Q3 2021 Verint Systems Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Barents third quarter conference call at the.
The cycle participant lines on the listen only mode. After the speakers presentation. There will be a question and answer session to ask the question. During the session you will need to press star one on your telephone. Please be advised of today's conference is being recorded if you're acquiring the further assistance. Please press star Zero I would now like to hand, the conference over to your speaker.
The today, Alan Roden Senior Vice President of corporate development. Thank you. Please go ahead Sir.
Thank you operator, good afternoon, and thank you for joining the conference call today.
Sure, Dan Bodner, Verints, CEO, and Doug Robinson Verints CFO.
Before getting started I like the mentioned that accompanying our call today is the webex the slides.
Like the review the slides the real time during the call. Please visit the IR section of the website at <unk> Dot com.
The Investor Relations tab the.
On the webcast link and stuck today's conference call.
I'd also like to draw your attention on the back that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of non 95, and the other visions of the federal Securities laws.
All of these statements are based on management's current expectations are not guarantees of future performance.
Actual results could differ materially from those expressed in or implied by these forward looking statements. The voting statements are made out of the day this call except as required by law from assumes no obligation to update or revise them investors are cautioned not to place undue reliance on these forward looking statements.
The more detailed discussion of these and other risks and uncertainties could cause <unk> actual results to differ materially from those indicated in these forward looking statements. Please see our form 10-K for the fiscal year ended January Onest 2020, and the other filings from making the FCC.
The financial measures discussed today include non-GAAP measures as you believe investor's focus on those measures and comparing results between periods and the mom peer companies we.
Please see today's webcast slides earnings release, and the best Relations section of website at <unk> Dot Com for reconciliation of non-GAAP financial measures to GAAP measures.
The non-GAAP and find information should not be considered in isolation from a substitute to force period to GAAP information, but included because management believes the provides meaningful supplemental information regarding the operating results when assessing on business and is useful to investors for informational and comparative purposes.
The non-GAAP financial measures of the company uses of limitations and may differ from those used by other companies.
Now I'd like to turn the call over the Dan Dan.
Yeah.
I'm pleased to report strong third quarter.
Revenue coming in better than expected.
The strong year over year, adjusted EBITDA growth of 17%.
Cash from operations year to date.
It was also strong increasing 16% of comfort of the same period in the per year.
Looking ahead.
We believe of cloud momentum will continue.
We see perpetual deals gradually coming back.
And the RBC book the has improved from prior quarters.
We are resuming guidance for the year.
Well the expectations for strong Q4.
Also.
I'm used to reported we are on track to complete our separation into true public companies.
Okay after fiscal year end.
We already made our initial confidential filing with the efficacy.
It blends of filed publicly within the next two weeks.
Head of far separation.
We will be holding Investor day and management all true in January.
Joining the customer engagement.
In Q3, we experienced significant cloud momentum.
We believe the industry shift the the cloud is being accelerated by coffee.
You were in Q3, we continued to win new cloud customers.
<unk> based competitors.
Due to the significant differentiation of the cloud platform.
Artificial intelligence and analytics innovation.
And on partner on agnostic strategy.
Here are three examples of large cloud the.
And the 11 million dollar cloud order from an existing insurance customer related to their decision to transition to SAP.
It really didn't on our cloud order from one of the largest pharmaceutical companies.
Due to their rapid growth in self service interactions.
And the $2 million or cloud order from one of the largest beat the old.
These competitive displacements was driven by our open end agnostic partner approach.
And our ability to easily integrate into their operations.
In addition to the large cloud orders.
We saw a gradual return of perpetual license orders in Q3.
Which we believe will continue in Q4.
Behind these large means is our ability to address the following the recent industry trends.
First.
Customers are looking to address the lasting impact of call of it on the workforce.
We believe all the recent cloud momentum.
In part due to our ability to help our customers navigate the called the environment growth.
Creating significant opportunity for variant going forward.
The second half.
Customers today are even more focused on addressing a key strategic for all the.
We choose.
Oh, the strike the right balance between cost efficiencies and exceptional customer experience.
During the it's been a market leader in the workforce engagement.
The over two decades.
We are uniquely positioned to help organizations address the strategic problem.
Third.
The role of partners in our industry is increasing.
And the strong Barbara Echo system has become an important competitive differentiator.
Unlike many competitors the ofer close solutions.
During the open cloud platform increasingly mix on the partner of choice across the industry ecosystem.
And finally.
We have a large customer base and are seeing an increasing number of customers expressed interest in converting their legacy deployments the stuff.
And we launched an attractive conversion of program in Q3.
We expect will increase the pace and number of conversions.
To summarize we believe we are uniquely positioned to address the recent interesting growth trends we.
It was the focus on the evolving work environment open.
On the open cloud platform.
And an expanding part of network.
Turning to our outlook for the current year we.
We expect $835 million of revenue for customer engagement segment.
At the midpoint of on guidance range.
Our guidance reflects the strong market share from south.
And we expect to reach true important milestones this year.
Which I would like to highlight.
First the.
This year, we expect approximately half of all the new software bookings.
Income from some of.
It's the birds to about a third in the prior year and only a quarter two years ago.
We are pleased to be crossing over the 50 per cent new bookings Mark.
And second.
We expect the 80 per cent of our software revenue to be generated from recurring sources.
Up 400, Bips from the prior year.
And up 900, Bips from just two years ago.
We expect the kick the on ice to improve further of next year, which I will discuss the next.
Looking ahead to the next year.
We expect the cloud revenue growth.
To accelerate to approximately 30%.
Driven by strong new softer bookings and south of conversions.
From a mix perspective.
Next year, we expect two thirds of on you softer bookings coming from South.
We also expect the the percentage of our software revenue that is recurring.
The increased to 85%.
Another 500 EBIT improvement from.
The current year.
Achieving the 85% level.
Marks the substantial completion of of cloud transition.
True provide us many benefits.
Including improved because the do acai.
Better economics over the lifetime of the customer.
And less revenue headwind associated with cloud transitions.
Today, we are introducing long term targets for the customer engagement business.
Hey, the from planned separation.
We're targeting an approximate 30% CAGR.
For cloud revenue over the next three years.
The other cloud transition.
We expect our revenue growth and margin.
To gradually improve in.
In fiscal the ending 23 and 24.
We're targeting $1 billion of revenue.
In fiscal year ending 24.
It was approximately 90% of our software revenue.
Generated from recurring sources.
We will provide more detail on not free of targets as one of the review of growth strategy Tam and competitive differentiation.
During our vitriol Investor day from.
Customer engagements.
To be held on January 21st.
Moving to our cyber intelligence business.
Today I'm excited to announce the new name for this company, which.
Which will become official up on the separation.
Carbonite is.
These coins from the word cognition.
And the ignite.
To reflect the powerful analytical nature of our security software solutions.
Carbonite will be headquartered in Israel.
And it would be listed on the NAFTA.
Under the symbol Fuji empty and the foreign private issuer.
Our security analytics softer.
Generate actionable intelligence from any government and enterprise security customers around the world.
After some call of it related impact earlier in the year, we experienced strong sequential revenue growth in Q3 and enter Q4 was improved visibility.
Got it must come from very far mission critical security software.
To help accelerate investigations of terror crime and cyber threats.
In Q3, we received multiple large orders include.
Including one for approximately $15 million.
One order for approximately $7.5 million.
And for orders for approximately $5 million each day.
In addition, we.
We continued to execute well on our software model strategy.
During Q3, our non-GAAP estimated flow relocated gross margin came.
Came in at 74%.
And 900 bps year over year increase.
And non-GAAP gross profit.
Increased 21% year over year.
We're very pleased with the progress, we're making on our financial and strategic goals.
Looking over the last three years, you can see the part of it in pockets of the softer most transition is having on our financials.
The percentage of of revenue that is generated from software.
Has been steadily increasing as we reduce the amount of revenue we generate from services.
The percentage of of revenue. The these recurring he's also steadily increased.
The biggest positive impact on financial moral it's been on gross margin.
Our estimated full year located gross margin increased approximately 800 basis points on.
Over the last three years.
And I expect it to reach 70% this year for the first time.
For revenue, we expect 445 minutes on this year at the midpoint of our guidance.
Overall, our cyber intelligence management team.
Executing well and its build the solid foundation.
To be successful independent public company.
Looking forward, we believe debt carbonite is well positioned for growth and market leadership.
From that is a market leader in security analytics software.
We have developed trust the long term relationships with our customers net.
End of it very successful track record of profitable growth.
Behind the leadership is out technology strength.
Carbonite is at the forefront of advanced artificial intelligence and machine learning technology.
Which are critical for addressing the security challenges of customers face.
We participate in the large $30 billion addressable market.
Which is growing the security challenges become more complex and.
Customers seeking innovative open security analytics software.
To meet those challenges.
Overall, we believe the the bucket trends are favorable income.
And can support the standard growth over the loan growth.
For the next year we're on.
The <unk>, 10% revenue growth.
Our cyber intelligence business.
For fiscal year, ending 23 and 24.
We're targeting revenue growth to improve.
Moving by greater adoption of our open security software solutions.
We will provide more detail on the three year targets.
Well, let's review of growth strategy, Tam and competitive differentiation.
You are on Carbonite virtually investor day.
To be held the on January 11.
And now I would like the Sunrise.
I'm very pleased with <unk> with the execution of our cloud strategy and customer engagement.
And the softer moral strategy in cyber intelligence.
I'm also very proud of the work we've done to.
To prepare for the separation.
And believe that both businesses will continue to prosper and appeal to invest on its two independent public companies.
Now, let me turn over the call it the Doug.
Uh huh.
Thanks, Dan Good afternoon, everyone.
Our discussion today will include non-GAAP financial measures reconciliation between our 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.
From the adjustments related to acquisitions, including fair value revenue adjustments amortization of acquisition related intangibles certain other acquisition related expenses stock based compensation separation related expenses as well of certain other items. The can vary significantly in the mountain frequency for certain metrics. It also includes adjustments from.
Ladies the foreign exchange rates.
Today I'll cover four topics.
First.
I will review our Q3 results in fiscal 21 guidance.
Second I will review our initial outlook for next year on an as is basis.
What we mean by assets is just what the aren't would look like if we remained as one company.
This is meant to help you update your models on a consolidated basis until the separation of our two businesses occurs.
The plan to provide you additional information on Investor days, the will enable you to start to build models separately for each business.
Third.
I'll provide some additional detail regarding the separation, including the anticipated capital structures and the amount of the synergies we expect.
And fourth.
I will take you through our long term targets for each business.
We're pleased with our 6% sequential revenue growth, which as Dan mentioned came in ahead of expectations and drove a 17% year over year increase the adjusted EBITDA in Q3 and.
And the 16% increase in GAAP, the cash from operations on a year to date basis.
We expect to finish the year strong and given our improved visibility we are providing guidance.
We expect non-GAAP revenue of 1.28 billion with 330 million of adjusted EBITDA.
And $3.40 non-GAAP diluted EPS at the midpoint of our revenue guidance.
Overall, we're pleased with the performance this year and despite cold the delaying some perpetual license orders, we expect to grow adjusted EBITDA by about 5 million year over year.
Looking ahead to next year, we believe the momentum we experienced this year will continue in the introducing our initial has his outlook.
We expect non-GAAP revenue to increase around 5% to 1.35 billion.
We expect adjusted EBITDA to increase sort of similar range before separation, the synergies, which I'll discuss the minute.
Excluding the impact of the separation.
The next around 20 million of non-GAAP interest expense.
The non-GAAP share count of 71.5 million shares.
Again, we are providing this information to help you update your consolidated models pending the separation.
At our Investor Day on January will provide more detail regarding the post the models of the two companies.
Hi, Dan noted earlier, we plan to file or 20 of publicly in the next two weeks and we expect the consummate the separation shortly after year end.
Today, we'd like to provide some additional visibility in the capital structures and the synergies.
Well the companies will have strong balance sheets adequate working capital and strong cash generation post separation.
Following the separation current we'll have modest net leverage of about one times adjusted EBITDA, excluding the preferred stock.
At this point, we expect each company to have about 15 million of separation the synergies.
Most of the synergies are related to public company expense I T and other shared business services expenses.
Now I'd like to provide further information for each business on the Standalone basis, starting the customer engagement.
As Dan discussed earlier, we think it's very helpful to analyze the customer engagement cloud and perpetual revenue stream separately.
On the cloud side.
We expect the momentum we experienced this year to accelerate next year.
You saw us bookings, which is a leading indicator of cloud revenue growth is expected to increase when 40% this year.
Helped drive approximately 30% cloud revenue growth next year.
We expect our bookings next to continue the shift to cloud.
It's about two thirds of new software bookings coming from SAS compared to about half of this year.
We were also expecting recurring revenue to reach 85% of our software revenue of 500 Bips from this year.
Regarding perpetual licenses do.
Due to our cloud first strategy, we expect the reduction to around 140 million of revenue. This year next year, we expect the for the decline as we approach the completion of the cloud transition overall for fiscal 22 for new bookings, we expect 10% growth in new perpetual license equivalent bookings and for revenue.
On adjusted EBITDA, we expect low single digit growth before the synergies.
We are targeting cloud revenue growth of approximately 30% CAGR over the next three years driven by strong new SaaS bookings healthy renewal rates and ongoing SAS conversions.
We expect our revenue growth to improve over time following the completion of our cloud transition in fiscal 22.
In fiscal 2003.
We expect our perpetual license revenue to level off at around 100 million a certain customers will continue to prefer perpetual licenses.
Regarding margins.
The one time step down in fiscal 22 due to the separation the synergies I discussed earlier, followed by ongoing margin expansion.
In addition to margin expansion the cloud model will provide us with better economics over the longer term.
Overall, we're targeting 1 billion of revenue in fiscal 2004, with 90% of our software revenue being the current.
Now, let's turn to our cyber intelligence business, which will soon be named cognate.
I'll start with the review of our historical performance.
On the last three years or EBITDA on an estimated fully allocated adjusted basis.
Has increased at a 25% CAGR driven by the business transformation as part of our software strategy, where we have been steadily improving our software services mix and increasing our gross margins.
This trend continued into the current year, where we have experienced the 7% year to date increase.
Estimated fully allocated non-GAAP gross profit year over year.
The 35% year to date increase in estimated fully allocated adjusted EBIT of versus last year.
Recurring revenue, we've seen strong sequential growth after the initial impact from call of it.
For the year. Despite this call of it impact we're expecting another year of growth in estimated fully allocated adjusted EBITDA.
The reach 70% estimated fully allocated gross margins for the full year for the first time.
Over the next three years we.
We are targeting cognex revenue growth to improve driven by greater adoption of our open software and expect margins. The gradually expand after a one time step down next year due to the separation of the synergies.
Overall Cogs night, we'll have a strong financial profile post separation, we look forward to providing you more detail head of virtual Investor day on January 11.
In summary, we the strong Q3.
Expecting to finish the year strong and look forward to providing more information regarding the separation at our upcoming virtual investor days, So with that operator, let's open up the line for questions.
Thank you I'll share my day to ask a question you on the the press Star one on your telephone. So let's try you question touched upon key please stand by the will be compiled the current day last day.
Our first question comes from shall the out with Oppenheimer and company. Your line is now open.
Thank you good afternoon, guys. Congrats on the on going fully performance and the inside and Dan a really great cloud momentum on yet again, if I may add on.
Can you talk to us about what is driving the the strong momentum at and how do you see this momentum evolving over the next few years as you move to the cloud transition and I have the follow up.
Okay sure.
So thank you, yes, we see strong backlog momentum and we see the across all regions.
We build the open cloud platform and this allows our customers to easily turn on new cloud applications. So the can expand on and we have the broad portfolio. As you know it also allows the partners to easily integrate and add value and I'll talk about partners or perhaps later.
So that's on the club thought from side from the sales force perspective, the assessment is leading with us.
And the and I, we see great the market adoption in our in our area and our business application area.
And this is partially due to call of it.
So we are pleased to cross over the 50 per cent mark of new bookings.
Oh, that's coming from South and we based on the pipeline expect two or two of two thirds of on your books from next year to come from SaaS.
We target 30% of cloud the cloud revenue growth next year, so from $217 million give or take this year to $350 million next year.
As long as targeting 30% CAGR over the next few years.
So.
I I think it's important to to explain your question of you know how the assessed position is evolving because we mentioned on.
On prior calls on today again that we expect to complete the.
The trust position next year.
So when you look at our perpetual perpetual license revenue.
They decline this year, we expect the about 140 and the end was <unk> hundred 85 last year, So big decline.
In in perpetual license, but next year, we would we expect the from decline as we finished the transition, but then the leveled off in fiscal 23.
And as we have sort of customer the will continue to buy perpetual and expand we expect some growth in perpetual license, but it will be you know around the underpinning the door. So we expect it to be a 90% of force softer would be recurring.
So that's kind of the perpetual revenue and and what would the goodies basically Dan.
The headwinds from the perpetual revenue decline a wouldnt be substantially over.
On the tailwind that we get from the cloud revenue growth will from fully contributes to the top line growth.
And the margin perspective actually before the same the same trend Oh margin expand a it at the end of the cloud transition and ER and we'll see that during the fiscal 23, and 24 and the and then over the long line on the economics of the cloud moral are actually better than a than economic.
Of the perpetual license. So we expect the lot of good positive.
Outcome from the momentum we see now we do need to finish the transition next year, which we feel we are very very good with the metrics we share.
We are on the way to do that.
And for fees from 24 were targeting about 1 billion dollar.
Which is the Cagar oh from mid to high single digit revenue growth.
Obviously, it was improving growth rates as we move Oh two of the out years.
Got it got it and then my follow up is it is concerning the Coke died so congrats on on on the really being ready to bring it up to the mocking the kind of the the entire separation process.
Yes over the course of of the past two months of Palin here has that gone public we've been getting many questions on the from from investors maybe.
Maybe can you discuss how you on the one hand similar to what they do but maybe on the other hand differ and in some other way.
Sure.
So the first you know we are excited to have called the not starch. The next chapter of their growth as the public company.
We share a lot of information to day on on day historical growth of Carbonite and margin expansion a huge margin expansion.
So we have great opportunity I had we'll share even more information and you.
You know, we're going to file the 20-F document in two weeks and then two weeks later on January 11 will share more information.
On the Carbonite, but let me briefly.
Touch on your balance your question.
We are pleased to report on here is the public comp.
Keep an eye to the volunteer EPS seaman our capabilities, but.
But historically have different go to market strategy, which is important to understand so first in terms of the the similarities both companies share of the vision of open on Linux.
And the livery technology platforms that can help customers find the needles in the haystack and to make the world safer.
And there's a big opportunity.
But historically the company has approached the opportunity.
Based on the go to market strategy.
And the I think the best is to look at the a couple of examples.
So cold and I'd say the strategy of profitable growth as you all know the as part of variance.
Well part of the theory as a private company incurred losses from many years.
So one of this <unk> the impact of this is that for example balance here, it's about 150 customers.
And they of higher average revenue per customer. So so so they went deeper into their customers.
Probably not have more than a thousand customers.
But our strategy was to land and expand and grow these customers over time.
Another example of is the difference in global coverage.
But in theory stronger in the U.S. well Carbonite is stronger in the rest of the world.
And the originator of historically, we had very low believed that the investment in developing the U.S. government markets.
Take significant time and resources.
And we saw more attractive opportunities outside the U.S. consistent with this a profitable profitable growth strategy that we were pursuing.
Oh. So these are the two quick examples and the we will discuss the security landscape.
In more detail during the Investor day.
Got it. Thank you so much of that good luck the job.
Thank you. Our next on next question comes from Daniel Ives with Wedbush Securities. Your line is the open.
Thanks So.
[laughter], maybe first just talk about Dan your conversations with customers on what you're hearing from the sales force I mean, how things are changing in terms of the sort of cloud strategy do you think it's more.
Just the product footprint or is the customers now adopting getting to that stage, where they're looking for more significant deployments I mean, how do you sort of view, where we are in the <unk> in terms of the that sort of cloud build out that we're seeing from the customer base.
Yeah. That's the that's a that's a good question I think we are going through some interesting changing the nomics.
Some of them are driven by coffee than the lasting impacts of coffee on the workforce by non mix.
And I think we have great solutions. We are we are discussing with customers.
And already brought some new innovation of cloud platform to address these changes.
This is a more interesting automation driven by again.
Again call of it is also a chronic important people looking to create efficiencies through automation and there is the I would say an acceleration in a in the cloud to the transition which started obviously a few years back, but we do see customers much more open to.
To to actually execute on it.
No. It's very important for customers and you know that I'm not the majority of revenues come from on me two large enterprises.
And they have complex needs.
Needs and ER and infrastructure. So they are looking for a bridge or the they're not just going on you know move overnight and they need to preserve.
The profit seriously the to preserve data.
And ER and the cannot disrupt himself definitely not true called <unk> when people working from home. So they are looking for a partner that can help the navigate through the cloud transition.
And ER and help the move to the cloud the in the more orderly fashion and whats interesting about that is you know when.
When you look at a 20% cloud revenue growth that we are expecting this year, but in Q4 and.
And that's 20% a we we mentioned the excluding foresee.
15% of that came from new bookings and the only 5% came from conversion of legacy.
Solution. So that tells you that while the moving to the cloud they're not as fast moving their legacy because it's working it's there they've got their data centers and you know there's no real reason to the to the swap, but the buying new functionality you know the they're comfortable on getting the cloud.
And we saw some really great accounts. This year some of the you know one of the lead Inc.
You know of food delivery service companies one of the leading the.
The grocery delivery or one of the leading the cloud infrastructure companies. These are the new economy companies doing very well. It was called me of an expanding and they chose variants in the cloud.
So it.
It is easy for new customers to buy in the cloud, it's easy for existing customers to buy new functionality of the cloud and data are looking at varying to help them to migrate their legacy solutions to the cloud overtime and we're ready to help them in the old is different than ours.
Great.
And then.
Maybe you can just sort of the address in terms of cost structure and obviously on this you're strategically this has been well mapped out per year for many many months, but just may be stranded costs and as well as just plans in place to hit the ground running as soon as this thing gets the green light just maybe.
We talk about that and the.
The sort of preparation from a from a cost structure perspective.
Yeah. So so I think we kind of figured out the cost structure, we discussed earlier and clearly we'll provide more details over the next few weeks about.
About the the capital structure, how that's going to be allocated and also in terms of the dissynergies or we do expect approximately $50 million the of Oh.
Suppression of the synergies in each company.
We expect that to be a onetime stepped on which we can grow out of that a the there is obviously certain inefficiency was breaking the public company into two public companies and certainly.
You know out of the gates.
So a lot of debt or has been already in place or as we were growing into the separation.
We do expect to have a tier say a transitional services agreement between the two companies and the reverse just say as well. So both companies will provide for Oh sometime services to each other but these are relatively small a lot of the resource is already been identified.
Hi. This is you know, which one is going to each company and and there is you know fuming on Dawes of tier say, Oh services that will go back and forth and of course, we would you know that will come on Oh decline over the over time.
So we think we think that.
We have prepared a we expect to file of the documents publicly so called the nights in in two weeks.
And then in January will be Oh, there was the management teams of both companies.
To discuss with investors I think the.
That's true will meet a lot of new people certainly we have the management team from Carbonite.
I'm ready as the management team of the Division.
We got out of a new a new board from Carbonite.
Oh, three direct source from a from variants will continue.
With the coming on board.
We are targeting seven direct doors. So they will be three continuing from variants or the new CEO a lot Sharon will will join the board and we are looking for three new directors.
Ah two joined the company so the all.
All of that will be kind of a folding in in January.
Thanks, that's great.
Thank you. Our next question comes from Ryan Macdonald of Needham. Your line is now open.
Hi, good evening, Thanks for taking my questions and congrats on the nice quarter and appreciate all of the the future outlook disclosures as we're looking at these two businesses I guess as we look into next year and sort of the 30% of cloud growth CAGR, what's your expectation in terms of mix of that coming from existing customers.
This is not new and how does this distance program conversion program that you started at the third quarter. How do you expect that to sort of accelerate that transition as we look in the next year.
Okay.
Yeah, So what I mentioned before the of the 20% the series of 15% from new booking Faisel conversion the.
30 next year actually he's also 15% from the booking.
So we don't dialing gain a huge growth in new bookings relative to what we just did in the cover the air but the conversion we expect to be 15, so that's up from five to 15.
We launched the new program in Q3, we already saw a pick up in Q3, and a and the beginning of Q4.
So based on the conversion of pipeline I think in the early days of coffee.
Of course, the would hesitate to convert because they were more sensitive to.
To the disruption the new pulled on we introduced a universe.
Basically no disruption so we will all of them are.
We we critics of technology that day, the could continue to work on premises and test the new product a in the clogging follow and then just overnight.
Switch over.
Which was very obviously very appealing.
For for anyone's concerning the about the operational disruption. So we think the conversion of program will pick up next year.
That's about 50 50 between new bookings of conversion.
Excellent that's very helpful on and just curious to get your thoughts on as you look out over the past month as we've seen throughout EMEA and the little bit in the U.S., you're obviously you know some shutdowns of Lockdowns again.
How is the environment compare as you're going out on selling to what we saw earlier. This year would you would you say that businesses are better suited are better prepared I guess this time around to kind of continue business as usual and sort of sales cycles as usual.
I think so I think look we have very little exposure to travel industry Entertainment. The only industries that were the dollar still suffering from the call of it impacts. The you know our exposure is really really minimal so in in the main verticals that we are addressing this was mostly about.
On premises deal.
The infected by travel and and just you know work force at home.
And you know some of the on some of the the perpetual deals that we have in the pipeline of this year.
Moving to cloud, but found actually pushed to next year. So.
So they're still in in the plant.
We do see from a on premise the steel. So it's it's it's been getting better it got better in Q3, and we feel like it's getting better in Q4.
But we also see that some of these perpetual deals on a will come back next year as cloudy.
So I I would say the you.
You know, it's it's not business as usual, but the companies are.
Oh, focusing on the priorities are and and I think customer engagement is the priority.
Having the tools to.
Managed the work force remotely and increase automation is a priority. So so I think of it is actually providing got some some good or the.
The tailwinds in the tailwind into next year.
Great and then just one final one from me ill hop back in the queue of great to see that you had some nice competitive wins that you announced during the quarter I'm just curious to see how that competitive environment is evolving and and I guess, what your thoughts are on the on the recent announcement of sales force what their own work force engage on management I imagine that's likely more of a.
The competitive dynamic down market, but a lot of your thoughts on that.
Yeah, Yeah. So.
No we're not very competitive with sales force and we also of which is in the very small part from one of them. We also a partner of risk was up.
Oh, we sales force and we have from products in the marketplace. So it's a competition ways.
The CRM guys and the sickest guys.
And you know, we clearly see interest from the pick up on certain vendors to offer business applications like we do.
Advanced business applications are critical to our customers.
And if they're looking to address the the workforce been on X and a and information as I mentioned before so fundamentals on a f. from people doing this but many already partner was married and many are looking to partner with very low.
Due to the strength that we bring with our with our leading up the occasions in the open platform and an apart enough on diagnostic strategy.
So for example, you know you can we find yourself in in in our species.
Where the could be multiple vendors bidding and we are in all of the big and and that's great. Because we don't really care who's going to win.
So [noise].
They they they not making such that we.
We think partners are going to be more important.
And we not only part of the partnering with the.
So because of the corporation I event doors, but we also had originally fillers.
And they can refill, you know and not of indoor and variant and and add value.
And and very important about this is day the competitive landscape is we saw this year.
The system integrators actually are increasing their role is.
As more customers are seeking advice from the integration services.
And that's and that's the so you know obviously good for current because we have the open approach and our open platform is an ideal choice for system integrators.
So just last one example of that and we'll talk more in the Investor day about the competitive landscape.
But when you look at the social Security administration deal that we the we want Oh. This is the Verizon deal one of arise when he is a is the system integrator for the social security a.
If I was chosen as the collaborations platform.
And the other part of the for choice for the business applications.
Well I I think that's the day not makes I think customers want to get what they need and the and they do it in many different ways.
And and we think that they did the stronger opportunity for growth with the supporter of Nostix strategy.
Thank you very much.
Yes.
Thank you. Our next question comes from buying assets with Goldman Sachs. Your line is now open.
Hi, good afternoon to take the taking the question Congrats from me as well on the quarter of nice a nice reacceleration.
I was wondering if maybe you could give us a little bit more color on the cotton 18, I think you mentioned that allowed for all of the be the new CEO, but you know how how how well establishes the management team for that business and is it just.
The personnel just moving over underneath that umbrella that are already working of the company or is there a lot of new hiring and reorganization that's going to take place once that spends on.
Yeah. So in preparation for this and as you know we've been preparing for a long time.
We had two objectives. One is we want to complete the soft the moral transition.
And get to the 70% of gross margin.
And position this company to really focus on growth as is a software company. So lot of force in strengthening of the management team to bring that.
The experience and and change the business model.
And the second thing is to prepare the company to be an independent public company <unk> and ER and we did it through a combination of of promoting people from within and hiring people.
I just give one example of you know, which we we hired.
This year, we hired the our chief product officer.
Oh, the who is really going to be responsible for the product and go to market and and he was from years back. He was the president of nice knocking the overnight space in the customer engagement space, but clearly a strong addition to the management team.
So I feel like you just don't game you guys, you're going to meet them on on on January 11 of Unfortunately, it's going to be a good chunk of day. So.
Oh, you all good of gets a bit of virtually but Ah you definitely get a chance to see the the new management team and and will you know we part part of we want to do is also introduce the.
The the the spirit of the company and obviously their passion of you know.
Growing and becoming a very successful.
Oh pure plays to the Holdings company.
Okay, but is that all established at this point or is there additional transition of the need to happen I mean, the whole sales organization has that already on place and you're ready to go or is there more that needs to happen that <unk> on so it's on place the sales services R&D management all in place.
The only thing as I mentioned before there are some transitional services that would they will get from variant and its really in the area of.
You know some some of financial advice on on public company readiness of the legal advice I our advice. The there's a function that that will be continue to build.
During the during next year, but a in terms of the in the functions the the only place.
Got it and maybe just a follow up any update on the past and where they stand with the with with regard to the the second tranche. After the spin it looks like we're above what I think it was a $50 per floor on the color here.
You know any expectations around that in particular with regard to your capital structure expectations going forward.
Yeah.
Yeah, I believe from memory that the attritional of $48, but.
You know I'm, so pleased to have eight bucks I'm joining the company.
They they they have the.
Oh, one designated board member.
It's part of tranche true we agreed that we will add another board member that he's joins me agreeable to apex and variants and independent Board member.
And in terms of the capital structure.
Maybe I'll turn it over to Doug just the say few words on on the and on on capital allocation.
Oh, yes, yes sure yeah.
Hey, Brian Yes.
Yes, the we expect the pets. The second tranche provided makes the threshold to be funded sometime in Q1 and it just subject to the closing conditions on.
The we previously had shared with folks on in terms of use of that cash of general corporate purposes, or perhaps supply into the outstanding debt on we will outline better for you at the Investor day, the capital structures of but the you know Cogs night is being spot on you know debt free.
One of them with the you know adequate working capital of.
The apply excess cash to bring the debt down and try to be sensitive to the not too much leverage on the the C.E.S. So you know the main coal if you will side of the business.
So we would expect day, you know the debt to EBITDA ratio of one ish or so on that business. So we just have some cash to move around we're doing that as part of the the spin structure or line. The legal entities of <unk> will take you through all that and a little more detail on the other investor day.
Got it Super helpful. Thank you very much.
Sure Brian.
Thank you. Our next question comes from Paul Coster with JP Morgan. Your line is now open.
Yeah. Thanks for taking my question, so sort of some sort of how soon to sort of arrangements in place for a period of the two companies go through the separation, but are there any of the relationships that will last beyond.
On the separation, meaning for instance is there any comment on what's in the boards.
Is there any cross licensing or is the separation of the was completely.
Completely clear.
They should they shouldn't be any other relationship.
Other than to say in terms of board crossover, we expect to people to be on both boards.
The that's two out of seven from from a from a from Carbonite.
So that's I think it's important for continuity.
But.
That's the end of it.
There won't be any constraints imposed on the <unk> from the perspective of selling the business for instance.
The <unk>.
Obligations the on due to the variance in the future.
No the okay got it both he and the obligations the restrictions on on the call Tonight the business.
Okay great.
You all clouds of businesses accelerates, the which is very welcome.
The using some of course, you little bit I asked the some of your peers well why did the boys the you're experiencing the strength, but a little bit later the than everyone else in what's the most of the the cause of the study using here Dan.
Yeah. So I think we actually had the far peers [laughter]. So it depends on on you know what you would refer to as peers and you know the they are they.
Ah cooperation and communication platforms, right and we know that they are.
About 100 companies now that the have sick of so your cost of some sort of from calibration lots on the cloud.
And and I think the space the vision, it's accelerated its transition to the cloud.
It's very much in the infrastructure change from.
You know corporation platform, Oh, what used to be a unified communication platform right now not what's called calibration that it's pretty much in the change flow out to the cloud, which which was accelerated for a lot of good reasons, but.
But the business applications that we sell.
We feel like we are ahead, even you know.
And of course, the better in terms of how much we moved to the cloud.
It's really what the market adoption.
Again, the big applications require companies to.
Changed more than 92 to two.
Change processes, and so on and and and the work.
Flooring slowing the adoption, we talked before about the fact that we said of course, the enterprise knows or other.
We so for example in our branch business there was a lot of of.
Oh adoption of to cloud adoption of solution, we felt of the marketing department almost entirely cloud of.
And then you know back office and some comics. Other we saw that are on the market was low.
Sure.
But all of that is I think is the history, because whatever was called weighted or whether it was just natural.
Evolution, a it looks like this year the market was ready and we are ready.
So you know we're moving from one third mix the two last year to this year to two thirds, which we feel.
We can achieve next year.
I think that's the pace that.
Oh, we were hoping to get before but we were getting now.
And my last question on the sovereign so from you had three deals or.
To the studios have similar characteristics or with a diverse from the perspective of geography and the application.
Oh, no I don't see any anything unusual you know they they the large deal usually represents a cost of the buy more.
More than one functionality, that's where it becomes larger.
Of the come bundled civil thinks they need into into bigger contract.
But I think what we see across the deals including the large deals is the trends that we were hoping to see which is less hardware.
Oh I think of hogs, there was a lesson I mean, the dogs in in Q3, very small or less services. It's not just hardware declined but the services the Claude because of the investment we Didnt productizing.
And we also you know customers can do more of the services themselves. So.
The mix is changing of course, the big deals as well a tour of the softer mix.
Where the 74% of gross margin in Q3, but that was probably a little bit of an anomaly. The we only expect 70%.
For the full year, but a this was 66 last year and 62 of the year before so very quick shift and we will continue to improve the gross margin beyond 70%, but obviously, the big pickup or acceleration is behind us and I think from now we'll see some more.
Modest margin expansion.
Well when we talk about you know 10.
10% growth for next year.
We expect some margin expansion as well.
And and and we hope to the target growth rate in subsequent years as the independent of the company.
Got it thank you.
Thank you. Our next question comes from Dan Bergstrom with RBC capital markets. Your line is now open.
Yeah. Thanks for taking my questions. So Doug you mentioned some cold the delayed federal license orders, obviously not impacting the numbers are out but the could you expand on those comments.
Maybe quantify the impact what you're seeing in federal or status of those deals.
Yeah sure I mean, so all year, we've seen impact from coal that you know as you know in the beginning of the year, we felt we couldn't provide.
Guidance because of that.
But as we've gone through the year I think of the ones learn to kind of work remotely our customers are functioning better and getting more I think comfortable with the.
On ongoing nature of the business and making better commitments you know, we're hoping a perpetual licenses. So you know start to get a little bit more on track into next year on I think that was the large impact but largely you know it's the that the plans haven't changed the customers have a lot to do a they know they have to do it on I think the you know.
As Dan mentioned several times on the you know called it certainly is kind of walk on people up because of the need to get to more of the you know what infrastructure in the cloud or that's more straightforward accessible et cetera.
So it's hard to quantify it right because you know deal slide in the smaller and koby behind a lot of that but the but we do see just continual improvement in the overall business environment as people are coping with called the better.
And Ah and that's the reason for you know getting back the guidance in providing some outlook calls for next year on longer term.
Great. Thanks.
[music].
Thank you.
And the next question comes from Jeff Kessler with Imperial Capital. Your line is now open.
Jeff Your line is muted the mute.
I'm not showing any other questions at this time of the now that could turn the call back over to Alan relative to closing remarks. Thank.
Thank you operator, and thank everyone for joining us today we.
We will be quite active next six weeks, we look forward to seeing you at our two investor days and also on the road show in January have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for the beating you may now disconnect.
Yeah.
Yeah.
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