Verint Systems Inc.

Good day, and thank you for standing by, and welcome to the Variant Systems Inc. Q3 2022 Earnings Conference Call. At this time, our participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. Please be advised this call is being recorded. If you require any further assistance, please press star zero. We would now like to hand the conference over to your host today, Matthew Frankel. You may begin.

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 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 and click on the webcast link and select today's conference call. I'd also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call and, as accepted 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 about these and other risks and uncertainties could cause variance 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, 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 and earnings release in the investor relations section of our website at barron.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. Those 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 the momentum we experienced in the first half of the year continued in our third quarter. We had strong cloud revenue growth, strong new PLE booking growth, and overall revenue and diluted earnings per share coming in significantly ahead of our expectations. Looking ahead, We expect the momentum to continue in Q4 and are raising our annual guidance for non-GAAP revenue to $875 million at the midpoint of our range. We're also raising our annual guidance for both cloud revenue growth and new PLE booking growth. We believe our results and improved outlook reflect the differentiation of our cloud platform and our strong execution following the spin of our security business earlier this year. At the time of the spin, we provided three-year targets for our cloud-first strategy and accelerating growth. I'm pleased to report that we are tracking ahead of our three-year plan. We're introducing guidance for next year above our prior targets and also increasing our targets for fiscal 24. Let me start with our Q3 results and discuss what we believe is behind our strong cloud growth and booking momentum. In Q3, our cloud revenue grew 33% on a GAAP basis and 32% on a non-GAAP basis year over year. We expect our strong cloud revenue growth to continue in Q4. and we are raising our guidance for more than 35% for the year. We also had strong new booking growth on a PLE basis across new logos and existing customers with 21 large cloud orders, each in excess of $1 million TCV. New PLE bookings increased 14% year-over-year in Q3, and we are raising our outlook for the year to more than 15%. Our numerous multi-million cloud orders in Q3 included some of the more normal brands in the world, such as Costco, Disney, Goldman Sachs, and HP. Regarding new customers, I'm glad to report that during Q3, we added more than 100 new logos, including Western Digital, Blackstone, Eventbrite, Network Markets, and the Bank of Hawaii. Regarding existing customers, we had many expansions as a cloud platform strategy makes it easier and faster for customers to expand and benefit from our AI innovation. Overall, we had strong booking momentum and are pleased with the addition of many new customers. In Q3, we continue to innovate and introduce new capabilities in our cloud platform to help brands close the engagement capacity gap. For example, we recently announced new AI-driven real-time agent assist capabilities, including real-time sentiment analysis and a new highly accurate cloud transcription engine based on deep neural network models. We also introduced in our cloud platform new social messaging functionality that can be deployed together with intelligent virtual assistants to automate social messaging. Our cloud platform has an open multi-cloud architecture that enables us to deliver innovation at an accelerated pace. Our openness enables the platform to seamlessly fit with existing enterprise ecosystems. It provides customers out-of-the-box integrations with many communication infrastructure, enterprise data, and CRM vendors. This strategy of a truly open and agnostic platform is very attractive to both our customers and a growing set of partners. At the heart of our cloud platform is Varian DaVinci AI, which drives strong automation and customer ROI. Because the platform is also modular, brands are able to deploy our workforce engagement, digital first engagement, and experience management based on their business priorities to close the engagement capacity gap. Looking forward, we're pleased with the momentum we experienced throughout this year and are introducing guidance for next year, fiscal 23, above our prior targets. For fiscal 23, we now expect $935 million of total revenue, reflecting 7% growth, up from our prior target of 6%. We're also expecting 30% cloud revenue growth, driving cloud revenue to over $500 million, around 55% of our total revenue. As previously discussed, our shift to the cloud will positively impact cash flow, and we're expecting more than 20% growth in cash flow operations next year. Behind our improved growth outlook for fiscal 23 is our significant bookings momentum this year. As a reminder, since the beginning of fiscal 22, we have raised our outlook multiple times for new PLE booking growth, which is a leading indicator of future revenue growth. In addition, I would like to point out that we expect to finish the year with non-GAAP cloud revenue in Q4 of around $117 million, providing us with a solid starting point to achieve more than $500 million in cloud revenue next year. Turning to fiscal 24, We're now targeting 10% revenue growth, which will take us to $1 billion and $30 million of revenue up from previous target of high single digit growth. We're also raising our cloud revenue target for fiscal 24 to over $650 million with another year of 30% growth. I would like to take a minute to review our multi-year cloud journey. In fiscal 19, only around 20% of our total revenue came from the cloud. And we're now expecting around 55% next year and targeting around 65% in fiscal 24. Shifting our revenue mix to the cloud has had many benefits to variants, including more recurring revenue, better visibility, and improved economics over the customer lifetime. In summary, I'm very pleased with our significant progress on all fronts. Since the spin, we've posted three-quarters of strong results, executing ahead of our three-year plan, and we're now raising our targets again. Our AI-powered cloud platform is differentiated and delivers significant ROI to customers, and our open and partner-friendly strategy is resonating well in the market and we are adding many new customers. Finally, I would like to thank our employees for their hard work and dedication. We continue to hear from our employees that they like our strong customer-centric culture and our focus on customer engagement as a pure play company. Now let me turn the call over to Doug to provide more details on our Q3 results and outlook. Doug?

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 expenses, 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. As Dan mentioned, our Q3 results came in ahead of expectations and we're pleased to be raising our annual guidance and long-term targets. For Q3, non-GAAP revenue came in at $227 million. Non-GAAP cloud revenue increased 32% year-over-year. New PLE bookings increased 14% year-over-year. Non-GAAP gross margin came in at 71%. Non-GAAP operating margins came in at 27%. Non-GAAP diluted EPS came in at 69 cents. And remaining performance obligations, or RPO, increased 31% year-over-year. We're pleased with our overachievement on both the top and bottom line. Our top line overachievement was due to strong demand for our cloud solutions, as well as a $4 million perpetual order coming in in Q3, which we previously expected to come in during Q4. Our Q3 bottom line was positively impacted by higher revenue and some expenses being delayed to Q4. For the year, we now expect $875 million of revenue, plus or minus 1%, up from our prior guidance of $872 million and our initial guidance of $860 million. We expect cloud revenue growth in the range of 35 to 37%, up from our prior guidance of 35% and our initial guidance of 30%. I'd like to mention that customers converting existing solutions to the cloud represent close to 40% of our expected cloud revenue growth, and the remaining 60 plus percent is driven by new deployments. We expect new PLE bookings growth in the range of 15 to 17%, up from our prior guidance of 15% and our initial guidance of 10%. From a mixed perspective, we expect 60% of new PLE bookings to come in from SAS in Q4. We expect $2.25 of non-GAAP diluted EPS at the midpoint of our revenue guidance based on 75.9 million diluted shares outstanding for the year. I'd now like to discuss guidance for our next fiscal year ending January 31st, 2023. For revenue, we are introducing guidance above our prior target and expect $935 million in revenue, plus or minus 2%, or 7% growth, which is being driven by our strong PLE bookings. For new PLE bookings growth next year, we are also guiding above our prior target to a range of 10% to 12%. Our pipeline is rapidly shifting to SAS, and next year we expect around 65% of new PLE bookings to come from SAS for the full year. We expect cloud revenue to exceed $500 million and to represent approximately 55% of our total revenue. With continued margin expansion, we expect $2.49 diluted EPS at the midpoint of our revenue guidance, reflecting nearly 11% growth year-over-year. We expect to generate $200 million of GAAP cash from operations, reflecting more than 20% growth year-over-year on a normalized basis. I'd also like to provide you with some additional detail for your models. We expect around $1.5 million per quarter of interest and other expense. We expect about $300,000 per quarter of net income from a non-controlling interest we have in a small joint venture. We expect an 11% cash tax rate for the year. And we expect $75.9 million of fully diluted shares flat with this year. Similar to fiscal 22, we intend to repurchase shares in fiscal 23 to offset dilution from our equity compensation program And we announced today that our board has approved a new buyback program for next year. In summary, we're very pleased with our strong momentum and are tracking ahead of our three-year plan we laid out at the beginning of the year. We expect our revenue growth rate to accelerate from 4% this year to 7% next year and are targeting 10% the year after. From a mixed perspective, we're targeting nearly two-thirds of our revenue in fiscal 24 to come from cloud. As we approach the holiday season, I'd like to thank our employees during unprecedented time in the market. Our strong results are due to your hard work, thought leadership, and commitment to serving our customers. So with that, operator, let's open up the line 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. And our first question comes from Ryan McDonald from Needham. Your line is now open.

Hi, thanks for taking my question and congrats on an excellent quarter here. Again, I was most impressed by the strong new customer, new logo additions, and I think over 100 in the quarter you mentioned and over 60% of PLE bookings coming from new customers. Just love to understand a little bit more where that strength is coming from, whether it's, you know, you're seeing sort of a surge in demand in the marketplace from new customers as they, you know, spend on digital transformations, or has this come down to just great sales execution? Would love a little more color there. Thanks.

Yeah, yes, thank you. So I think it comes from demand for cloud platform. We discussed before that a cloud platform is differentiated. It's... helpful to our customers to innovate faster because they can consume applications from the platform easier than on an on-prem basis. We do see also increase in partners execution with the cloud platforms and growth with partners. So I think it's really the overall positioning from a product perspective as well as our partner agnostic strategy. We actually did mention on the call first time 100 new customers, and some of them are notable brands like the Bank of Hawaii and Western Digital and Blackstone. But we saw this momentum since the beginning of the year. We also had more than 100 new customers in Q1 and in Q2, and we expected to continue in Q4. So we actually expect more than 400 customers new customers to join Variant by the end of the year. So it's a trend that now has been established and we feel very strongly that it's a result of the strength of the platform as well as the agnostic strategy.

Excellent. Thanks for the color there. And then, you know, on the raised outlook as we start to think about the fiscal 24 targets being higher, I'm just curious about what you're seeing from a visibility perspective to give you confidence in this higher outlook. You know, what are you seeing from a roadmap perspective as you talk to your customers that are looking to migrate over? Thanks.

Yeah, so visibility has actually improved quite a bit. Obviously, you know, partially it's because of the growth in recurring revenue. We're now, you know, around 83% of our software revenue is recurring, so that's improved visibility, but also pipeline. You know, we see, you know, Doug mentioned RPO. Our remaining performance obligation is up 31% year-over-year. We see strong demand in the pipeline and also a big shift. So we actually expect, in terms of the pipeline mix, we expect 60% of the booking in Q4 to be from SAS. And for next year, we expect 65% of the booking to come from SAS. So pipeline suggests overall strength and also continuing shift mix towards SAS. We also raised PLE bookings guidance for next year. We took it from 10% to higher to a range of 10% to 12%. Obviously this year, we now expect more than 15% booking growth. So we hope that we'll continue to see strong momentum into next year as well. But all these are helpful to visibility. When you look at our Q4 cloud revenue, we're expecting 117. So that's a good starting point for another year of more than 30% growth. So that will bring us to more than half a billion dollars in cloud revenue and even more recurring revenue, so improved visibility. So really on all fronts, we feel like, you know, strategy is working. We're over the midpoint of our cloud transition. So our revenue growth is now accelerating because we have less headwinds from the perpetual decline. So we gave targets for, you know, 7% growth next year and 10% growth the following year on overall revenue, and cloud revenue continued to grow at 30%. So it looks good.

It sounds good from my end as well. Congrats again. I'll hop back in the queue.

And our next question comes from Dan Eyes from Whitbush. Your line is now open.

Yeah, thanks. So can you just talk about, in terms of the cloud transition, it feels like you've sort of crossed that line now to, to sort of like almost the second half as you're sort of getting into the inflection point more than 50%. Can you talk about that? Like what are sort of now the triggers that we should see going forward as it feels like you're kind of past the midway point of the transition?

Yeah, so the midpoint is very important. So first, just to make it clear, we passed the midpoint in booking and we expect to pass the midpoint in revenue during next year and get to 55% of revenue to be cloud. So what happens as we get more cloud revenue are a number of things. First, visibility will continue to improve as we get more recurring revenue. Second, we'll see improvement in cloud revenue growth because we are going double-digit in booking. We have a lot of new customers we added. We're talking about more than 15%. We now raise the guidance to between 15% to 17% booking growth this year. So all this booking acceleration will start to contribute more into revenue acceleration because the perpetual decline is less material. We just have less perpetual. So obviously revenue acceleration, but also gross margin acceleration. When you look at our gross margin mix, our non-recurring gross margin is in the mid-50s because perpetual carries a lot of professional services. So that's a mid-50s average gross margin for non-recurring. But the recurring margin is the mid-70s. So as recurring goes up, also gross margin will start to go up. Modestly next year and more and more in the following years. And we talked about, you know, better economics and improved cash flow. So crossing the midpoint is really, you go uphill and you get a lot of headwind on the way up and you start to get tailwind on the way down, which is what we're starting next year.

Great. And then can we just talk about in terms of just size of deals? As you think about pipeline and you're hitting it and we sort of get through the midpoint, should we expect just larger deal sizes, more strategic? Is that a trend? Thanks.

Yes, I think we are becoming more strategic to our customers and partners because they can consume more from a cloud platform in a very consistent way. All the applications we have and And you guys know that we have acquired companies over the years, and we put all these technologies that we acquired in one platform, which gives customers the ability to expand very easily, just consuming more services rather than going through the whole effort of on-prem deployment. So that makes the relationship more strategic. They can benefit from innovation in AI much faster in the cloud platform. Our partners have access to a lot of AI innovation quickly through our DaVinci services. So all this effort we put into the platform is really positioning us to have more footprint with our customers and partners. And we expect, when I look at the mix right now, we generate about half of our revenue from direct and half from indirect, from partners. We expect both to grow nicely and partners to grow a little bit faster. So the 50-50 ratio will probably be not that materially different in a year or two, but the indirect will slightly grow faster. And that's good for us because we have a lot of leverage with partners and don't have to add a lot of salespeople as we continue to accelerate our growth rates. So putting all that into the context of the journey, we think that for us, cloud is not just a change in business model, but it was the ability to really offer a single platform that is open, that is connected to the ecosystem. We have a lot of out-of-the-box integrations. We now have a pretty significant ISV program, so a lot of companies are developing applications on our platform. And we're listing these companies in our marketplace so the customers can benefit from the open platform. So creating that ecosystem of ISD partners, creating an ecosystem of out-of-the-box integrations with enterprise data systems and enterprise CRM or HR or any type of enterprise system that is important to be integrated into customer engagement, customers and partners can consume that very easily from a cloud platform. So, you know, it's a big innovation. We spent a lot of time and effort in building that platform and we believe it's very differentiated right now. And because it's open and agnostic, you know, we see a lot of changes in the communication infrastructure market. You know, we saw just lately 8x8 is acquiring FUSE, so that's a, you know, consolidation of CICAS and UCAS. We saw, you know, Zoom trying to buy Five9 for the same reason, and WebEx has announced a CICAS offering, and Avaya, UCAS and CICAS, and Microsoft has announced, you know, an extension of Teams into the Connick Center. So all this infrastructure consolidation across the Connick Center and the enterprise is really the starting point for more demand for our platform because we have applications that are across the enterprise connecting the Connect Center into other parts of the enterprise in a way that can generate a lot of business ROI. Customers buy infrastructure based on their IT ecosystem and what they need from the infrastructure But customers really need a strong application platform to create business ROI, applications with workflows and automation that drive business ROI. And this is where Variant is, right? We are in this bucket of very strong, best-of-breed applications, all available in one platform, so customers can consume those services in a very consistent manner.

Thanks. And thank you. And our next question comes from Peter Levine from Evercore. Your line is now open.

Great. Thanks for taking my question. I'm sorry if I missed it, but cloud growth in the quarter or sequential decel. Maybe first, can you just kind of talk about those dynamics where there are deals that pulled into Q2 or perhaps that deal got pulled into Q4? I'd just like to understand what happened in the quarter.

Yeah. So let's look at the numbers, right? We started the year with a cloud growth expectation of 30%, and then we upped it to 30 to 35%. Then we upped it again to 35. And today we upping the cloud growth for the year between 35% and 37. So I don't think we are decelerating. I think every quarter we raised our, you know, our expectations for cloud growth this year. And when you dissect the cloud growth, you can see that in cloud we have SaaS and we have managed services. And managed services, as we discussed many times, is something we offer our customers as a service. It's low margin, and we don't plan to grow that that much. So in Q3, managed services grew 10%, which is fine, but SaaS grew 38%. So we continue to see very strong growth in Q3, and we expect acceleration Q4. So that's why we are raising our cloud growth guidance to more than 35%. So bottom line is I think we are progressing very well through the year. We see a pipeline shifting. We see cloud deals that were potentially – You know, customers were looking to buy perpetual, shifting to the cloud much faster. And I think that, you know, quarter to quarter, there could be small fluctuations, but I'm very pleased with over 30% growth in Q3, as well as, you know, raising, again, guidance for Q4. And, you know, the numbers are getting bigger, and we still think that we can achieve more than half a billion in cloud revenue next year. And if you look at, you know, the Q4 expectation, that's a very solid start for achieving the, you know, the half a billion next year. So I don't see any deceleration in demand for cloud, and I think we are well positioned to, you know, provide customers cloud solutions when they – When they're ready, you know, some customers are saying, yes, we're going to go cloud, but not now. But when they're ready, we are ready, and we continue to see very good growth.

And then maybe to that point, you know, what's the catalyst that jumpstarts, I think, the conversation to move to the cloud, or even if you go to IT? Is it a line of business that's making these purchases decisions, meaning how much of that is being driven by contact center upgrades versus more of a digital transformation within customer engagement?

Yes, I think it's predominantly digital transformation. When you look at our cloud growth, more than 60% comes from new deals. So less than 40% is actually conversion. If you look at our 35% to 37% cloud growth this year, and more than 60% is new deals, so that's like 21%. And 15% comes from conversion. So I think that gives you the idea that even if we didn't have any conversion in our base, we would still be growing at 21% because of digital transformation and demand for new functionality. Look, the content center is disruptive. How many times people go online and try to do something before they call the Connect Center. It's very often. And when they call the Connect Center, they expect the Connect Center to understand what they did, what was their journey before they called. So the Connect Center is disrupted by digital because customers expect more contextual and connected experiences, and the Connect Center needs to be connected to the back office, to the online and self-service channels that are mostly designed by marketing, customer experience teams that measure experience across the journey. And that's what we provide in our platform. We specifically emphasize that we designed the platform to close the engagement capacity gap. And the capacity gap is created because of the increase in the number of digital platforms touch points and digital interaction. It's just more and more of them, and it just, you know, organizations cannot add people to address it, so they need more automation. And the demand for automation is driving our growth, because we are an application platform, and, you know, agnostic to the infrastructure, but our customers really need to make changes and buy applications that can help them close that gap Because otherwise, they'll just have consumers that have terrible experiences. And you know also, when our customers report to us, they report great ROI. We discussed the Forrester report last quarter, where Forrester approached our customers and the ROI was 300% over three years and payback in less than six months. And they also report to us that When they deploy these type of solutions, they can also increase revenue. So it's not only that they can reduce the spend on workforce and elevate the customer experience. Elevating customer experience creates opportunity for upsell and increasing revenues. So the demand was a long answer, but the demand for cloud growth really is driven by this whole digital transformation that our customers are going through.

Great. Thank you very much for the caller.

Thank you. And our next question comes from Samad Samana from Jefferies. Your line is now open.

Hi. Good evening. Thanks for taking my questions. Maybe just first on the long-term guidance, I just want to double check. Is that all organic, the assumptions for fiscal 23 and fiscal 24? Or does that assume some level of M&A as well? And then I have a quick follow-up as well.

Yeah, so we don't assume any future M&A. We had the Congress Social M&A that we did earlier in the year, right? We talked about, you know, that that's going to contribute about, you know, $6 million this year. And because we did it, you know, seven months into the year, there's going to be some contribution into next year. But, you know, it's a few million dollars of inorganic in the guidance for next year, and that's it. We don't assume any future M&A in 23 or 24.

Great. Thanks for that. And then, Doug, maybe one for you, just to better understand the expenses that fell out of 3Q into 4Q. Wanted to make sure I heard that correctly. And just was that due to hiring being tougher? Was that due to... you know, T&E, just maybe help us triangulate what those expenses were and how that could impact the business.

Yeah, there's no big trends, Matt. So it's just some timing around some things that, you know, our folks kind of pulled the trigger on a little sooner than we had planned for in our model, if you will. So just some timing of expenses hitting Q3 rather than Q4 in the numbers. You know, we're still investing in the business, so expect, you know, Q4 OPEX to ramp a little bit off of, you know, Q3 levels and come down a little bit in, you know, Q1. So probably next year we'll probably have about 7% OPEX growth, you know, for the full year.

Great. And then maybe just one last one, just to ask a couple of quickies, which is, When you think about the end contact center seat that Varon's WFO is being attached to, have you seen any change in the mix of that this quarter? You know, if you think about whether they're using 5.9 or in contact or Genesis, any evolution in who you're attaching your WFO to?

So, yeah, we've seen the – from a contact center infrastructure perspective, we see a lot of augmentation. So, you know, we have the Avaya CICAS offering that is launched to the market. We have Cisco new WebEx CICAS offering, obviously Amazon Connect and Twilio and, you know, and that's more players like the 8x8 and Vonage. And, you know, we partner with all these guys because when, customers need applications and they want best of breed, you know, that, that, that's variant. Um, so when you look at five, nine, you know, five, nine is a partner. Uh, the revenue, the revenue we have today with five, nine is still very small, but it's been, it's been growing this year because they, they started to go off market and we expect it to continue to grow next year as they continue to go to up market. So, uh, the smaller, you know, the vendors that we've been targeting more of the SMB market, as they go off market, they need more sophisticated applications, and that's where, you know, customers really want variants, and many times, you know, the customers actually decide on the applications, and then they choose the communication infrastructure vendors, so the partnership is really one that benefits both sides, because more and more in the digital transformation, the business needs are actually more important than the IT infrastructure needs. And as they look to close the engagement capacity gap, they want more AI, more analytics. That's the leading requirement, right? First, they want to make sure they have ROI, and then they want to make sure the infrastructure supports it. So we see, to your question, we see customers that want to buy... infrastructure and application at the same time, but I think we also see more and more customers that understand that they can bifurcate these decisions, that if they need applications now because that helps them close some gaps and drive a lot, they don't necessarily have to change their infrastructure right away. They can make that decision later on. So we see all the above, but clearly the SMB, the smaller the customer is, the smaller their contact center, the less urgent is their need for business applications that close the gap, and the more sophisticated and larger organizations really feel the pain of digital transformation, and they're leading with business applications first.

Great. Thank you. Appreciate that.

And thank you. And our next question comes from Brian Essek from Goldman Sachs. Your line is now open.

Great. Thank you. And thank you for taking the question. Maybe, Dan, for perpetual revenue, we'd like to just, you know, thank you for the revised forecast on cloud, by the way, but I'd like to kind of back into perpetual revenue to see If your outlook there has changed at all, I think previously, you know, your team has thought that this would kind of level off in the 100 million range. How should we think about incremental perpetual sales? How much visibility do you have into that? And has your outlook changed? Is it just a matter of, like, looking through your pipeline and you have a certain hit rate that tends to be perpetual? Or just love a little bit more color, how to think about that particularly longer term?

Yeah, sure. So first and very important is that we, today, we allow our sales force to sell perpetual only by exception. They have to go through an exception process. And believe me, they don't want to sell perpetual. They want to sell sales. But we do have a number of customers. It's not a large number, but it's typically the larger customers that we know that for now we have to give them exceptions. You know, interesting, we talked about the $4 million deal that came earlier. We expected it in Q4, and it came in Q3, and it's a perpetual deal from a large telecom customer. And what's interesting about this deal, not only it came earlier, but actually we were surprised that the customer was entertaining going to SaaS. And we didn't think they were going to do it this year. We thought maybe next year, but they were entertaining it. Eventually, they decided not now. And I see that as a very good development, that even this very large telecom customer is starting to move and consider it. At least they requested to understand how the proposal will look like in SASP. And look, there's timing issues. These are complex organizations that have compliance needs, that have security needs. IT may have all kinds of priorities, what they want to shift to SaaS and what they want to keep on-prem. I do believe that the entire industry is shifting to SaaS. There's no question about it in my mind. And the dialogue with customers suggests that. But I think that Right now, our view is that in 24, yeah, we'll have about $100 million, which will be tens of customers, not more than tens of customers, and about $100 million in 24 that will still be perpetual. Will that continue to get smaller? Probably over time. Probably over time. But, you know, the big thing with perpetual for variant was that perpetual was very big, and every decline – was a big headwind. Even if, you know, booking was good, the revenue decline was material. And I think that as we have very large cloud baseline now that is growing 30%, even if perpetual will decline a little bit faster, I still think we have a good chance to accelerate growth rates, overall revenue growth rates.

Got it. That's super helpful. And maybe, maybe to follow up, you know, as we think about, you know, the overall environment, just from a macro point of view, you know, I recall, you know, during the pandemic, you know, there were, there were issues with regards to, you know, needing to be, you know, in customer facilities, you know, to sell certain, certain types of software. As we, as we kind of evaluate the news flow that we see every day, I mean, do you see anything that's materially disruptive as, I don't know, new variants pop up or travel issues arise from one geography to the other? Anything that we might be able to digest that might impact your business one way or the other?

From a travel perspective, we got organized to do mostly remotely. When we do need to travel, we do. It's not an issue today, but it's really not very common. So I don't expect travel restrictions to make things worse. But I think that the fact that we now have this new variance and more and more customers realize that this pandemic is gonna stay with us maybe longer, it does help to the cloud acceleration. I think that that's probably one of the reasons we see even the larger customers realizing it's time to move to cloud and benefit from doing everything remotely. And it's also helpful in terms of demand for more visibility tools and analytics tools as the workforce, you know, is all kind of scattered and, you know, management needs to really be able to provide people at home with the right tools and be able to understand, you know, what works and what doesn't work So, yeah, that probably drives more demands. But I don't see any customers really thinking that they just need to hold their breath and wait for the pandemic to be over. I think customers realize that they're going to need to buy into these workforce optimization tools because, first, you know, people will probably work hybrid anyway in the future. There are more and more customers that are hiring people in a lot of different locations because there's a hot labor market and they want to take advantage of where they can hire. The days where everybody sits in one office are gone. The digital transformation is really the biggest drive for AI. Some people can be replaced with automation. All these trends, I think the pandemic was accelerating the shift, but the fact that the pandemic may take longer may be somewhat helpful to acceleration, but doesn't change the overall trend.

Got it. That's super helpful. Thank you.

And thank you. And our next question comes from Dan Bergstrom from RBC Capital Markets. Your line is now open.

My question is, say, maybe could we look at the near-term side of Brian's previous question? You know, it sounds like we're expecting a typically seasonally strong fourth quarter here, less perpetual than previously, obviously, and you provided some guidance around the cloud. But, you know, is there the potential for a more pronounced break in customer preference towards the cloud with all the business in the quarter? You know, you just talked about that large perpetual customer. that closed early was considering SaaS, or do you feel like you have a pretty good visibility around customer preference at this point in the quarter?

I do. I do. I see 60% or more in SaaS in Q4, so I definitely believe that's the best quarter we'll have in terms of this shift. And as we look at the pipeline into next year, we believe 65%, will be SaaS. When we analyze that further, we also see that the ones that remain perpetual, again, are smaller and smaller universe of customers that are just going to take longer in the decision making, but it's not a pervasive trend. It's limited to customers. We announced Just in the quarter, 21 multimillion-dollar deals. Last quarter, we had also, I think, about 20 multimillion-dollar deals. And that's just cloud deals. So we do have some large customers that will continue next year to buy Perpetual, but the number of those customers will be small. So the trend is very, very clear, and I think that, you know, in the past I spoke about, The industry is shifting. Some customers are ready. Some are not ready. I think today I can say every customer realized that that's where they're going. It's just a matter of when.

Great. That's helpful. And then maybe for Doug, Doug, could you just help us think through the cash flow dynamics here over the next several years? Dan touched on this a bit in the prepared remarks and in response to a question. But, you know, it seems like the second half of the cloud transition, typically, we really start to see the benefit in cash flow. I think those previous headwinds that built up, you know, RPO and deferred should be coming in as a tailwind to cash flow. Is that the right way to think about the dynamics for cash flow from here?

Yeah, exactly, Dan. We touched on this a little bit last quarter as well, kind of as we look out. So you can see this quarter we had a very good quarter. Next quarter we expect a strong quarter. So we'll probably come in around 180 on a, you know, before non-recurring items from a cash from ops. And as you mentioned, there's a bit of a waterfall of cash kind of coming in just the way the revenue accelerates, you know, the cash accelerates into next year too. So coming off of this year's base, we should grow maybe 20% in terms of, you know, cash before non-recurring items, cash from ops next year. And then probably that's probably the big kind of windfall in, if you will, and then kind of leveling and think about cash kind of growing with earnings at that point, kind of low double digits, similar earnings, but, you know, still very strong cash growth.

That's great. Appreciate that, Bob. Thanks.

Sure.

And thank you. And now I would like to turn the call back to Matthew Frankel for closing remarks.

All right. Thanks, operator, and thank you, everyone, for joining us today. If you have any questions, please feel free to reach out, and we'll talk to you again soon. Have a good night. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.

An iconic shot. Like Capital Group's new ETFs, there's so much behind it. Like navigating ups and downs. Can I find an ETF with a whole lot behind it? With Capital Group, I can.