another major benefit of our cloud model is improved economics over time. Turning to the balance sheet, following the spin of Cognite on February 1st, we completed several capital market transactions which strengthened our balance sheet. We closed the second tranche of the APEX investment, following which APEX holds about 13% of our shares on an as-converted basis. We issued new convertible notes with an effective conversion price of $100 per share after giving effect to the cap call. We repurchased 1.6 million shares of our common stock for 75 million. We paid down our term loan to a current balance of 100 million, and we settled our prior convertible notes upon maturity the first week in June. Following these transactions, we have a strong balance sheet with approximately $400 million of cash and net debt of approximately $50 million. For the year, we expect to have 76 million fully diluted shares outstanding, including the APAC's preferred shares on a NAS converted basis and excluding any accrued dividends. To help you further with your models, with respect to interest and other expense, we expect $3 million in Q2 and $1.5 million in Q3 and in Q4. In addition, For the year, we expect a 10% tax rate and a $1 million non-controlling interest. Based on the momentum we experienced in Q1, for the year, we expect $860 million of non-GAAP revenue, plus or minus 2%, and $2.23 of non-GAAP diluted EPS at the midpoint of the revenue range. Regarding our cloud outlook for the year, last quarter we raised our cloud revenue growth outlook, and today we are raising our outlook for new PLE bookings growth to more than 10%. Let me also discuss how we are seeing the year progressing. For Q2, we expect revenue to increase sequentially to between 205 and 210 million, with additional sequential increases in Q3 and Q4. From an expense perspective, given our expectation for strong cloud growth this year, we are making investments to support that growth. Based on our revenue expense outlook, we expect around $0.40 CPS in Q2. As a reminder, we took steps during Q2 of last year to lower expenses due to COVID. In summary, we had a strong first quarter driven by our differentiated cloud platform and expect strong cloud performance for the year. With that operator, let's open up the lines for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Dan Ives with WebPush. You may proceed with your question.

Yeah, thanks. Solid quarter. So what's the biggest driver, Dan, of why customers are moving to cloud today with Veri? I mean, why not wait? Like, Can you just talk about a catalyst and what you're hearing from customers?

Yeah, sure. So customers are moving to the cloud with Varian today because the workforce has been disrupted by digital transformation. And also COVID is accelerating the digital transition. So COVID has changed the workforce dynamics in some aspects permanently. And the Varian Cloud Platform provides our customers better visibility and efficiency tools to manage the new workforce of humans and bots. But looking at digital transformation, this is a more strategic driving force, as it's driving a massive increase in the number of digital and social interactions, and also consumers expect faster and more contextual service. And the result of this is that brands cannot afford to hire more employees to respond to this massive increase in volume and expectations. So this is causing an engagement capacity gap. And as you know, Variant offers today an open cloud platform that is focused on empowering this workforce of human and bots so that brands can close the engagement capacity gap. This is a strategic challenge to our customers and they are moving to the cloud with Variant so they basically want to accelerate closing the capacity gap.

Great. And just sort of as a follow-up, what percent of the beasts had today's move to cloud? I mean, what's the best way to think about penetration of an average existing variant customer today going forward? Thanks.

Yeah, okay. So basically two questions. So first, today, the majority of our customers are moving to the cloud and have made plans or have made plans to move to the cloud. So we all... more than 50% of our PLE booking coming from SAS. And we expect this to continue to improve and gradually approach 60% for the year. The second part of the question is on penetration. So we did a study of our top 1000 customers. And we believe that on average, they are less than 25% penetrated with the cloud platform. And the reason for this relatively low penetration today is basically the time and complexity associated with the on-prem expansions. And of course, with the cloud platform, it makes it easy for customers to expand in the cloud. So we believe that our open cloud platform is the main reason behind our double-digit new booking growth rates. As we see, more penetration accelerating relative to the pace we had on-prem. and we have significant opportunity with our base to move to the cloud. But let's also not forget that we also win new customers directly and with partners. And, for example, we discussed earlier a $4 million win of new customers, which we did together with one of our partners, and this is also due to the open cloud platform. So I think we have both a really good – Opportunity now with the cloud platform to accelerate the penetration to the base, which is less than 25%, and to continue to differentiate and win new customers.

Thanks.

Thank you. Our next question comes from Ryan McDonald with Neato. You may proceed with your question.

Hi. Thanks for taking my questions, and congrats on a nice quarter here. Dan, first for you, I'd be curious as to seeing what you're seeing from a market dynamic perspective. Obviously, we're seeing, you know, increased demand for cloud-based solutions, but how is RFP activity trending when you think quarter over quarter, and how are you feeling about win rates currently today?

Doug, you want to take this? Yeah, sure. Yeah, hey, Ryan. You know, if you've seen the pace of the cloud transitions accelerating, as you've seen with our strong cloud revenue and bookings growth, when you look at our new bookings mix, we just crossed the midpoint, so more than 50% is coming from SAS now. So we think the midpoint's a key inflection point, and we've got the tailwind from the cloud growth now stronger than the headwind that we've been getting from the perpetual decline. So from a revenue perspective, we expect our revenue growth to accelerate every year as a perpetual decline, revenue declining this year and then it troughs next year. And then from a margin perspective, going forward, we expect an improvement also as the mix of recurring revenue continues to improve. A recurring revenue carries a higher gross margin, right? So we don't expect margin to improve this year, but going forward, we're looking for improvement every year starting from next year.

Excellent. And as a follow-up, you know, interesting to see the real-time work solutions offering that you introduced at the conference. Just curious what sort of feedback you've been getting from customers thus far, and how should we start to think about that layering into bookings as we progress through the remainder of the year?

Thanks.

Hey, Dan, were you going to take that?

Yeah, sure. So the response we got from customers during the Engage conference was terrific, and also from partners who are excited to carry the product. The concept of real-time work and assisting the workforce in the moment with AI-driven decision-making is not a new idea. The market has shown interest in this for years. years now, but we believe that technology was just not effective to do that in real time. And of course, when you start to guide a person during an interaction, if you're not very accurate and provide value, then you're just basically disrupting the person from doing the work. So I think we got to the point now that we feel that we packed a lot of AI from different type of disciplines, all sitting in one platform, based on what we call DaVinci, which is the AI engine in our platform. And this is AI that is crossing disciplines. So we have AI relative to understanding the intent of a voice call. We have AI looking at the acoustic dynamics of the call, looking at sentiment, And also looking at what the agent is doing on the desktop with applications and understanding all in real time what is the context of what the agent is trying to do and how we can suggest help. Some of this help could be based on knowledge that is pushed to the agent in real time so they don't have to search. Some is based on a body, a virtual assistant body. that the agent can interact with in real time and get faster answers so they don't have to put customers on hold and do a long search, which obviously is loss of productivity, but also very annoying to the consumers. So we think that this technology now is ready and can basically help close the engagement capacity gap But doing both, increasing productivity of the workforce and at the same time elevating the customer experience as they get faster and more contextual responses. Now, in terms of the impact on the second part was the impact on our growth rates, you know, like any, this is not a new, completely new product. It's part of the platform. It's now available for all our customers to turn on as a cloud service from the platform. And obviously, you know, with my comments earlier, we just expect in the cloud that it's going to be easier. So the whole sales cycle is much faster. A customer can actually start with a small number of agents and test the technology and then expand over time. So this is one of the innovations that we're doing in the platform that will help us accelerate growth.

Excellent. Thank you very much.

Thank you. Our next question comes from Peter Levine with Evercore. You may proceed with your question.

Great. Thanks for taking my question. So, the first one, I made it for Dan. You know, the KFC deal is running through the pipeline. How is that trending today versus 12 months ago? Are we back to pre-COVID levels?

We have, I would say, definitely in perpetual growth. A year ago, we said perpetual is on hold and it's going to come back. It is coming back, but much of it is coming back as cloud. So in terms of the overall demand, I think we're showing great growth in booking, and then obviously booking will become revenue over time in the SaaS model. But the shift from perpetual to cloud is also a very clear trend. So I would say the shift in both areas. We see the shift from our customer base and the number of conversions that we have of legacy solutions to the cloud, but also very important with new booking. As we just said, I guess, several times, because we think it's a very important milestone that we just crossed the midpoint that more than 50% is coming from SaaS and it's going to continue to grow towards SaaS. So yeah, the demand is strong, but definitely shifting to cloud across the platform.

And maybe one for you, Doug. Sticking to the full year guide, let's understand what's behind that, right? What are the tailwinds that you're building in? What are you not building in or not making and that could potentially be upside as we progress through the year? Thank you.

Yeah, sure. Hey, Peter. Yeah, I think... You know, what we've modeled into the guidance is our expected mix of business as we see it. You know, we've talked about headwinds, tailwinds. You know, customers come back and want more perpetual licenses that would drive additional revenue growth. You know, if it's more bundled and it's more later, you know, that's a bit of a tailwind, you know, for us. So it's really, you know, the mix. The expense side is pretty steady, right? Software companies mostly headcount, and much of that is fixed. So it's really kind of a revenue mix that could give us upside, and we think we've modeled it conservatively. So hopefully we're in good shape for the year and may get some upside.

Yeah, and I would say that you have to look at the P&L but also the cloud metrics because we just talked about we expect now P&L growth to be double-digit, more than 10%. Now, the higher the booking growth, not necessarily, you know, translating to revenue this year, but actually, you know, this booking is going to be revenue over the next few years, so it's going to accelerate our three-year targets, but not necessarily this year target. We also discussed, you know, our RPO, remaining performance obligations, so basically we're getting more multi-year cloud deals So that was, I believe, 30% growth year-over-year, and that also translates into future revenue and future commitments that we have from customers for revenue that are locked up this year. So there's a lot of things that can definitely improve, and you will be able to see that from our cloud metrics, but not necessarily going to be reflected in the P&L. for this year. So I think it's important for investors to look both at our annual guidance, but also we discussed three-year targets and any improvement in booking will suggest also in our ability to achieve and overachieve our three-year targets. Great. Thank you.

Thank you. Our next question comes from Samad Samana with Jefferies. You may proceed with your question.

Hey, good afternoon, and thanks for taking my questions. I guess the first one, just a follow-up question on the guidance, where, yeah, I know that we're only through the first quarter of the year and then a couple weeks into the next quarter, but that 30% to 35% range is fairly on the wide side. So maybe, Doug, could you help us understand kind of directionally where we are headed in that range and maybe a better triangulation around 2Q seasonality specifically?

Yeah, I mean, as Dan just went through, it really depends on the bookings mix that drives the revenue growth. So you really need to look at that hand in hand, right? So it depends on the mix and the timing. And while that seems like a loud band, a wide band, that's the way it trickles into our revenue. But I think you need to look at the RPO, which is up 30%. That gives us good basis going forward for the year. You know, we've been reporting our new ACV bookings that was up, what, 58% in Q1. So we're building some good momentum here. And it's just a question of the mix of how much ends up in the revenue line, actually. But, you know, the revenue line no longer, as we're going through this, is really the sole measure of the strength of the business, right? You have to look at all the kind of the data points collectively.

Yeah, but cloud revenue, just to add to this, cloud revenue, we Last quarter, we raised the guidance to 30% to 35%. And, you know, obviously we achieved 39% in Q1, and at this point we feel good about achieving the cloud revenue growth targets that we have for the year.

Great. And then maybe, Dan, a follow-up for you on the kind of business environment. One of your top partners, you know, they obviously have their own WFO offering now, but they've seen a kind of steady acceleration in in their bookings and their business. And I'm curious if you're seeing maybe the same mix coming from the same partners, or are you seeing any change in the partners that are helping drive your WFO offering?

Yeah. So in terms of change, we see more activity with partners and more adoption of partners of a cloud platform. You referred to WFO, but obviously in a cloud platform we have now many, many different applications that are much bigger than WFO. They include all aspects related to managing the workforce across the enterprise and also just managing workflows. So it's not just bots. Of course, all the different digital channels, social channels, voice channels, obviously, and also the workflows that are going to drive the productivity and the customer experience that are very key. And, you know, we discussed the fact that the workforce is a $2 trillion expense. If you remember when we discussed at TAM, we spoke about 50 million workers in customer engagement and, you know, approximately the cost of an employee is $40,000. That's a $2 trillion expense. And with the increasing volume in interactions, obviously, you know, brands cannot afford to hire. So that's the capacity gap, and that's where we, you know, that's where we focus and that's where we have a differentiated functionality, a real open platform that cut across all aspects of the workforce and the future of work. So I want to give you an example just to understand, you know, what I just said in terms of expansion across the platform. So one of our customers is a large bank. They have 50,000 employees overall. And they purchased from Variant 3,500 licenses in the Connect Center, but also additional 5,000 licenses for the back office workforce, an additional 9,000 licenses for the branched workforce. So, you know, overall 17,500 licenses and, of course, the accounting center, back office, and branches. So these banking customers recognize the benefits of having a single platform that is open and that connects the silos that exist today in accounting center, back office, and branch. And, of course, from a variant perspective, There is a single salesperson that is for this account. Obviously, the salesperson is being supported by subject matter experts, so we can offer the customer additional functionality for our platform. But this is one of the unique capabilities that we have in the platform, and some of our partners are system integrators that they like this type of model, and they like to help enterprise connect silos from the connect center throughout the enterprise. So we have system integrator, SIs as partners, obviously we have resellers, and then we also have communication platform vendors as partners as well, which you refer to one of them. So I think it's important for you to understand, you know, what is really the platform What are we able to solve for the end customer? And we're solving a really, really important problem today, which is they can't afford hiring, and they need to bring more AI and automation, and they need to manage the workforce and the work in a way that they can connect. Because, again, you know that how many companies today are able to connect chat on the website with a connector, right? When we chat with someone on the website and it doesn't work, And we call into the Connect Center, very, very few brands today are able to say, yeah, we can see what you did on the website, and let's help you. In most cases, you have to start all over again. And this is because of the silos that are created historically. And those silos don't work anymore in the digital transformation, when more and more of the interactions are digital, chat, social media, community, messaging. Lots of different vehicles to engage customers beyond the traditional call into Connect Center. And that's how we approach customers, and that's also how we approach partners. So we see our partner business growing a little bit faster than direct. So to answer another question numerically, today our direct business is a little bigger than our partner business. And in terms of growth rates, our partner business is growing a little bit more, but, you know, pretty much the same rate. But we expect with the greater adoption that the mix will change more toward partners gradually and that we'll see faster growth rates from partners over time.

Great. Thanks for that color and appreciate the example as well. Thanks again for taking my questions.

Sure.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Brian Essex with Goldman Sachs. You may proceed with your question.

Great. Thank you, and thank you for taking the question. You know, great to see the strong cloud growth in the quarter. I was wondering, Dan, maybe if you could unpack that a little bit. You know, it looks like unbundled SaaS accelerated. really nicely year on year, but was sequentially down a little bit and certainly more than we thought it was going to be. What were some of the dynamics, and maybe this kind of goes towards your partner comment, what were some of the dynamics at play in the quarter that drove unbundled SAS expectations for the year and maybe help us understand seasonality in case that unbundled number moves around a little bit? I know there's a lot in there.

Yeah, the bundled SAS, you know, In Q1, just the number of days in the quarter, if you neutralize the number of days, it was actually growing a little bit. But more importantly is to really understand how we offer bundled and unbundled SaaS to our customers. Basically, in a bundled SaaS, we license the product and the hosting services bundled together. And in unbundled SaaS, we license the product and give the customer an option to to purchase the hosting services from Variant at a later time. Now, it's an option. They may not, but sometimes they want to host themselves. Sometimes they want to host with another partner of choice. So they don't necessarily have to host with Variant. But in essence, you know, we expect the two models to really work together, and some customers may start with unbundled. And then maybe six months later, they buy hosting services and they become more like bundled with the same economics. So that's kind of our approach. It's really to help the customers to give them more choice and flexibility. It's part of the openness because when we talk about open cloud platform, it's not just the APIs and the development tools and the community environment to support development and we're getting more and more developers in our community now. And that's great. That's a lot of people writing functionality around the platform. But we look at openness very seriously also in many other facets, including, for example, a marketplace. We have a free marketplace where customers can download assets and think that some of their assets are contributed by partners into their own marketplace. So we see the flexibility in cloud environments, you know, we are multi-cloud architecture, the flexibility in SaaS models, the ability to do bundled or unbundled, to your specific question, the flexibility to do hybrid where some solutions are on-prem and some already are in the cloud that many, many of our customers take advantage of because they want to move to the cloud. And, you know, to the question from Dana and I of why, I think I made it clear customers really see that imperative to move to the cloud and accelerate the innovation, but sometimes they don't necessarily want to move a legacy product that works well to the cloud now. So we give them an option to have a hybrid of on-prem and cloud, and in that sense, they can be partially unbundled and partially bundled, right? So bottom line is we are focusing on cloud growth, and We believe that the economics behind the models of cloud, whether it's this or that, are much better than perpetual. As Doug said, you know, we have better margins on our recurring business.

Right. That's helpful. Thank you for that. Maybe just to follow up, if I can understand the margins differential between bundled and unbundled, and what's the deal differential? So if you do, like, say, a $5 million deal that's bundled, what might the difference be between, you know, a bundled deal of that size versus an unbundled deal and impact on the fundamentals, like gross margins of the business?

Yeah, so a $5 billion unbundled would be basically us licensing the product, let's say, for three years, right, $5 billion. And in a bundled situation, this could be $5 million for the product plus, let's say, another million or million and a half for the hosting services, which they can buy separately, right? In an unbundled, they can buy the $5 million and the $1.5 million in separate transactions, or they can buy them in one transaction bundled. The margin on the product is the same, and the margin on the hosting services is obviously a lower margin, but it's pretty typical margins on bundles. But, you know, if the customer starts with a $5 million unbundled deal and then purchase a $1.5 million hosting services, they're going to end up exactly at the same place with the same margin as a bundle deal. So no, no, no difference. And that's why it's compelling for customers because we're not trying to push them one way or the other. We're trying to tell them, do what's right for you based on your circumstances.

Right. Very helpful context. Thank you very much.

Thank you. And our next question comes from Dan Bergstrom with RBC Capital Markets. He may proceed with your question.

Yeah, thanks for taking my questions. So in the prepared remarks at the large deals, you talked about some success in the white spaces, you know, when customers transition to the cloud from on-premise. And then you also mentioned with your surveys that customers were about 25% penetrated in the cloud. Just curious if there are some common adjacencies or products that maybe are really standing out for you and driving success in that white space.

Yeah, I would say the first thing and most important thing about that white space is the customers want to know that they're signing up to an open platform because some of the vendors today in the market are trying to push a closed platform, and customers realize that, The customer engagement challenge is much bigger than anyone's platform. And that's why the first thing they look at variants is how do you play with the communication platform? Because we may have all kind of different communication vendors. It could be C-CAS or UCAS or CPAS or collaboration like Teams and Zoom. There's a lot of choices. So they want to see that we play... well integrated with communication platform. They want to see that we play well with CRM platform and that we can support their enterprise BI and analytics, which is obviously important for them for any data-driven enterprise. So once they kind of understand what the open platform offers, where they adapt is very different. So let's look at these three examples that I mentioned earlier. And let's look at one dimension, because we're very often being asked, are your customers moving to the cloud and they're moving their communication platform at the same time, not at the same time, in one deal, in two deals? So I want to discuss the openness and show you what happened with the three customers. So let's look first at the $10 million win. Okay, so with the $10 million win, The customers actually moved variant to the cloud, a bunch of variant applications they already have, and they expanded at the same time, buying deeper into the platform. But the legacy communication channel is still on-prem. So the ACD, the routing, they decided they don't need to change that. It's working. So this was – the reason was to move this variant to the cloud to accelerate innovation. and they didn't see right now any urgency to change their communication platform. So that was the $10 million deal. Now when we look at the $17 million deal, this customer actually decided to move everything to the cloud, both the communication platform and the business application platform from Variant, but they decided to do it in separate deals. So, Variant basically was awarded the cloud platform deal, And they went on and chose another communication platform vendor. And they had the peace of mind that Variant will work with any of them because they know we're agnostic to the communication platform. So that was the case in the $17 million. Now let's look at the $4 million, which was a win, which was a new customer for Variant. And again, you'll see a different story. Here, this deal was won together with a partner. This partner has their own communication platform. And the customer wanted to buy from one vendor both, the communication and the application platform. So we joined forces and we displaced the competitor and gave the customers one solution in one deal. And the customer chose basically the solution based on the functionality that Variant has in the platform. So you can see that customers wanna behave in a lot of different ways, and they need openness and flexibility, which is what we are focused to providing them.

Thanks, Dan. Very helpful.

Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to Matthew Frankel for any further remarks.

Great. Thank you, everyone, for taking the time. Of course, feel free to reach out with any questions you have. I'm more than happy to chat. But thank you again, and I look forward to talking to you again soon. Have a good night.

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

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