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spk00: Ladies and gentlemen, thank you for standing by, and welcome to Verit Systems' fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press the star, then the one key on your touch-tone telephone. If you require operator assistance, please press star, then zero. I would now like to send the conference over to your speaker host, Matthew Franco, Investment Relations and Corporate Development at Verit. Please go ahead.
spk03: Thank you, Operator, and good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodnar, VARIN's CEO, Doug Robinson, VARIN's CFO, and Alan Roden, VARIN's Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a WebEx slide. If you'd like to view these slides in real time during the call, please visit the IR section of our website at VARIN.com. Click on the Investor Relations tab, then 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 the date of this call and is accepted as required by law. Fairness 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 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 and at January 31, 2022, 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 supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. These non-GAAP financial measures the company uses have limitations that may differ from those used by other companies. Now, I'd like to turn the call over to Dan. Dan?
spk09: Thank you, Matt. I'm pleased to report the cloud momentum we experienced throughout the year continued in our fourth quarter, and we finished the year strong across all key financial and cloud metrics. Here are some highlights of our Q4 performance. Non-GAAP revenue came in significantly ahead of our guidance. We delivered strong cloud revenue growth. Our booking mix continued to shift to the cloud with 61% of new PLE bookings coming from SAS. And non-GAAP diluted EPS also came in ahead of our guidance. Looking ahead, we expect our momentum to continue and are raising our guidance for the current year for revenue, cloud revenue growth, and diluted earning per share. We believe our results and improved outlook reflect the strength of our open cloud platform and AI differentiation, as well as our strong execution following the spinoff of our security business last year. At the time of the spinoff, we outlined a three-year plan targeting a 30% cloud revenue CAGR and targeting revenue growth to increase each year. I'm pleased that we performed ahead of this plan in fiscal 22, which was year one of the plan. I'm also pleased that we are tracking ahead of our targets for years two and three. We're targeting revenue growth accelerating to 7% this year and to 10% next year, driven by faster cloud growth. Let me start our Q4 review by discussing our bookings momentum and our many customer wins. Throughout the year, we added many new logos and expanded our footprint with existing customers. We're seeing strong market adoption for cloud in the SMB segment and increasingly also with larger enterprises. We won many large deals. And for the year, we landed approximately 100 cloud deals over $1 million TCV, up nearly 25% year-over-year. In Q4 specifically, our million-dollar cloud orders included some of the leading brands in the world, across different industries, such as Avis, Farmers Group, and Goldman Sachs. Regarding new logos, In Q4, we added more than 100 new logos, including Chipotle, Gerber, Rolex, and Wayfair. This brings the tall number of new logos added in the full year to more than 400. Overall, we finished the year with strong bookings across existing and new customers, and we believe our booking momentum is driven by both our open AI-powered cloud platform as well as by the strength of our partnerships. Our open cloud platform is designed to help brands close the engagement capacity gap. The platform includes a broad set of applications across workforce engagement, digital first engagement, and experience management. the ingredients brands need to close the engagement capacity gap across the enterprise. At the core of our cloud platform is Variant DaVinci, our differentiated AI functionality that is specifically designed to automate customer engagement business processes. Variant DaVinci infuses AI-powered automation across all business applications running in our cloud platform and is a key driver in helping brands reduce their operating costs while elevating the customer experience across the enterprise. Because a platform is designed with an open architecture, our partners are able to leverage our platform ecosystem to further innovate and create value for customers. The combination of an open platform design and a partner-friendly strategy drive the ongoing expansion of our partner ecosystem and is resonating well with our customers around the world. I would like to discuss three examples of wins that demonstrate our strengths and competitive differentiation. The first order for $4 million was a competitive displacement and an expansion order from a leading transportation company. An existing customer, the company decided to expand its relationship with Variant in several geographies by purchasing additional products across our platform. A platform approach, open partnership strategy, and differentiated AI were key reasons we won this opportunity. The second order for $2 million was from a customer in the healthcare industry. This customer is a new logo for Variant. After putting out an RFP, the customer decided to award Variant and replace a legacy vendor with the Variant Cloud Platform. This competitive win across several parts of our platform came against multiple point solution vendors. Aside from our platform approach, the key drivers of the win included Variant DaVinci AI and Analytics, and our open partnership strategy. And the third one for $2 million was also from a new customer that is one of the world's leading e-tailers. This win was also a competitive displacement and was due to our platform approach, our ability to demonstrate our leading AI technology delivers significant ROI as well as the open and scalable architecture of the platform. Looking back at the full year, fiscal 22, we're very pleased with the execution of our cloud strategy as evidenced by our cloud metrics coming in strong across the board. New booking growth on a PAB basis came in at 17% compared to our initial guidance of 10%. We saw booking strength in both our direct and indirect business and in both existing customer expansions and new logos. Non-GAAP cloud revenue growth came in at 37% compared to our initial guidance of 30%. We saw strength in both customers buying new cloud solutions as well as our maintenance customers converting to the cloud. New SAS HCV bookings growth came in strong at 42%. And we delivered $881 million of revenue and $2,028 sense of diluted earning per share, both on a non-GAAP basis. During last year, we raised guidance multiple times and ended the year significantly ahead of our initial guidance. We're entering fiscal 23 with cloud momentum and improved visibility. And next, I would like to discuss our outlook. We are raising our annual guidance for fiscal 23 across key financial and cloud metrics. Doug will discuss our new guidance later in more detail. Let me just share that behind our increased guidance is improved visibility driven by several factors. First, we finished fiscal 22 with Q4 non-GAAP cloud revenue of $119 million and record backlog. providing a strong starting point for Fiscal 23. Second, we have a strong pipeline, our partnerships are growing, and we're targeting another year of double-digit new PLE bookings growth. And third, our platform is making it easier for maintenance customers to convert to the cloud and add new cloud applications. During Fiscal 22, with close to $250 million of maintenance revenue, and expect conversions to continue and to contribute to cloud growth in fiscal 23 and beyond. In summary, looking back at fiscal 22, I believe our strategy is resonating well with customers and partners. The spin-off of our security business 14 months ago drove a greater focus on a single market, and is contributing to our improved execution. Today, we are a pure-play customer engagement company, 100% focused on helping brands close the engagement capacity gap. Last year, we raised our cloud revenue growth multiple times throughout the year, and we are pleased to be increasing our outlook for fiscal 23 as well. We expect our revenue growth to accelerate over the next three years as we benefit from the tailwinds associated with crossing the midpoint of our cloud transition as cloud is becoming the bigger piece of our total revenue. Long-term, we have a significant growth opportunity as we are uniquely positioned to help brands close the engagement capacity gap with our AI-powered platform. Now let me turn the call over to Doug to discuss our financial results in more detail. Doug?
spk01: 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, accelerated lease costs, 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, the momentum we experienced throughout the year continued in Q4 and we finished the year strong. Q4 non-GAAP revenue came in at $236 million, up 4% year-over-year. For the full year, we generated non-GAAP revenue of $881 million, up 5% for the prior year. The percentage of our software revenue that was recurring continued to increase and came in at 83% in Q4 and 82% for the year. Our non-GAAP cloud revenue increased 35% year-over-year in Q4 and 37% for the year. Of the 37% cloud growth, the majority, or nearly two-thirds, came from new orders, and close to one-third came from maintenance revenue converting to cloud revenue. New PLE bookings increased 13% in Q4 and 17% for the full year. In Q4, 61% of our new PLE bookings came in as SaaS, compared to less than 50% in the fourth quarter of last year. And non-GAAP diluted EPS came in at $0.57 for Q4 and $2.28 for the full year. Overall, we are pleased with our Q4 overachievement, which was driven by the success of our open cloud platform, differentiated AI, and analytics capabilities. And now turning to the balance sheet. We ended the year with $360 million of cash and $415 million of debt, comprised of our $100 million term loan and $315 million convertible notes. Regarding our stock buyback, I'd like to mention that we already completed our existing $75 million program, and I'm pleased to announce that we plan to buy back an additional $25 million, which is the maximum we are permitted to repurchase this year due to the tax-free nature of the spinoff. I'd now like to discuss our guidance for the current year, ending January 31, 2023. Let me start with three key metrics. We expect $940 million of revenue, plus or minus 2%. reflecting 7% growth year-over-year, up from our prior guidance of $935 million. We now expect cloud revenue growth of 30% to 32%, up from our prior guidance of 30%. And we expect non-GAAP diluted EPS of $2.50, reflecting 10% year-over-year growth. I'd also like to provide you with some additional information for modeling purposes. Starting with bookings, we expect double-digit new PLE bookings growth in the range of 10% to 12%, with approximately 65% coming from SAS. With respect to perpetual revenue, as we transition to the cloud, we expect it to continue to decline to around 120 million compared to 138 million last year. And with respect to margins, we expect some modest gross margin and operating margin expansion for the full year. Now let's discuss some below the line assumptions. We expect around 1.5 million per quarter of interest in 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 11.5% cash tax rate for each quarter and for the year. And we expect around $76 million of fully diluted shares flat with this year, reflecting the effect of our stock buyback program. Let me also discuss how we see the year progressing. For modeling purposes, we assume approximately $215 million of revenue representing 6.5% growth in Q1. We expect OPEX to sequentially drop a couple million from Q4 levels, driving approximately 46 cents of EPS in Q1. For the rest of the year, we expect sequential revenue growth, with Q2 and Q3 increasing sequentially between 10 and 15 million each quarter, and finishing the year with our typically strong Q4. I'd now like to take a minute to review our multi-year cloud journey. The percentage of our revenue coming from the cloud is steadily increased. In fiscal 21, 34% of our total non-GAAP revenue came from the cloud. In fiscal 22, it increased to 45%, while in Q4, it comprised half of our revenue. For the current year, we are expecting around 55%, and we're targeting around 65% in fiscal 24. As we previously pointed out, Last year we crossed the midpoint of our cloud transition on a bookings basis, and this year we expect to cross it on a revenue basis with cloud revenue in excess of 500 million. We have clearly achieved scale in our cloud offerings and are seeing strong market adoption. Shifting our revenue mix to the cloud has had many benefits for Variant, including more recurring revenue, better visibility, and improved economics over the customer lifetime. In summary, we are very pleased with our strong cloud momentum and we are tracking ahead of the three-year plan we laid out at the beginning of last year. Our revenue growth is accelerating, we expect our margins to gradually expand, and we have a strong balance sheet and strong cash generation. Most importantly, we believe our cloud and AI differentiation positions us well for long-term growth. Before taking Q&A, I'd like to mention that we will be discussing our AI differentiation at our annual Investor Day, which will take place in early June. Details will be announced at a later date. And with that, operator, let's open up the line for questions.
spk00: Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the Start and the 1 key on your touch-tone telephone. To withdraw your question, you may press the pound key. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Peter Levine with Evercore. Your line is open.
spk02: Great. Thank you for taking part. You know, so cloud momentum seems like to be in full force, you know, record number of million-dollar cloud signings. But maybe can you dissect, I think, the cloud guide of 31% at the midpoint? Like, what are the assumptions behind that guide? I think with everything you're saying, You know, you're now well above the midpoint of the transition. Customer growth is strong. Pipelines seem healthy. You know, your on-cloud prem transitions are picking up. So why does 6% decel in the cloud growth? Like, what has to happen for us to see cloud growth, call it north of 35% again this year? Thanks.
spk09: Yeah. So we guided, you know, last year when we did a three-year plan, we guided to CAGR 30%, and this was our – Initial guidance also for fiscal 22 last year. And as you recall, as we move through the year, we got some good traction and we ended up with 37% versus the 30% guidance. We're taking the same approach. We're starting the year based on our ARR for Q4. And based on what we see right now, we can definitely increase our guidance. We gave... Last quarter we gave, for this year, we gave 30% guidance. Now we are moving our guidance up to between 30% and 32%. So, you know, as we continue to see cloud adoption accelerating, we will hopefully be able to raise guidance again, and we're still early in the year. So that's kind of the logic behind, you know, how we give guidance. In terms of what we see in the market, I think it's interesting because, We did report that in the SMB segment, there is already cloud adoption. We definitely saw in the second half of last year that the enterprise segment is also moving to the cloud. We are now engaged with many customers that are discussing their timeline. Some of the larger customers are planning ahead a year or two or even three years ahead, but we are having discussions with customers about when they think they will be ready and what they need from Varian to help them to be ready. So we're happy to be engaged because obviously we want to help our customers do that in a very smooth way. And another very encouraging data point here is that we reported that we have some very large customers that actually told us that they don't want to move to the cloud. And we see some breaking news also with this. Customers are now saying, you know, maybe we should. And some customers are encouraged by the fact that they have IT shortage of people, they have supply chain issues to buy components for their data centers, and they feel like getting to the cloud will be faster with a cloud company rather than themselves. But nevertheless, whatever the reasons are, we definitely see a change in that direction. In Q4, as you know, 61% of our booking, new booking on a daily basis, came from cloud, which is a big acceleration. And what we see from our pipeline, same for the year. So if all goes well and we continue to see this momentum, I hope we'll continue to be in a position to raise cloud revenue guidance. This is one of the key metrics for us. When you look at... how it's broken down. So about a third of our cloud revenue, 37% growth came from maintenance, contrast, conversion, converting to the cloud. So the rest, about more than 20% growth came actually from new logos and expansions, which is good. And if we have the same dynamic this year, obviously we'll be able to accelerate cloud revenue growth as well. because we see the maintenance. I spoke about we have $250 million of maintenance conversion. Right now, we're not assuming acceleration of conversion. Obviously, any acceleration of conversion, maintenance conversion, will contribute to cloud growth, and we have great momentum with new customers as well. So this is kind of where we are and how we think about the outlook for the year.
spk02: No, that's insightful. Maybe I could choose one more, just on the macro side. I think a concern for investors as it relates to software is just any risk of deteriorating or economic downturn in Europe, you know, the geopolitical environment we unfortunately see ourselves in. So can you let us know what your exposure is in EMEA, Europe specifically, and kind of what kind of assumptions are baked into the guide when looking at your European segment, you know, longer sales cycle, sales disruption, any churn, any color would be great. Thank you.
spk09: Yes, yes, happy to go. So when we look at our EMEA business, I'll make separate comments for EMEA and for Russia. So we generated $4 million of revenue from Russia last year. We do not expect to generate any new sales from Russia at this point, and that's already backed in our guidance. So we raised the guidance to $940 million, and that doesn't include any new sales to Russia. For the rest of EMEA, we don't see any change right now in terms of activity and demand. We have about 20% of our business is Europe, give or take, depends how you define Europe. It's more heavily concentrated into the UK than the rest of Europe. And at this point, we don't see any disruption as a result of the Russian crisis. And, you know, Russia obviously is not already backed into our guidance.
spk02: Great. Thank you very much.
spk00: Our next question coming from the line of Ryan McDonald from Nieman Company.
spk07: Hi, Dan and Doug. Thanks for taking my questions, and congrats on an excellent quarter. Dan, maybe starting with the competitive environment, it was notable in a lot of the customers you highlighted and from the notable wins in the fourth quarter that a number of those were competitive replacements, whether they were new logos or just expansions of your business within the existing logos. Just curious if you're seeing any changes here that's creating sort of incremental displacement opportunities, whether it's with new customers or within the existing base. Thanks.
spk09: Yeah, yeah, I think very, very important question. This is about the varying differentiation and what we see currently and the long term. So let me kind of address it completely. So first, where's the differentiation today? It's clearly that our cloud platform strategy is resonating well with the market and it's evidenced by all the momentum we have both with existing and new logos. But I think what's behind it, I believe, is focus is very important right now. And we are laser focused on one mission, which is helping brands close the engagement capacity gap. And I know I mentioned that several times before. But this is a big thing. The capacity gap is big, and it's a growing issue. It's a growing issue for our customers. So we see more and more customers looking for solutions that can effectively address it. And... As you know, we have the most iconic brands in the world as our customers for many years, and we let them guide our strategy. We just asked them, and they told us three things. They told us that the workforce is being disrupted, and brands already spend $2 trillion on labor costs, and they cannot spend more on hiring. They told us that consumer expectations are rapidly increasing, and they must elevate the customer experience. And they also told us that customer engagement must be an enterprise-wide mission, and the Connect Center can no longer remain a silo as it used to be for many years. So we listened to our customers, and we launched the Variant Cloud Platform, and it's an AI-powered platform. So we have DaVinci, Variant DaVinci is at the core of the platform, which is specifically designed to help brands close the engagement capacity gap, and as I mentioned before, This is a focus, and this has been behind many of this competitive win because it's really a great differentiation. So we have a great differentiation today, but also we're asking ourselves, so what about the future? Where is this going? And we believe we can continue to differentiate because many customers are only starting now to realize that this engagement capacity gap is a strategic challenge, and they have to address it. And this is because, you know, digital transformation is quite recent, and this is what's creating this capacity gap and making it wider. You know, it's widening because more digital interactions creates more disconnected customer journeys and more customer demand for, you know, elevating the experience. So brands feel like they have to address this more and more. And, in fact, we are engaged with more and more customers that say, hey, you know, We need to start to take action. We cannot operate in silos the way we did before. We need automation across the enterprise, and we need to make the workforce more efficient and elevate customer experience. I can say that we have early adopters, like in any market. For example, it's across many industries. In retail, for example, Costco, He's one of our customers that is deploying across the enterprise variant solutions. In healthcare, we have Humana deploying variants across the enterprise in a number of different solutions, and all in one platform, all connected in one platform. So we have many customers that already realize that, and they use to connect the variant platform to SICAS, but also to UCAS, and also to collaboration solutions. different communication infrastructure across the enterprise. And why? Because they need applications that can bring automation and workflows to the silos and they need that to be implemented holistically across all infrastructure. So, we believe that we can continue to win based on this very simple strategy to be laser focused on helping brands close the engagement capacity gap. We do this quite well today, and we think it's an early-stage problem that was created by the recent market shift to digital. And as more and more customers look to solve the gap, we are very, very strong offering for that.
spk07: Excellent. Thanks for the color on that. And then maybe just on my follow-up question, you know, last week we had attended Enterprise Connect, and it sounded like You know, at the event that there was a lot of, I guess, AI-enhanced IVA and agent assist functionality was really in demand with a lot of the customers and vendors at the event. You know, you had launched the real-time agent assist in late 2021. Just be curious, you know, how that solution is resonating in the market given sort of this increased level of demand, at least from buyers, and, you know, how that positions you well heading into next year. Thanks.
spk09: Yes, I think there is strong demand in the market for AI, but more importantly is that our customers are looking for AI that is infused into workflows and into business processes so they can actually use that in real life. So this is not about having the best bot, because a bot is more of a generic AI. It kind of understands what you say, But what's more important is to make the bot intelligent, is to give the bot the answers, not just the means to understand the question, but also the intelligence to respond contextually and elevate customer experience. So what we do with IVAs and so on, we connect IVAs with knowledge management so we can infuse contextual knowledge, and we can understand how to help the agent while they are working on an interaction. And this is not trivial because agents are busy. They need to focus on customers and they cannot be distracted by bots trying to help them. So I think where Variant is really doing well is in our ability to understand the whole workflow, because we've been in workforce engagement for many, many years, and how we infuse the AI into helping the agent in real time and making it part of their normal operation in a way that really helps them. I think it's an early stage market. This whole real time agent assist is very early stage. In my mind, penetration is few percentages, low penetration into the workforce today. But this is one of the areas that is required in order to make the workforce more efficient, reduce cost, and also give customers better answers to elevate the experience.
spk07: Excellent. Congrats again on a great quarter.
spk00: Our next question coming from the line of Samad Samana with Jefferies. Your line is open.
spk06: Hi, this is Mason Marion on for SMOD. Thanks for taking our questions. So SaaS revenue is nicely reaccelerated in the quarter. Can you elaborate perhaps on some of the drivers, maybe discuss the factors in unbundled and bundled SaaS?
spk09: Yes, sure. So a cloud business grew 37%. It is including SaaS and managed services. Managed services growth, as we indicated now for a couple of years, is expected to be low. Managed services should grow around 10%, give or take. So that's what happened last year, and we expect it to be this year. So our SaaS business actually grew more than 40%, with the cloud overall 37%. Within SaaS, as we indicated, we have two types of SaaS offering. One that allows the customer to host anywhere, So they can host with any cloud of their choice, any partner. And in that case, we do not provide any hosting services. That's what we call unbundled or hosted by somebody else. And then there is the bundler, which is very hosted, where we get an order for the SaaS software and the hosting services bundled into a single order. And that's how we report the... and obviously the accounting is different for each stream, but it's basically a customer choice, how they prefer to deploy and which environment. We support multi-clouds, so they can deploy it on any public cloud or on private clouds.
spk06: Okay, thank you. And then you added 100 new logos in the quarter, I think 400 for the full year. if we think about the drivers behind this new logo growth, is it being driven by more of a direct sales effort or are these deals coming through partners?
spk09: Yeah, I would say the majority of the new logos are driven by partners. We have several hundred partners around the world and most of the smaller opportunities are driven by partners. When it's larger, it's either direct or it's a combination of our Salesforce working with the partner. And then, you know, there are many opportunities to start small and grow over time. There are companies like Wayfair, which is a new logo for Variant, which the company is growing very quickly and we hope will grow with the company. So in particular, we're very excited about any new logos, but we want to help companies to scale. And one of the differentiation that I did mention before is, you know, Variant is capable of supporting customers in the cloud globally, because we have cloud centers around the world, and we also are able to scale quickly, so customers have the peace of mind. If they grow quickly, they can go with the Variant solution. We have one of the, we probably have the largest customers in the world in customer engagement as Variant customers, so we know our solutions can scale. And we also support customers that have many different type of customer engagements, whether it's in the store or branch, right, or the website or e-commerce platform, which is important to a retailer, as well as in the Connect Center, as well as in mobile apps. So the ability to have customer engagement solutions across all these different customer touch points is another important point to many of our new logos. But, you know, we have direct sales force that is, you know, hunting for new logos, and we have many partners that are, by definition, you know, focusing on customer base that they have close relationship with.
spk06: Thank you.
spk00: Our next question coming from the line of Dan Burstrom with RBC Capital. Your line is open. Thank you.
spk04: taking my questions. Zay, could you talk to some of the spending trends across some of those larger verticals in the quarter? Anything worth pointing out across, say, financial services, government, transportation, telecom?
spk09: Yeah, well, transportation is coming back. That's obvious. We do see – we mentioned Avis before as one of the large deals – We see airlines coming back. We have many airlines with customers, so definitely not surprising given the COVID pandemic that now they're coming back. I think there is strong spending going on in healthcare. Financial services continue to spend money. In addition to elevating the customer experience, they are looking for compliance, and there's always new compliance policies that they want to be able to, using automation. Again, AI is very important for compliance because you have your workforce talking to customers all day long. How do you know that they're saying the right things? And you can't just listen to conversations because that would be a small sample. So having your AI listen to all this conversation, ensuring they're compliant, is a great way to automate the entire compliance process. So that's strong with financial services. But I think that there is strength across the industries. Retail continues to show strength. They're more focused on the e-commerce side, on online retailing. So generally I think the market is spending on technology and customer engagement because otherwise they'll have to spend on labor. And that will be you know, 30 times more. The market is spending $65 billion on technology and $2 trillion on labor. So, obviously, if they find something that can, you know, be extra spend on technology but save 30 times more labor, that's a no-brainer and it's a huge ROI.
spk04: Thanks, Dan. And then maybe for Doug. Doug, you've done a really good job with presenting us with a transition plan and then you know, updating us off and you're raising guidance again here. I guess, you know, with a lot of software companies, this, this earning cycle kind of investing more into the opportunity. It sounds like you still, still feel good here about the level of investment and providing some leverage in the model, correct?
spk01: Yeah. I mean, it's all trade-offs, right? Finding that right level of sharing with the shareholders and investing back for our future growth. Uh, Clearly, we've invested a lot in the cloud platform as we've gone through this transition, but we feel very good about where we're at, investing a lot in analytics and AI. So there's always things to do. But as you can see, we run kind of like 13% of sales as R&D level, and we kind of use that and prioritize within that and then invest kind of on top of that and around it in terms of OPEX, et cetera. So it's trying to drive efficiencies, trying to – you know, get more efficient so we can invest in the areas that are going to, you know, produce the future growth for us.
spk09: Yeah, but bottom line, our guidance is for margin expansion and EPS growth of 10%.
spk08: Thank you.
spk09: Sure.
spk00: Our next question coming from the line of Brian Essex with Goldman Sachs. Your line is open.
spk08: Hi, good afternoon. Thank you for taking the question. Dan, it's a question, you know, I understand that, you know, DaVinci is kind of infused into your applications and understand how you're kind of using that capability to drive better adoption on the SaaS side. How, but with now partners able to develop on top of, or, you know, develop on DaVinci and offering DaVinci as a service, are you getting any traction there? And maybe if you could tell us, what the go-to-market motion is for DaVinci as a service, so to speak, and your outlook for the next couple of years on that.
spk09: Yeah, I'd be happy to talk about it. We're going to have an investor day in June, and that's going to be our focus. We're going to bring it to life and discuss exactly where is DaVinci and where are we going to go with DaVinci, because it is at the core of the platform. And again, not because AI on its own is the secret sauce. It's really the automation. Customers are looking for automation, automating processes, and AI is an ingredient. So DaVinci is available to all the various applications running in the platform, and that's how we designed it at the core. But as you mentioned, and that's a recent development that I announced last quarter, we started to open DaVinci to partners so they can leverage those AI models and develop their own applications. The reason is that we see partners looking also to add value. They don't want just to resell SaaS because that's not enough value for partners to create. We give them APIs and DaVinci API services so they can develop their own. We have now about 150 partners that have developed something around our ecosystem and put it in our marketplace. So that's a big push for us this year to expand the marketplace and provide customers as well, but definitely partners opportunities to develop and to make those developments available to everyone on the variant marketplace. So building a greater ecosystem around our platform is part of our platform strategy. So specifically, so far we exposed four DaVinci services to be commercialized in terms of Revenue, it's minimal, and I don't expect this to be a major revenue stream, but I think it is important overall to get platform adoption, both by partners as well as end users, because the greater ecosystem we develop around DaVinci, the more value, not just variant. Doug mentioned we spend 13% of our revenue on R&D. But if we have partners spending some of their R&D developing value on top of our platform, that's obviously very good for our customer ecosystem. So that's what's driving. And, again, I don't want to take too much time here. In a couple months, in June, we will have a pretty long session on DaVinci. Thank you.
spk08: Got it. Look forward to it. So thank you for that. And then maybe for Doug, can we just understand a couple of puts and takes on the margin side, both for gross margins, operating margins, what some of the primary drivers of that movement were in the quarter, and then seasonally as we fine-tune our models for 2023, how should we think about, you know, some of the movement for both gross margins, operating margins kind of going forward?
spk01: Yeah, so you can see that with our guidance, we're looking to expand margins a little bit for both gross and operating in fiscal 23 off of the 22 levels. In Q4, expenses popped a little bit, just kind of some timing issues there. But we're looking for efficiencies and driving some margin expansion on both sides, gross and at the OPEX level. From a gross margin perspective, there's a mix there, right? So it's the components. So the hosted is very, the cloud margins are very high. They're kind of in the high 70s. The non-recurring business is only about 50. Professional services kind of drags that down. As professional services become a smaller piece in the future, that'll help the overall gross margin. So it's kind of a mixed shift that's occurring, you know, slowly. And from that, we expect the gross margins to expand a little bit, too, as we go forward and more over time.
spk09: Yeah, let me... If you want to develop your long-term model and gross margin, take the recurring revenue margin last year was 76%, and the non-recurring revenue margin was 49%. So... As recurring revenue, obviously, with the cloud revenue growth, recurring revenue becomes a much bigger piece. And long-term, this is where, you know, we're aiming at mid to high 70s in gross margin. But as Doug said, because of where we are in the transition, we'll have modest gross margin improvement this year, and then, you know, it's going to start to accelerate over the next three, five years.
spk08: Very helpful. Thank you very much.
spk01: Sure.
spk00: And as a reminder, to ask a question, please press star 1. Our next question coming from the line of Tim Horan with Oppenheimer. Your line is open.
spk05: Thanks, guys. Can you talk a little bit about the relationship with the major hyperscale cloud guys? Do you see them as partners? Are they competitors? Are they building a DaVinci-like platform themselves? Any thoughts around them? Because they do seem to be entering the CX market and I guess ultimately these kind of see them as competitors or partners. Thanks.
spk09: Yeah, I think that, you know, the customer engagement market is a big opportunity and, you know, the market is looking for innovative solutions, so it is positive. I think it's positive for the customer engagement industry that this new large software company is the big tech joining the market because they bring a more enterprise-wide approach to customer engagement, so it's I think it's, it's what the market needs. Um, so if we look at, uh, you know, the, the three guys that you, the cloud guys, so Google is a variant customer, the user products internally, and, and they're also a partner. Uh, Microsoft is a variant customer, customer and, uh, and it's also a partner. And Amazon is a partner, hopefully also a variant customer, but not at this point. Uh, so, so all three are partners and, uh, I see more opportunities down the road for variants to partner with the big tech companies as they show more interest in this market. Because I think together, what they bring to the table with their enterprise-wide capabilities and where we bring with this enterprise platform to close the capacity gap, I think together we can actually create more market adoption. We can accelerate the adoption of what we believe is the enterprise strategy. So, you know, we are very partner-friendly, and I think that if they get more seriously into the market, I think it will positively impact the growth of Variant.
spk05: Thank you very much.
spk00: Thank you, and I'm showing no further questions at this time. I would now like to turn the call back over to Matthew Frankel.
spk03: All right, thank you, and thank you everyone for joining us today. Please don't hesitate to reach out to me with any questions, and I look forward to speaking to you again soon. Have a good night.
spk00: Ladies and gentlemen, that does end our conference for today. Thank you for your participation. You may now disconnect.
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