Q3 2023 Verint Systems Inc Earnings Call
Speaker 2: materially from those indicated in these four different statements, please see our Form 10-K for the fiscal year ended Jan 31, 2022, our Form 10-Q for the quarter ended October 31, 2022, one filed and other filings we make with the SEC.
Speaker 3: 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.
Speaker 4: Please see today's slide presentation, Our Earnings Released, in the Industrial Relations section of our website at Varen.com, for a reconciliation of non-GAAP financial measures to GAAP measures.
Speaker 5: non-GAAP financial information should not be considered an isolation firm as a substitute for or superior to GAAP financial information, but is included because management believes we provide meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used.
Speaker 6: by other companies.
Speaker 7: Now I'd like to turn the call over to Dan.
Speaker 8: Thank you, Matt.
Speaker 9: I'm pleased to report another quarter with continued strong SAS momentum across key metrics.
Speaker 10: Driven by brands looking to close the engagement capacity gap.
Speaker 11: Veritcloud's platform is differentiated.
Speaker 12: especially for organizations looking to elevate customer experience.
Speaker 13: with the same resources and budget.
Speaker 14: Ongoing changes in workforce dynamics.
Speaker 15: make it more compelling for brands to deploy AI-driven solutions.
Speaker 16: to increase their workforce effectiveness.
Speaker 17: Throughout this year, we have experienced strong fast growth.
Speaker 18: with our cloud platform driving increased recurring revenue.
Speaker 19: and sequential growth margin expansion.
Speaker 20: Today, we will review our Q3 and year-to-date financial results.
Speaker 21: and provide an update on recent market trends.
Speaker 22: We will also discuss our guidance for this year and introduce our outlook for next year.
Speaker 23: We expect continued SAS revenue growth.
Speaker 24: perpetual revenue decline, and gross margin expansion.
Speaker 25: driving strong earnings growth.
Speaker 26: Let's take a closer look at our Q3 results.
Speaker 27: this revenue in Q3 we delivered revenue in line with our prior guidance
Speaker 28: Our gross margins have increased throughout the year, tracking ahead of plan.
Speaker 29: And our non-GAAP diluted EPS
Speaker 30: came in significantly ahead of our guidance.
Speaker 31: We are pleased with our overall results and especially with our SAS growth metrics.
Speaker 32: Cloud revenue increased 35% in Q3.
with the last portion of cloud revenue growing over 40% on a constant currency basis versus last year.
Class Bookings also came in strong.
With new SAS ACV bookings...
growing in Q3 over 50% year over year on a constant currency basis.
As a reminder, in Q2 our new SAS ACV has single digit rules.
Due to a tough compare
and we guided to strong Q3 growth.
which we are pleased to have delivered.
Driving our strong new SAS ACV growth were many customer expansions and new logos.
In Q3, we received 31 cloud orders in access of $1 million TCV.
as large enterprise customers continue shifting to the cloud.
This is about a 50% increase.
compared to 21 orders in the same quarter last year.
and reflect the trends of large enterprises adopting cloud.
These large cloud orders included some of the more recognizable organizations in the world.
such as financial services provider Discover.
Home Goods retailer IKEA
and healthcare provider, Cardinale Health.
In addition, we continue to win many new customers and in Q3
We again added more than 100 new logos
including the grocery company Kroger
and food delivery company Grubhub.
Let's take a closer look.
Two large seven and eight digit wins in Q3
The first order
for $13 million was from a leading financial services company.
This large customer decided to move to the cloud and selected Variance Cloud Platform.
We believe we won this large order.
Due to our platform openness
DaVinci AI differentiation
and enterprise scalability.
And the second order for $7 million.
was from a leading company in the utility sector.
This large organization
which serves several million customers across the US.
It's also moving to the cloud is variant
and adding new applications across the variant class platform.
We believe the openness and breadth of the platform.
DaVinci AI automation and differentiation and a strong ROI were key reasons we won this opportunity.
As discussed on prior calls, the VeriCloud platform is differentiated across multiple dev stores.
First.
the platform core
includes our market-leading engagement data hub and variant DaVinci AI.
It underpins all the applications running on our platform
This data centric approach
empowers our customers with business insights and drives automation across the enterprise.
Second, our platform offers many best-of-breed applications to help brands close the engagement capacity gaps and generate quick ROI.
The platform approach makes it easy for customers to start anywhere.
and adapt additional applications over time.
And third...
Our platform is open and agnostic
to a brand choice of telephony solution, CRM solution and data lakes.
where it makes it easy for brands to deploy a platform into their existing ecosystem.
Next, I would like to discuss the SAS revenue and SAS Booking Strands
we have seen this year and our expectations for the remainder of fiscal 23.
Our SaaS revenue has consistently increased over the last few years.
And this year we expect over 35% growth on a constant currency basis.
throughout this year.
Our SUS revenue has increased every quarter.
and we expect to finish this year strong.
With non-gap SaaS revenue approaching one hundred and thirty million dollars in Q4
With respect to booking
We expect strong new SAS ACV growth in Q4.
Following our strong growth in Q3.
Overall, the second half...
We expect around 40% growth year over year.
and acceleration over the 15% growth we saw in the first half.
on a constant currency basis.
Does Bookings Accelerate in age 2?
We see the opposite trend in perpetual license bookings.
which I will discuss next.
In Q3 we saw a change in behavior from perpetual license customers.
Our perpetual revenue in Q3 was significantly lower than in Q1 and Q2.
We expect this trend to continue in Q4.
Looking at the second half of the current year.
We expect the pension revenue to drop to $46 million.
which is a faster decline than previously expected.
For the full year, we now expect $110 million of perpetual revenue.
As the market shifts away from perpetual to SaaS,
Our recurring revenue metrics continue to be strong.
for the year
We expect non-gap recurring revenue to increase around 10% on a constant currency basis
For Q4...
Given the perpetual trends we just discussed,
We expect close to 90% of our non-GAAP software revenue.
to come from recurring sources.
As a greater portion of our revenue is requiring,
Visibility has improved.
And we also benefit from gross margin expansion.
expansion as I will explain next.
Throughout this year, we have experienced a sequential improvement in growth margins.
A recurring revenue generates much higher growth margins than a non-recurring revenue.
And recurring revenue growth has been driving gross margin expansion.
Overall, we expect around 100 points of expansion this year.
With a Non-GaP Annual Growth Margin,
reaching 70% for the first time in our SAS transition.
Turning to guidance for the current year.
In Q4, SS revenue continues to grow.
We expect perpetual revenue to decline faster than we previously expected and are adjusting our annual revenue outlook accordingly
to 5% growth on a constant currency basis.
Regarding EPS, we are maintaining our guidance for 10% diluted EPS year-over-year growth.
Next year's guidance
is driven by the trends and market environments we are seeing today.
another year of strong SaaS momentum with 30% SaaS revenue growth on a constant currency basis
while perpetual revenue
declines to approximately $100 million.
Overall, this drives our total revenue growth.
to 6% on a constant currency basis.
Up from 5%, we now expect...
for this year.
We expect another year of growth margin expansion as we continue our shift towards recurring revenue.
And regarding EPS,
We expect 8% Eurobia growth.
resulting in diluted EPS of $2.70
Before handing the call over to Doug, let me conclude with our long-term targets.
new buyback program
We believe that helping brands close the engagement capacity gap
It's a growth opportunity that will support strong SaaS revenue growth for many years.
In addition, we believe our gross margins will continue to expand as we shift to SARS.
which will enable us to drive strong double-digit earning growth long term.
We are confident in our long-term prospects.
and are pleased to announce a new $200 million stock buyback program over the next two years.
And before I turn over the call to Doug,
I would like to remind you of the previously announced CFO transition in Q4.
This is the last early call the Doug joins as our CFO .
And a great opportunity for me to thank Doug for his tremendous contribution to variants over the last 16 years.
and for the slowest execution of our complex spin-offs almost two years ago.
Now let me turn the call over to Doug.
Thanks, Dan. Good afternoon, everyone.
Our discussion today will include non-GAAP financial measures.
A reconciliation between our GAAP and non-GAAP financial measures is available, as Matt mentioned, in our earnings release and in the IR section of our website.
Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions including fair value revenue adjustments.
amortization of acquisition-related intangibles.
certain other acquisition related expenses, stock based compensation expenses, separation related expenses, accelerated lease costs, IT facilities and infrastructure realignment, as well as certain other items that can vary significantly in amount and frequency from period to period. For certain metrics, it also includes adjustments related to foreign exchange rates.
Similar to last quarter, given the significant appreciation of the US dollar this year, I'll be discussing certain results on a constant currency basis today to better understand their business performance.
Revenue came in at 232 million on both a gap and non-gap basis in line with our prior guidance reflecting 2% year-over-year growth on a non-gap currency basis.
Year-to-date non-GAAP revenue increased 6% on a constant currency basis.
Recurring revenue came in at $175 million on both a gap and non-gap basis.
reflecting 12% year-to-year growth on a non-GAAP constant currency basis.
Year-to-date non-GAAP recurring revenue increased 11% on a constant currency basis.
As Dan discussed earlier, as we shift to a more recurring revenue model, we are seeing an improvement in our gross margins.
And our non-GAAP gross margin came in strong at 71.2% in Q3.
Our strong gross margins enabled us to significantly overachieve on the bottom line, and non-GAAP diluted EPS came in at $0.69.
Turning to our strong cloud KPIs, we're very pleased with our Q3 and year-to-day performance.
Cloud revenue on a constant currency basis increased 37 percent on a gap basis and 35 percent on a non-gap basis year-over-year in Q3, slightly faster growth than the first half of the year.
non-GAAP SaaS revenue on a constant currency basis increased 41% year over year in Q3.
or 44 percent on a GAAP constant currency basis.
Both networks grew strongly in Q3, with SaaS growing faster than cloud.
As we previously discussed, cloud includes optional managed services, which is a low-margin business that we're not targeting for growth.
New SAS ACV bookings represent annualized contract value of all new SAS contracts booked in a quarter.
In Q3, new SaaS ACP was up strong at 51% year over year on a constant currency basis.
as we continue to see strong demand across industries and geographies, as well as new and existing customers for the Verent Cloud Platform.
discussed earlier in Q3 perpetual revenue declined more than expected which resulted in new PLE bookings being down 4% year-over-year on a constant currency basis.
Here to date, new PLE bookings increased 11% on a constant currency basis.
Given the trends we discussed today, I'd like to mention that it's useful to look at two components in PLE, Perpetual and SAS, which demonstrate different behaviors.
In Q3, the SAS component increased 42%.
while the perpetual component declined 43%.
And year to date, we experienced 41% growth in the SAS component, while the perpetual component declined 20%.
like to discuss our current guidance for Q4 in the year ending January 31, 2023.
We expect another quarter of SAS growth in Q4, driving more than 35% SAS revenue growth and 10% recurring revenue growth for the year, both on a constant currency basis.
We expect revenue to increase sequentially by around $6 million in Q4, and are adjusting our outlook for total revenue for the year to $900 million, or 5% year-over-year growth on a constant currency basis.
Our current outlook reflects the trends we discussed today, including strong, fast growth coupled with faster than expected perpetual decline.
Our current outlook for perpetual revenue is approximately $110 million.
With respect to EPS...
We are maintaining our guidance for 10% diluted EPS growth year over year.
In Q4 below the line, we expect interest and other expense net should be around 1 million.
Yet income from a non-controlling interest we have in a small joint venture should be around $200,000.
Our cash tax rate should be about 12%.
And we expect around 76 million fully diluted shares outstanding.
Before moving to our outlook for next year, let me take a minute to review where we are in our cloud transition across three areas and discuss how we're modeling next year's SaaS growth.
Starting with the cloud mix.
Over the next several years, our revenue and bookings have steadily shifted staff.
This year, we expect cloud revenue to represent 64% of our cloud software revenue.
Regarding bookings, we expect 67% of new PLE bookings to come from SAS.
We're pleased with our continued progress with our mix change towards SAS.
Next, I'd like to discuss SAS Revenue.
As we look at our expected 35% SAS revenue growth...
We expect around 60% of our growth to come from new business and 40% to come from conversions.
At the end of this year, we expect to have $180 million of support revenue remaining.
which we expect to convert to SAS over time.
Third, our recurring mix of revenue continues to increase, and we expect around 86% of our software revenue to come from recurring sources this year, driven by new SAS ACV bookings and strong renewal rates.
Overall, I believe we're well positioned going to next year for continued SAS growth.
Now let's turn to our guidance for next year.
Our Fiscal 24 guidance…
reflects the trends we discussed today including strong SAS bookings, declining perpetual as well as the current macro environment which may be impacting customer and partner buying decisions.
for total revenue.
We expect 6% year-over-year growth on a constant currency basis, resulting in $945 million of reported revenue plus or minus 2%.
We expect recurring revenue to grow close to 10% year over year on a constant currency basis, with perpetual revenue coming in around $100 million.
We expect gross margins and operating margins to continue to expand and deliver 8% fully diluted EPS growth.
Now let's discuss some below the line assumptions.
We expect around 750,000 per quarter of interest in other expense net.
We expect about 200,000 per quarter of net income from a non-controlling interest we have in a small joint venture.
We expect a cash tax rate of approximately 11% for each quarter and for the year. And our guidance assumes 75 million fully diluted shares, down slightly from the year due to the new buyback program.
We expect a cash tax rate of approximately 11% for each quarter and for the year. And our guidance assumes 75 million fully diluted shares, down slightly from the year due to the new buyback program. The actual share count will depend on the pace of the buyback.
In summary, we're pleased with our Q3 and year-to-date results and are well positioned for a strong finish to the year.
We expect the strong SaaS momentum we experienced this year to continue into next year, driving another year of strong earnings growth.
longer term.
We are operating in a favorable market that supports sustainable SaaS growth, from which we expect to drive double-digit total revenue growth, continued margin expansion, and double-digit earnings growth.
Our new 200 million share buyback program, which at current prices could allow us to repurchase approximately 7% of our outstanding shares, reflects the confidence we have in our outlook.
And finally, as this is my last earnings call as CFO of Varen, I'd like to share that I couldn't be more confident in granting our team and look forward to acting as an advisor to Dan and the company for a period of time.
With that operator, let's open up the line for questions.
As a reminder to ask a question, you will need to press star 1 1 on your telephone.
Please send by your name and roster.
Our first question comes from line of Shaw Eel from Callan. Your line is open.
Thank you. Good afternoon, gentlemen. So, healthy quarter on the cloud front. Yes, next year's guidance is coming below consensus. Maybe, can you reconcile for us this tale of two cities, so to speak?
Is it the transition which is taking away from next year's revenue as product revenue is saying headwinds or is it just a macro weighing in? And maybe if on the macro front, do you think that you've taken the necessary measures?
to tackle a moderating economy as you see it right now.
Yes, thank you for the question.
So let me start by how we see the macro environment today and of course that we guide into next year.
So clearly, very very strong Q3.
on all metrics, fast revenue up 40%,
on a constant currency basis, such as booking the new SaaS ACV 51%, so not just revenue, but also.
booking strength which is a leading metric. 100 plus new logos, large deals up 50%, 31 over $1 million.
Right now when we look at how we execute on our cloud strategy.
Clearly the platform is driving.
customers to the cloud.
And our goal is to help our customers complete their subscription.
and we think we're doing well in Q3 and also Q4 when we
Look at the Q4 guidance that we just gave we expect fast booking to grow in h2 40%
So continue to be strength.
You know, I spoke about the platform differentiation. It's an enterprise-wide platform. It's about CX automation
It's not about telephony or CRM, so it's very differentiated.
And customer partners love it because it's quick time to value.
And in this environment, when they're looking to reduce the cost of the workforce...
This is exactly what they need. They need to elevate CX with automation.
and workforce efficiency. So that's kind of the backdrop for.
what we see now.
Now, as you mentioned on the perpetual, very clear change in Q3.
where the perpetual license revenue are down, booking and revenue and sharply down from H1. So you look at the H1 numbers this was a run rate of 130 million dollars perpetual.
now in Q3 we are the run rate of 100 million about 25 in Q3 is 100 minute or run rate and in Q4 it's going to be about the same
So a very short job potentially related to context budgets and macro.
But what's interesting as we speak to these customers, and you know, they've been customers for variants for a long time.
We didn't lose the deals and when they come back...
I believe some of them will come back as SaaS. So these are customers that before indicated.
that it will take them a while to move to the cloud and now they are more seriously considering
transition to SaaS next year.
So I think overall the macro is favorable for SAS and...
We gave a lot of metrics today to measure the progress of our suspects.
So now bridging into next year.
On the recurrent revenue side, we do expect to see 10% growth on a constant currency basis.
So, recurring revenue will grow nicely to $750 million.
But Perpetual we are assuming a hundred million dollars
and professional services usually...
one-to-one ratio with
Perpetual, so that's the balance.
So when you think about this, obviously the potential.
has a big impact on the guidance change.
FX has another impact, about 1% next year.
And the balance is, what we're assuming in terms of SaaS booking next year.
The assumption behind the guidance is 15% NUSUS ACV booking.
that's obviously lower than h2
In H2 now we have 40%.
But I think that's the main assumption that drives the balance of the guidance.
And and that's top line right so just to finish the the way we think about it we in addition to Continue to motivate our customers to move to SaaS which we've done
since the spin and continue to do into this economy.
We also see a very nice margin expansion.
Q3 GORs margins are 71%, we expect Q4 GORs margins to continue to expand from there.
So the mix between recurring and non-recurring, as Doug mentioned before, is creating a good uplift on course margin.
And that coupled with expense management.
We we are able to continue to grow Earning much faster than we're growing the top line this year, and that's also a plan for next year
as we got it for $2.70.
which is 8% growth.
So in summary, we think next year has two objectives.
accelerate the cloud transition and have a very strong SaaS growth, 30% SaaS revenue growth.
and also Manage the bottom line of course we have an FX we have natural hedge
As you know, we manage the gross margin and cost structure to accelerate earnings faster than revenue.
Thank you for this elaborative reply.
as we think about some of those elongated s Cliff MER Ethereum
Can you identify for us maybe, is that a vertical driven, is that specifically macro driven? How could we be thinking about it and understanding that for now, and again, correct me if I'm wrong, nothing is getting cancelled but rather pushed?
Please correct me if I'm wrong, but is it coming from...
one industry or it's pretty much broad-based.
Yeah, so I would say first, we don't see elongated shell cycle across every customer. Some customers actually are.
looking to accelerate because they see our eye and they need new technology.
while other customers obviously take the time because they want to be more careful in spending. And clearly, as I discussed before, the...
There's a capex-optics difference here that is very visible in terms of the longer cell cycle.
But if I look at other, like you mentioned, verticals and so I'll start with geographies.
Here today,
What you see in America is EMEA and APOC is very similar.
So I can say no change in geography.
In terms of verticals, we are very diversified across verticals. OSP financial services continue to be strong, healthcare continues to be a strong part of our business.
These are large B2C companies, and we had seven and eight digits wins with these companies moving through the cloud.
I think it's more customer by customer decision.
When I look back at our recession in 2008,
Well, we did really well and we grew a little bit and we grew earning a lot in 2008.
and
It was obviously diversified, we have large enterprise customers and we also have very sticky solutions.
But also it was very clear that this type of B2C companies need to engage with their customers in good times and in bad times.
and especially when the workforce costs are increasing and they need technology to increase automation while elevating CX.
So I think that's the dynamic you know we see some customers that have you know more pause and we see customers that actually
I would say even accelerate their.
they're technology purses.
The way we think about you know guidance for next year is obviously like we always did we we take what we see now And that's reflected in
in a guidance.
So we're not trying to
project change, whether it's to the better or the worse.
We think this is a pretty good environment.
for us with our ability to protect earnings.
with our increasing cost margins and cost management.
Understood. Thank you so much and best of luck to Doug.
Thank you. One moment for next question.
Thank you.
And our next question will come from Ryan McDonald from Needham. Your line is open.
Thanks for taking my questions and congrats to Doug on a great career and best of luck in the future. Dan, maybe to start, I just wanted to clarify, I think one of the assumptions you talked about for next year's outlook. Did you say that SaaS bookings that you're expecting 15% growth next year?
But just love some clarification there.
Yeah, so...
Let's look at all the SAS metrics for next year. Start with fast revenue
We're expecting 30% growth.
in SAS Revenue.
As you know, we have about 60-40 in revenue between new booking and conversion.
So conversion we expect to continue to grow.
But there are no.
different dynamics in terms of the new SAS booking.
So 30% growth success revenue, 60% for expansion and new logos.
and 40% of conversion, that's one assumption. Again, that's the same mix we have this year.
In terms of the…
booking assumption.
We...
Last year we I mean the current year. I'm sorry the current year in h1
We had 15% new society growth.
in an H2
we are projecting now 40%. So it's a big increase from
H1 to H2
I'd love to think that this will continue to next year, but right now, in our guidance, we assumed the same as H1.
this year, so 15% is our assumption that drives the guidance.
I don't think that it's suggesting that we see deceleration. It's suggesting that we are trying to provide now in December guidance and we're trying to look at that from a perspective of, you know.
what did we achieve this year? and we clearly have acceleration in Q3 which we expect
strong new surface in Q4, but we're only baking 15% into our guidance assumptions.
Yeah, that's helpful color.
Yeah, just to finish, if you're building the model, you can also assume that
About 75% of our new site's ACV
is bundled source and 25% is unbundled source.
So, um.
you know, just give you the numbers.
So right this this at this point our guidance for this year suggests we're going to have a hundred and twenty million dollars of ACV booking that are new and that number will go to about a hundred and forty
next year in the guidance and and you should you can assume a 75 25 percent mix for this year and for next year
That's super helpful, Kala. I appreciate that, Dan. Maybe Doug, for you, on the gross margin expansion, it's great to see that we're going to get to 70% for the year here as that transition accelerates.
I'm curious as you think about next year, I know you talked about gross margin expansion, but as perpetual continues to fall off, what structurally do you think gross margins can get to when you think about 24 and beyond? Thanks.
thing.
Thanks Ryan.
We'll continue to see gross margin expansion. It's kind of a weighted average thing, right? So recurring revenues have a higher gross margin, and as that becomes a bigger piece of the puzzle, the gross margins are going to expand. So we'll see Q4 will be up a point or so from…
Q3 that will give us a 70 for this year and we'll probably have 50 bps or so next year and then continuing and we might see acceleration beyond that in the out years.
Yeah, and you can see the numbers in the dashboard. We have over 75% ghost margin on recurring.
and under 50% gross margin on non-recurring. So as we continue to grow recurring next year 10% and.
obviously non-recurring continued to decline, that's the average of the mix shift toward it.
the 75% plus that we have currently in the recurring course margin.
I just want to thank you for taking my questions. I'll hop back in the queue.
Yeah, sure.
One moment for next question.
Thank you.
And our next question will come flying out. Peter Levine from Evacore ISI. Your line is open. We'll take that in. Mm hmm.
Thanks for taking my questions and Doug, that's the block in your next endeavor.
The first one is the kick stay with the macro theme is, you know, what's the recession playbook for Verit, right? Like what, you know, we've seen others kind of take the right steps to kind of resize their business, prioritize investments, focus on efficiencies. What cards do you have in your back pocket?
you know if things get worse to play and then as it stands today can you quantify your hiring plans for next year?
and as it stands today, can you quantify your hiring plans for next year? Yes.
Okay. Yes. Okay.
In terms of the cost structure, the cost matrix expansion
is a function of a mix shift toward recurring, so that's going to continue into next year.
we
expect Q3 if you look at our OPEX.
It's a hundred and two million that's down from Q1 and Q2 and we expect to
maintain that in Q4
Part of what's working in the industry.
is the fact that the labor environment has cooled off.
So we continue to hire talent but we have selective hiring.
and we also have a little bit of a mix shift towards
We also have a little bit of a mix shift towards...
You know geography is when there is low cost because variant is a global company
And that's the lever we've used before to...
to manage our cost structure.
And of course the effects, the fact that we have a natural hedge.
Regardless of what the currencies will do, we don't have to deal with...
the FX headwind, it's a headwind to the top line and that's why we report constant currency but it does not create headwind on a bottom line.
If you look at our last recession 2008
We used all these levers and we actually had huge growth in earnings that year.
Because the top line didn't drop as much as other companies and we did manage the borrow line and we ended up with great margins.
So I think we know how to manage our expenses and we have the ability to
use fixed cost and variable cost.
But at the same time, so far we think that...
we see a good pipeline for next year that supports our guidance.
So, you know, things can get worse and obviously we'll prepare and if needed we know how to respond.
Now with on the cloud revenue side, can you share or quantify what your net retention rates look like? Helping customers create mobile phones? faithful and faithful confronted by the Prime established
And I ask because you talk about the 60-40 split, but if I think about 60% net new logos, but if I think about the install base, are you assuming that you're going to be able to better tap in to your install base? Assuming the environment gets tough, right? It's an easier sale. Just to know, can you just quantify?
you know, net retention rates, and then kind of how are you positioning sales reps next year to maybe focus back more on those install-based sales? Thank you. Yes, absolutely. So first just…
To clarify, the 60% new is not.
Only new logo. It's new logo and expansion from the base So it's anything new any new business as opposed to conversions
Historically,
We're generating more than 90% every quarter, every year from our base.
large enterprise customers that continue to expand and buy and they need more technology.
And we have very sticky solutions and they continue to expand. And now with the class platform
The time to value is actually faster, so we actually think it's going to be easier for our customer base to expand relative to the on-prem environment.
So what we kind of discussed historically is that our GRR, our gross retention rate, are in the 90s.
and that NRR net retention rates are over 100%.
We talked about reporting.
Pure cloud metrics when we get to be more pure cloud company
So in some metrics like NUSASS-ACV we already have that in the dashboard. NRR to get you the specific numbers that will come over time as we...
ready to report NRR but...
You know the self force your question about the self force, and now we organized
We expect the vast majority of our revenue to come from the base. And when we get new customers, like we got 100 new logos today.
and we mentioned some great names in these logos but...
They start small new logos erm well... bye
into a platform and then over time they'll expand with the platform.
So we have very little reliance on new logos. Most of our new business come from the basic spending.
Great, thank you very much for taking my questions.
And as a reminder that star one question for once, one moment for our next
Our next question will come from line of your line is open.
Great. Thank you. Thanks for taking my questions. Maybe first, just to understand the conversion mix expectation, how many of those customers have already signed up or committed to convert next year.
and, therefore, you have visibility into it. So, like, the contract is – I don't know if that contract would be inked or not, but how many have already said they are going to versus – of that 40%, how much do you have to actually go and convince to convert? Just maybe help us understand that.
Yeah, so all these customers have construction vehicles with variants. They're not new. We don't have to.
you know, get into a new relationship.
And many of these customers actually, while they didn't convert the legacy solutions to the cloud.
May already bought some nuke applications in the variant cloud, so they're not necessarily
at a position that they just need to make a decision first time to test variant in the cloud. So, thanks a lot for watching, and I'll see you next time.
decided that they see no rush, they like the variant solutions on-prem, it's working, they don't want to be disrupted, but new capabilities that we offer in the cloud, they started the journey with variants in the cloud.
So the bottom line is we do have discussions with these customers ongoing on their appetite for conversion. This discussion with, you know,
Most of our customers, the discussion started.
not now, but a year ago, and many said, not this year, maybe next year, maybe the year after. So it's a journey. Customers need to go through their own internal decisions because it's affecting their IT organization, security considerations.
And obviously they look at the ROI, you know, what's the best time from an ROI perspective to make the move?
So I'm not suggesting that we have a clear contractual commitment from customers on the date that they will convert.
But we have a good sense of which ones.
budgeting conversion into next year and which one are only contemplating.
And our assumption for next year is consistent with what we've done this year. So it's not that we are trying to.
rely on some new dynamics in our base.
on some new dynamics in our base. You could see that for the last few years.
Every year there's about 50 million dollars or a little bit more than 50 million dollars of maintenance
revenue that is converting into
into the cloud. So it's pretty consistent for next year. Great, yeah, that's very helpful to get more clarity. And then just on the shared buyback, you guys gave guidance for the share count for next year, but just maybe, how should we think about the prioritization of, of.
capital management in terms of tuck in M&A versus the buyback.
Any level that we think about where you would prioritize one over the other, should we think about it being kind of balanced like you've been in the past? What's the higher priority?
Yeah, so you know there are several drivers to the buyback. One is obviously our confidence in our long-term outlook.
that's reflected in the decision for the buyback and the second is as you remember following the tax-free spin-off
We have some restrictions on the
on the size of the buyback and
You know, we're still obviously limited by the tax-free structure, but we're able to enhance this program within the limitations of the tax-free spin-off.
In terms of the overall capital structure.
We expect this program to be
more than 50%, somewhat more than 50% of our free cash flow that we generate in that period.
So we think it's a good balance of using our free cash flow for Biodek and for the rest for other usage, you know M&A could become more attractive.
We'll see and we can obviously make adjustments over time.
But this is the way we think about it now.
We generate a lot of cash, we expect to grow cash flow next year and the year after faster than EBITDA.
because we are in the second half of our cloud transition and the cash flow is accelerating.
So we expecting very healthy cash flow the next two years and we think it's prudent
to put more than 50% of that back to investors.
Great, appreciate you taking my questions.
Thank you. And I'm not showing any further questions in the queue, so I'd like to turn it back to the speakers for any closing remarks.
Great, thank you for joining our call today. If you have any questions, feel free to reach out. We look forward to speaking to you soon. Good night, everybody.
And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
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