Q1 2021 Verint Systems Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Barents systems first quarter conference call. At this time, all participants on a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if you require any further assistance. Please proceed.
Star Zero I would now like to hand, the conference over to your Speaker Mr., Alan Roden Senior Vice President of corporate development. Please go ahead Sir.
Thank you operator, good afternoon, and thank you for joining our conference call today I'm here again, Bahner, Darren CEO, Doug Robinson Baron CFO.
Before getting started like dimension that company or call. Today is went back to slides you like to beauty slides in real time during the call. Please visit the our section of website during dotcom click on the Investor Relations tab.
On the website webcast link and select today's conference call.
We'd also like to draw your attention. The fact that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act and 95, another visions of the federal security laws.
These forward looking statements are based on management's current expectations are not guarantees of future performance.
Actual results could differ materially from those expressed and implied by the forward looking statements forward looking statements made as the day this call and except as required by law Darren 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 how these and other risks and uncertainties because barron's actual results to differ materially from those indicated in forward looking statements. Please see our form 10-K for the fiscal year ended January 30, Onest two dozen 20 and other filings we make with the FCC.
The financial measures discussed today include non-GAAP measures as you believe investors focus on those measures and comparing results between periods and among our peer companies.
Please see today's webcast slides, our earnings release, and the Investor Relations section of our web site at Baron Dotcom for reconciliation of non-GAAP financial measures to GAAP measures.
Non-GAAP financial conditions, not be considered in isolation from as a substitute for or spirit to GAAP financial information, but included because management believes provides meaningful supplemental information regarding our operating results when assessing a business and it's useful to investors for informational and comparative purposes.
Non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies.
Now I'd like to call over turning over to Dan Dan.
Thank you Alan.
The onset of Colbert 19.
We took immediate steps to help our customers address the challenges of this new environments.
We're pleased to have received positive customer feedback for innovation.
Customer Centricity and the quick response of Barclays.
Following bookings growth in February and March.
Many customers delayed projects in April.
On the on premise is deployments.
Looking forward is organization gradually return to offices.
And travel restrictions are lifted.
Customers are expressing that they intend to resume on premises deployments.
Considering accelerate accelerating clouds.
We now expect a sequential improvement in Q2.
And continued improvement in the second half of the year.
Before reviewing the Q1 results.
I'm pleased to report significant progress on a plan to courage to independent public companies.
We recently amended our term loan agreement on favorable terms.
Facilitate the separation.
We also closed the first tranche of the eight Bucks investments.
Jason rights lead softer partner at April.
Joining very board.
And we'll have drive the separation and our growth strategy.
We are targeting completion of the separation.
Shortly after fiscal year end.
And Doug will review the progress we've made.
Later in the coal.
Turning to our customer engagement business.
As I mentioned before.
Mr deployments were impacted by corporate 19.
Its cloud momentum continued in Q1.
Consistent with this trend.
Many large cloud orders.
For both existing and new customers, including competitive displacements.
These orders include a five minute dark cloud order.
Leading financial services company.
These expensing the deployments of our cloud solution from one to three business units.
A $3 million cloud order so embedded customer.
That is adopting additional modules of o'clock portfolio.
What replacing an on premise your solution from a competitor.
That's really means all cloud order from another global bank customer.
At 2 million dogs order from a leading business services provider.
And a one year ago cloud order from a leading insurance and services company and new customer forbearance and another competitive displacements.
As you can see.
Most of these large cloud orders came from banking insurance business services and government customers.
We just strong vertical.
Representing a majority of our customer base.
I will further discuss the resilience of our customer base in few minutes.
Overall, we're seeing strong interest in our cloud solution.
And I'm pleased to report new Skus HCV increased 45% year over year in Q1.
Service revenue increased double digits year over year, excluding foresee.
Just to remind you we acquired foresee five quarters ago.
And expected their legacy revenue to decline.
But we're very pleased we've acknowledged G, which is good which has been fully integrated into our experience management platform.
Doug will review later, the keep one click key cloud metrics and trends.
We're targeting cloud growth.
<unk> direct sales force and a growing network of cloud partners.
I'm pleased to report it our communication infrastructure agnostic strategy and our cloud offering are resonating well with partners.
With respect to post cobot 19.
There is a potential acceleration for cloud and digital transformation in our industry.
And we believe that we are well positioned to participate in this acceleration.
Customers rely on our solutions to drive workforce productivity business analytics compliance and fraud detection.
Revenue is primarily generated from large enterprises.
Across the strong verticals.
Drilling financial services healthcare utilities technology and governments.
We also generate the majority of a revenue from our existing customer base.
Which includes over 85% of Fortune 100 organizations.
We're pleased to report that during Q1 renewal rates remain strong.
And we believe that the on premise is deals that were delayed.
Well come back as they bought environment improves.
Our ability to grow new cloud bookings.
And sustained when you run rates during the for Debbie.
Reflects a strong customer base and the ongoing relationships with our customers.
Last month.
We had our annual user conference.
With almost 4000 customers and partners attending virtually.
Which is double the number for 10 days, we had last year.
And demonstrates strong interest.
Our latest innovative solutions.
I would like to expand on some of our recent innovations.
The initial focus of our customers as they shifted to work from home.
It was providing connectivity for their employees.
Organizations have now turned their attention from connectivity so addressing business challenges.
Touches workforce productivity business analytics compliance is broad.
We settle employees working at home and some in the office.
Let me give you a few examples of how we are helping customers.
We have recently enhanced our workforce engagement solution.
To help organizations automates workforce planning for a gradual and safe returned to the office.
These new capabilities enable organizations to meet service levels and elevate the customer experience, while complying with office social distancing rules.
Workspace igene checks and workforce assignments rules.
Very that's created a new work flow.
Customer can use to automatically create a comprehensive schedule.
That accommodates not only traditional workforce management criteria.
Got you ski level at peak hours.
But also new requirements, including the need for staggered work schedules.
It is building a mix of work from home and office agents.
Safe distancing guideline and opportunities for employees to create to rotate in and out of the office.
Another example isn't analytics package.
We launched to help increase the productivity of agents at home.
Well some agents the work conditions at home could be disruptive and effective productivity.
Our new packaging help supervisors to remotely analyze agent desktop applications and workflows.
And to suggest improvements in real time.
And you package also helps managements identify best practices, that's where were disrupted by the transition to work from home.
And make adjustments to increase productivity.
And the third example is a new automated compliance package.
It helps ensure that agents at home adhere to compliance rules.
The same way they did one working from the office.
Each and every call is automatically screens by our software.
There are triggered in case of compliance errors or care.
Also agents are provided individual reports on compliance gap.
Well create a strong compliance culture.
The pandemic have disrupted our people work and we believe.
We'll have a long term impact on the workforce in our industry.
Very good has always been a thought leader in workforce engagements.
We are quickly addressing new requirements from our customers.
With innovation, driven by strong analytics and automation.
Looking forward.
We see three areas that should positively contribute to our customer engagement growth.
First we expect on premise it feels to come back.
As organizations, we opened their offices and travel restrictions are lifted.
At the same time.
We expect the industry to accelerate it she's it shifts to the cloud.
And more customers to purchase you solutions into cloud.
As well as migrate their legacy on premise it solutions.
And third.
We believe that organizations managing their workforce in the new normal.
We're required to type of politico workforce engagement solutions.
For which variance has been recognized as the leader for many years.
Turning to cyber intelligence.
Advanced data mining analytics.
Tended to play a critical role in accelerating security investigations.
And generating actionable insights to fight crime Antero.
Our solutions help maintain law and order.
Both in terms of fees and crisis.
In Q1, we received multiple large orders.
Including an order for greater than $15 million.
Three orders for approximately $5 million each.
And for orders for approximately $3 million each.
We believe these large orders reflect ongoing demand for our data mining solutions.
And our strong competitive position with the global set of customers across more than 100 countries.
Most of our revenue today comes from a broad base of government customers. The chose variant of the strategic partner.
In which we had strong relationships for many years.
In Q1.
Our soccer mobile strategy continues to generate benefits for customers and feel very.
Our Q1 gross margin.
On an estimated fully allocated basis.
Increased approximately 400 basis year over year.
Continuing the trend of the significant increase over the last few years.
In addition.
During part of the introduction of new subscription based solutions, our recurring revenue as a percentage of total revenue.
And Chris were about one third a few years ago.
More than half in Q1.
We believe a softer strategy resonates well with customers.
And provides variant the competitive advantage.
It's also benefits our customers.
With faster softer refresh cycle.
To quickly address security threats that are rapidly evolving around the world.
Looking for it.
Perfect three areas that should positively impact our cyber intelligence growth.
First the gradual reopening of offices.
And lifting of travel restrictions.
With facilitate the deployment of on perimeter solutions that were delayed in Q1.
Second the pandemic as elevated crime and unrest globally.
Driving interest in new data mining analytics to fight crime Antero.
And third.
Dr. More will continue to improve our financial results.
You prove our competitive position.
And benefit customers with foster software refresh cycle.
To better respond to threats.
Overall.
We believe our cyber intelligence business is well positioned to be successful independent software company.
We are targeting the completion of the cyber intelligence, Spain shortly after fiscal year end.
And it made good progress.
Since our last call.
In May we completed the first 200 million dollar investments tranche from April partners.
And yesterday.
We completed an amendment of our term loan.
The amendment will facilitate our separation into two public companies.
And enable our existing credit facility.
The survived the separation.
Providing us with attractive credit terms through 2024.
Following the investment and amendment.
We believe both businesses will be well capitalized.
For the separation.
Now, let me turn the call over to Doug.
To discuss our financial results in more detail.
Okay.
Thanks, Dan Good afternoon, everyone.
Our discussion today will include non-GAAP financial measures.
A reconciliation between GAAP and non-GAAP financial measures is available as Alan mentioned in our earnings release and in the IR section of our website.
Differences between 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 as well as certain other items that can vary significantly in a mountain frequency.
For certain metrics. It also includes adjustments related to foreign exchange rates.
Today I'd like to discuss several things first briefly review our first quarter results, which as Dan mentioned were impacted by covert 19, which caused delays at her on premises deals in both segments.
That will discuss how we're managing our business, who covert 19, and our outlook and finally I'll provide an update on our separation plan.
This is a dashboard we developed a few quarters back for a customer engagement business.
It includes a Q1 results it can be found in our IR website.
He chose the key metrics for a customer engagement business, which we believe are most helpful to understand the performance of our business.
In Q1 on a constant currency basis customer engagement GAAP revenue was down 9% and non-GAAP revenue was down 12% year over year due to decline in perpetual license revenue has on premises deals were delayed.
Perpetual equivalents were also down for the same reason, although new sassy if he was up 45%.
Looking forward, we expect improvement in Q2, and the second half the year has on premises deals come back and our cloud momentum continues.
In Q1.
Uncapped estimated fully allocated operating margin for customer engagement came in at around 20%.
Reflecting April weakness, we discussed earlier and the cost controls would begin to put in place.
I'd now like to take a closer look at our cloud performance in Q1.
Starting with cloud bookings as discussed in Q1, we had another strong quarter of new cloud bookings growth.
Regarding booking quality as Dan mentioned earlier, our new bookings in Q1 included many multimillion dollar cloud deals to spike of 19.
I'd like to note at the average contract a cloud contract term remained above two years as their solutions are sticky and customers typically use or software for many years rather than purchase for short term needs.
Another measure stickiness is our recurring revenue and renewal rates.
In Q1, the percentage of our revenue software revenue. It is recurring came in at 82% an increase of approximately 900 pips year over year.
This significant increase was result of cloud mix shift and strong renewal rates.
Our Q1 recurring renewal rate was around 90% similar to last fiscal year and came in a few points stronger when excluding the renewal rates for foresees legacy products.
Turning to revenue.
The cloud metrics are providing a dashboard and I'd like to explain or cloud revenue trends across bundled hsas.
Unbundled Hsas and optional managed services.
Non-GAAP bundled SaaS revenue increased 5% year over year for around 25%, excluding foresee whose products we stopped selling since we acquired the company.
The 25% is consistent with a strong growth in new SAS HCV two we've achieved over the last few quarters.
Unbundled, south which tends to fluctuate quarter to quarter declined a bit.
And actual managed services was up slightly in Q1 year over year.
Regarding our cloud conversion program.
As a reminder, we have a maintenance base of more than $300 million and offer our customers the flexibility to migrate from existing on premise solution the cloud at their own pace.
Customers can migrate to the cloud to improve T C O.
What used to keep legacy solutions on premises and purchase incremental functionality from there into the cloud.
Large enterprises required this flexibility as they migrate to the cloud over time.
As Dan mentioned to the pandemic, we believe the industry will accelerate the shift to the cloud.
During the pandemic, most customer slow down and migration initiative.
We expect those migrations to resume and an increase in the coming most months and post Pitney panic.
Overall, we are well positioned for cloud growth. We believe there is now an opportunity to complete our cloud transition faster has the industry accelerates cloud adoption post covert 19.
Now I'll provide a few comments in the cyber intelligence segment.
This is a dashboard for cyber intelligence business, which includes acute wouldn't result, and can also be found on our IR website.
Similar to the customer engagement dashboard and includes the key metrics. We believe are most helpful to understanding the performance of this segment has to go through our software model transition.
In Q1, as Dan mentioned, we received many multimillion dollar deals which will be converted to revenue over time.
Our revenue in Q1 declined around 5% year over year, both on a GAAP and non-GAAP basis has I'm kinda says deals were impeded by cold in 19.
Well on premises deals were impacted gross profit remain strong as we continue to reduce hardware and low margin services as part of our software model transition.
Non-GAAP estimated fully allocated gross margins came in at 69%.
And approximately 400.
EPS increase year over year.
The percentage for revenue it is recurring increase to around 55%.
Up 1200 dips year over year.
Non-GAAP estimated fully allocated operating margins came in at around 10%.
And now turning to our balance sheet.
We continue to prepare the company for the separation of our two segments had a P to close both the first 200 million tranche of the apex investment.
A term loan amendment, allowing us to continue with attractive credit terms now and beyond the separation through June 2024.
Both of these actions have helped solidify an already strong balance sheet and will facilitate the separation.
During the quarter, we continue to buy back shares, which took our non-GAAP share count down to 65.6 million shares in the quarter driving 52 cents in non-GAAP EPS.
With the attacks and S&P accounted for as equity rather than debt, we expect our non-GAAP share count for the year to be approximately 69 million shares.
Today, including the first tranche of the apex investment we have over 800 million of cash and short term investments in a leverage ratio of less than one times net debt to last 12 months EBITDA on an adjusted basis.
Our cash flow from operations on a GAAP basis was strong in Q1 coming in at 76 million, reflecting our strong enterprise and government customer base.
Let me take a woman now to discuss our customer base.
The majority of our revenues generated from large existing customer base, primarily across the financial services healthcare utilities technology and government verticals.
In Q1, we benefited from the resiliency of our customer base, that's continued strong renewal rates.
We also benefiting from a growing portion of revenue generated from recurring sources.
They aren't has experience managing two different economic cycles and the onset of covert 19, we took actions to manage our expenses, while continuing to invest for long term growth.
We remain focused on executing our cloud first strategy and software model transitions and preparing the company for the separation.
I believe that the actions we've taken during the pandemic to support our customers partners and employees will enable us to emerge even stronger.
Finally, I'd like to provide an update or plan to separate parent into two public companies.
Since our last earnings call. In addition to closing Apacs investment and completing the credit agreement Amendment, we've made progress across many areas.
On the tax side, we made the required filings with the authorities in both the U.S. and Israel and our tax ruling process is underway.
On the financial side, we continue to prepare the required carve out financials for cyber intelligence business.
On the public reporting side, the transactional and SCC documents that are required to effectuate the spin or in process.
And on the Nike side, we continue to execute infrastructure and application separation plant.
Overall at this point, we're making good progress with the separation and we will continue to update you on our progress on future earnings calls.
That concludes our prepared remarks, operator can we now open up I'll call for questions.
[laughter] as a reminder to ask a question you want me to press Star one on your telephone till a giant question Preston Hunky. Please standby, while we compile the culinary roster.
[noise] I first question comes on line Mcdonald with Needham. Please go ahead.
Yeah. Good afternoon, everyone. Thanks for taking my questions first I'd love to get a little bit more color on on the discussions you're having with.
Customers that are underway with on premise deployments and just get a sense of how long you think the delay or what they're looking at as it is it a matter of weeks and months on on some of the pipeline conversion here or is it a multi quarter issue do you think.
<unk>.
Yeah, I'll be happy to provide an update so as we previously discussed a we had strong bookings in February and March.
And then you know at the end of March beginning of April we started to see the impact with the pandemic.
And that's why we didn't give guidance on how that's cool and April was pretty much shut down in terms of on premises.
You know, we could not travel to the customer sites and also customers do not want us to be there.
In may at the beginning made continues I would say the last two weeks, we're starting to see customers are oh discussing scheduling on premises installations.
We did get a the first customers last week that actually put a schedule and they want us to come out shortly on site and help them with an on premise installation.
So it's a it's starting to change not not unexpectedly or given what's going on in the country.
And you know we will leave the cats was working full priorities.
And in many cases, a customer engagement is a big priority, especially if they are starting to prepare to bring some of the workforce back to the office and clearly everyone is talking about than your normal.
Oh, where they will be a hybrid.
Oh workforce with works, partially from home and partially from the office.
So many in the near future. A this is a challenge how to bring I'm pleased to the office, So and you know its social distancing rules and.
Workspace hygiene and you know all kind of Oh regulations with policies. So we clearly helping customers to address their return to the office that will impact a the workforce.
And I think that that's one of the highest priorities that a weather stations have is too.
You know a plan to back that we turn to the office in into most left in this disruptive way. They can so some optimism certainly that's the reason why we guided for.
Improvement in Q2, we believe Juno will be stronger in July will be stronger and a and we see improvement continuing through the here.
Excellent and then in terms of the that you talked about the potential migration opportunity and able to convert some of that maintenance revenue.
Hey, what's sort of acceleration have you seen in sort of the discussions with those types of customers and willingness to move to the cloud. Thanks.
Oh, the cloud you know obviously in Q1, we had very strong performance with many multimillion dollar cloud deals so.
By the disruption of Koby 19 cloud was much less disruptive.
And certainly within the verticals that we're strong in financial services and governments and utilities and so on that there was continuing to be a strong when we reported oh great wins.
And then the impact was on on premises. So there is discussion now.
Early signs that even customers that were reluctant to bolster the cloud a they were for securing the events or other internal reasons. They they they thought they will do it over many years.
Our thing the benefits of cloud and are being more open to cloud.
Cloud deployments.
As you know we supports a cloud customers to move to the cloud the on pace. So they can keep some of their solutions on prem and and and purchase some your solution from the cloud and those would work seamlessly as if they are on prime or on the cloud. So we invested in a hybrid cloud.
Deployments moral to help our customers transition to the cloud that their own pace and and we believe that's a competitive advantage and one of the reasons we're getting.
A big Big Big Cloud orders.
But but there is discussion that the industry may know or accelerate adoption of cloud.
Obviously this is this is very positive for very interesting it's been our intention to.
Pepsi industry moved to the cloud and we have a cloud first strategy, we thought direct sales force.
And our cloud cloud strategy with our cloud partners.
So at this point I would say that were previously targeted our cloud transition to complete in three years and we now see opportunity to completed in two years.
And that includes also converting.
The legacy Oh installed base the there to support.
A base.
Oh, so specifically about conversion as Doug mentioned, we have more than $300 million of revenue from our base in recurring revenue that comes to support contract.
And here the opportunity to convert to support contract to assess contract.
Or was it two X multiple as we moved it is softer to the cloud and provide the customers. They are multi tenant hosting services as well.
So this is a good opportunity for base too.
You know get rid of their datacenters and don't have to worry about I T cost because that's all going to be.
Delivered by Verints.
And obviously, we have already a pretty large oh revenue base last year, we had close to $250 million cloud revenue also we built a scalable.
Infrastructure and its customers moved to the cloud or we can do it very efficiently.
We discussed a you know gross margins that are going to be favorable.
Then when when we hosting the multitenant cloud of around 80% gross margin so the more.
Oh far legacy support revenue moved to the cloud will convert to the cloud we see opportunity for revenue multiple and also some gross margin expansion.
So early signs, but I think Ur cobot 19 have.
Many lessons learnt that do you have to be adopted by the industry, but the two areas that we think.
Our showing some some early signs of change is cloud acceleration is one and the second thing is the workforce and adopting the new normal with the workforce and I think a boat both areas are favorable to vary.
Hi, good morning, Thanks for taking my questions.
Thank you. My next question will come from Shaw I deal with Oppenheimer. Please go ahead.
Thank you who died good afternoon, Ghana I had a question about the delayed or the snack business.
In the final month of the quarter.
Well, there any cancellations or just slippage into the second quarter and potentially into the second half Oh yeah.
Yeah. So in April we had a number of on premises deals that are we were expecting and the customers basically told us that obviously, they're not into office and they cannot continue with the on premise is this is all not just new deals, but also deployments of they also so the professional services too.
Ah deploy deals that we had a was also slowed down.
In terms of.
What happens to this deals or non up their feels we lost to do any competitor.
And these are up as we said before primarily a business come form a large enterprise customers as they expand as by new solutions. So we believe that a this this business will come back.
In terms of intentions are many customers indicated that the budgets.
Not being lost and they still have the budget in the air and they expect to do it later in the here, but I don't think that at this point and here for customers speaks was about confidence in terms of exactly.
When and this is why today.
We're not giving guidance for the here.
But we are giving some color you know on Oh, sorry on Q2, where we see a given the influence we so so far we forecast sequential improvements in Q2 in terms of revenue.
Fuming Gonzalez a sequential improvement in revenue.
And we also.
As you know we spoke about how we can manage costs.
In a in a recession. So you can see that in Q1.
February and March were strong bookings bug in April we start to.
Well manage cost so a Q1 opex.
Is lower than last year Q1 opex.
And some of the actions we took in April obviously will be now in full effect.
During Q2, so we expect.
The Q2 Opex to come down further.
About you know a $10 million. Moreover, further.
Cost reduction.
And and we believe that.
With this.
Modest revenue improvement and cost control.
We believe will result in Q2 EBITDA.
It would be similar to last year.
So this is how we manage right now the business.
Ill, we finished goods, we manage expenses and we are working with our customers too.
Helped him come back to the office and you don't have resumed their their on premise is a business at the same time, we do see momentum in cloud a we had to actually get growth in Q1 and we.
I expect also have you actually the growth in Q2.
And continued drug momentum throughout the year.
Got it got it. Thank you. Thank you for the color.
I want to go back to a this slide on the product front on the workforce engagement or the productivity analytics and the automated compliance.
Dan are you seeing you private companies in the various verticals or buckets or companies that you haven't seen.
Before say over the past two years or so.
We saw we see some some some new small companies they usually I try to enable.
They did not represents at this point a a serious competitive threats there mostly going after more simple I use cases at the low end of the market.
For Fourq for our customers. We know we have the breadth of functionality they need I think cells example.
That we gave earlier was seen in terms of the workforce return to the office.
And you know they the challenge of scheduling the workforce.
To make sure that you have sufficient skew level.
Skills, and and and you should have gone to address the volume of course, a overseas changing quite a bit.
As when you have and please return to the off base.
You hope they partially work for the office is partially from home.
The into office Dallas zones, they are Oh, social distance, saying and the there's so many people you can accommodate and a shift you have to accommodate for break between shave. So you can clearly claim to work spaces.
There's lot of different rules now that need to be.
Incorporate into workforce planning.
And we were able very quickly to launch to our customer base.
A planning automation tool.
With algorithms that take into consideration all this new Oh, we turn to office regulations and help them to prepare schedule that will.
You know elevate the customer experience so they this type of.
You know capability, so we have and flexibility to product I think we were very.
Well positioned for more complex.
You know mid to high end of the market and where we see some as you said you use small companies they really mostly focused on the low end.
Got it understood. Thank you for the cliched.
Thank you. My next question will come from Daniel Ives must Wedbush. Please go ahead.
Yes. Thanks, I mean, my question Kinda to show hit on it a bit but is there anything.
From an execution perspective, when you look back in April.
Now going into.
June July you know, we obviously are going forward. There's anything that you have started the change in terms of strategically in the field and yeah on either both are each of the businesses just given this environment, what you've learned from customers execution. Thanks.
Yes, we did so we keep we seek to foreign so you know I gave three examples earlier, but we actually actually launched 11, new packages over the last two month.
So this is very very rapid innovation and and we were able to launch date so quickly.
They were strong foundation, we have in analytics and artificial intelligence and this package is all focused on you know healthier customer just quickly to the changing environment.
Hey, the industry overall in the first month in April was focused on conductivity, how how do I can assure that my employees at home have the right connectivity to be in a position to respond to customers.
But right after the connectivity issues, where address than I would say generally the industry adjusted very well.
They focus shifted to you know a productivity because processes were disrupted.
Analytics to understand what our customers are really asking because conversation if changed quite a bit.
And also compliance of fraud.
Were.
<unk> organization have to remain compliance regardless, if they change in the workforce and of course fraud.
We have many castles reporting.
You know elevated for activity.
So all this issue start to become more of the forefront in may.
And we very quickly decide there there's rather than go after you know the large on premises deals that will come back later, we wanted to help our customers address the urgent needs now.
And and it's not just they didn't need they had June covert 19, but we now believe that many of these things will be in the new normal. So we see organization required. This type of automation analytics, you know certainly for the next year and maybe permanently.
Thanks for the insight.
Thank you know our next question will come from Brian Essex with Goldman Sachs. Please go ahead.
Hi, good afternoon, and thank you for taking my question I guess you know.
Doug do you have you have any insight around how we might be able to think about the companys. What's their separated in terms of anticipated incremental public company cost for two different companies and then any milestones that you need to still complete particularly on the C. I ask bill.
Yes, with <unk> with regard to you know staffing executive team for example, maybe just help us understand like what's your expectations for cost in incremental.
You know staffing needs be for the remainder of the year in kind of how to think about that into into next fiscal year.
Yeah sure you were making good progress I mean are.
During the first tranche of apacs, having the term loan b amended.
You know I'm, a good things moving forward.
We have been working with IP plans in the carve out financial plans. We've got our tax ruling is going so I think we're in good shape here and we still have plenty of time and we're not looking to do.
To the spin until you know just shortly after the end of fiscal year.
So we've been looking at you know, how we build up kind of the public company infrastructure.
For the cyber intelligence business, we've got a management team that season. There are so that's fine we'll have to build a board HM for that the you know separate.
From what we call Remainco, which will be the customer engagement business and we have some kind of its mostly shared services. So yes, there'll be some dissynergies in terms of public company costs, you know insurance for two separate companies will be a little bit more we'll have a few more staff, we need to add a but both businesses run very independently already you know the R&D.
Sales and the whole infrastructure of the kind of the go to be you know go to market is completely independent now. So it's really just kind of separating out the I T. The finance the legal type operations and will provide some more kind of quantitative update as we get closer and realize you know what those.
Costs will be more specifically, but again, it's just more the shared service kinda duplicative costs.
It will have a running is to public entities.
Okay. That's that's really helpful. Maybe just to follow up is if I could you know follow up the last quarter.
On a social security administration deal in the Appeals process and I think you had a large financial services customer where.
Existing customer worsen business push any any updates with regard to you know the status of either of those.
Yeah, they the social security deal Oh, they appeared at least you forecast for the government decision in July.
Obviously, it can do that earlier, but at this point they did not Oh provided decision.
And are we still expect that.
You know it will be awarded the or to a partner and to variant and that will have revenue up this year.
Anything on the financial services side.
That's a longstanding customer that.
He has been.
For the last seven years have been spending was variance around $15 million, the air and still a very good.
Our relationship with this customer, but did not to lose the business. It's an on premise its business and with respect to.
Now is other on premises deals to come back when offices will be open.
Right right great. That's very helpful. Thank you very much.
Thank you and your next question will come from Jeff Kessler with Imperial capital. Please go ahead.
Thank you when the when the nature of Cobranded became a quite apparent you came out with several I've asked minson programs are in the cyber intelligence side.
One I guess related to.
One related to monitoring in surveillance soon for covert compliance.
I guess related to somewhat too.
The use of of now forced helping now force acquisition, helping to helping to notify you know helping to notify authorities.
Where and when things were happening did you did you get any revenues during the quarter already receiving those types of revenues now from those programs that were that were marketed.
Yes, we've got several deals in the end and there's some revenues although.
These deals were delivered in cloud so the revenue will be over time.
So the revenue in Q1 was was very minimal, but Ah. We got few deals a these are quarantine management solutions based on our analytics.
It's you know, it's not it's not a business, but we have.
Relationship with this type of customers National security organizations that in many countries were responsible for the quarantine management and obviously for a law and order in times of carbon 19, and and as you know.
In many countries now there is a concern for elevated crime antero.
As a result to you know the post cobot 19.
Consequences, but are you know we kind of we we had request from customers that we as we know many years to helping with quarantine management and we quickly.
Put together a this type of solution. This is not what we see is our you know oh ongoing business, but nobody was very good in terms of Oh, helping our customers to achieve.
There are short term goals and again part of what we can do with analytics automation is it's it's fairly when you have a strong foundation is fairly simple to quickly adopt the solution to do data mining around corn teen.
Because you have all the tools and algorithms that that.
Good could facilitate up you know gathering data and provide you know a deep analytics. This is really.
At the end today, the strength of our cyber intelligence business, it's big data, a big data comm swimming logs to sources they could come from the web they can come from.
You know a different types of media voice text and video but.
Our expertise was always in unstructured data actually helping customers to capture and analyze unstructured data and corn can management ended up being another use case will far unstructured data analytics. Okay. Thank you.
The company wide basis.
No when you talk about the new normal.
There is.
Actually tickets 14 states where.
We're the number of cases is actually going up and there's three or four they put on a how do you want to caught up on a real emergency alert because those because they're they're spiking.
At this point in time. So this is something that may hang around for a while how are you given the fact that you've already dealt with Oh, you know a close essentially a closed out of premises how do you get back on premises.
In this period, particularly in states, where you're still seeing problems.
Yeah. The on premise is are we turn to office is gradual.
Again, even in states, where they still see problems. They allow a return to office, but they have regulations. They they don't allow the full capacity.
So organization needs to do zoning and.
And plan, who can come to the offer is how many people are the same time and you know take care hygiene and HR, new HR policies. So each state regulations I think once again, they this solution that we announced.
Around the workforce planning.
Can automatically put all these rules into the plan and help our customers to.
Ah anticipate you know how many people can be into office, how many off you're pleased actually want to be into office because some some do some don't they have all kind of our personal situations you have to take into consideration furnace rules when it comes to the workforce.
So we were able to quickly automate their return to office for customers and help them with workforce planning it it different you're right in different states.
And it's also differently in different companies because each company adopts different pace to return to their office.
But I think what's nice about the tool instead it allows to they love the customer too.
Italy, there their own specific rules and and it takes the algorithm Wolf just consider that in in a in doing the work for planning.
So we think this is really this is very much. A then your normal always go take time, it's going to be different for different companies, but potentially even to look for the long term.
Companies are discussing that they don't need a full return to the office and they do they do like the hybrid environmental people staying from home either for some of the weight.
Or working in remote cities, where labor is not as costly and they can actually do the job remotely, but they need a tools they need to be able to be you know and compliance they they need to make sure that those employees are productive and and they need analytics to understand how it's going to impact there.
Overall business when they changing their workforce composition.
[laughter]. Thank you very much appreciate it.
Thank you and speakers I'm showing no further questions in the queue. At this time I would now like turn the call back over to Mr., Alan maybe didn't for any further than mine.
Thank you operator, and thank everyone for joining US Tonight have a great evening look forward to talking to you on her next call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Well, ladies and gentlemen, thank you for standing by and welcome to the their it systems first quarter conference call. At this time all participants on the listen only mode. After the speaker presentation, there will be a question and answer session.
A question. During this session you want me to press Star one on your telephone if you require any further assistance. Please press star zero I would now like to handle the conference over to your Speaker Mr. Alan.
Senior Vice President Corporate development. Please go ahead Sir.
Thank you operator good afternoon. Thank you for joining our conference call today I'm here again, Bodner, Barents CEO, Doug Robinson Barents Sea about.
Before getting started like dimension that company or call today is went back to slice.
Like the beauty slide in real time during the call. Please visit the our section of website at <unk> Dot com click on Investor Relations tab click on the website webcast link and select today's conference call.
We're also like to draw your attention. The fact that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act 95, another visions of the federal security laws.
These follow these statements are based on management's current expectations are not guarantees of future performance.
Actual results could differ materially from those expressed and implied by the public statements.
Statements made during the day this call except as required by law.
Assumes no obligation to update or revise them.
That's what are cautioned not to place undue reliance on these forward looking statements.
More detailed discussion how these and other risks and uncertainties caused variance actual results to differ materially from those indicated in forward looking statements. Please see our form 10-K for the fiscal year ended January 1st two dozen 20 and other filings made with yes, you say.
Financial measures discussed today to non-GAAP measures as you believe investors focused on those measures incurring results between periods and among our peer companies.
Please see today's Webex fights our earnings release, and the Investor Relations section of our website at <unk> Dot Com reconciliation of non-GAAP financial measures to GAAP measures.
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Non-GAAP financial measures a couple of users have limitations and may differ from those used by other companies.
Now I'd like to call overturn the quota Dan Dan.
Thank you Alan.
The onset of Colbert 19.
We took immediate steps to help our customers addressed the challenges you environments.
There appears to have received positive customer feedback.
<unk>.
Terrific.
And the quick response, so far.
Following bookings growth in February and March.
Many customers delayed projects in April.
Jeremy on premises deployments.
Looking forward.
They should gradually return to offices.
And travel restrictions are lifted.
Oh, my God expressing that they intend to zero on premises deployments.
Now considering accelerated accelerated and clouds.
We now expect a sequential improvement in Q2.
Continued improvement in the second half of the year.
Before reviewing our Q1 results.
I'm pleased to report significant progress on Atlantic courage to independent public companies.
Recently amended our term loan agreement on favorable terms.
Assuming that the separation.
We also closed the first tranche of the eight Bucks investments.
Jason right.
The need softer partner at eight Bucks.
John it's very important.
And we'll have drive the separation and our growth strategy.
We are targeting completion of the separation.
Shortly after fiscal year end.
And Doug where you're the progress we've made.
Later in the cool.
Turning to our customer engagement business.
As I mentioned before.
Mr deployments were impacted by corporate my team.
Its cloud momentum continued in Q1.
[laughter] grants was this trend.
Many large orders.
Well, both existing and new customers, including competitive displacements.
These orders include a five minute dark cloud order.
Leading financial services company.
Have you been think of deployments of our cloud solution from one right.
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It remains on Oclock order all embedded customer.
That is adopting additional modules of o'clock portfolio.
What replacing an on premise solution from a competitor.
That's ready made a dog order from another global bank customer.
Assuming a dog order from and we think business services provider.
And one of your dog cloud order from a leading insurance and services company and new customer forbearance and another competitive displacements.
As you can see.
Most of these large cloud orders came from banking insurance.
Orbitz isn't government customers.
We just strong verticals.
Representing a majority of our customer base.
I will further discuss the resilience of our customer base in few minutes.
Overall, we're seeing strong interest cloud solution.
And I'm pleased to report new across ACB increased 45% year over year in Q1.
South revenue.
Great double digits year over year, excluding foresee.
Just to remind you we acquired foresee five quarters ago.
And expect that their legacy revenue to decline.
We're very pleased we've got technology, we just which has been fully integrated into our experience management platform.
Doug when would you laid out into Q1 click cloud metrics and trends.
We're targeting cloud growth.
Direct salesforce and a growing that's work with cloud partners.
I'm pleased to report it all communication infrastructure agnostic strategy and our cloud offering are resonating well with partners.
With respect to post cobot 19.
There is a potential acceleration for cloud and digital transformation our industry.
And we believe that we are well positioned what dissipate in this acceleration.
That's must rely on our solutions to drive workforce productivity.
Oh, lytic compliance and fraud detection.
Revenue is primarily generated from large enterprises.
Across the strong verticals.
Financial services healthcare utilities technology and governments.
We also generate the majority of from revenue from our existing customer base.
Which includes over 85% of Fortune 100 organizations.
We reported during Q1 renewal rates remain strong.
We believe that the on premise is deal that work delayed.
Well come back as they bought environments improve.
Our ability to grow new cloud bookings.
And sustain renewal rates during the pandemic.
Reflects the strong customer base and the ongoing relationships with our customers.
Last month.
At our annual user conference.
It's almost 4000 customers and partners attending virtually.
Which is double the number of attendees, we had last year.
And then went straight strong interest.
You know latest innovative solutions.
I would like to expand on some of our recent innovations.
The initial focus of our customers as they shifted to work from home.
What's providing connectivity well their employees.
Organizations have now turned our attention phone clinics integrity, so dressing business challenges.
She is workforce productivity business analytics compliance broad.
We sell working at home and some in the office.
Let me give you a few examples of how we are helping customers.
We have risen to enhance our workforce engagement solution.
To help organizations automates workforce planning for a gradual and said we turn to the offers.
These new capabilities enable organizations to lead service level and elevate the customer experience.
Complying with office, social gifting think rules.
Workspace I June checks and workforce assignments rules.
Very good granted in your work flow.
Customer can use to automatically create a comprehensive schedule.
That accommodates not only traditional workforce management criteria.
Got you ski level at peak hours.
But also new requirements, including the need for staggered work schedules.
It hasn't been good mix of work from home and office agents.
Safe, if those same guideline and opportunities for employees to create to rotate in and out of the office.
Another example isn't analytics package.
We launched to help increase the productivity of agents at home.
Well some agents war conditions at home.
Disruptive.
Good productivity.
Our new package helps supervisors to remotely I'm alive agent desktop applications and workflows.
Just improvements in ran side.
And your package also helps management.
Identify best practices, that's where were disrupted by the transition to work from home.
And they could judgments to increase productivity.
And the third example.
New automated compliance package.
That helps ensure the agents at home adhere to compliance rule.
Same way they did one working from the office.
Each and every call is automatic big screen by our software.
Another ups rigor in case of compliance errors or care.
Oh school.
I just provided individual reports noncompliant gap.
Well create a strong compliance culture.
The pandemic has disrupted up people work and we believe.
We'll have a long term impact on the workforce in our industry.
All right that's always been a thought leader in workforce engagement.
We are quickly addressing your requirements from our customers.
Beijing, driven by strong analytics and automation.
Looking forward.
We see three areas that should positively contribute to our customer engagement growth.
First we expect on premise it feels to come back.
Organizations, we opened their offices and travel restrictions are lifted.
At the same time.
We expect the industry to accelerate its cheez it shifts to the cloud.
And more customers to purchase your solutions into cloud.
As long as migrate their legacy on premise it solutions.
And third.
We believe that organizations managing their workforce in than normal.
We're required to type of politico workforce engagement solutions.
Well, which varies has been recognized as the leader for many years.
Turning to cyber intelligence.
Advanced data mining analytics.
Junior to play a critical role in accelerating security investigation.
And generating actionable insights to fight crime Antero.
Our solutions help maintain law and order.
Both in terms of phase and crisis.
In Q1, we received multiple large orders.
Including an order for greater than $15 million.
Three orders for approximately $5 million each.
And for order for approximately $3 million each.
We believe these large orders reflect ongoing demand for our data mining solutions.
And our strong competitive position with the global set of customers across more than 100 countries.
Most of our revenue today comes from a broad base of government customers that chose variance as a strategic partner.
In which we had strong relationships for many years.
In Q1.
Softer mall strategy continued to generate benefits for customers and feel very.
Are you on gross margin.
On an estimated.
Basis.
Increased approximately 400 basis year over year.
Continuing the trend of the significant increase over the last few years.
In addition.
During part of the introduction of new subscription based solutions, our recurring revenue as a percentage of total revenue.
And Chris what about one third a few years ago.
More than half in Q1.
We believe a softer side, you resonates well with customers.
Barry the competitive advantage.
It's also benefits our customers.
Foster a softer refresh cycle.
So quickly address security threats.
At our rapidly evolving around the world.
Looking forward.
Perfect Gray area that should positively impact our cyber intelligence growth.
First the gradual reopening offices.
And lifting of travel restrictions.
With facilitated the performance of on for Emeka solution, that's worthy late in Q1.
Second the pandemic elevated crime and unrest globally.
Driving interest in new data mining analytics to fight grime Antero.
And third.
Dr Model will continue to improve our financial results.
Can you provide competitive position.
And benefit customers with foster our software refresh cycle.
To better response the threats.
Overall.
We believe our cyber intelligence business is well positioned to be successful independent software company.
We are targeting the completion of the cyber intelligence being shortly after fiscal year end.
And it made good progress.
Since our last call.
In May we completed the first 100 million dollar investments branch eight Bucks partners.
And yesterday.
We completed an amendment of our term loan.
The amendment will facilitate our separation into two public companies.
And enable our existing credit facility.
The survived the separation.
Providing us with attractive credit terms.
2024.
Following the investment and amendment.
We believe both businesses will be well capitalized.
For the separation.
Now, let me turn the call over to Doug.
Discusses our financial results in more detail.
Doug.
Thanks, Dan Good afternoon, everyone.
Our discussion today will include non-GAAP financial measures.
A reconciliation between GAAP and non-GAAP financial measures is available as Alan mentioned in our earnings release and in the IR section of our website.
Differences between 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 as well as certain other items that can vary significantly in a mountain frequency.
For certain metrics. It also includes adjustments related to foreign exchange rates.
Today I'd like to discuss several things first briefly review our first quarter results, which as Dan mentioned were impacted by Copel 19, which caused delays that are on premises deals in both segments.
That will discuss how we're managing our business, who covert 19, and our outlook and finally I'll provide an update on our separation plan.
This is a dashboard we developed a few quarters back for our customer engagement business.
It includes our Q1 results and can be found in our IR website.
He chose the key metrics for our customer engagement business, which we believe are most helpful to understand the performance of our business.
In Q1 on a constant currency basis customer engagement GAAP revenue was down 9%.
Non-GAAP revenue was down 12% year over year due to decline in perpetual license revenue has on premises deals were delayed.
Perpetual equivalents were also down for the same reason, although new SaaS CCP was up 45%.
Looking forward, we expect improvement in Q2, and the second half the year has on premises deals come back and our cloud momentum continues.
In Q1.
Non-GAAP estimated fully allocated operating margin for customer engagement came in at around 20%.
Reflecting April weakness, we discussed earlier and the cost controls would begin to put in place.
I'd now like to take a closer look at our cloud performance in Q1.
Starting with cloud bookings as discussed in Q1, we had another strong quarter of new cloud bookings growth.
Regarding booking quality as Dan mentioned earlier, our new bookings in Q1 included many multimillion dollar cloud deals to spike of 19.
I'd like to note that the average contract cloud contract term remained above two years.
Solutions are sticky and customers typically use or software for many years rather than purchase for short term need.
Another measure stickiness is our recurring revenue and renewal rates.
In Q1, the percentage of our revenue software revenue. It is recurring came in at 82% an increase of approximately 900 bips year over year.
This significant increase was result of cloud mix shift and strong renewal rates.
Our Q1 recurring renewal rate was around 90% similar to last fiscal year.
Came in a few points stronger when excluding them renewal rates for foresees legacy products.
Turning to revenue.
The cloud metrics are provided in the dashboard and I'd like to explain our cloud revenue trends across bundled SAS.
Unbundled SaaS.
An optional managed services.
Non-GAAP bundled SaaS revenue increased 5% year over year for around 25%, excluding foresee whose products we stop selling since we acquired the company.
The 25% is consistent with a strong growth in new SAS ACB, we've achieved over the last few quarters.
Unbundled, south which tends to fluctuate quarter to quarter declined a bit and actual managed services was up slightly in Q1 year over year.
Regarding our cloud conversion program.
As a reminder, we have a maintenance base of more than $300 million, an offering our customers the flexibility to migrate from an existing on premise solution to cloud at their own pace.
Customers can migrate to the cloud to improve tcl.
For choose to keep legacy solutions on premises and purchase incremental functionality from there and to the cloud.
Large enterprises require this flexibility as they migrate to the cloud over time.
As Dan mentioned due to the pandemic, we believe the industry will accelerate the shift to the cloud.
During the pandemic, most customers slowed down and migration initiative.
We expect this migration to resume and an increase in the coming most months and post panic.
Overall, we are well positioned for cloud growth and we believe there is now an opportunity to complete our cloud transition faster has the industry accelerates cloud adoption post cobot 19.
Now I'll provide a few comments in the cyber intelligence segment.
This is a dashboard for cyber intelligence business, which includes our Q1 results and can also be found on our IR website.
Similar to the customer engagement dashboard includes the key metrics. We believe are most helpful to understanding the performance of this segment as we go through our software model transition.
In Q1, as Dan mentioned, we received many multimillion dollar deals which will be converted to revenue over time.
Our revenue in Q1 declined around 5% year over year, both on a GAAP and non-GAAP basis has on premises deals where impeded by cobot 19.
Well on premises deals were impacted gross profit remains strong as we continue to reduce hardware and low margin services as part of our software model transition.
Non-GAAP estimated fully allocated gross margins came in at 69%.
In approximately 400.
EPS increase year over year.
The percentage of our revenue it is recurring increase to around 55%.
1200, bips year over year.
Non-GAAP estimated fully allocated operating margins came in at around 10%.
Now turning to our balance sheet.
We continue to prepare the company for the separation of our two segments had a play to close both the first 200 million tranche of the apex investment.
A term loan amendment, allowing us to continue with attractive credit terms now and beyond the separation through June 2024.
Both of these actions have helped solidify an already strong balance sheet and will facilitate the separation.
During the quarter, we continue to buy back shares, which took a non-GAAP share count down to 65.6 million shares in the quarter driving 52 cents in non-GAAP EPS.
With the Eightx and S&P accounted for as equity rather than debt, we expect our non-GAAP share count for the year to be approximately 69 million shares.
Today, including the first tranche of the apex investment we have over 800 million of cash and short term investments in a leverage ratio of less than one times net debt to last 12 months EBITDA.
Adjusted basis.
Our cash flow from operations on a GAAP basis with strong in Q1 coming in at 76 million, reflecting our strong enterprise and government customer base.
Let me take a moment now to discuss our customer base.
The majority of our revenues generated from large existing customer base, primarily across the financial services healthcare utilities technology and government verticals.
In Q1, we benefited from the resiliency of our customer base with continued strong renewal rates.
We also benefiting from growing portion of revenue generated from recurring sources.
Darren test experience managing two different economic cycles, and the onset of covert 19, we took actions to manage our expenses, while continuing to invest for long term growth.
We remain focused on executing our cloud for strategy and software model transitions and preparing the company for the separation.
I believe that the actions we've taken during the pandemic to support our customers partners and employees will enable us to emerge even stronger.
Finally, I'd like to provide an update or plan to separate ferrant into two public companies.
Since our last earnings call. In addition to closing Apacs investment and completing the credit agreement Amendment, we've made progress across many areas.
On the tax side, we made the required filings with the authorities in both the U.S. and Israel and our tax ruling process is underway.
On the financial side, we continue to prepare the required carve out financials for our cyber intelligence business.
On the public reporting side, the transactional and FCC documents that are required to effectuate the spin or in process.
And on the key side, we continue to execute infrastructure and application separation plan.
Overall at this point, we're making good progress with the separation and we will continue to update you on our progress on future earnings calls.
That concludes our prepared remarks, operator can we now open up I'll call for questions.
Of course as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question Preston Junkie. Please standby, while we compile the culinary roster.
Our first question comes from Ryan Macdonald with Needham. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking my questions first I'd love to get a little bit more color on on the discussions you're having with.
The customers that are underway with on premise deployments and just get a sense of how long you think the delay or what they're looking at as it is it a matter of weeks and months on on some of the pipeline conversion here or is it a multi quarter issue do you think.
Yeah, I'll be happy to provide an update so as we previously discussed we had strong bookings in February and March.
And then.
At the end of March beginning of April we start to see the impact of the pandemic.
And Thats why we Didnt give guidance on that last call an April was pretty much.
Shut down in terms of on premises.
We could not travel to the customer sites and also customers do not want us to be there.
In may at the beginning May continue as I would say the last two weeks, we're starting to see customers are.
Discussing scheduling on premises installations.
We did cats the first.
Customers last week that actually put a schedule and they want us to come shortly on side can help them with.
This is installation.
So it's it's starting to change.
Not unexpectedly given what's going on in the country.
And.
We will leave the cats was working full priorities.
And in many cases, especially engagement is a big priority, especially is starting to prepare to bring some of the workforce back to the office.
Clearly.
Everyone is talking about than your normal.
Where they will be a hybrid.
Our workforce with works, partially from home and partially from the office.
So many in the near future.
This is a challenge how to bring I'm pleased to the office.
Social discussing roles.
Looks good hygiene and.
Okay.
Quick relations with policies so.
Well clearly.
Helping customers to address the return to the office that will impact the workforce.
And I think thats, one of the highest priorities that.
Patients have is too.
Hello.
And the best that we turn to the office and the most left in this disruptive way they can so some optimism.
Certainly that's the reason why we guided for.
Improvement in Q2, we believe joint will be stronger in July will be stronger.
And and we see improvement continuing through the year.
Excellent and then in terms of that you talked about the potential migration opportunity and able to convert some of that maintenance revenue.
What's sort of acceleration have you seen in sort of the discussions with those types of customers and willingness to move to the cloud. Thanks.
Oh the cloud.
Well, obviously in Q1.
We had very strong.
Performance with many multimillion dollar cloud deals so.
Despite the disruption of Koby 19 cloud was much less disruptive.
And certainly within the protocol is that we're strong in financial services and governments and utilities and so on.
That was continuing to be strong when we reported.
Great wins.
And the impact was on on premises. So there is discussion no.
Early signs that even customers that were reluctant to most of the cloud or they were for securing the event. So other internal reason to say they thought they will do it over many years.
We are seeing the benefits of cloud and are being more open to cloud.
Cloud deployments.
As you know we support.
Our cloud customers to move to the cloud the on pace. So they can keep some up there.
Solutions on Prem and purchase some your solution from the cloud and those would work seamlessly as if they are on prime or on the cloud. So we invested in hybrid cloud deployment moral to help our customers transition to the cloud that there are on pace and we believe that's a competitive advantage and one of the reasons we're getting.
A big Big cloud orders.
But there is discussion that the industry may know accelerate adoption of cloud.
And obviously.
This is this is very positive for very interesting it's been our intention to.
The industry moves to the cloud and we have a cloud first strategy, we saw direct sales force and a cloud cloud strategy with our cloud partners.
So.
At this point I would say that were previously targeted our cloud transition to complete can three years and we now see an opportunity to completing two years.
And that includes also converting.
The legacy.
Oh installed base the support.
Yes.
Oh, so specifically about conversion.
As Doug mentioned, we have more than $300 million of revenue from our based in recurring revenue that comes to support contract.
And here the opportunity to convert to support contract to assess contract.
With the two X multiple as we moved it is softer to the cloud and provide the customers. They are multi tenant hosting services as well.
So this is a great opportunity for our base too.
You know getting rid of their datacenters and don't have to worry about I'd be cautious because that's all going to be.
Delivered by very.
And obviously, we have already a pretty large.
Revenue base last year, we had close to $250 million cloud revenue also we've built a scalable.
Infrastructure and as customers move to the cloud we can do it very efficiently.
We discussed.
Gross margins that are going to be favorable.
When when when we hosting the Multitenant cloud.
Around 80% gross margins. Furthermore.
Oh of our legacy support revenue.
Most of the cloud will convert to the cloud.
We see opportunity for revenue multiple and also some gross margin expansion.
So early signs, but I think coping 19.
Many lessons learnt that you have to be adopted by the industry, but the two areas that we think.
Our showing some some early signs of change is cloud acceleration is one and the second thing is the workforce and adopting the new normal with the workforce and I think both areas are favorable to vary.
Hi, good morning, Thanks for taking my questions.
Thank you. Our next question will come from Shaw ideal with Oppenheimer. Please go ahead.
Thank you.
Hi, guys good afternoon.
Ghana I had a question about the delayed or the snack business.
In the final month of the quarter.
Well, there any cancellations or just slippage into the second quarter and potentially into the second half of them. This year.
Yes. So in April we had a number of on premises deals that we were expecting and the customer specific told us that obviously, they're not in the office and they cannot continue always the on premise is this is not just new deals, but also deployments of they also so the professional services too.
Deploy deals that we had was also slowed down.
In terms of.
What happens to this deals or non up their sales we lost to any competitor.
And these are.
As we said before primarily a business comes form.
Our large enterprise customers as they expand as buying new solutions. So we believe that.
This business will come back.
In terms of intentions, many customers indicated that the budget.
It's not being lost and they still have the budget in the air and they expect to do it later in the air but I don't think that at this point for customers speaks was about confidence in terms of exactly when and this is why today.
We're not giving guidance for the year.
Well, giving some color.
You know on starting in Q2 or where we see.
Given the improvement we saw so far we forecast.
Sequential improvements in Q2 in terms of revenue.
Fuel means our.
Sequential improvement in revenue.
And we also.
As you know we spoke about how we can manage costs.
In a in a recession. So you can see thats in Q1.
February and March were strong bookings bug in April we start to.
Well manage our cost so Q1 opex.
It is lower than last year Q1 opex.
And found the actions we took in April obviously will be now in full effect.
During Q2, so we expect.
The Q2 Opex to come down further about.
$10 million. Moreover, further.
Cost reduction.
And.
And we believe that.
With this.
Modest revenue improvement and cost control.
We've been able to result in Q2 EBITDA.
It would be similar to last year.
So this is how we manage right now the business.
Ill, we manage quit we manage expenses and we are working with our customers too.
How can come back to the office and.
You know.
Resumed their on premises.
Business at the same time, we do see momentum in cloud.
We had.
Hi, good growth in Q1 and we.
Expect also have you actually growth in Q2.
And continued strong momentum throughout the year.
Got it got it thanks.
For the color.
I want to go back to the slight on the product front on the workforce engagement in the productivity analytics and the automated compliance.
Dan are you seeing new private companies in the various verticals or buckets companies that you haven't seen.
Before say the past two years or so.
We saw we see so some some new small companies.
Usually.
Trying to enable.
They do not represent at this point a serious competitive threats there mostly going after more simple use cases at the low end of the market.
Fulfil our for our customers we know we have.
The breakfast functionality they need I think sounds example.
We gave earlier was in terms of the workforce return to the office.
And you know the.
The challenge of calculating the workforce.
To make sure that you have sufficient skew level.
Skills and you should have gone to address the volume of course, obviously is changing quite a big.
As when you have and please return to the off base.
Okay, partially what from the office is partially from home.
The into office the ALJ zones they are.
Social distancing and the there's so many people you can accommodate can shift you have to accommodate for break between shape. So you can click claim to work spaces.
There's lot of different.
Rules now that need to be.
Incorporate into workforce planning.
And we were able very quickly to launch to our customer base.
Planning automation tool.
With algorithms that take into consideration all this new I'll return to office regulations and help them to prepare.
Schedule that will.
You know elevate the customer experience so they this type of.
Capabilities that we have and flexibility the product I think we are very.
Well positioned for more complex.
Mid to high end of the market and where we see some.
As you said you use small companies they really mostly focused on the low end.
Got it understood. Thank you for the cliched.
Thank you My next question will come from Daniel Ives with Wedbush. Please go ahead.
Yes. Thanks.
My question kind of to show hit on it a bit but is there anything.
From an execution perspective, when you look back in April.
Now going into.
June July you know, you're obviously going forward. There's anything that you have started the change in terms of strategically in the field.
Yeah on either both are each of the businesses just given this environment, what you've learned from customers execution. Thanks.
Yes, we did.
So we seek to foreign so you know I gave three examples the earlier, but we actually actually launched 11, new packages over the last two month.
So this is very very rapid innovation and and we were able to launch day so quickly.
For a strong foundation, we have in analytics and artificial intelligence and this packages are all focused on.
Helping our customer just quickly to the changing environment.
They industry overall in the first month in April was focused on conductivity, how how do I can assure that my employees at home have the right connectivity to be in a position to respond to customers.
But right after the connectivity issues, where address than I would say generally the industry adjusted very well.
The focus shifted to you know a productivity because processes were disrupted.
Analytics to understand what our customers are really asking because conversation has changed quite a bit.
And also compliance of fraud.
Where.
<unk> organization have to remain compliance regardless of the change in the workforce and of course fraud.
We have many castles reporting.
You know innovative foreign activity.
So all this issue starts to become more of the forefront in may.
And we.
Very quickly to side there is rather than go off there.
Large on premises.
Deals that will come back later, we wanted to help our customers address.
Urgent needs now.
And ER and it's not just at the needs they had.
During the call with 19, but we now believe that many of these things will be in the new normal.
So we see organization required this type of.
Automation and analytics.
Certainly for the next year and maybe permanently.
Thanks for the intent.
Thank you. Our next question will come from Brian Essex with Goldman Sachs. Please go ahead.
Hi, good afternoon, and thank you for taking my question I guess you know.
Doug do you have you have any insight around how we might be able to think about the companies.
There are separated in terms of.
Anticipated.
Incremental public company costs for two different companies and then any milestones that you need to still complete.
Particularly on the CIA us business with.
With regard to staffing executive team for example, maybe just help us understand like what's your expectations for cost and incremental.
Staffing needs be for the remainder of the year and kind of how to think about that into into next fiscal year.
Yeah sure.
We're making good progress I mean.
During the first tranche and apacs, having the term loan b amended.
A good things moving forward.
We have been working with IP plans in the carve out financial plans. We've got our tax ruling is going so I think we're in good shape here and we still have plenty of time and we're not looking to love to do the spin until just shortly after the end of fiscal year.
So we've been looking at how we build up kind of the public company infrastructure.
For the cyber intelligence business, we've got a management team that season there.
So thats fine we'll have to build a board.
For that the you know separate.
From what we call Remainco, which will be the customer engagement business.
And we have some kind of its mostly shared services. So yes, there'll be some dissynergies in terms of public company costs, you know insurance for two separate companies will be a little bit more we'll have a few more staff we need to add.
But both businesses run very independently already.
R&D and sales and the whole infrastructure of the kind of the go to bid.
Go to market is completely independent now so it's really just kind of separating out the I T. The finance the leasing operations.
And we'll we'll provide some more kind of quantitative update as we get closer and realize those.
Costs will be more specifically, but again, it's just more the shared service kind of duplicative costs.
That will have a running as to public entities.
Okay. That's that's really helpful. Maybe just to follow up this if I could follow up to last quarter.
On a social security administration deal and the appeals process and I think you had a large financial services customer where.
Existing customer worsen business push any any updates with regard to the status of either of those.
Yeah, the social security deal Oh, they appear at least you for for the government decision in July.
Obviously, they can do that earlier, but at this point.
They did not.
I'll.
Provided decision.
And we still expect that.
It will be awarded.
Two apartment rental variant and that we will have revenue this year.
Anything on the financial services side.
That's a longstanding customer that.
It has been.
For the last seven years have been.
Spending was variance around $15 million, the air and still a very good.
Our relationship with this customer, but he's not to lose the business, it's an on premises business and putting it back to.
Now is are there on premises deals to come back when offices will be open.
Right right great. That's very helpful. Thank you very much.
Thank you and our next question will come from Jeff Kessler with Imperial capital. Please go ahead.
Thank you when the when the nature of coated became a quite apparent you came out with several last Vincent programs.
The cyber intelligence side.
One I guess related to.
One related to monitoring and surveillance soon for Covanta compliance.
I guess related to somewhat to.
The use of of now forced helping now force acquisition, helping to.
Helping to notify helping to notify authorities.
Where and when things were happening did you did you get any revenues during the quarter already receiving those types of revenues now from those programs that were that were marketed.
Yes, we've got several deals and and there's some revenues although.
These deals were delivered.
In the cloud so the revenue will be over time.
So the revenue in Q1 was was very minimal, but we got few deals.
Quarantine management solutions based on our analytics.
It's.
You know, it's not it's not a business, but we have.
Relationship with this type of customers National security organizations that in many countries were responsible for the quarantine management and obviously for a law and order in times with carbon 19, and as you know.
In many countries now there is.
A concern for elevated crime antero.
As a result too.
Couple of 19.
Consequences, but.
We we kind of we had request from customers that we as we know many years to helping with corn can management and we quickly put together. These type of solution. This is not what we see is our oh ongoing business, but but it was very good in terms of.
Helping our customers to achieve.
There are short term goals and again.
Part of what we can do with analytics automation.
It's fairly when you have a strong foundation is fairly simple to quickly adopt the solution to do data mining around quarantine.
Because you have all the tools and algorithms that.
Could facilitate.
You know gathering data and provide you know.
Deep analytics this is really.
At the end today the strength of our.
Cyber intelligence business is big data.
Big data comm swimming log for sources, they could come from the web they can come from.
You know different types of media voice text and video but.
Our expertise was always in unstructured data heavily helping customers to capture and analyze unstructured data and corn can management ended up being another use case will far unstructured data analytics.
Thank you on a companywide basis.
No when you talk about the new normal.
There is.
Actually tickets 14 states where.
We're the number of cases is actually going up and there's three or four of them put on a.
On a caught up on a real emergency alert because those because they're they're spiking.
At this point in time. So this is something that may hang around for a while how are you given the fact that you've already dealt with.
A close essentially a closed out of premises how do you get back on premises.
In this period, particularly in states, where we're still seeing problems.
Yeah.
Mrs are we turn to office is gradual.
Again, even in states, where they still see problems they allow or we turn to office, but they have regulations. They don't allow the full capacity.
So organization leaks against zoning.
And plan, who can come to the offer is how many people are the same time.
And you know take care hygiene, and HR, new HR policies, so each state.
Regulations I think once again this solution that we announced.
Around the workforce planning.
Can automatically put all these rules into the plan and help our customers to.
Anticipates, you know how many people couldn't be into office, how many off youre pleased actually want to be into office because some.
I'm doing some don't they have all kind of.
Personal situations you have to take into consideration furnace wells when it comes to the workforce.
So we were able to quickly automate their return to office for customers and help them with workforce planning it if you're right in different states and it's also differently in different companies because each company adopts different pace to return to their office.
But I think what's nice about the tool instead it allows to they love the customer too.
Stepped away it's their their own specific rules and it takes the algorithm will just consider that in in doing that work for planning.
So we think this is Rick this is very much. A then you know I'm always going to take time, it's going to be different for different companies, but potentially even to look for the long term.
Companies are discussing that they don't need before we turn to the office and they do they do like the hybrid.
Environmental people staying from home either for some of the weight.
Or working in remote cities, where labor is.
Not as costly and they can actually do the job remotely, but they need a tools they need to be able to be.
You know and compliance they need to make sure that those employees are productive and ER and they need analytics to understand how it's going to impact the overall business when they changing their workforce composition.
Okay.
Thank you very much appreciate it.
Thank you and speakers I'm showing no further questions in the queue. At this time I would now like turn the call back over to Mr. Alan met in for any further mine.
Thank you operator, and thank everyone for joining US Tonight have a great evening look forward you're talking to you on our next call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.