Q4 2022 Verint Systems Inc Earnings Call

[music].

Good day, ladies and gentlemen, thank you for standing by and welcome to various systems fourth quarter earnings call.

At this time all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session. Just a question. During this session you will need to press. The Star then the one key on you touched on the telephone if people go out offer assistance. Please press Star then zero.

I would now like to turn the conference over to your Speaker host Matthew Frankel Investor Relations and corporate development. Please go ahead.

Thank you operator, and good afternoon, and thank you for joining our conference call today.

Here with Dan Bodner, <unk>, CEO , Doug Robinson, <unk>, CFO , and Alan Roden Burns Chief Corporate development Officer.

Before getting started I'd like to mention that accompanying our call today is a webex slides if you'd like to view. These slides in real time during the call. Please visit the IR section of our website.

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 of the Federal Securities laws. These forward looking statements are based on management's current expectations and are not guarantees of future performance actual results could differ materially from those expressed.

In or implied by these forward looking statements.

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 best.

Investors are cautioned not to place undue reliance on these forward looking statements for more detailed discussion about these and other risks and uncertainties could cause <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, 2022, when filed and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures as we believe investors focus on those measures 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.

GAAP financial information should not be considered in isolation from as it.

Institute for or superior to GAAP financial information, but is included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes.

These non-GAAP financial measures. The company uses have limitations 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 cloud momentum we experienced throughout the year continued in our fourth quarter.

And we finished the year strong across all key financial and cloud metrics.

Here are some highlights of our Q4 performance.

non-GAAP revenue came in significantly ahead of our guidance.

We delivered strong cloud revenue growth.

Our booking mix.

Continuing to shift to the cloud with 61% of new bookings coming from SaaS.

And non-GAAP diluted EPS.

Okay.

The full guidance.

Looking ahead, we expect our momentum to continue.

And are raising our guidance for the current year for revenue cloud revenue growth.

And diluted earnings per share.

We believe our results and improved outlook reflect the strength of our open cloud platform and AI differentiation.

As well as our strong execution following the spin off of our security business last year.

At the time of the spin off we are.

Outlined a three year plan.

We're getting 30% cloud revenue CAGR.

And targeting revenue growth to increase each year.

I am pleased that we performed ahead of plan in fiscal 'twenty two.

Which was year one of the plan.

I'm also pleased that we are tracking ahead of our targets for years, two and three.

We're targeting revenue growth accelerating to 7% this year and to 10% next year.

Given by faster cloud growth.

Let me start our Q4 review.

By discussing our bookings momentum.

And there are many customer wins.

Throughout the year, we added many new logos and expanded our footprint with existing customers.

We're seeing strong market adoption for cloud.

<unk> segment and increasingly also with larger enterprises.

We werent many large deals.

For the year, we landed approximately 100 cloud deals over $1 million TCP.

Up nearly 25% year over year.

In Q4, specifically.

A million dollar.

Cloud orders, including some of the leading brands in the world across the different industries.

Such as Avis farmers group and Goldman Sachs.

Regarding new logos.

Q4, we added more than 100, new logos.

Including Chipotle, Gerber, Rolex and way fair.

This brings the total number of new logos various added in the full year two more than 400.

Overall, we finished the year with strong bookings across existing and new customers.

And we believe our booking momentum is there.

Driven by both our open AI powered cloud platform.

As well as by the strength of our partnerships.

Our open cloud platform is designed to help brands closed engagements capacity gap.

The platform includes a broad set of applications across workforce engagement did.

Digital first engagement and experience management.

The ingredients brands need to close the engagements capacity gap across the enterprise.

At the core of our cloud platform is variant da Vinci, our differentiated AI functionality.

That is specifically designed to automate customer engagement business processes.

Various da Vinci infused with AI powered automation across all business applications running in a cloud platform.

And as a key driver in helping the brands reduce their operating cost while elevating the customer experience across the enterprise.

Because our platform is designed with an open architecture.

Our partners are able to leverage our platform ecosystem too.

To further innovate and create value for customers.

The combination of an open platform design.

And the partner friendly strategy.

Drive the ongoing expansion of our partner ecosystem and.

And it's resonating well with our customers around the world.

I would like to discuss three examples of wins.

To demonstrate our strength and competitive differentiation.

The first order for $4 million.

Was a competitive displacement and an expansion order from a leading transportation company.

An existing customer the company decided to expand its relationship with variant in.

In several geographies by purchasing additional products across our platform.

Our platform approach open partnership strategy and differentiated AI.

Were key reasons, we won't this opportunity.

The second order for $2 million.

From a customer in the health care industry.

This customer is a new logo for varian.

After putting out an RFP the customer decided to evolve toward variance and replace a legacy vendor with the various cloud platform.

This competitive win across several parts of our platform.

Came against multiple point solution vendors.

Aside from a platform approach.

The key drivers of the win included varying da Vinci, AI and analytics, and our op and partnership strategy.

And the third one for $2 million.

Well, it's also from a new customer.

That is one of the worlds leading E tailers.

This win was also a competitive displacement.

It was due to a platform approach.

Ability to demonstrate our leading AI technology delivers significant ROI.

As well as the open and scalable architecture of the platform.

Looking back at the full year fiscal 'twenty two.

We're very pleased with the execution of our cloud strategy as evidenced.

By our cloud metrics coming in strong across the board.

New booking growth on a period basis came in at 17% compared to our initial guidance of 10%.

We saw bookings strength in both our direct and indirect business and.

And in both existing customer expansions and new logos.

non-GAAP cloud revenue growth came in at 37% compared to our initial guidance of 30%.

We saw strength in both customers buying new cloud solutions.

As well as our maintenance customers converting to the cloud.

Youssef ACB bookings growth.

Remained strong at 42%.

And we delivered $881 million of revenue and.

And $2.28 of diluted earnings per share.

Both on a non-GAAP basis.

During last year, we raised guidance multiple times.

And ended the year significantly ahead of our initial guidance.

We're entering fiscal 'twenty, three with cloud momentum and improved visibility.

And next I would like to discuss our outlook.

We are raising our annual guidance for fiscal 'twenty three of course key financial and cloud metrics.

Doug will discuss our new guidance later in more detail.

Let me just share that behind our increased guidance is.

These improved visibility driven by several factors.

First we finished fiscal 'twenty two.

With Q4, non-GAAP cloud revenue of $119 million.

And record backlog providing.

Providing a strong starting point for fiscal 'twenty three.

Second we have a strong pipeline our partnerships are growing.

And we're targeting another year of double digit new bookings growth.

And third.

Our platform is making it easier for maintenance customers to convert to the cloud and add new cloud applications.

During during fiscal 'twenty two.

We're close to $250 million of maintenance revenue.

And expect conversions to continue and to contribute to cloud growth in fiscal 'twenty three and beyond.

In summary.

Looking back at fiscal 'twenty two.

I believe our strategy is resonating well with customers and partners.

The spinoff of our security business 14 months ago.

Drove a greater focus on a single market.

And is contributing to our improved execution.

Today, we are a few play customer engagement company, 100% focused on helping brands close the engagements capacity gap.

Last year, we raised our cloud revenue growth.

Multiple times throughout the year.

And we are pleased to be increasing our outlook for fiscal 'twenty three as well.

We expect our revenue growth to accelerate over the next few years.

As we benefit from the tailwind.

<unk> added with crossing the midpoint of our cloud transition.

Cloud is becoming the bigger piece of our total revenue.

Long term, we have a significant growth opportunity.

We are uniquely positioned to help brands closed the engagement capacity gap with our AI powered platform.

Now, let me turn the call over to Doug to discuss our financial results in more detail.

Deb.

Yes, 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 accelerated lease costs as well as certain other items that can vary significantly in amount and frequency from period to period for.

For certain metrics. It also includes adjustments related to foreign exchange rates.

As Dan mentioned the momentum we experienced throughout the year continued in Q4, and we finished the year strong.

Q4, non-GAAP revenue came in at $236 million up 4% year over year.

For the full year, we generated non-GAAP revenue of $881 million up 5% from the prior year.

The percentage of our software revenue the recurring continued to increase and came in at 83% in Q4 and 82% for the year.

Our non-GAAP cloud revenue increased 35% year over year in Q4, and 37% for the year.

Of the 37% cloud growth the majority or nearly two thirds came from new orders and close to one third came from maintenance revenue converting to cloud revenue.

<unk> bookings increased 13% in Q4 and 17% for the full year.

In Q4, 61% of our new bookings came in as SaaS compared to less than 50% in the fourth quarter of last year.

And non-GAAP diluted EPS came in at 57 for Q4 and $2 28 for the full year.

Overall, we are pleased with our Q4 over achievement, which was driven by the success of our open cloud platform.

<unk> AI and analytics capabilities.

And now turning to the balance sheet.

We ended the year with $360 million of cash and $415 million of debt comprised of our $100 million term loan and $315 million convertible notes.

Regarding our stock buyback I'd like to mention that we have already completed our existing $75 million program and I'm pleased to announce that we plan to buy back an additional $25 million, which is the maximum we are permitted to repurchase this year to the tax free nature of the spin off.

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

Start with three key metrics.

We expect $940 million of revenue plus or minus 2%.

Reflecting 7% growth year over year up from our prior guidance of $935 million.

We now expect cloud revenue growth of 30% to 32% up from our prior guidance of 30% and.

And we expect non-GAAP diluted EPS of $2 50.

10% year over year growth.

I'd also like to provide you with some additional information for modeling purposes.

Starting with bookings, we expect double digit new <unk> bookings growth in the range of 10% to 12% with approximately 65% coming from SaaS.

With respect to perpetual revenue as we transition to the cloud we expect it to continue to decline to around $120 million compared to $138 million last year.

And with respect to margins, we expect some modest gross margin and operating margin expansion for the full year.

Now, let's discuss some below the line assumptions.

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

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

We expect an 11, 5% cash tax rate for each quarter and for the year.

And we expect around $76 million of fully diluted shares flat with this year, reflecting the effect of our stock buyback program.

Let me also discuss how we see the year progressing.

For modeling purposes, we assume approximately $215 million of revenue representing six 5% growth in Q1.

We expect opex to sequentially drop a couple of million from Q4 levels driving approximately 46 cents of EPS in Q1.

For the rest of the year, we expect sequential revenue growth with Q2, and Q3, increasing sequentially between 10, and 15 million each quarter and finishing the year with our typically strong Q4.

I'd now like to take a minute to review our multiyear cloud journey.

The percentage of our revenue coming from the cloud has steadily increased.

In fiscal 'twenty, 134% of our total non-GAAP revenue came from the cloud in fiscal 'twenty two it increased to 45% while in Q4 it comprised half of our revenue.

For the current year, we are expecting around 55% and we're targeting around 65% in fiscal 'twenty four.

As we previously pointed out last year, we crossed the midpoint of our cloud transition on a bookings basis and this year, we expect to cross it on a revenue basis with cloud revenue in excess of $500 million.

We have clearly achieved scale in our cloud offerings and are seeing strong market adoption.

Shifting our revenue mix to the cloud just had many benefits for variant, including more recurring revenue better visibility and improved economics over the customer lifetime.

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

Our revenue growth is accelerating we expect our margins to gradually expand and we have a strong balance sheet and strong cash generation.

Most importantly, we believe our cloud and AI differentiation positions us well for long term growth.

Before taking Q&A I'd like to mention that we will be discussing our AI differentiation at our annual Investor day, which will take place in early June .

Details will be announced at a later date.

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

Ladies and gentlemen, I'd like to ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone.

To withdraw your question you May press the pound key.

Please standby, while we compile the Q&A roster.

Now first question coming from the line of Peter Levine with Evercore. Your line is open.

Great. Thank you for taking.

So clever about some seems like to be in full force record number of $1 billion cloud signings.

But maybe can you dissect I think the cloud guide of 31% at the midpoint like what are the assumptions behind that Guy and I think with everything Youre, saying Youre now well above the midpoint of the transition that new customer growth is strong pipelines and healthy.

On cloud Prem transitions are picking up so why did 6% diesel and the cloud growth like what what has to happen for us to see cloud growth call. It north of 35% again this year. Thanks.

Yes.

Well, we guided.

Last year, when we did a three year plan, we guided to CAGR of 30% and this is our.

Initial guidance also for fiscal 'twenty two last year.

And as you recall, we as we move through the year.

Some good traction and we ended up with.

37% versus 30% guidance.

We take into the same approach we are starting the year.

Based on our Q4.

And based on what we see right now we can definitely increase our guidance we gave.

Last quarter, we gave for this year, we gave 30% guidance now we're moving our guidance up to between 30% and 32%.

So as we continue to see cloud adoption accelerating.

We will hopefully be able to raise guidance again and we're still early in the year.

So that's kind of the logic behind how we give guidance in terms of what we've seen the market I think it's interesting because we did report that.

The SMB segment, there is already cloud adoption we.

We definitely saw in the second half of last year did the enterprise segment is also moving to the.

Cloud.

We are now engaged with many customers that are discussing their timelines so.

Some of the larger customers are planning ahead, a year or two or even three years ahead, but we are having discussions with customers about when they think we are.

Ready and what they need from varian to help them to be ready. So we're happy to be engaged because of.

Obviously.

We want to help our customers do that in a very smooth way.

And another very encouraging data points here is that.

We reported that we have some very large customers that actually told us they don't want to move to the cloud.

And we see some breaking news also as these customers are now, saying, maybe we should.

And some customer are encouraged by the fact that.

They have it.

Mortgage of people to have supply chain issues to buy components for the data centers.

And they feel like getting to the cloud will be faster.

A cloud company rather than himself.

But nevertheless, whatever their reasons are we definitely see a change.

In that direction in Q4, as you know 61% of our.

Booking.

New booking on a PV basis came from cloud, which is a big acceleration and what we see from a pipeline painful for the year. So if all goes well and we continue to say this.

This momentum I hope we will.

We will continue to be in a position to raised cloud revenue guidance. This is one of the key metrics for us.

When you look at.

How it's broken down.

So about a third of our cloud revenue 37, 37% growth came from maintenance contracts conversion converting to the cloud. So the rest about no more than 20% growth came actually from new logos and expansion which is good.

<unk>.

If we have the same dynamic this year obviously.

We'll be able to accelerate cloud revenue growth as well because we see the maintenance we I spoke about we have $250 million of maintenance conversion.

Right now, we're not assuming acceleration of conversion obviously any acceleration.

Conversion maintenance conversion will contribute to cloud growth and we have great momentum with new customers.

As well.

So this is kind of where we are and how we think about the outlook for the year.

No.

That's insightful and maybe I can squeeze one more in just on the macro side I think a concern for investors as it relates to software is just any risk of deteriorating economic downturn in Europe .

The geopolitical environment. Unfortunately yourselves in so can you can you let us know what your exposure is in EMEA, Europe , specifically and kind of what kind of assumptions are baked into the guide when looking at your European segment, no longer sales cycle sales disruption any churn any color would be great. Thank you.

Yes, yes happy too.

So when we look at our EMEA business.

I'll make a comment for EMEA and for Russia.

So.

We generated $4 million of revenue from Russia last year.

We do not expect to generate any new sales from Russia at this point.

And that's already baked in our guidance. So we raised the guidance to $940 million.

And that doesn't include any any new sales to Russia for.

For the rest of EMEA, we don't see any change right now in terms of activity and demand.

We have about.

20% of our business is Europe give or take.

How you define Europe .

It's.

More heavily concentrated into the U K than than the rest of Europe .

And.

At this point, we don't see any disruption as a result of the Russian crisis.

And.

Russia, obviously.

Obviously, it is not already baked into our guidance.

Great. Thank you very much.

And our next question coming from the line of Ryan Macdonald from Needham <unk> Company. Your line is open.

Hi, Dan and thanks, Thanks for taking my questions and congrats on an excellent quarter.

Dan maybe starting with the competitive environment. It was notable in a lot of the customers you highlighted and from the notable wins in the fourth quarter that a number of those were competitive replacements, whether they were new logos or just expansions of your business within the existing logos just curious if youre seeing any any changes here that.

Creating sort of incremental displacement opportunities, whether its with new customers are within the existing base. Thanks.

Yes, yes, I think very very important question. This is this is about the very differentiation.

And what we see currently in the long term so.

Let me kind of address it completely so firstly where is the differentiation today, it's clearly that our cloud platform strategy is resonating well with the market and it's evidenced by by all the momentum we have both with existing and new logos.

But I think what's behind it is I believe his focus is very important right now and we are laser focused on one mission, reaching helping brands closed engagements capacity gap and I know I mentioned it several times before but this is a big thing the capacity to get is big and it's a growing issue for <unk>.

The issue for our customers.

So we see more and more customers looking for solutions that can.

Effectively address it.

<unk>.

As you know we have the most iconic brands in the world as our customers for many years.

And we let them guide US strategy, we just ask them and they told US three things they told us that the workforce is being disrupted.

And Brian has already spent two trillion dollars on labor cost and they cannot spend more on hiring.

They told us that consumer expectations are rapidly increasing and they must elevate the customer experience.

And they also told the customer engagement must be an enterprise wide mission and the chronic center can no longer remain a silo.

It used to be for many years.

So we listen to our customers and we launched the very cloud platform and it's an AI powered platform.

We have da Vinci during da Vinci is at the core platform, which.

Which is specifically designed to help brands closer to engagements capacity gap and as I mentioned before.

This is our focus and this has been behind many of this competitive win because it's really a.

Great differentiation.

So so so we have a great differentiation today, but also we are asking ourselves so what about the future where we get going.

And we believe we can continue to French eight because many customers are only starting now to realize that.

<unk> engaged with capacity gap.

<unk> challenge.

They have to address it.

And this is because digital transformation is quite recent.

This is what.

Creating this capacity to get them, making it wider.

It's widening because more and more digital interactions.

Creates more disconnected customer journeys and more customer demand for for elevating the experience. So brands feel like they have to address this more and more and in fact, we are engaging more and more customers that says hey, we need to start to take action. We just we cannot operate in silos. The way we did before we need automation crossed.

The enterprise and we need to make the workforce more efficient and elevate customer experience.

No.

No.

I can say that.

We have early adopters like like in any market.

For example.

Of course, many industry. So in retail for example, Costco is one of our customer that is deploying across the enterprise experience solutions in healthcare we have yamana.

Deploying various across the enterprise.

A number of different solutions in all in one platform all connected in one platform.

So we have many customers that already.

Realize that and.

They used to connect the very platform to seek us, but also to ucas and also to collaboration solutions different communication infrastructure across the enterprise.

And why because they need applications that can bring automation and workflows.

The silos and and they need that to be <unk>.

Implemented holistically across all infrastructure.

So.

We believe that.

We can continue to win based on this very simple strategy to be laser focused on helping brands closely engaged with capacity to get.

We do this quite well today and we think it's an early stage problem that was created by the recent market shift to digital.

And as more and more customers look to solve the gap, we are very very strong offering for them.

Excellent. Thanks for the color on that and then maybe just on my follow up question.

Last week, we had attended enterprise connect and it sounded like.

At the event that there is a lot of I guess AI enhanced IV agent assist functionality was really in demand with a lot of the customers and vendors at the event.

You had launched the real time agent assistant late 2021, just just be curious how that solution is resonating in the market given sort of this.

Increased level of demand at least from buyers and how that positions you well heading into next year. Thanks.

Yes.

I think there is strong demand in the market for AI, but more importantly is that our customers are looking for AI that is infused into workflows and into business processes. So they can actually use that in real life.

So this is not about having the best bought.

Because the bot is more of a generic AI each kind of.

Understand what you say.

But what's more important is to make the bought intelligence is to give the board the answers not just the way the means to understand that.

Question, but also the intelligence to.

Respond.

Contextually and elevate customer experience. So so what do we do with IV and so on we connect ideas with knowledge management. So we can infuse protection knowledge. So we can understand how to help the agent while they are.

Working on an interaction.

And this is not not trivial because agents are busy they need to focus on customers and they cannot be distracted by bots trying to help them. So.

So I think we were variant is really doing well is in our ability to understand the whole workflow because we've been in workforce engagement for many many years and how we infused AI.

Into helping the agents in real time.

And making it part of their normal operation in.

In a way that really helps them.

I think it's an early stage market, there's no real time agent assist is very early stage.

<unk>.

Penetration is few percentages low low low penetration into the workforce today.

But this is this is one of the areas that is required in order to.

It makes the workforce more efficient reduce cost and also give customers better answers to to elevate the experience.

Thanks, a lot and congrats again on a great quarter.

Yes.

And our next question coming from the line up.

<unk> <unk> with Jefferies. Your line is open.

Hi, This is Mason Marion on for smart Thanks for taking my questions.

So SaaS revenues nicely re accelerated in the quarter can you elaborate perhaps on some of the drivers.

Maybe discuss the factors that stand unbundled and bundled SaaS.

Yes sure.

Our cloud business.

<unk> grew 37%.

It is including SaaS and managed services managed services growth as we indicated now for a couple of years is expected to be low managed services should grow around 10% give or take.

So that's what happened last year, and we expect it to be this year. So our first SaaS business actually grew more than 40%.

With cloud.

Overall, 37%.

Thanks.

We.

Indicated we have two types of.

Thats offering one that allows the customer to host anywhere so they can host wheels.

The cloud of their choice any partner.

And in that case.

We do not provide any hosting services, that's what we call unbundle or hosted by somebody else.

And then there is the bundle, which is very toasted, where we get an order for.

The SaaS software and hosting services bundled into a single order.

And Thats, how we report the.

Revenue.

And obviously the accounting is different for.

Extreme but it's basically.

Customer choice, how they prefer to deploy and which environment, we support multi cloud so they can deploy it.

On any public cloud or private cloud.

Okay.

Okay. Thank you.

And then you added 100, new logos in the quarter I think 400 for the full year.

If we think about the drivers behind this new level of growth is it being driven by more of a direct sales effort or are these deals coming through partners.

Yes, I would say the majority of the new logos are driven by partners. We have several hundreds of partners around the world.

And most of the smaller opportunities are driven by partners when it's larger.

It's either direct or it's a combination of our sales force working with the partner.

And then you know.

There are many opportunities to start small and grow over time.

There are companies like wafer, which is which is a new logo for variant which comp.

The company is growing very quickly and we hope we will grow with the company.

So we are in particular, we're very excited about any new logos, but we want to help companies to scale and one of the differentiation that I didn't mentioned before is.

Very capable of supporting customers in the cloud globally, because we have.

Cloud centers around the world and we also.

Able to scale quickly so our customers have the peace of mind, if they grow quickly.

Can grow with the varying solution.

We have one of the we probably have the largest customers in the world in customer engagement is very <unk> customers. So we know our solutions can scale and.

And we also support customers that have many different.

Type of customer engagements, where they reached in the store or branch right.

On the website or e-commerce platform, which is important to retailer as well as into contact centers, where it is in mobile apps.

So the ability to have customer engagement solutions.

Of course, all of these different customer touch points is another.

Important to many many of our new logos.

But.

We.

We have direct sales force that is hunting for new logos and we have many partners that are by definition.

Focusing on our customer base that they are a close relationship with.

Thank you.

And our next question coming from the line of Dan Bergstrom with RBC capital. Your line is open.

Taking my questions.

So could you talk to some of the spending trends across some of those larger verticals in the quarter anything worth pointing out across the financial services government transportation and telecom.

Yes, well transportation is coming back Thats obvious we do see we mentioned.

This before is one of the.

Large deals.

We see Arab airlines coming back we have many airlines with customers so definitely not surprising.

Given the Covid.

Now they are coming back.

I think there is strong spending going on in healthcare.

Financial services continue to.

To spend money.

In addition to elevating the customer experience they are looking for compliance and Theres always new compliance.

Policies that.

They want to be able to.

Using using automation again AI is very important for compliance because.

You have your workforce talking to customers all day long, how do you know that they're saying the right things and you can't just listened to conversations because that's that will be a small sample. So having your AI listening to all this conversation ensuring the compliance is a great way to automate the entire compliance process.

So thats a strong.

With financial services.

But I think that there is strength across the industries retail continued to show strength.

They're more focused on on the e-commerce side on online retailing.

So.

Jeremy I think the market is spending on technology and customer engagement, because otherwise they'd have to spend on labor and that will be.

30 times more.

The marketing spending $65 billion on technology in two trillion dollars on labor.

Obviously, if they find something that Ken.

The extra spend on technology, but save 30 times more than labor, that's a no brainer.

Why.

Thanks, Dan and then maybe for Doug Doug you've done a really good job of presenting us with a transition plan and then.

<unk> us off on your raising guidance again here.

Yes, with a lot of software companies this earnings cycle kind of investing more into the opportunity. It sounds like you still still feel good here about the level of investment in providing some leverage in the model correct.

Yeah, I mean, it's all tradeoffs right funding that right level of sharing with the shareholders and investing back for our future growth.

Clearly we've invested a lot in the cloud platform as you've gone through this transition, but we feel very good about where we're at investing a lot in analytics and AI.

There's always things to do.

But you Shouldnt see run kind of like 13%.

Sales into R&D level, and kind of use that and prioritize within that and then if thats the kind of on top of that and around it in terms of Opex et cetera. So it's trying to drive efficiencies trying to.

Get more efficient so we can invest in the areas.

The future growth for us.

Yes.

We're a bottom line.

Our guidance is for margin expansion and EPS growth of 10%.

Thank you.

Sure.

And our next question coming from the line of Brian Essex with Goldman Sachs. Your line is open.

Hi, good afternoon, and thank you for taking the question.

Dan just a question I understand that da Vinci kind of infused into your applications.

I understand how you're kind of using that capability to drive better adoption.

Ias side.

But with now partner is able to develop on top.

Develop on da Vinci and offering da Vinci as a service are you getting any traction there and maybe if you could tell us what the go to market motion is for da Vinci as a service so to speak and your outlook for the next couple of years on that yes.

Yes.

To talk about it and.

And.

We are going to have an investor day in June and that's going to be a focus we are going to bring it to life in.

To discuss exactly whereas da Vinci, and where we're going to go with da Vinci because it is a the quarter platform and again not because AI on its own.

Is the secret sauce is really the automation right that customers are looking for automation automating processes.

And AI is an ingredient so da Vinci is available to all the various applications running in the platform.

And that's how we designed it to the core but as you mentioned and that's recent.

Okay.

Since last quarter, we started to open da Vinci to partners. So they can leverage those AI models and develop.

The applications and the reason is.

Debt.

We see partners looking also to add value.

They don't want just to resettle SaaS.

Because that's not enough value for partners.

To create and we give them.

And da Vinci API services, so they can develop their own we have.

Now about 150 partners that have developed something around our ecosystem and put it in our marketplace. So that's a big.

For us this year to expand our marketplace and.

Provide customers as well, but definitely partners opportunities.

To develop and to.

Make those development available to everyone on the Bryant marketplace.

So building a greater ecosystem around our partner is part of our platform as part of our platform strategy.

So specifically.

We so far we exposed four.

<unk>.

Da Vinci services too.

To be commercialized in terms of revenue.

Minimal so.

And I don't expect this to be a major revenue stream, but I think it is important.

Overall to get platform adoption, both by by partners as well as end users because the greater ecosystem, we developed around da Vinci.

The more value not just variant Doug mentioned that we spent 13% of our revenue on R&D, but if with partner spending some of their R&D developing value on top of a platform. That's obviously very good for our partner for.

Our customer ecosystem.

That's what's driving.

And again I don't want to take too much time here in a couple of months in June we will have a pretty long session on da Vinci.

Got it and looking forward to it.

So thank you for that and then maybe for Doug.

Can we just understand a couple of puts and takes on the margin side. Both for gross margins operating margins, what's some of the primary drivers of that.

That movement, where in the quarter and then seasonally as we fine tune our models for 2023, how should we think about.

Some of the movement for both gross margins operating margins kind of going forward.

Yes, you can see that.

With our guidance, we're looking to expand margins, a little bit and put both gross and operating in fiscal 'twenty three off of the 2002 levels.

Q4 expenses popped a little bit that's kind of some timing issues there.

But we're looking for efficiencies and.

Driving some margin expansion in both sides growth and.

Opex level.

Margin perspective.

There is a mix there right. So it's the components.

So the.

The hosted as very compelling cloud margins are very high there.

The high Seventy's the nonrecurring business is only about 50 professional services kind of dragged that down.

As professional services become a smaller piece in.

In the future that will help the overall gross margin.

So it's kind of a mix shift that's occurring slowly and from that we expected gross margins to expand a little bit too as we go forward and more over time.

Yes.

If you wanted to develop your long term model on gross margin.

Take the recurring revenue margin last year was 76%.

The nonrecurring revenue margin was 49%.

So as recurring revenue, obviously with the cloud revenue growth recurring revenue becomes a much bigger base.

And long term.

This is ware.

We are aiming at mid to high seventies.

And gross margin, but as Doug said because of where we are in the transition will have modest.

Gross margin improvement this year and then.

It's going to start to accelerate over the next three five years.

Very helpful. Thank you very much.

Sure.

And as a reminder to ask a question. Please press star one and our next question coming from the line of Tim Horan with Oppenheimer. Your line is open.

Thanks, guys could you talk a little bit about the relationship with the major Hyperscale cloud guys are they do you see them as partners are they competitors are they building a da vinci platform themselves or any thoughts around them because they do seem to be.

Entering the <unk> market.

And I guess ultimately do you kind of see the most competitors or partners. Thanks.

Yeah, I think that the customer engagement market is a big opportunity.

The market is looking for innovative solutions so.

It is positive I think it's positive for the for the customer engagement industry that this new large software companies the big Tech joining.

Joining the market because they bring more enterprise wide approach to customer engagement.

I think it's what the market needs.

So if we look at.

The three guys that you see the cloud guys. So Google is a variant customer use our products internally and also our partner.

Microsoft is a very customer customer and and he is also a partner.

And Amazon is a partner hopefully also apparent customer, but not at this point.

So all three of our partners and.

I see more opportunities down the road for variance to partner with the Big Tech companies as they show more interest in this market.

Because I think together they bring to the table.

With their enterprise wide capabilities, and where we had rig.

With this enterprise platform to close the gap.

Think together.

We can actually three.

Create more market adoption, we can accelerate the adoption of.

What we believe is the enterprise strategy.

No.

We have a very partner friendly and.

I think that this.

If they get more seriously into the market I think it will positively impact the growth of <unk>.

Thank you very much.

Thank you and I'm showing no further questions at this time I would now like to turn the call back over to Matthew Frankel.

Alright, Thank you and thank you everyone.

Joining us today, please don't hesitate to reach out to me with any questions.

We look forward to speaking to you again soon have a good night.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

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