Q2 2020 Earnings Call
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As a reminder, this conference maybe recorded I would now like to introduce your host for today's conference Mr., Alan Roden Senior Vice President of corporate development you may begin.
Thank you operator, good afternoon, everyone. Thank you for joining our conference call today.
I'm here, Dan Bodner, Barents, CEO , and Doug Robinson Verints CFO .
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And other visions of the federal Securities laws.
These forward looking statements are based on managements current expectations.
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For more detailed discussion how these and other risk and uncertainties could caught verints actual results could differ materially those indicated in the forward looking statements. Please see our Form 10-K for the fiscal year ended January Onest 2019, and other filings we make with the FCC.
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Now I'd like to turn the call over to Dan Dan.
Thank you Alan.
Oh, good afternoon, everyone and thank you for joining us today to review, our second quarter and first half results.
Q2 revenue came in at $324 million on a GAAP basis, and $331 million on a non-GAAP basis.
Excluding the impact of currency.
non-GAAP revenue came in at $335 million, reflecting 8.6% year over year growth on a constant currency basis.
Q2, EPS came in at 16 cents it on a GAAP basis, and 82 cents on a non-GAAP basis.
To understand how we're tracking against our annual targets I would like to start by reviewing our first half results followed by a discussion of our two segments.
Looking at our consolidated first off results. We are pleased to report double digit revenue growth on an organic constant currency basis.
In the first half revenue increased 7.4% on a GAAP basis, 9.2% on a non-GAAP basis.
And 10.6% on a non-GAAP constant currency basis.
In addition to strong revenue growth, we increased non <unk> non-GAAP , yes, 20% year over year consistent with our goal of growing earnings faster than revenue.
We're also pleased to report that we are making very good progress on two key strategic initiative.
As we've discussed on prior calls.
Our cloud first strategy and customer engagement.
And a softer model strategy in cyber intelligence.
I would like to review our progress in more detail by segment.
In customer engagement.
We're helping customers to address a very important challenge reducing their operating costs.
Elevating the customer experience.
Our strategy is to help customers simplify automate and modernize their customer engagement operations.
We help them simplify operations by decoupling the value add software applications for the communications infrastructure.
We help them automate processes by infusing artificial intelligence throughout our portfolio.
And we help them modernize their cloud operations.
By making the cloud migration seamless.
Today, I would like to focus on reviewing our strong cloud momentum.
At the beginning of the year, we discussed our cloud first strategy.
And provided long term cloud targets.
Customers have responded well to our cloud initiative.
And we are seeing the benefits of our cloud first strategy in our results.
In the first half of the year.
Customer engagement GAAP revenue increased 8.1%.
On a non-GAAP revenue customer engagement revenue increased eight point <unk>, 10.8%.
And more than 12% on a constant currency basis.
We're pleased with the first off double digit growth.
Which is in line with our annual guidance for this segment.
From a mix perspective.
In the first half cloud represented 25% for non-GAAP revenue.
Up from 19% in the first half of last year.
Recurring revenue, which includes both cloud and maintenance.
Represented 62% of our non-GAAP revenue.
Up from 59% in the first off last year.
We're encouraged by the pace of the mix shift.
Well at the same time, achieving double digit revenue growth.
Now, let's look at our cloud trends more closely.
In the first half of the year.
Our non-GAAP cloud revenue increased 49% year over year.
Were SaaS revenue growing a bit faster.
We see improved market adoption.
With more large customers embracing cloud deployments.
Within this brand's manifest itself in two ways first new cloud deployments, where customers choose to deploy new softer in the Veyron cloud.
And second.
Conversion of customers existing on premises deployments to the Verizon cloud.
On past calls we view the opportunity.
To convert our installed base with an uplift of at least two X of maintenance revenue.
We also discussed expectations that the uplift would begin to contribute significantly to our revenue growth over the next few years.
As more of our large installed base moves to the Veyron cloud.
During the first half we had several customers convert from maintenance to the Verizon cloud.
And while early.
We are pleased to report that the terms of those deals.
Validated the opportunity for two X. uplift.
To better understand our cloud growth, we would like to share.
ACB data for new SaaS contracts received within the period.
In the first half of the year, you saw us HCV increased 84% year over year.
And the last 12 months, new Hsas HCV.
Increased 95% year over year.
As we look forward, we expect USIS HCV to agree with more than 80% for the full year.
In addition to a CV growth.
We're also pleased to report an increase in the number of cloud deals with TCV of over $1 million, which reflect a higher level of interest in cloud for larger enterprises.
In the first half we have 11 cloud deals with a TCV greater than $1 million.
Compared to only four in the first half of last year.
The average cloud contract duration approach 2.5 years.
It'd be longer than the average last year.
The large cloud deals were received during the first six months of the year cut across many different verticals.
And were from existing customers as well as new customers, including competitive displacements.
We see growing cloud adoption in large enterprises across multiple buyers within the same organization, including in the contact center customer experience branch back office and marketing functions.
This supports our strategy.
To help different parts of an organization to collaborate to drive elevated customer experience.
What a reducing the operating cost.
[noise].
Turning to our recent M&A activities.
Last quarter, we discussed our buy versus build approach and review the foresee acquisition.
In connection with our strategy to accelerate our voice of the customer roadmap.
We discussed foresees low renewal rates at the time of the acquisition.
And our plan to improve renewal rates with introduction of a new unified VLCC platform.
Our new platform was launched in Q2 and was well received by customers and industry analysts.
For example, Ventana research said.
Very solutions have always been leading edge.
But the unified unified you'll see solution.
Providing a complete cross channel view of the customer.
Is it true innovation.
I'm pleased to share that with the progress we made with integration and with the introduction of the new via the platform.
Foresees renewal rates improved in Q2 from the Q1 level.
And we expect continued improvement in the second half.
Moving to a more recent acquisition.
At the very end of Q2, we made another technology tuck in acquisition.
Of an innovative cloud company cotton Vericel.
This is a small company with an annual revenue run rate of around $8 million, breaking even with an impressive technology team.
This is another good example of our buy versus build approach.
As the acquisition is accelerating the roadmap of our machine learning and artificial intelligence capabilities.
To better deliver contextual knowledge to both agents and self service boss.
As previously disclosed discussed going forward.
We expect to continue providing financial details and discussing the strategic rationale of our acquisitions, even is immaterial to our results.
In addition to our strong cloud momentum, we continue to execute well on our automation innovation strategy.
During the first half our innovation in machine learning artificial intelligence and robotics was widely recognized by industry analysts.
For example.
Forrester commented in their in their recent conversation artificial intelligence report.
Very strong analytics environments.
Stand out from the pack.
Also a breakthrough and other industry research firm.
Recognize variant for innovation and success in artificial intelligence machine learning platforms, Smart robotics analytics and natural language processing.
In summary, we are very pleased with our first half customer engagement results, reflecting the successful execution of our simplify automate and modernized strategy.
As well as our commitment to innovation.
We saw strong momentum in cloud driven by improved cloud adoption in the enterprise market and strong execution of our cloud first strategy.
Turning to cyber intelligence.
We are global market leader with a broad portfolio across the cyber intelligence cyber security and physical security markets.
Our advanced data mining solutions to help customers capture and analyze structured and unstructured data.
And gain insights that help accelerate security investigations.
In the first six months of the year.
Cyber intelligence revenue increased by more than 6%.
About 7.5% on a constant currency basis.
This revenue growth was accomplished by accelerated margin expansion sorry, the revenue growth was accompanied by accelerated margin expansion, which I will discuss shortly.
In Q2.
We continue to win large deals around the world.
Including an order of approximately $50 million.
And for orders with an average size of around $5 million each.
We believe this types of large orders.
To reflect our ability to address.
The market two trends that we have discussed on past calls.
First security threats are becoming more complex.
And as a result security and intelligence organization.
Find it more difficult to detect investigate and neutralize threats and are seeking new data mining solutions.
And second.
There is a shortage of data scientists and cyber analysts.
And security organizations are seeking advanced automation capabilities.
To perform functions previously performed by humans.
With more than 1000 customers.
And allow our solution portfolio.
We are well positioned to benefit from these trends with both existing and new customers.
We continue to expand our customer base.
And also pleased to report that we added approximately 50, new customers in the first half.
Over the last few years, we discussed a strategy to shift from an integrated model to a softer MRO.
Through investments in unbundling and Productizing, our data mining softer.
Historically large deals sold under the integrator MRO included a fair amount of pass through hardware and custom development services.
And Varian delivered these professional services.
In addition to deploying our data mining software.
Shifting to a softer moral over the last two years, we have made product investments and enabling our customers and third party integrators.
To deliver a third party hardware himself and perform some of the customer developments.
Using our standard.
We believe there are significant benefits to our customers from the softer productization.
Making our softer easier to implement and easier to refresh.
Which is critical in a rapidly evolving technology landscape.
Customers have realized that the integrator MRO, which provides them one stop shop accountability.
Is quite limited in terms of system often openness.
And the ability to quickly deploy software enhancements.
The investments we've made.
In the soften model.
Create significant benefits to our customers.
And improve our competitive differentiation.
During the first half consistent with our software model strategy.
We saw a reduction in the amount of third party hardware we pass through.
As well as a reduction in our development services.
These reductions came in at a faster pace than originally planned.
And led to a 6% increase in gross margin year over year.
Overall, we are pleased with exit with the execution of our softest strategy.
And excluding pass through hardware in both periods.
Cyber intelligence segment revenue increased double digits in the first half of the year.
In summary.
We are pleased with our second quarter and first half results and the progress we've made with our two key strategic initiatives.
In the first half we increased non-GAAP revenue double digits on a constant currency basis.
Expanded margins.
And increased EPS, 20% year over year.
In customer engagement, we experienced strong cloud momentum.
And in cyber intelligence, a softer model transition progressed ahead of plan.
Now I would like to turn the call over to Doug to discuss our financial results and outlook in more detail.
Doug.
Thanks, Dan Good afternoon, everyone. Our discussion today will include non-GAAP financial measures reconciliations between our GAAP and non-GAAP financial measures is available as Alan mentioned in our earnings release and in the IR section of our website.
Differences between 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 as well as certain other items that can vary significantly in amount and frequency.
For certain metrics that also includes adjustments related to foreign exchange rates.
We're pleased with our strong first half of fiscal 2000, and I'll start today by discussing Q2, and first half and then I'll discuss our outlook.
For Q2 results follow very strong Q1, and I'll review, both our Q2 and first half results to explain where we stand at the midpoint of the year.
Starting with Q2 non-GAAP revenue came in a bit over 331 million, a 7% year over year increase.
On a constant currency basis, non-GAAP revenue was $335 million up 9% over last years second quarter.
non-GAAP diluted EPS was 82 cents for Q2 up 8% year over year.
Our Q2 revenue reflects an acceleration in our cyber intelligence software model plan, which resulted in a reduction in our third party hardware sales, which I'll discuss later.
During the first half we achieved strong non-GAAP revenue growth of 9.2% year over year and non-GAAP revenue growth on a constant currency basis was 10.6%.
non-GAAP gross margin expanded 250 basis points to 67.4% driven by the acceleration of our cyber intelligence software model.
non-GAAP operating income increased 17%.
And non-GAAP operating margins improved by 140 basis points from last year's first half.
Adjusted EBITDA increased 15% as margins expanded by 120 basis points.
non-GAAP diluted EPS increased 20% year over year ahead of our annual guidance of 14%.
Now I'd like to review, our Q2 and first half results by segment.
In Q2, non-GAAP customer engagement revenue increased 8% from last year or 9% on a constant currency basis.
As we look back at our first half results Im pleased to report that non-GAAP revenue increased 11%, which was 12% on a constant currency basis.
non-GAAP recurring revenue increased by nearly 17%.
We continue to benefit from high renewal rates for recurring revenue approximately 90% and strong growth from new contracts.
As Dan mentioned earlier, the mix of our business is fundamentally improving as our non-GAAP recurring revenue represented 62% of total revenue in our customer engagement segment. During the first half of fiscal 20, an increase from 59% in last year's first half.
The key driver was a strong growth in our non-GAAP cloud revenue of nearly 50% year over year.
Estimated fully allocated non-GAAP gross margins were up 50 basis points as we had targeted.
Our estimated fully allocated adjusted EBITDA margins declined a bit from last year due to the timing of certain expenses for the year. We expect these margins to be up for the year around 28.5%.
I'd like to make a few comments about the strong momentum we're experiencing with our cloud first strategy.
First an increase in the number of large deals from enterprise customers is an important data points, suggesting that large enterprises are starting to adopt cloud faster.
As you May know enterprises move to the cloud at different paces, and we're helping them make this migration easier.
For example, we offer solutions with feature parity across on premise and SaaS, allowing a seamless user transition.
The size and breadth of our enterprise customer base provides significant future growth opportunities as we help them execute their individual cloud strategies.
Second regarding the strong ACB growth, we discussed on prior calls for a while that has been giving customers quotes for both weve given covers customer quotes for both on premise and SaaS solutions.
In the first six months of the year, we saw more customers choosing the SAS option as evidenced by more than 80% new Hsas HCV growth.
We expect this trend to continue and currently expect around 80% CV growth for the year as well.
Now, let me turn to cyber intelligence.
In Q2, non-GAAP cyber intelligence revenue increased 7% from last year or 8% on a constant currency basis.
As we look back on our cyber intelligence segment for the first half of the year I'm pleased to report that non-GAAP cyber intelligence revenue increased 6% year over year or 7.5% on a constant currency basis, while at the same time accelerating our software model plan.
As Dan discussed earlier over the last two years, we have made product investments, enabling our customers and third party integrators to deliver a third party hardware themselves and perform some of their custom development using our standardized tests.
During the first half of fiscal 20, we executed well on the software model and saw a significant reduction in the amount of third party hardware we resell.
This reduction came in at a faster basis than originally expected and led to a 6% increase in estimated fully allocated gross margin year over year ahead of our plan.
Overall this is an important strategic objective and we are pleased to over achieve in the first half while driving down our low margin hardware revenue.
As Dan mentioned earlier, excluding pass through hardware, we experienced double digit revenue growth in the first half of the year.
As we continued our first half investments in our software model strategy, our estimated fully allocated adjusted EBITDA margin increased by 420 basis points less than our gross margin expansion.
Now turning to the balance sheet.
At the end of Q2, we had 466 million of cash and short term investments, including short term and long term restricted cash and investments.
We ended the quarter with net debt of $351 million, including long term restricted cash and investments and excluding discounts and issuance cost primarily associated with our convertible debt.
Year to date cash flow from operations on a GAAP basis was 98 million down slightly from last year due to the timing of collections and payments for the full year, we expect cash from operations to increase over last year.
Our net debt to EBITDA ratio is 1.1 and were pleased the Moody's upgraded our corporate debt rating to be a two during the quarter due to our continued growth and increased profitability.
Turning to our annual guidance.
We expect total non-GAAP revenue of $1.375 billion with a range of plus or minus 2%, reflecting just over 10% growth for the year.
From an operating margin perspective, we expect non-GAAP operating margins in fiscal 20 of approximately 22%.
We expect our non-GAAP quarterly interest and other expense, excluding the potential impact of foreign exchange to be approximately $5.6 million.
Given volatility in foreign exchange rates, there could be future gains or losses related balance sheet translations in our future results, which are not included in our guidance.
We expect our non-GAAP tax rate to be approximately 9% for the year, reflecting amount of cash taxes, we expect to pay this year.
Our cash tax rate slightly lower than what we were previously guiding two based on lower estimated tax payments, we now expect to make across our various entities.
Based on these assumptions and assuming approximately 67.7 million average diluted shares outstanding for the year, we're expecting non-GAAP diluted EPS at the midpoint of our revenue guidance to be approximately $3.65.
In addition to our annual guidance, we'd like to provide you with our current view on how the year will progress.
In Q3, we expect non-GAAP revenue to be similar to Q2, which is consistent with past years, followed by our usual seasonally strong Q4.
We also expect EPS in Q3 to be similar to Q2.
And this concludes our prepared remarks, so operator can we please open up the lines for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the Star then the one key on your Touchtone telephone.
If your question has been answered any wish remove yourself from the queue press the pound key.
Hi, again to ask a question press Star then the one key on your Touchtone telephone.
And our first question comes from Dan Ives with Wedbush Securities. Your line is open.
Yes. Thanks.
So can you just talk about on the cloud.
Just maybe how the conversations are changing with customers may you started to see more strategic deals there and then.
And our maybe you can just talk about like how things are changing in the pipeline from a deal flow perspective.
Maybe just changed there.
Yes, we certainly think that there is a clear change, especially at the enterprise level.
Which is the majority of our businesses enterprise focus.
And that is the conversation on changing form just talking about cloud to actually.
Buying hsas.
We have been giving customers quotes both ways for quite some time.
Given the giving them the choice to to move to the cloud at their own pace and we've seen now more enterprise customers are actually choosing at the end of the sales forces.
That choosing the SaaS option.
And I think it's primarily because of things we've done to make you Phyllis for them.
Doug mentioned feature parity, which is an important consideration for customers that want to move on Prem to cloud. They can maintain the same functionality resolved to retrain users.
And it's it's it's the overall.
No cloud security that we offer and global.
Deployments with the offer we have now a pretty scalable cloud operations.
We are we expecting too.
We finished the year with air are approaching $250 million of no. We have several cloud partners and one of the largest partner is.
A double you asked and we are one of the top 100 partners with a ws where we are.
Scaling our infrastructure, which will help us also provide better pricing better security and make enterprise customers very comfortable.
With the transition to the cloud and the evidence is $11 million videos in H., one versus four in April one of last year.
And also longer duration of contracts. So these are all things that show us that.
The trend is real and we.
We talked about expectation for 80% of growth in new SaaS deals useless HCV for the year. So we achieved 80% in each one and we believe we will achieve 80% for the year.
Thanks.
Ill go back in queue.
Thank you and our next question comes from.
With Jefferies. Your line is open.
Hi, Thanks for taking my questions today I appreciate it.
Maybe Dan one for you first when you think about the characteristics and be maintenance customers that have you've just ask the early proof points that you have is there any particular characteristics and those customers is is there any type of pattern that you're seeing I know, it's a small sample set but what's leading them to move from maintenance to SaaS early on that you've seen that that might help you as you think about future conversion opportunities national follow up questions.
Yes, that's a good that's a very good point.
So we will first we see early so we have a handful of data points and important for US was to continue to validate that the two X.
Uplift is not only something that we target but also it provides.
Benefits to our customers so it's a win win.
Arrangements, where they save a lot of money on their internal datacenter in internal operations by moving.
The cloud operation into the Verizon cloud and I think that is being validated.
We also see that customers as they.
Move on Prem deployments to the cloud typically also interested in expansion.
Either expansion of their.
A solution or actually adding more solutions. So it's a good inflection point for us too.
Discusses the customers.
Something that is more strategic than just saving some money on.
Changing the deployment to the cloud.
We.
We believe that we will see in the future.
The move to the cloud by enterprises as a strategic decision and one that that can help us through all in addition to the uplift to continue our land and expand strategy with these customers.
Great and then Doug if I could ask some follow up questions. So the acquisition of transfer so it's.
Immaterial in terms of the overall size, but.
How should we think about whether that business is growing and then.
I think it might just $8 million does that imply that the adair is $8 million lowering the core guidance. Just maybe help me think about the impact of that and how that's factored into numbers and.
Yes outside of FX, the company would still be on track on an organic basis to hit the targets that you've set out for the year.
Yes sure yes.
Transource, Missouri small acquisition was primarily technology oriented they had some nice technology wanting to combined with ours.
So we didnt really look take a look at that as kind of a run rate continuing business as much as we just one of the kind of the code to get to put with ours, it's a million or two a quarter kind of offsetting some of the FX headwind. If you will so not really additive demand overall.
Okay, Great and then just one more fuel engaging in Belgium.
I was just looking at non-GAAP cloud revenue and I think based on the July Investor presentation, you guys had put out.
I think there is may be a slight quarter over quarter dollar decline from from one Q2 Q curious if that was just in the managed services piece or if that was in core SaaS, maybe I think you're just help us understand.
How those two pieces looks this quarter as well.
Yes, so when you look at.
Cloud revenue growth.
The the the growth comes from a combination of renewal rates of existing accounts and new deals right. So obviously, we have very strong new deals.
And we also have strong renewals, we talked about 90% renewal.
But you also remember that we discussed that the foresee renewals.
In Q1 were in the fifties and while we improve them in Q2, they're still well below our.
Average renewal rates as expected.
We are working hard on improving renewal rates and foresee and that's coming that's going to come with.
The introduction of our VLCC platform, which is going very well.
But definitely there is an impact on on the sequential.
Our growth.
Until we can get the renewal rates to our average.
And whether and when you look at the new SaaS deals.
You saw us HCV, well, it's growing 80%.
When you get an $11 million to $11 million video of the time between the bookings and the revenue is longer on bigger deals. So thats also an element of it.
A lag between the bookings and in the end the revenue so so overall.
No we see the cloud revenue continued to grow in Q3 and Q4.
And as I mentioned earlier.
We see the year ending was about 40% growth in revenue.
And.
Our our.
The Q4 era will be approaching $250 million.
Great and.
Just one last housekeeping question, the new Hsas HCV does that include.
Maintenance conversions that that contract for sasols that they've gotten the new HCV bucket as well.
Yes, we do include that because there are new SaaS contracts, but there were again a small number.
So far with they should become a bigger number.
Over time, but they will yes, they will be included and they will drive this hopefully to a much larger growth rates.
Great. Thanks, again for taking my questions I appreciate it.
Sure.
Thank you and we have a question a follow up from Daniel Ives with Wedbush Securities. Your line is open.
Yeah, just just one last question can you maybe just talk about hiring plans on the sales force just given.
On the cloud side and maybe some of the hiring plans there. Thanks.
Yes so.
So if you take a closer look at our first half you can see that our.
Opex investments actually were.
You know as essential in each one.
This is ahead of you know growth, we expect in H. too.
So in terms of hiring and growth and investments, we basically have done that in each one.
We believe that's going to.
And drive the growth in H. too.
The mix between age when things went through is pretty good.
The overall, the overall number for customer engagement.
We did $434 million in the first off that's a 48.2%.
Of the year, so thats pretty consistent with the 40 852 that we had.
In prior years.
So we think that we are pretty good on the investment we made in each one.
And.
If we consider more investment it will be towards the end of year.
Toward growth next year.
But we're not expecting.
Headcount growth.
In H. too.
Great. Thanks.
Thank you and our next question comes from Hugh Cunningham with the Opco. Your line is open.
Hi, guys. Thanks for taking my question.
First one is relatively simple this is us on cyber intelligence side.
So.
Excluding a hardware you are saying revenue there grew double digits, which is very encouraging.
And im trying to understand what you're seeing in that market.
And specifically.
What you are seeing in sort of the important markets emerging markets.
Yes, mark its leverage to commodities et cetera.
Yes clear so so let me first just address the hardware so.
To be clear why we are why we gave this metric of excluding hardware, but thats because we are intentionally driving the hardware pass through down.
This this is in the making for a couple of years and we now see acceleration and we're really happy about it but it's obviously a decline year over year actually the number excluding hardware and H won this year and last year will be 12% growth. So are we happy that the portfolio overall, excluding hardware is growing 12% in each one.
Now putting that into perspective of the macro environment.
So we clearly hear from customers the need.
For advanced data mining solution is strong.
And.
Government agencies across the globe.
Really looking for new advanced technology to help them combo crime and terror.
And then what the challenges are big and the security threats are increasing and the need for technology is certainly there.
Obviously, we have question about emerging markets and so more so and so forth is is.
You know in order to be able to buy they need to.
Be able to keep their funding.
And and there is a changing economic environment.
That can impact spending, but I can say that at this point.
We have not seen any evidence that.
You know budget has been negatively impacted across the globe.
On that same point on cyber intelligence, Dan the do you have any sort of sense for.
You May have said this I, just forget where margins can get to in that business. If you.
Got it.
Down to where you want it.
Oh, how far down can you get it yes, yes, absolutely so the hardware.
Specifically the hardware was 10% last year.
And we expect it to be certainly less than 5%.
On a go into long term moral.
But in addition to hardware reduction.
Which we are achieving ahead of plan. We also starting to see the benefits from development services reduction so that customers that need to develop some customers softer or they can do it.
With a CPI is they don't have to.
Asked varying to do it for them and Thats also another trend.
Okay reduction in development services. So overall, if you look at the last year.
25% of our total revenue in cyber came for professional services.
Which includes Aguiar include development services and include implementation services, but that was 25%.
The target we gave.
The three of targets, we gave last quarter is that by fiscal 2002, our three year target.
We expect this 25% to come down to 15% one 515% of total revenue.
So thats, a 10% reduction that will increase the gross margin to about 70%.
So we see our cyber business as a growing business with 70% gross margin softer model. We also starting to see more subscriptions. So the recurring part of the business is growing and.
And we think these are all very good.
Trends that.
Not only benefit the various financial moral but as we discussed also customers the benefits from being able to buy more stand at softer and get a much faster refresh cycle that they need in order to keep this off their current.
Sure. Thank you one last question on CE, Dan just sort of a big picture question.
One of the questions were getting fairly frequently is.
It's about what happens if the economy turns down there some sort of confusing signs out there in the marketplace right now.
Our sense is that with your investments in things like machine learning and artificial intelligence and.
And just.
Your new announcement of this voice of the customer platform. These sort of things sort of de couple you.
Well give you some immunity from a downturn in the macro economy and in fact.
As your customers start to respond to a slowing economy that may generate more business for you can you talk about how you look at it.
Yes, I think that.
You kind of sum its very well because our all all existence the customer engagement.
He is really to help customers reduce operating costs.
This this is all we do.
Well well, we hear from customers that they don't want only to reduce cost we want to do it while.
Elevating the customer experience or at least not no.
See fear any erosion in the customer experience.
So thats why it has to be with a lot of automation and analytics to to make sure that reduction in operating cost does not come at the expense of customer dissatisfaction.
The focus on cost reduction.
What we've seen in the past when the economy turn turn turn down negative was was.
A very strong focus because.
Customer service.
It is very.
So dependent on on people.
And.
In our estimate is one more than one trillion dollars of spending in the industry on the workforce.
So there is typically a focused on you know how can we make the workforce more productive how can we achieve our strategic always less cost and again just just.
Reducing the workforce or shifting their workforce to.
You know overseas to low cost low cost areas.
As proven not to do not to do the trick so technology will be more in demand to allow them to reduce cost while achieving their strategic objectives.
Thanks for taking my questions and I appreciate it.
Sure Yes.
Thank you and I'm showing no further questions at this time I would like to turn the call back to Mr., Alan Roden for any closing remarks.
Thank you operator, and thanks, everyone for joining our call Tonight have a great evening.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect everyone have a great day.