Q3 2022 Verint Systems Inc Earnings Call

Okay.

Good day, and thank you for standing by and welcome to the <unk> Systems, Inc. Q3, 2022 earnings Conference call.

At this time all participants are in a listen only after the speaker's presentation there'll be a question and answer session. Please be advised this call is being recorded if you require any further assistance. Please press star zero wed now like to hand, the conference over to your host today, Matthew Frankel you may begin.

Thank you operator, good afternoon, and thank you for joining our conference call today I'm here with Dan Bodner, <unk> CEO, Doug Robinson, <unk>, CFO and Alan Roden parents, Chief Corporate development Officer.

Before getting started I'd like to now.

Accompanying our call today is a webex with slides.

The beauty slides in real time during the call. Please visit the IR section of our website at <unk> Dot com click on the Investor Relations tab.

On the webcast link and select today's conference call.

I'd also like to draw your attention to the fact that certain matters discussed in this call may contain forward looking statements within the <unk>.

Any of the private Securities Litigation Reform Act of 1995, and other provisions et cetera Securities laws.

Forward looking statements are based on management's current expectations and are not guarantees of future performance actual results could differ materially from those expressed in or implied by these forward looking statements.

The forward looking statements are made as of the date of this call and except as required by law Geron assumes no obligation to update or revise them investors are cautioned not to place undue reliance on these forward looking statements.

For a more detailed discussion of how 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 31, 2021 and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures as we believe investors focus on those measures and comparing results between periods and among our peer companies.

Please see today's Webex slides our earnings release in the Investor Relations section of our website at <unk> Dot com for a reconciliation of non-GAAP financial measures to GAAP measures.

Non-GAAP financial information should not be considered in isolation from or as a substitute for or superior to GAAP financial information.

But is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and useful to investors for informational and comparative purposes. The.

The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies now.

Now I'd like to turn the call over to Dan Dan.

Thank you Matt.

I'm pleased to report the momentum we experienced in the first half of the year.

In our third quarter.

We had strong cloud revenue growth.

Strong new booking growth.

And overall revenue and diluted earnings per share.

Coming in significantly ahead of our expectations.

Looking ahead.

We expect our momentum to continue in Q4.

And are raising our annual guidance for non-GAAP revenue.

$875 million at the midpoint of our range.

We are also raising our annual guidance for both cloud revenue growth and UK any booking growth.

We believe our results and improved outlook.

Select the differentiation of our cloud platform.

And our strong execution following the spin of our security business.

Earlier this year.

At the time of the speed, we provided three year targets for our cloud first strategy and accelerating growth.

I am pleased to report.

But we are tracking ahead of our three year plan.

We're introducing guidance for next year above our prior target.

And also increasing our target for fiscal 'twenty four.

Let me start with our Q3 results and discuss what we believe is behind our strong cloud growth and bookings momentum.

In Q3, our cloud revenue grew 33% on a GAAP basis, and 32% on a non-GAAP basis year over year.

We expect our strong cloud revenue growth to continue in Q4.

And we are raising our guidance for more than 35% for the year.

We also had strong new booking growth on the PMA basis.

Of course, new logos and existing customers with.

With 21 large cloud orders each in excess of $1 million GCB.

Nuclear late bookings increased 14% year over year in Q3.

And we are raising our outlook for the year to more than 15%.

Our numerous multimillion cloud orders.

And in Q3 included some of the more notable brands in the world.

Such as Costco Disney Goldman Sachs and HP.

Regarding new customers I'm glad to report that during Q3, we added more than 100, new logos.

Including Western digital Blackstone, Eventbrite Natwest markets and the bank of Hawaii.

Regarding existing customers.

We had many expansion.

It's a cloud platform strategy makes it easier and faster for customers to expand and benefits from from our AI innovation.

Yeah.

Overall, we had strong bookings momentum and are pleased with the addition of many new customers.

In Q3, we continue to innovate and introduce new capabilities in a cloud platform.

To help brands closed engagements capacity gap.

For example, we recently announced new AI, driven real time agent assist capabilities.

Including real time sentiment analysis.

And the new highly accurate cloud transcription engine.

Just on deep neural network models.

We're also introducing a cloud platform, new social messaging functionality.

That can be deployed together with intelligent virtual assistant.

To automate social messaging.

Our cloud platform as an open multi cloud architecture that enables us to deliver innovation at an accelerated pace.

Our openness enables the platform to seamlessly fit with existing enterprise ecosystem.

It provides customers out of the box integration with many communication infrastructure enterprise data and CRM vendors.

This strategy of a truly open and agnostic platform.

He is very attractive to both our customers and a growing set of partners.

At the heart of our cloud platform is very da Vinci AI.

Which drive strong automation and customer ROI.

Because the platform is also modular brands are able to deploy our workforce engagement digital first engagement and experience management.

Based on their business priorities to close the engagements capacity gap.

Yeah.

Looking forward.

We're pleased with the momentum we experienced throughout this year and are introducing guidance for next year fiscal 'twenty three above our prior targets for.

For fiscal 'twenty, three we now expect $935 million of total revenue.

Reflecting 7% growth.

From our prior target of 6%.

We also expecting 30% cloud revenue growth.

Driving cloud revenue to over $500 million.

Around 55% of our total revenue.

As previously discussed our shift to the cloud will positively impact cash flow.

And we're expecting more than 20% growth in cash from operations next year.

Behind our improved growth outlook for fiscal 'twenty three.

Our significant bookings momentum this year.

As a reminder, since the beginning of fiscal 'twenty. Two we have raised our outlook multiple times for new <unk> bookings growth.

Which is a leading indicator of future revenue growth.

Yeah.

In addition, I would like to point out that we expect to finish the year with non-GAAP cloud revenue in Q4 of around $117 million.

Providing us with a solid starting point.

To achieve more than $500 million in cloud revenue next year.

Turning to fiscal 'twenty four.

We're now targeting 10% revenue growth.

Which would take us to $1 billion and $30 million of revenue.

Up from previous target of high single digit growth.

We're also raising our cloud revenue target for fiscal 'twenty four to over 650 million daus.

As another year of 30% growth.

I would like to take a minute to review our multiyear cloud journey.

In fiscal 19, only around 20% of our total revenue came from the cloud.

And we're now expecting around 55% next year and targeting around 65% in fiscal 'twenty four.

Shifting our revenue mix to the cloud it's.

It has many benefits to Varian, Inc.

Including more recurring revenue better visibility.

And improved economics over the customer lifetime.

In summary I.

I'm very pleased with our significant progress on all fronts.

Since the spin we've posted three quarters of strong results executing ahead of our three year plan.

We're not raising our targets again.

Our AI powered cloud platform is differentiated.

And deliver significant ROI to customers.

In the open and partner friendly strategy.

It's resonating well in the market and we are adding many new customers.

Finally, I would like to thank our employees for their hard work and dedication.

We continue to hear from all of our employees.

Like our strong customer centric culture, and our focus on customer engagement.

Your play company.

Now, let me turn the call over to Doug to provide more details on our Q3 results and outlook.

Doug.

Yeah, Thanks, Dan and good afternoon, everyone.

Our discussion today will include non-GAAP financial measures a reconciliation between our GAAP and non-GAAP financial measures is available as Matt mentioned in our earnings release and in the IR section of our website.

Differences between our GAAP and non-GAAP financial measures.

Include adjustments related to acquisitions, including fair value revenue adjustments amortization of acquisition related intangibles.

Certain other acquisition related expenses.

Stock based compensation expenses separation related expenses as well as certain other items that can vary significantly a mountain of frequency from period to period for certain metrics. It also includes adjustments related to foreign exchange rates.

As Dan mentioned, our Q3 results came in ahead of expectations and we're pleased to be raising our annual guidance and long term targets.

For Q3.

Non-GAAP revenue came in at $227 million.

Non-GAAP cloud revenue increased 32% year over year.

<unk> bookings increased 14% year over year.

Non-GAAP gross margin came in at 71%.

Non-GAAP operating margins came in at 27%.

Non-GAAP diluted EPS came in at 69 cents.

And remaining performance obligations or <unk> increased 31% year over year.

We're pleased with our over achievement in both the top and bottom line.

Our topline over achievement was due to strong demand for our cloud solutions as well as a $4 million perpetual order coming in in Q3, which we previously expected to come in during Q4.

Our Q3 bottom line was positively impacted by higher revenue and some expenses being delayed to Q4.

For the year, we now expect $875 million of revenue plus or minus 1%.

Up from our prior guidance of $872 million and our initial guidance of $860 million.

We expect cloud revenue growth in the range of 35% to 37%.

Up from our prior guidance of 35% in our initial guidance of 30%.

I'd like to mention that customers converting existing solutions to the cloud represent close to 40% of our expected cloud revenue growth in the remaining 60% is driven by new deployments.

We expect <unk> bookings growth in the range of 15% to 17%.

Up from our prior guidance of 15% of our initial guidance of 10%.

From a mix perspective.

60% of new bookings to come in from SaaS in Q4.

We expect $2, 25% of non-GAAP diluted EPS at the midpoint of our revenue guidance.

On $75 9 million diluted shares outstanding for the year.

I'd now like to discuss guidance for our next fiscal year ending January 31 2023.

For revenue, we are introducing guidance above our prior target and expect $935 million in revenue plus or minus 2% or 7% growth, which is being driven by our strong PLE bookings.

For new PLE bookings growth next year, we are also guiding above our prior target to a range of 10% to 12%.

Our pipeline is rapidly shifting to SaaS and next year, we expect around 65% of new bookings to come from SaaS for the full year.

We expect cloud revenue to exceed $500 million and to represent.

Approximately 55% of our total revenue.

With continued margin expansion, we expect $2.49 diluted EPS at the mid point of our revenue guidance, reflecting nearly 11% growth year over year.

We expect to generate $200 million of GAAP cash from operations, reflecting more than 20% growth year over year on a normalized basis.

I'd also like to provide you with some additional detail for your models.

We expect around one 5 million per quarter of interest and other expense.

We expect about 300000 per quarter of net income from our Noncontrolling interests, we have in a small joint venture.

We expect an 11% cash tax rate for the year.

And we expect $75 9 million or fully diluted shares flat with this year.

Similar to fiscal 'twenty, two we intend to repurchase shares in fiscal 'twenty three to offset dilution from our equity compensation program, we announced today that our board has approved a new buyback program for next year.

In summary, we're very pleased with our strong momentum and are tracking ahead of our three year plan, we laid out at the beginning of the year.

We expect our revenue growth rate to accelerate from 4% this year to 7% next year targeting 10% a year after.

From a mixed perspective, we're targeting nearly two thirds of our revenue in fiscal 'twenty four to come from cloud.

As we approach the holiday season, I'd like to thank our employees during an unprecedented time in the market. Our strong results are due to your hard work thought leadership and commitment to serving our customers.

So with that operator, let's open up the line for questions.

Yeah.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

All your question press the pound key please standby, while we compile the Q&A roster.

And our first question comes from Ryan Macdonald from Needham. Your line is now open.

Hi, Thanks for taking my question and congrats on an excellent quarter here.

Dan I was most impressed by the strong new customer new logo additions and I think over 100 in the quarter you mentioned, an over 60% of PLE bookings coming from new customers, just love to understand a little bit more where that strength is coming from whether its youre seeing sort of a surge in demand in the marketplace from new.

Customers that they spend on digital transformations or is this just come down to just great sales execution would love a little more color there. Thanks.

Yeah.

Thank you.

I think it comes from demand for cloud platform, we discussed before at a club that is differentiated.

<unk>.

Helpful to our customers too.

Innovate faster because they can consume applications from the platform easier than on an on prem basis.

We do see also increasing partners execution with our cloud platforms and growth with partners. So.

I think it's really the overall positioning from a product perspective, as well as our partner agnostic strategy.

We actually did mention on the call first time.

100, new customers and some of them are.

Notable brands like the bank of Hawaii, and Western digital and Blackstone.

But we saw this momentum since the beginning of the year. We also had more than 100, new customers in Q1 and in Q2.

And we expect it to continue in Q4, so we actually expect more than 400 customers new customers to join.

Variant Baidu.

By the end of the year.

So it's it's a it's a.

Trend that now it's been established.

And we feel very strongly that it's the result of the strength of the platform as well as the agnostic.

Nothing strategy.

Excellent. Thanks for the color there and then.

On the <unk> outlook as we start to think about the fiscal 'twenty four targets being higher I'm, just curious about what youre seeing from a visibility perspective. It gives you confidence in this higher outlook.

What are you seeing from a roadmap perspective as you talk to your customers that are looking to to migrate over.

Yes, so visibility is actually improved quite a bit.

Obviously.

Partially its because of the.

Growth in recurring revenue, we are now you know around 83%.

Software revenues were carrying so thats improved visibility, but also our pipeline we see.

The other dimension appeal, our remaining performance obligations is up 31% year over year.

We see strong demand in the pipeline and also a big shift.

So we actually expect in terms of the pipeline mix we expect.

60, 40, 60% of the booking in Q4 to be from SaaS and for next year, we expect 65% of the booking.

To come from Star So pipeline suggest.

Overall, strengthen and and also continuing to shoot.

<unk>.

Towards towards SaaS.

We also raised our PEO PLE.

<unk> bookings guidance for next year.

We took it from 10% to higher to a range of 10% to 12%. Obviously this year, we now expect more than 50% booking growth.

So we hope that will continue to see strong momentum into next year as well.

But.

All of these are helpful to visibility when you look at our Q4 call.

<unk> revenue, we're expecting 117, so that's a good starting point to.

So another year of more than 30% growth.

So that would bring us to more than half of it.

At $1 billion in cloud revenue.

And even more.

Revenue improved visibility.

So really on all fronts, we feel like.

He is working we over the midpoint of our cloud transition.

So our revenue growth is now accelerating because we have less headwind from the perpetual decline.

So we gave targets for 7% growth next year and 10% growth.

Following here on overall on overall revenue and cloud revenue continued to grow at a 30%.

So it looks good looks good.

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

Okay.

And our next question comes from Dan Ives from Wedbush. Your line is now open.

Yes. Thanks.

So.

Can you talk about in terms of the cloud transition it feels like you've sort of crossed that line now too.

Mike on the second half as we sort of get into the inflection point more than 50%.

Can you just talk about the weather.

Whether it is sort of now two triggers that we should see going forward as it feels like youre kind of past the midway point of the transition.

Yeah. So let me point it is very important.

So first just to.

Make it clear, we we pass the midpoint and booking and we expect to pass a moot point in revenue.

During next year and get to 55% of our revenue to be cloud.

So what happens as we get more cloud revenue.

A number of things first visibility will continue to improve as we get more recurring revenue.

Second we will see improvement in cloud revenue growth because we are growing double digit in bookings, while we have a lot of new customers. We had as we talked about more than 15%. We now raised the guidance to between 15% to 17% booking growth this year.

So all of these bookings acceleration will start to contribute more into revenue acceleration because the perpetual decline is less material, we just have less perpetual.

So obviously our revenue acceleration, but also grew.

Gross margin acceleration.

When you look at our gross margin mix.

Nonrecurring gross margin is in the mid fifties.

Because perpetual carries a lot of professional services. So that's the mid fifties.

Average gross margins for nonrecurring.

But the recurring margin in the mid seventies. So as recurring goes up also gross margin will start to go up modestly next year and more and more in the following years.

And we talked about.

Better economics.

And improved cash flows so close to the midpoint is really you go appeal and you get a lot of.

Headwind on the way up and you start to get a tailwind on the way down which is what we are starting next year.

Great and then can we just talk about it.

As the size of deals.

You'd think about pipeline.

You hit and we sort of get to the midpoint should we expect as large as deal sizes more strategic is that a trend.

Yes, I think.

We are becoming more strategic to our customers and partners.

Because they can consume more from a cloud platform in a very consistent way you know all of the applications. We have in and you guys know that we have acquired companies over the years and why we put all this technology that we acquired in one platform, which gives customers the ability to expand very easily just consuming more services.

Rather than going through the whole effort of on Prem deployment.

<unk> so that makes the.

The relationship more strategic that can benefit from innovation in AI much faster in the cloud platform or <unk>.

Partners have access to a lot of AI innovation quickly through our da Vinci services.

So all of these efforts we put into the platform is really positioning us.

To have more footprint with our customers and partners.

And.

We expect when they look at the mix right now we generate about half of our revenue from direct and indirect.

Indirect from cutoff of partners we.

We expect both to grow nicely and partners to grow a little bit faster.

So 50, 50 ratio will probably be not that materially different than a year or two but but but the indirect will slightly go faster and and that's good for us because we have a lot of leverage.

With partners and don't have to add a lot of.

Salespeople as we continue to accelerate our growth rates.

So.

Putting all that into.

No the context of the journey.

We think that for US cloud is not just the change in business model, but it was the ability to really offer a single platform that is open that is connected to the ecosystem, we have a lot of.

All of the box integrations.

Now we have a pretty significant ISP program. So a lot of companies are developing applications on our platform and we are lifting these companies in our marketplace. So the customers can benefit from the open platform, so creating that ecosystem of ISP partners, creating an ecosystem of the box integrations with.

Enterprise data systems and enterprise.

CRM or HR or any type of enterprise systems.

It's important to be integrated into customer engagement.

Customers and partners get consumed it very easily from a cloud platform.

So.

It's a big innovation, we spent a lot of time and effort in building that platform and we believe it's very differentiated right now and because it's open and agnostic, we see a lot of.

Changes in the communication infrastructure market.

We saw just lately at eight by eight.

These acquiring fuse so that's.

Hey.

You know consolidation of secrecy Nuc us.

We saw.

So I'm trying to buy five nine for the same reason.

And Webex is announced.

Sick is offering in Nevada.

You kept the CCAR and Microsoft has announced the you know in.

An extension of teams into the contact center. So all of this.

Infrastructure consolidation across the contact center and the enterprise is really the starting point for more demand for our platform because we have applications.

There are of course across the enterprise connecting the contact center into other parts of the enterprise in a way that can generate a lot of business I'll try.

So customers buy infrastructure.

Just on you know it.

Ecosystem and what they need for it for me for me from the infrastructure.

But preference really needs a strong application platform to create business OE applications with workflows and automation to drive business and this is we're very engaged right. We are in this bucket of very strong best of breed applications all available in one platform so customers can.

Consume those services in a very consistent manner.

Thanks.

Yes.

And thank you.

And our next question comes from Peter Levine from Evercore Your.

Your line is now open.

Great. Thanks for taking my question I'm, sorry, if I missed it but cloud growth in the quarter saw a sequential D cell. Maybe first one just can you just kind of talk about those dynamics were there deals that pulled into Q2, perhaps the deals got pulled into Q4, just like to understand what happened in the quarter.

Yeah.

So let's look at the numbers right. We started the year with the cloud gross expectation of 30%.

And then we update 230% to 35% then we asked it again to 35 and today, we are upping the cloud growth for the year between 35% and 37.

So I don't think we are decelerating I think every quarter, we raised our.

<unk>.

Our expectation for cloud growth this year.

And.

When you dissect the cloud growth.

You can see that.

In cloud, we have SaaS and we have managed services.

And managed services as we discussed many.

Many times it is something we offer our customers with the survey it's low margin.

We don't plan to grow that much so in Q3 minutes.

Managed services grew 10%.

Which is fine, but SaaS grew 38%.

So we continue to see very strong growth in Q3.

And we expect acceleration in Q4, so that's why we are raising.

Raising our cloud growth guidance to more than 35%.

So bottom line is I think we are we are progressing very well through the year.

We see our pipeline shifting we see cloud deals.

That were potentially.

Customers were looking to buy perpetual shifting to the cloud much faster.

And I think that quarter to quarter, there could be small fluctuations, but I am very pleased with over 30% growth in Q3.

As well as raising again guidance for Q4.

And then I'm sorry.

There is also getting better.

And we still think that we can achieve more than half a billion in cloud revenue next year.

And if you look at.

The Q4 expectation that's a very solid solid start for achieving the 1 billion next year. So I don't see any deceleration in demand for cloud and I think we are.

I will position too.

Provide customers cloud solutions when they when they when there might be some some customers are saying, yes, we are going to go cloud, but not now.

But when they are ready we are ready and we continue to see very good growth.

Okay, and then maybe to that point, what's the catalyst that jump starts I think the conversation to move to the cloud or even if you go to IAC right is it a line of business that that's making these purchases at citizens, meaning how much of that is being driven by like contact center upgrades versus more of a digital transformation within the customer.

Engagement.

Yeah. So I think it's predominantly digital transformation.

When you look at our cloud growth more than 60% comes from new deals.

Right, so less than 40%, it's actually conversion.

So if you look at like our 35% to 37% cloud growth this year and more than 60% is new deal. So that's like 21%.

And 15% comes from conversion.

So I think that gives you the idea that.

Even if we didn't have any conversion in our base, we will still be growing at 21% because of digital transformation and demand for new functionality.

The kind of salary disruptive.

How many times people go online and try to do something before the called the contact center, it's very often.

And when they call it kind of center, they expect to kind of accept it to understand what they did what was there Jeremy before they called.

So the contrary is disrupted by digital because.

Customers expect more.

Contextual and connected.

Experiences and the culture needs to be connected to the back office to the.

Online and self service.

Channels that are mostly designed by marketing.

The experienced team that measure of experience of course the journey.

And that's what that's what we provide in our in our platform.

Specifically as you know.

Emphasized that we designed the platform closed engagements capacity gap and the capacity gap is is created because of the increase in the number of digital touch points and digital interaction is there's just more and more of them.

And he just organization cannot urge people to address it so they need more information.

And then drive the demand for automation is driving our growth because we are an application platform.

And you know agnostic to the infrastructure.

But opex is really need to make changes and by applications that can help them close that gap.

Because otherwise they'll just have consumers that have terrible experiences.

And then also when our customers report to US They report greater ROI, we discussed the Forrester report last quarter.

We're forced their approach our customers and.

Roy was three.

300% over three years and payback in less than six months.

And.

You know they also report to us that when they when they deploy these types of solutions that can also increase revenue.

So it's not just that it's not only that they can reduce the.

The spend on workforce and elevate the customer experience elevated customer experience creates opportunity for upsell and increasing revenues. So the demand towards either with a long answer but the demand for our cloud growth really is driven by this whole digital transformations that our customers are going through.

Great. Thank you very much for the color.

Yeah.

Thank you and our next question comes from some Mod Samana from Jefferies. Your line is now open.

Hi, good evening. Thanks for thanks for taking my questions maybe just.

First on the on the long term guidance I just wanted to double check is that all organic the assumptions for fiscal 'twenty, three and fiscal 'twenty four or does that assume some level of M&A as well and then I have a quick follow up as well.

Yes, so we don't we don't assume any future M&A.

We had the <unk>.

Social M&A that we did earlier in the year right. We talked about you know that that's going to contribute about six.

$6 million this year and because we did it.

Seven months into the year theres going to be some contribution into next year.

But it's a few million dollars of inorganic in the guidance for next year and that's if we don't we don't assume any future M&A in 'twenty three or 'twenty four.

Great. Thanks for that and then.

Doug maybe one for you just to better understand the expenses that fell out of <unk> into <unk> wanted to make sure I heard that correctly and just was that due to hiring being tougher was that due to you know.

<unk>, just maybe help us triangulate, what those expenses were and how that could impact.

The business.

There's no big.

Trends Matsui is just some timing around some things that our folks.

Folks kind of pull the trigger on a little sooner than we had planned for in our model if you will.

So just some timing of expenses hitting Q3, rather than Q4 and the numbers.

No we're still investing in the business that we expect Q4 opex to ramp a little bit off of the <unk>.

Q3 levels, and then come down a little bit and.

Q1.

So probably next year.

We'll probably have about 7% opex growth for the full year.

Great and then maybe just one last one.

I asked a couple of quick ease which is.

When you think about the.

And contact center seat that that variance WSI was being attached to have you seen any change in the mix of that this quarter. If you think about whether they're using five nine or in contact or Genesis any evolution in who you're attaching your Wi Fi too.

So we yeah, we've seen day for me.

Contact center infrastructure perspective, we see a lot of fragmentation.

So.

We have there.

<unk> is offering that is launched to the market we have.

Cisco, New Webex seek us offering, obviously, Amazon connect and Twilio and.

And that smaller players like the eight by eight and vantage and we partner with all these guys because when customers need applications and they want best of breed.

Thats variant.

So when you look at 5959 is a partner.

The revenue the revenue we have today with five nine is still very small.

But.

It's been growing this year because they started to go up market and we expect that to continue to grow next year as they continue to go through upmarket.

No.

The smaller.

The vendors that we've been targeting more of the SMB market as they go off market they need more sophisticated sophisticated applications and thats where.

Customers really well.

One variant and many times the customers actually decide on the applications and then they choose the communication infrastructure vendor so.

The partnership is really one that benefits both sides.

Because.

More and more in the digital transformation the business needs are actually more important than the it infrastructure needs and as they look to close the engagement capacity gap. They once more AI more analytics.

That's the leading.

They didn't requirement, but first I want to make sure. They have a law and then they want to make sure that the.

Our infrastructure supports it so we see two questions, we see customers that want to buy.

Infrastructure and applications at the same time, but I think we also see more and more customers that understand that they can bifurcate. This decisions that if they need applications now because that helps them close some gaps and drive our why they don't necessarily have to change their infrastructure right away they can make that.

<unk> decision late later on.

So we see we see all of the above.

But clearly the F&B the smaller of the customer is the smaller of their contact center.

The less elegant is there need for.

Business application that close the gap.

The more sophisticated and larger organizations really feel the pain of digital transformation and they are leaving with business applications first.

Great. Thank you I appreciate that.

And thank you.

Our next question comes from Brian Essex.

From Goldman Sachs. Your line is now open.

Great. Thank you and thank you for taking the question maybe began for for perpetual revenue, we'd like to just you know.

Thank you. Thank you for the revised forecast on cloud by the way, but I'd like to kind of back into perpetual revenue to see if your outlook. There has changed at all I think previously.

Your team has thought that this would kind of level off in the $100 million range.

Should we think about incremental perpetual sales.

How much visibility do you have into that and has your outlook changed is it just a matter of like looking through your pipeline and you have a certain hit rate that tends to be perpetual or just love a little bit more color.

About that particularly longer term yes.

Yeah sure. So first it's very important is that we.

Today.

We allow our sales force to sell perpetual only by exception they have to go through an exception process.

And believe me they don't they don't want to sell perpetual they want to sell stuff.

But we do have a number of customers that it's not a large number but it.

Typically the larger customers that we know that for now we have to give them exception.

You know interesting we talked about the $4 million deal that came earlier, we expected in Q <unk> Q4, and it came in Q3 and with the perpetual deal from a large telecom.

Customer.

And.

And what's interesting about this deal not only came in earlier, but actually we were surprised that the customer was entertaining going to SaaS.

And we Didnt think its good theyre going to do this year, we thought maybe next year.

But they were entertaining it eventually that you started not now.

And.

I see that as a very good.

Good development.

Even this very large telecom customer is starting to.

Move.

And consider it at least eight they are requested to understand how the proposal will look like and stuff and.

There's timing issues there.

These are complex organizations to have compliance needs to have security needs.

Hi team they have all kind of.

Priorities.

What they want to shift to SaaS and when they want to keep on Prem.

I do believe that the entire industry is shifting to sucks Theres no no question about it in my mind.

And the dialogue with customers suggest that.

But.

I think that's right now our view is that in 24, yeah, we'd have about $100 million, which will be tens of customers not more than tens of customers.

And about $100 million and 24 that will still be perpetual.

Will that continue to to get.

Smaller part probably over time, probably over time, but.

The big thing with perpetual for variant was that perpetual was very big and every decline what was the big headwind even that booking was good.

The revenue decline was material and I think that as we have very large clouds baseline that is growing 30%.

Even if perpetual will decline a little bit fast there I still think we have a good chance to accelerate growth rates overall revenue growth rates.

Got it that's super helpful and maybe maybe to follow up.

Think about the overall environment just from a macro point of view I recall.

During the pandemic.

There were there were issues with regards to needing to be.

In customer facilities.

To sell certain certain types of software as we as we kind of evaluate the news flow that we see every day I mean do you see anything that materially disrupted.

Don't know, new new Gary <unk> pop up or.

Travel issues arise from from one geography to the other way anything anything that you might be able to digest it might impact your business, one way or the other.

So from a travel perspective, we don't need we got organized to do mostly remotely when we do need to travel we do.

It's not an issue today, but it's really not very common.

So I don't expect travel restrictions to make things worse.

But I think that the fact that we now have.

This new variants and more and more customers realize that this pandemic is going to stay with us maybe longer.

It does help to the cloud acceleration I think that's probably one of the reasons, we see even the larger customers are realizing.

It's time to move to cloud and benefit from doing everything remotely and it's also helpful. In terms of demand for more visibility tools and analytics tools.

As the workforce is all kind of scattered and.

Management needs to really be able to provide.

People are at home with the right tools and be able to understand.

What works and what doesn't work so yeah that probably drives more demand.

But.

I don't I don't see I don't see any customers really thinking that they just need to all of their breath and and wait for the pandemic to be over I think customers realize that.

No need to buy into this workforce optimization tools because.

<unk>.

First you know people will probably work hybrid anyway in the future.

You know.

They are more and more customers are hiring people and a lot of different locations. Because these are hot labor market.

They want to take advantage of where they can hire so.

As where everybody sits.

One offish.

Gone and the digital transformation.

Really the biggest.

Dry for.

AI.

So some people can be replaced with automation. So all these trends I think the pandemic was accelerating the shift but.

The fact that the pandemic may take longer.

Maybe maybe somewhat helpful to exploration, but doesn't change the overall trend.

Got it that's super helpful. Thank you.

Okay.

Yeah.

And thank you and our next question comes from Dan Bergstrom from RBC capital markets. Your line is now open.

My questions.

Maybe because we look at the near term side of Brian's previous question. It sounds like we're expecting it typically.

Seasonally strong fourth quarter here less perpetual.

Previously obviously you provided some guidance around the cloud, but is there the potential for a more pronounced break in customer preference towards the cloud with all the business in the quarter, you just talked about that large perpetual customer.

Those early was considering SaaS or or or do you feel like you have pretty good visibility around customer preference at this point in the quarter I do I do.

C, 60% or more in SaaS in Q4, so I definitely.

But if that's the best that's the best quarter, we will have in terms of this shift.

And as we look at the pipeline into next year, we believe 65% will be sash. So.

And when we analyze it further we also see that.

The ones that remain perpetual again are smaller and smaller universe of customers that are just going to take longer in the decision, making but it's not a.

Pervasive trend is.

It's limited to customers and you know we announced.

Just in the quarter 21, multimillion dollar deals last quarter. We had also I think about 'twenty, a multi million dollar deal. So.

And that's just Claudius.

We do have.

Some large customers that will continue next year to buy perpetual, but the number of those customers.

We'll be small so the trend is very very clear and I think that you know in the past I spoke about.

The industry is shifting.

<unk>.

Some customers already so I'm not ready I think today I can say.

Every customer realize that that's where they're going it's just a matter of when.

Great. That's helpful. And then maybe for Doug Doug could you just help us think through the cash flow dynamics here over the next several years Dan touched on this a bit in the prepared remarks and in response to a question.

But it seems like the second half of the cloud transition typically we really start to see the benefit in cash flow I think those previous headwinds that built up.

R P O and deferred should be coming in as a tailwind to cash flow is that the right way to think about the dynamics for cash flow from here, Yeah, exactly Dan we touched on it a little bit last quarter as well.

Kind of as we look out.

So you can see this quarter, we had a very good quarter next quarter, we expect a strong quarter.

So we'll probably come in around 180 on a before.

Or nonrecurring items.

Cash from ops and <unk>.

You mentioned, there's a bit of a waterfall of cash kind of come in and just the way the revenue accelerates the.

Cash accelerates our internet here too so coming off of this year's dates we should grow maybe 20% in terms of cash before nonrecurring items.

From ops next year.

And then probably that's probably the big kind of windfall in if you will and then kind of leveling and think about cash kind of growing with the earnings at that point kind of low double digits similar to earnings, but it's still a very strong cash growth.

That's great appreciate the thoughts thanks.

Sure.

And thank you.

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

Great. Thanks, operator, and thank you everyone for joining us today. If you have any questions. Please feel free to reach out and we'll talk to talk to you again soon have a good night.

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

Okay.

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Yes.

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Good day, and thank you for standing by and welcome to the <unk> Systems, Inc. Q3, 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session. Please be advised this call is being recorded if you require any further assistance. Please press star zero would.

I'd now like to hand, the conference over to your host today, Matthew Frankel you may begin.

Thank you operator, good afternoon, and thank you for joining our conference call today I'm here with Dan Bodner, <unk> CEO, Doug Robinson parents, CFO, and Alan Roden Burns Chief Corporate development Officer.

Before getting started I would like to maintain that accompanying our call today is a webex with slides if you'd like to do these slides in real time during the call. Please visit the IR section of our website at <unk> Dot com click on the Investor Relations tab and click on the webcast link and select today's conference call.

I'd also like to draw your attention to the fact that certain matters discussed in this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, and other provisions and federal Securities laws.

We're looking statements are based on management's current expectations and are not guarantees of future performance actual results could differ materially from those expressed in or implied by these forward looking statements are.

The forward looking statements are made as of the date of this call and except as required by law Geron assumes no obligation to update or revise them investors are cautioned not to place undue reliance on these forward looking statements.

For a more detailed discussion of how these and other risks and uncertainties could cause actual results to differ materially from those indicated in these forward looking statements. Please see our Form 10-K for the fiscal year ended January 31, 2021 and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures as we believe investors always on those measures and comparing results between periods among our peer companies.

Please see today's webex slides in our earnings release in the Investor Relations section of our website at <unk> Com for a reconciliation of non-GAAP financial measures to GAAP measures.

Non-GAAP financial information should not be considered in isolation from or as a substitute for or superior to GAAP financial information.

But I think credit because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and useful to investors for informational and comparative purposes. The non-GAAP.

Financial measure the company uses have limitations and may differ from those used by other companies.

Now I'd like to turn the call over to Dan Dan.

Thank you Matt.

I'm pleased to report the momentum we experienced in the first half of the year.

In our third quarter.

We had strong cloud revenue growth.

Strong new booking growth.

And overall revenue and diluted earnings per share.

<unk> significantly ahead of our expectations.

Looking ahead.

We expect the momentum to continue in Q4.

Raising our annual guidance for non-GAAP revenue to a head.

$875 million at the midpoint of our range.

We're also raising our annual guidance for both cloud revenue growth and UK early booking growth.

We believe our results and improved outlook reflects the differentiation of our cloud platform.

And our strong execution following the spin off of our security business earlier this year.

Anticlinal, Christine we provided three year targets for our cloud first strategy and accelerating growth.

I'm pleased to report.

We are tracking ahead of our three year plan.

We're introducing guidance for next year above our prior target.

And also increasing our target for fiscal 'twenty four.

Let me start with our Q3 results and discuss what we believe is behind our strong cloud growth and booking momentum.

In Q3, our cloud revenue grew 33% on a GAAP basis, and 32% on a non-GAAP basis year over year.

We expect our strong cloud revenue growth to continue in Q4 and.

And we are raising our guidance for more than 35% for the year.

We also had strong new booking growth on the PND basis.

Across new logos and existing customers with.

With 21 large cloud orders each in excess of 1 million Daus GCB.

New <unk> bookings increased 14% year over year in Q3.

And we are raising our outlook for the year to more than 15%.

Our numerous multimillion dollar cloud orders.

And in Q3 included some of the more notable brands in the world.

Such as Costco, Additionally, Goldman Sachs and HP, Inc.

Regarding new customers I am glad to report that during Q3, we added more than 100, new logos.

Including Western digital Blackstone, Eventbrite Natwest markets and the bank of Hawaii.

Regarding existing customers.

We had many extensions as a cloud platform strategy makes it easier and faster for customers to expand and benefit from from our AI innovation.

Overall, we had strong bookings momentum and are pleased with the addition of many new customers.

In Q3, we continue to innovate and introduce new capabilities in a cloud platform.

To help brands closed engagements capacity gap.

For example, we recently announced new AI, driven real time agent assist capabilities.

Including real time sentiment analysis.

And the new highly accurate cloud transcription and Jan <unk>.

Just on deep neural network models.

We also introduced in a cloud platform, new social messaging functionality.

It can be deployed together with intelligent virtual assistant.

To automate social messaging.

Our cloud platform as an open multi cloud architecture that enables us to deliver innovation at an accelerated pace.

Our openness enables the platform to seamlessly fit with existing enterprise ecosystem.

It provides customers out of the box integration with many communication infrastructure enterprise data and CRM vendors.

This strategy of a truly open and agnostic platform.

He is very attractive to both our customers and a growing set of partners.

At the heart of our cloud platform is varying da Vinci AI.

Which drive strong automation and customer ROI.

Because the platform is also modular brands are able to deploy our workforce engagement digital first engagement and experience management.

Just on their business priorities to close the engagement capacity gap.

Yeah.

Looking forward.

We are pleased with the momentum we experienced throughout this year and are introducing guidance for next year fiscal 'twenty three above our prior targets for.

For fiscal 'twenty, three we now expect $935 million of total revenue.

Reflecting 7% growth.

From our prior target of 6%.

We are also expecting 30% cloud revenue growth.

Driving cloud revenue to over $500 million.

Around 55% of our total revenue.

As previously discussed our shift to the cloud will positively impact cash flow.

And we're expecting more than 20% growth in cash from operations next year.

Behind our improved growth outlook for fiscal 'twenty three.

These are significant bookings momentum this year.

As a reminder, since the beginning of fiscal 2002, we have raised our outlook multiple times for new <unk> bookings growth, which.

Which is a leading indicator of future revenue growth.

In addition, I would like to point out that we expect to finish the year with non-GAAP cloud revenue in Q4 of around $117 million.

Providing us with a solid starting point to achieve more than $500 million in cloud revenue next year.

Turning to fiscal 'twenty four.

We are now targeting 10% revenue growth.

Which will take us to $1 billion and $30 million of revenue.

Up from the previous target of high single digit growth.

We're also raising our cloud revenue target for fiscal 'twenty four to over 650 million daus with.

It was another year of 30% growth.

I would like to take a minute to review our multiyear cloud journey.

In fiscal 19, only around 20% of our total revenue came from the cloud.

And we're now expecting around 55% next year and targeting around 65% in fiscal 'twenty four.

Shifting our revenue mix to the cloud.

Many benefits to very <unk>.

Including more recurring revenue better visibility.

And improved economics over the customer lifetime.

In summary.

I am very pleased with our significant progress on all fronts.

Since the spin we've posted three quarters of strong results executing ahead of our three year plan.

We are now raising our target again.

Our AI powered cloud platform is differentiated.

And deliver significant ROI to customers.

And our open and partner friendly strategy.

Is resonating well in the market and we are adding many new customers.

Finally, I would like to thank our employees for their hard work and dedication.

We continue to hear from our employees that they like our strong customer centric culture, and our focus on customer engagement.

As a pure play company.

Now, let me turn the call over to Doug to provide more details on our Q3 results and outlook.

Scott.

Yeah. Thanks, Dan Good afternoon, everyone.

Our discussion today will include non-GAAP financial measures a reconciliation between our GAAP and non-GAAP financial measures is available as Matt mentioned in our earnings release and in the IR section of our website.

Differences between our GAAP and non-GAAP financial measures.

Include adjustments related to acquisitions, including fair value revenue adjustments amortization of acquisition related intangibles.

Certain other acquisition related expenses.

Stock based compensation expenses separation related expenses as well as certain other items that can vary significantly amount and frequency from period to period for certain metrics. It also includes adjustments related to foreign exchange rates.

As Dan mentioned, our Q3 results came in ahead of expectations and we're pleased to be raising our annual guidance and long term targets.

For Q3.

Non-GAAP revenue came in at $227 million.

Non-GAAP cloud revenue increased 32% year over year.

<unk> bookings increased 14% year over year non.

Non-GAAP gross margin came in at 71%.

Non-GAAP operating margins came in at 27%.

Non-GAAP diluted EPS came in at 69 cents.

And remaining performance obligations or <unk> increased 31% year over year.

We're pleased with our overachieve them on both the top and bottom line.

Our topline over achievement was due to strong demand for our cloud solutions as well as a $4 million perpetual order coming in in Q3, which we previously expected to come in during Q4.

Our Q3 bottom line was positively impacted by higher revenue and some expenses being delayed to Q4.

For the year, we now expect $875 million of revenue plus or minus 1%.

Up from our prior guidance of $872 million and our initial guidance of $860 million.

We expect cloud revenue growth in the range of 35% to 37%.

Up from our prior guidance of 35% in our initial guidance of 30%.

I'd like to mention that customers converting existing solutions to the cloud represent close to 40% of our expected cloud revenue growth in the remaining 60% is driven by new deployments.

We expect new bookings growth in the range of 15% to 17% up from our prior guidance of 15% of our initial guidance of 10%.

From a mix perspective.

We expect 60% of <unk> bookings to come in from SaaS in Q4.

We expect $2, 25% of non-GAAP diluted EPS at the midpoint of our revenue guidance based on $75 9 million diluted shares outstanding for the year.

I'd now like to discuss guidance for our next fiscal year ending January 31 2023.

For revenue, we are introducing guidance above our prior target.

$935 million in revenue, plus or minus 2% or 7% growth, which is being driven by our strong PLE bookings.

For new <unk> bookings growth next year.

We are also guiding above our prior target to a range of 10% to 12%.

Our pipeline is rapidly shifting to SaaS and next year, we expect around 65% of new bookings to come from SaaS for the full year.

We expect cloud revenue to exceed $500 million and to represent approximately 55% of our total revenue.

With continued margin expansion, we expect $2 49 diluted EPS at the midpoint of our revenue guidance, reflecting nearly 11% growth year over year.

We expect to generate $200 million of GAAP cash from operations, reflecting more than 20% growth year over year on a normalized basis.

I'd also like to provide you some additional detail for your models.

We expect around $1 5 million per quarter of interest and other expense.

We expect about 300000 per quarter of net income from Noncontrolling interests, we have in a small joint venture.

We expect an 11% cash tax rate for the year.

And we expect $75 9 million or fully diluted shares flat with this year.

Similar to fiscal 'twenty, two we intend to repurchase shares in fiscal 'twenty three to offset dilution from our equity compensation program that we announced today that our board has approved a new buyback program for next year.

In summary, we're very pleased with our strong momentum and are tracking ahead of our three year plan, we laid out at the beginning of the year.

We expect our revenue growth rate to accelerate from 4% this year to 7% next year and are targeting 10% thereafter.

From a mixed perspective, we're targeting nearly two thirds of our revenue in fiscal 'twenty four to come from cloud.

As we approach the holiday season, I would like to thank our employees during unprecedented time in the market. Our strong results are due to your hard work thought leadership and commitment to serving our customers.

So with that operator, let's open up the line for questions.

Yeah.

Thank you as a reminder to ask a question you will need to press star one on your telephone Joe Joe Your question post the balance sheet. Please standby will be compile the Q&A roster.

And our first question comes from Ryan Macdonald from Needham. Your line is now open.

Hi, Thanks for taking my question and congrats on an excellent quarter here.

Again I was most impressed by the strong new customer new logo additions and I think over 100 in the quarter, you mentioned, an or 60% of PLE bookings coming from new customers, just love to understand a little bit more where that strength is coming from whether its youre seeing sort of a surge in demand in the marketplace from new.

Customers as they spend on digital transformations are it does come down to is just great sales execution would love a little more color there. Thanks.

Yes, yes. Thank you.

So I think it comes from demand for cloud platform, we discussed before our cloud platform is differentiated.

Helpful to our customers too.

Innovate faster because they can consume applications from the platform easier than on.

Non fan bases.

We do see also increasing partners execution with the cloud platforms and growth with partners.

I think it's really the overall positioning from a product perspective, as well as our partner agnostic strategy.

We actually did mention on the call first time.

100, new customers and some of them are new.

Notable brands like the bank of Hawaii, and Western digital and Blackstone.

But we saw this momentum since the beginning of the year. We also had more than 100, new customers in Q1 and in Q2 and.

And we expect that to continue in Q4, so we actually would expect more than 400 customers new customers to join.

<unk> bye.

By the end of the year.

So it's.

It's a trend that now has been established.

And we feel very strongly that it's the result of the strength of the platform as well as the.

I have nothing strategy.

Excellent. Thanks for the color there and then.

On the range the outlook as we start to think about the fiscal 2004 targets being higher I'm, just curious about what youre seeing from a visibility perspective. It gives you confidence in this.

This higher outlook what are you seeing from a roadmap perspective as you talk to your customers that are looking to to migrate over.

Yes, so visibility is actually improved quite a bit.

Obviously.

Partially its because of the.

Growth in recurring revenue, we are now around 83%.

Software revenues were carrying so thats improved visibility, but also piper.

Pipeline, we see.

Doug you mentioned Apio, our remaining performance obligations is up 31% year over year.

We see strong demand in the pipeline and also a big shift.

So we actually expect in terms of the pipeline mix we expect.

60, 40, 60% of the booking in Q4 to be from SaaS and for next year, we expect 65% of the booking.

To come from SaaS, So so pipeline suggest.

Overall strengths and also continuing.

<unk>.

Towards towards SaaS.

We also raised our PEO PLE.

<unk> bookings guidance for next year.

So we took it from 10% to higher to a range of 10% to 12%. Obviously this year, we now expect more than 15% booking growth.

So we hope that will continue to see strong momentum into next year as well.

But.

All of these are helpful to visibility when you look at our Q4 cloud revenue, we're expecting 117, so thats a good starting point to.

So another year of more than 30% growth.

So that will bring us to more than one.

$1 billion in cloud revenue.

And even more.

Recurring revenue source.

Forward visibility.

Clearly.

We feel like.

Our strategy is working we over the mid point of our cloud transition.

So our revenue growth is now accelerating because we have less headwinds from the perpetual decline.

So we gave targets for 7% growth next year and 10% growth.

The following gear on overall on overall revenue and cloud revenue continuing to grow at 30%.

So it looks good.

Okay sounds good for my end as well congrats again I'll hop back in the queue.

Okay.

And our next question comes from Dan Ives from Wedbush. Your line is now open.

Yes. Thanks.

So.

Can you talk about in terms of the cloud transition it feels like you've sort of crossed that line now.

Like almost the second half is it sort of again, the inflection point more than 50%.

Can you just talk about that.

What are sort of now two triggers that we should see going forward is it feels like youre kind of past the midway point of the transition.

Yeah. So the midpoint is very important so so first just to make sure.

Clear.

We pass the midpoint and booking and we expect to pass the midpoint in revenue.

During next year and get to 55% of revenue to be cloud.

So what happens as we get more cloud revenue.

A number of things first visibility will continue to improve as we get more recurring revenue.

Second we will see improvement in cloud revenue growth because we are growing double digits in bookings, while we have a lot of new customers. We added were talking about more than 15%. We now raised the guidance to between 15% to 17% booking growth this year.

So all of these bookings acceleration will start to contribute more into revenue acceleration because the perpetual decline is less material, we just have less perpetual.

So obviously revenue acceleration, but also.

Gross margin acceleration when you look at our gross margin mix.

Our nonrecurring gross margin is in the mid fifties.

Because perpetual carries a lot of professional services, so thats a mid fifties.

Average gross margin for nonrecurring, but the recurring margin is in the mid seventies. So as recurring goes up also gross margin will start to go up modestly next year and more and more in the following years.

And we talked about.

Better economics.

And improve cash flow.

So cost at the midpoint is really you go appeal and you get a lot of headway.

Headwind on.

The way up and you start to get tailwind on the way down which is what we're starting next year.

Great and then can we just talk about.

In terms of just size of deals.

You'd think about pipeline and what kind of you're hitting it as we sort of get through the midpoint should we expect as large as deal sizes more strategic is that a trend. Thanks.

Yes, I think.

We are becoming more strategic to our customers and partners.

Because they can consume more from a cloud platform in a very consistent way all of the applications. We have and you guys noted we've acquired companies over the years and while we put all this technology that we acquired in one platform, which gives customers the ability to expand very easily just consuming more services.

And then going through the whole effort of.

On Prem deployment.

That makes the.

The relationship more strategic that can benefit from innovation in AI much faster in the cloud platform.

Our partners have access to a lot of AI innovation quickly through our da Vinci services.

So all of this effort we put into the platform is really positioning us.

To have more footprint with our customers and partners.

And.

We expect when they look at the mix right now we generate about half of our revenue from direct and.

Indirect from cut from partners.

We expect both to grow nicely and partners to grow a little bit faster.

So the 50 50 ratio will probably be not that materially different than a year or two but but but the indirect will slightly go faster and and thats. Good for us because we have a lot of leverage.

With partners and don't have to add a lot of <unk>.

<unk> as we continue to accelerate our growth rates.

So.

Putting all that into.

The context of the journey.

We think that for US cloud is not just the change in business model, but it was the ability to really offer a single platform that is open that is connected to the ecosystem. We have a lot of out of the box integrations. We now have a pretty significant Isd program. So a lot of companies are developing applications on.

Our platform.

And we are lifting this companies in our marketplace. So the customers can benefit from the open platform, so creating that ecosystem of ISP partners, creating an ecosystem of the box integrations.

Enterprise data systems and enterprise.

Sure.

CRM or HR or any type of enterprise systems.

Is it important to be integrated into customer engagement.

Customers with partners get consumed it very easily from a cloud platform.

So it's a big innovation, we spent a lot of time and effort in building that platform and we believe it's very differentiated right now and because it's open and agnostic.

We see a lot of.

Changes in the communication infrastructure market.

We saw just lately by eight.

These acquiring fuse.

Hey.

Consolidation will take us a new class.

We saw.

So im trying to buy five nine for the same reason.

And Webex is announced.

Take us offering in Nevada.

You guys in CCAR and Microsoft has announced.

An extension of teams into the contact center. So all of this.

Infrastructure consolidation across the contact center and the enterprise is really the starting point for more demand for our platform because we have applications.

Our cost across the enterprise connecting the contact center into other parts of the of the enterprise in a way that can generate a lot of business all awry right. So customers by infrastructure based on you know.

IC ecosystem and what they need for it for me.

From the infrastructure.

But customers really need a strong application platform to create business OE applications with workflows and automation to drive business and this is we're very engaged right. We are in this bucket of very strong best of breed applications all available in one platform so customers can cause.

Assume those services in a very consistent manner.

Thanks.

And thank you.

And our next question comes from Peter Levine from Evercore.

Your line is now open.

Great. Thanks for taking my question I'm, sorry, if I missed it but cloud growth in the quarter saw a sequential D cell. Maybe first can you just kind of talk about those dynamics were there deals that pulled into Q2, perhaps that youll got pulled into Q4, just like to understand what happened in the quarter.

Yeah.

So let's look at the numbers right, we started the year with cloud growth expectation of 30%.

And then we update 230% to 35% then we asked it again to 35 and today, we are upping the cloud growth for the year between 35% and 37.

So I don't think we are decelerating I think every quarter, we raised our.

Our expectations for cloud growth this year.

And.

When you dissect the cloud growth.

You can see that.

In cloud, we have SaaS and we have managed services.

And managed services as we discussed.

<unk> is something we offer our customers with the survey is low margin and we don't plan to grow that much so in Q3.

Managed services grew 10%.

Which is fine, but SaaS grew 38%.

So we continue to see very strong growth in Q3.

And we expect acceleration in Q4 first of all so thats why we are raising.

Raising our cloud growth guidance to more than 35%.

So bottom line is I think we are we are progressing very well through the year.

We see our pipeline shifting we see cloud deals.

Potentially.

Customers were looking to buy perpetual shifting to the cloud much faster.

And I think that quarter to quarter, there could be small fluctuations, but I am very pleased with over 30% growth in Q3.

As well as raising.

Raising again guidance for Q4.

And.

The number is also getting better and we still think that we can achieve more than half a billion in cloud revenue next year.

And if you look at.

The Q4 expectation that's a very solid solid start for achieving the 1 billion next year. So I don't see any deterioration in demand for cloud and I think we are.

Well positioned to.

Provide customers cloud solutions.

Well there may be some customers are saying, yes, we are going to go cloud, but not now.

But when they are ready we are ready and we continue to see very good growth.

Alright, and then maybe to that point, what's the catalyst that jumpstart affecting the conversation to move to the cloud or even if you go to IAC right is it a line of business that that's making these purchases decisions, meaning how much of that is being driven by like contact center upgrades versus more of like a digital transformation within the customer.

Engagement.

Yes, I think it's predominantly digital transformation.

When you look at our cloud growth more than 60% comes from new deals.

Alright, so less than 40%, it's actually conversion.

So if you look at like our 35% to 37% cloud growth this year and more than 60% is new deal. So thats like 21% and 15% comes from conversion.

I think that gives you the idea that.

Even if we didn't have any conversion in our base, we will still be growing at 21% because of digital transformation and demand for new functionality.

Kind of center of disruptive.

Yes.

How many times people go online and try to do something before the call. The contact center, it's very often.

And when they call a kind of a center they expect the context to understand what they did what was there Jeremy before they call.

So the confidence is disrupted by digital because.

Customers expect more.

Contextual and connected.

Experiences and the culture needs to be connected to the back office to the.

Online and self service.

Channels that are mostly designed by marketing.

Customer experience teams that measure experienced across the Jeremy.

And that's what that's what we provide in our in our platform.

We specifically.

Emphasized that we designed the platform closed engagements capacity gap and the capacity gap.

This is created because of the increase in the number of digital touch points and digital interaction is there's just more and more of them.

Andy just organization cannot urge people to address it so they need more information.

And then drive the demand for automation is driving our growth because we are an application platform.

And I cannot speak to the infrastructure.

Opex was really need to make changes and by applications that can help them close that gap.

Because otherwise I'll just have consumers that have terrible experiences.

And also when our customers report to US They report great DIY, we discussed the Forrester report last quarter.

We're forced their approach our customers and.

<unk> was three.

300% over three years and payback in less than six months.

And.

They also report to us that when they when they deploy these type of solutions that can also increased revenue.

So it's not just that it's not only that they can reduce the.

The spend on workforce and elevate the customer experience elevating customer experience creates opportunity for upsell and increasing revenues. So the demand there was a long answer but the demand for our cloud growth really is driven by this whole digital transformations that our customers are going through.

Great. Thank you very much for the color.

Yeah.

Thank you and our next question comes from Mark <unk>.

<unk> from Jefferies. Your line is now open.

Hi, good evening. Thanks for thanks for taking my questions maybe just.

First on the on the long term guidance I just wanted to double check is that all organic the assumptions for fiscal 'twenty, three and fiscal 'twenty four.

Or does that assume some level of M&A as well and then I have a quick follow up as well.

Yes, so we don't we don't assume any future M&A.

We had the call.

Social M&A that we did earlier in the year right we talked about.

<unk> contributed about.

$6 million this year and because we did it.

Seven months into the year theres going to be some contribution into next year.

But it's a few million dollars.

Inorganic in the guidance for next year and Thats. It we don't we don't assume any future M&A in 'twenty three or 'twenty four.

Great. Thanks for that and then.

Doug maybe one for you just to better understand the expenses that fell out of <unk> into <unk> wanted to make sure I heard that correctly and just was that due to hiring being tougher was that due to.

<unk> can you just maybe help us triangulate, what those expenses were and how that could impact.

The business.

Yeah, there's no big.

Trends Matsui is just some timing around some things that our folks kind of pulled the trigger on a little sooner than we had planned for in our model. If you will so.

So just some timing of expenses hit in Q3, rather than Q4 in the numbers.

We're still investing in the business. So expect Q4 opex to ramp a little bit off of.

Q3 levels, and then come down a little bit in <unk>.

Q1.

So probably next year.

We'll probably have about 7% opex growth for the full year.

Great and then maybe just one last one.

To ask a couple of quick which is.

When you think about the.

And contact center seat that that <unk> is being attached to have you seen any change in the mix of that.

Quarter, if you think about whether they're using five nine or in contact or Genesis any evolution in who you're attaching your Wi Fi too.

So we yes, we've seen.

For me.

<unk> centre infrastructure perspective, we see a lot of fragmentation.

So.

We have.

<unk> is offering that is launched to the market we have.

Cisco, New Webex pick us offering, obviously, Amazon connect and Twilio and.

And Thats smaller players like the eight by eight and vantage and and we partner with all of these guys because when customers need applications and they want best of breed.

Variant.

So when you look at 5959 is a partner.

The revenue the revenue we have today with $5 nine is still very small.

But it's been growing this year because they started to go up market and.

And we expect it to continue to grow next year as they continue to go through upmarket.

No.

The smaller.

And those that were targeting more of the SMB market as they go off market they need more sophisticated sophisticate applications and Thats where.

Customers really.

One variant and many times the customers actually decide on applications and then they choose the communication infrastructure vendor so.

The partnership is really one that benefits both sides.

Because.

More and more into digital transformation the business needs are actually more important than the it infrastructure needs and as they look to close the engagement capacity gap once more AI more analytics.

That's the leading.

The leading requirement, but first I want to make sure. They have ally and then I want to make sure.

Infrastructure support that we see to your question, we see customers that want to buy.

Infrastructure and applications at the same time, but I think we also see more and more customers that understand that they can bifurcate this decisions that today.

If they need applications now because that helps them close some gaps and drive our why they don't necessarily have to change their infrastructure right away. They can make that decision later later on.

So we see it we see all of the above.

But clearly the SMB the smaller the customer is the smaller their contact center.

The less elegant is there need for.

Business application that close the gap.

And the more sophisticated and larger organizations really feel the pain of digital transformation and they are leaving with business applications first.

Great. Thank you I appreciate that.

And thank you.

Our next question comes from Brian Essex from Goldman Sachs. Your line is now open.

Great. Thank you and thank you for taking the question maybe began for for perpetual revenue, we'd like to just.

Yes. Thank you. Thank you for the revised forecast on cloud by the way, but I'd like to kind of back into perpetual revenue to see if your outlook. There has changed at all I think previously.

Your team has thought that this would kind of level off in the $100 million range, how should we think about incremental perpetual sales how.

How much visibility do you have into that.

Has your outlook changed is it just a matter of like looking through your pipeline and you have a certain hit rate that tends to be perpetual or just love a little bit more color.

Think about that particularly longer term yes.

Yes, sure so first and very important is that we.

Today.

We allow our sales force to sell perpetual only by exception they have to go through an exception process.

And believe me they don't they don't want to sell perpetual they want to sell stuff.

But we do have a number of customer that is not a large number but it's a.

Typically the larger customers that we know that for now we have to give them exception.

Interesting we talked about the.

$4 million deal that came earlier, we expected in Q Q4, and it came in Q3 and with the perpetual deal from a large telecom.

Customer.

And.

And what's interesting about this deal not only came in earlier, but actually we are surprised that the customer was entertaining going to SaaS.

We didn't think theyre going to do this year, we thought maybe next year.

They were entertaining it eventually thank you cited not now.

And.

I see that as a very good.

Good development.

Even this very large telecom customer is starting to.

Move and consider a statistic they requested to understand how the proposal will look like in SaaS.

There's timing issues there.

These are complex organizations to have compliance.

Needs to have security needs.

The team they have all kind of.

Priorities.

What they want to shift to SaaS and when they want to keep on Prem.

I do believe that the entire industry is shifting to sucks Theres no no question about it in my mind.

And the dialogue with customers suggest that.

I think thats right now our view is that in 'twenty four yes, we will have about $100 million, which will be tens of customers not more than tens of customers.

And about $100 million and 24 that will still be perpetual.

Will that continue.

Continue to get.

Smaller.

Over time, probably over time, but.

The big thing with perpetual for variant was.

Perpetual was very big and every decline.

It was a big headwind even that booking was good.

The revenue decline was material and I think that as we have very large clouds.

Baseline that is growing 30%.

Even if perpetual will decline a little bit fast there I still think we have a good chance to accelerate growth rates overall revenue growth rates.

Got it that's super helpful and maybe maybe to follow up as we think about the overall environment just from a macro point of view I recall.

During the pandemic.

There were there were issues with regards to needing to be.

In customer facilities.

To sell certain certain types of software as we as we kind of evaluate the news flow that we see every day I mean do you see anything that materially disrupted.

Don't know, new new Gary <unk> pop up or.

Travel issues arise from from one geography to the other or anything anything that we might be able to digest that might impact your business, one way or the other.

So from a travel perspective, we don't need we got it organized to do mostly remotely when we do need to travel we do.

It's not an issue today, but it's really not very common.

So I don't expect chairman restrictions to make things worse.

But I think that the fact that we now have.

This new variants and more and more customers realize that this pandemic is going to stay with us may be longer.

It does help to the cloud acceleration I think thats, probably one of the reasons, we see even the larger customers are realizing.

It's time to move to cloud and benefit from doing everything remotely and it's also helpful. In terms of demand for more visibility tools and analytics tools.

As the workforce is all kind of scattered and.

Management needs to really be able to provide.

People are at home with the right tools and be able to understand.

What works and what doesn't work so, yes that probably drives more demand.

But.

I don't I don't see I don't see any customers really thinking that they just need to all of their bras and and wait for the pandemic to be over I think customers realize that.

No need to buy into this workforce optimization tools because.

<unk>.

Firstly, you know people would probably work hybrid anyway in the future.

You know.

They are more and more customers are hiring people and a lot of dislocations because these are hot labor market.

They want to take advantage of where they can hire so.

As where everybody sits.

One office.

Gone and the digital transformation.

Really the biggest.

Dry for.

AI.

So some people can be replaced with automation. So all these trends I think the pandemic was accelerating the shift but.

The fact that the pandemic may take longer.

Maybe maybe somewhat helpful to acceleration, but doesn't change the overall trend.

Got it that's super helpful. Thank you.

Okay.

Okay.

Yeah.

And thank you and our next question comes from Dan Bergstrom from RBC capital markets. Your line is now open.

Our questions.

Maybe could we look at the near term side of Brian's previous question. It sounds like we're expecting it typically.

Seasonally strong fourth quarter here of less perpetual.

And then previously obviously you provided some guidance around the cloud, but is there the potential for a more pronounced break in customer preference towards the cloud with all the business in the quarter, you just talked about that large perpetual customer.

Those early was considering SaaS or or do you feel like you have a pretty good visibility around customer preference at this point in the quarter I do I do.

C, 60% or more in SaaS in Q4, so I definitely.

But if that's the best that's the best quarter, we will have in terms of this shift.

And as we look at the pipeline into next year, we believe 65% will be SaaS. So.

And when we analyze that further we also see that.

The ones that remain perpetual again are smaller and smaller universe of customers that just going to take longer in the decision, making but it's not a.

Pervasive trend is.

It's limited to two customers and you know we announced.

Just in the quarter 21, multimillion dollars deals last quarter. We had also I think about 'twenty multimillion dollars deals so.

And that's just cloud deals.

We do have.

Some large customers that will continue next year to buy perpetual, but the number of those customers.

It will be small for the trend is very very clear and I think that in the past I spoke about.

The industry is shifting.

<unk>.

Some customers already so im not ready I think today I can say.

Every customer realize that that's where they're going it's just a matter of when.

Great. That's helpful. And then maybe for Doug Doug could you just help us think through the cash flow dynamics year over the next several years Dan touched on this a bit in the prepared remarks and in response to a question.

But it seems like the second half of the cloud transition typically really start to see the benefit in cash flow I think those previous headwinds that built up arps.

<unk> and deferred should be coming in as a tailwind to cash flow is that the right way to think about the dynamics for cash flow from here, Yeah, exactly Dan we touched on it a little bit last quarter as well.

Kind of as we look out.

So you can see this quarter, we had a very good quarter next quarter, we expected a strong quarter.

So we'll probably come in around 180 on a before.

Or are non recurring items.

Cash from ops.

And as you.

Mentioned, there's a bit of a waterfall of cash kind of coming in just the way the revenue accelerates.

Cash accelerates into next year or two.

So coming off of this year to date, we should.

So maybe 20% in terms of cash before nonrecurring items.

Cash from Ops next year.

And then probably that's probably the big.

Kind of windfall in if you will and then kind of leveling and think about cash kind of growing with the earnings at that point kind of low double digits similar earnings, but it's still a very strong cash growth.

That's great appreciate the thoughts thanks.

Sure.

And thank you.

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

Great. Thanks, operator, and thank you everyone for joining us today.

Have any questions. Please feel free to reach out.

We'll talk to you again soon have a good day bye bye.

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