Yahoo Finance Verint Systems Inc. (NASDAQ:VRNT) Q1 2025 Earnings Call Transcript
Verint Systems Inc. (NASDAQ:VRNT) Q1 2025 Earnings Call Transcript June 4, 2024
Verint Systems Inc. beats earnings expectations. Reported EPS is $0.59, expectations were $0.54.
Operator: Thank you for standing by, and welcome to Verint's First Quarter Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Matthew Frankel, Investor Relations and Corporate Development Director. Please go ahead.
Matthew Frankel: Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; Grant Highlander, Verint's CFO; and Alan Roden, Verint's Chief Corporate Development Officer. Before getting started, I'd like to mention that accompanying our call today is a slide presentation. If you'd like to view these slides in real time during the call, please visit the IR section of our website at verint.com. Click on the Investor Relations tab and then 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 on 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. The forward-looking statements are made as the date of this call, and as except as required by law, Verint assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For more detailed discussion of how these and other risks and uncertainties could cause Verint's 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, 2024, our Form 10-Q for the quarter ended April 30, 2024 when filed, and other filings we've made 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 slide presentation, our earnings release in the Investor Relations section of our website at verint.com, for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information, but is included because management believes 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 by other companies.
Now, I'd like to turn the call over to Dan. Dan?
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Dan Bodner: Thank you, Matt. I'm pleased to report that our strong momentum continued in Q1 driven by the strong AI business outcomes that our open platform delivers to our customers. The Verint open platform that we introduced last year transforms the latest AI technology from any vendor into tangible AI business outcomes better than any other contact center platform. And because our platform is completely open, we're able to quickly deploy AI-powered bots into a customer's existing workflows, accelerating their time to value. In Q1, revenue and non-GAAP diluted EPS came in ahead of our expectations and we are raising our annual guidance. We believe the AI opportunity in the contact center market is very large. As brands seek AI-powered bots to help increase CX Automation.
The market is starting to pivot from telephony-centric to AI and data-centric platforms, and Verint is very well positioned to lead the new CX automation category with our differentiated open platform. Contact centers have been challenged for many years to hire more people and deliver higher quality customer experiences. Today, contact centers seek a CX Automation platform that is centered on behavioral data and AI to deliver increased workforce capacity and lower labor costs, while at the same time elevating customer experience without additional headcount. More and more brands are seeking a CX Automation platform that can deliver tangible AI business outcomes. At our Investor Day last year, we discussed several examples of how Verint bots are helping our customers to reduce costs as well as driving faster growth for Verint.
For brands, the economic benefits from AI business outcomes results from the lowering of the cost of their workforce and increasing customer loyalty. At the same time, for Verint, the economic benefits come from increasing our addressable markets as brands increase their adoption of Verint's AI-powered bots. Our momentum continued in Q1, and later I will review Q1 large wins driven by AI-powered bots and customer case studies demonstrating the strong AI business outcomes we are delivering to our customers. Next, I would like to review our first quarter results and trends. In Q1, revenue came in at $221 million, $7 million ahead of our guidance. Our strong innovation continues to drive gross profit growth faster than revenue. And non-GAAP gross margins expanded 260 bps compared to the same quarter in the prior year.
Non-GAAP diluted EPS came in at $0.59, $0.05 ahead of our guidance, and an 11% year-over-year increase. Our SaaS metrics also came in strong and Grant will discuss our Q1 results in more detail later. As I mentioned earlier, Verint quickly transforms the latest AI technology into tangible AI business outcomes better than any other contact center vendor. Our open platform is highly differentiated from telephony-centric platforms due to its unique design with behavioral data and Verint Da Vinci AI at the platform core. Verint Da Vinci acts as the factory for our bots. It leverages the latest commercial, open source, and proprietary AI models to quickly deploy new bots and refresh existing bots. As Verint bots emerge from the bot factory, they train continuously in the bot gym on relevant behavioral data available in the Verint platform data hub.
And finally, the Verint bots are designed to leverage the same workflows our customers use every day, enabling brands to quickly deploy bots and benefit from AI business outcomes now. Our ability to deliver strong AI business outcomes is reflected in our Q1 momentum, including competitive wins for many of the leading brands in the world. During Q1, we had strong SaaS bookings driven by customer adoption of our AI-powered bots. As a reminder, our bots are only available as bundle SaaS running in the Verint Cloud and our new bundle SaaS ACV bookings in Q1 came in strong with 25% year-over-year growth. Some of the large wins that we recently announced include a $14 million win for one of the world's largest retailers, which I will discuss in more detail shortly.
A $7 million win for a Fortune 500 brand, a leading healthcare company adopting four Verint bots. A $7 million win for an insurance company, and a $4 million win for a leading healthcare provider, both adopting Verint bots. And finally, a $4 million win for a top five U.S. bank, which is an initial order covering about 12% of their contact center operations with a fully negotiated option to expand volume. Let's take a closer look at the Eight-Digit win in Q1. This large retailer is deploying the Verint open platform in the cloud to increase CX Automation in their contact center. Verint was awarded the $14 million contract due to our differentiated ability to deliver AI business outcomes now. The contract includes deployment of four Verint AI-powered bots.
The Data Insights Bot, which enables users to engage in AI-assisted conversations with their data by leveraging multiple AI models to answer natural language questions and to automatically identify anomalies and trends in the customer's data. The Subscription Bot, which delivers market-leading transcription accuracy, resulting in improved analytics and higher impact from business insights. The Quality Bot, which automatically evaluates customer interactions, resulting in reduced supervisor cost and improved agent coaching. And the Data Reduction Bots, which automates data compliance and protects sensitive personal data. In addition to deploying these four bots, we also replacing several legacy solutions from two competitors and helping the customer to consolidate dozens of data silos into a single unified data hub, which is critical to the ongoing training of the bots.
The Verint bots are designed to deliver specific AI business outcomes. As customers increase their Verint bot adoption, they are reporting significant AI business outcomes. Let's take a look at three such case studies that we recently announced. The first case study is a financial services company deploying Verint bots to increase self-service containment across 14 million interactions annually. The customer deployed the Verint IVA and achieved a successful containment rate of 80% by the Verint bots without human agents. This impressive market-leading containment rate drove significant agent capacity and the extra capacity is being used to extend service hours to elevate customer experience and to lower labor costs. The second case study is an insurance company deploying Verint bots to increase agent's work-life balance by providing agents unlimited schedule flexibility.
The insurance company deployed the Verint TimeFlex bots and saw a 30% reduction in agent attrition. The third case study is a bank deploying Verint bots to help agents improve their upsell skills and increase revenue. As Verint starts to benefit from increased agent capacity through AI, many are now looking to leverage their agents for additional tasks such as upselling and increasing revenue. With the Verint Coaching Bots guiding their contact center agents in real time on how to effectively sell to customers, the bank saw a 48% increase in upsell close rates. This is an example of how brands are able to leverage increased agent capacity to drive higher revenue. In summary, we're pleased with our large wins in the first quarter, including some of the leading brands in the world selecting Verint's open platform.
We're also pleased with the significant AI business outcomes reported by customers using the Verint's AI-powered bots. The key driver behind our momentum is our ability to deliver AI business outcomes now, and we believe this is a unique and sustainable differentiator. We expect AI technology to continue to evolve at an even faster pace, as evidenced by frequent GenAI enhancements from leading AI vendors. But GenAI models alone do not create AI business outcomes in the contact center. For that, a CX Automation platform such as ours is needed, which can combine AI models in a bot factory, train these models on fresh, relevant data 24/7, and then embed the AI into existing contact-centered workflows. Verint is benefiting from the fast pace in AI innovation and adoption in the industry.
The Verint's open platform was launched mid-last year and it's driving a recent momentum, positioning us well to lead the new CX Automation category. Today, we are raising our revenue and non-GAAP diluted EPS guidance for the year. As discussed at our Investor Day, we're targeting an acceleration in our revenue growth rates to 10% in fiscal '27, consistent with our Rule of 40 target. With that, I'll turn it over to Grant to discuss our financials in more detail.
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Grant Highlander: 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 and divestitures, including fair value revenue adjustments, amortization of acquisition-related intangibles, certain other acquisition and divestiture-related expenses, stock-based compensation 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.
Let me start with an overview of our strong Q1 results. Adjusted revenue increased 5% year-over-year to $221 million, $7 million ahead of our guidance. As a reminder, our 5% adjusted revenue growth reflects the Quality Managed Services divestiture we completed at the end of last fiscal year. When looking at the $7 million overachievement, about half was due to contract values coming in higher than anticipated and the other half was due to contracts closing earlier than planned. Non-GAAP gross margins came in strong at 72.4%, up 260 basis points year-over-year. We are pleased with our gross margin and believe our ability to increase gross margins reflects the strength of our AI innovation and the AI business outcomes we delivered to our customers.
The combination of our revenue overachievement and strong gross margin drove non-GAAP diluted EPS of $0.59, $0.05 ahead of guidance, and up 11% year-over-year. Our strong first quarter results were driven by our continued SaaS momentum. In Q1, SaaS revenue increased 20% year-over-year. Bundled SaaS new ACV bookings, which is a leading indicator for AI momentum, increased 25% year-over-year as 80% of our bundled SaaS bookings were contracts that included AI-powered bots. Important to note that many of our customers initially purchased bots for a portion of their potential AI volume, and our flexible consumption pricing model provides Verint a natural path for revenue growth as brands increase their consumption of our bots. Another SaaS metric that relates to AI adoption is term links.
In Q1, I am pleased to report that we saw our average SaaS contract term lengths about 30% longer than a year ago. We believe these longer-term lengths reflect growing customer confidence in the direction of our open platform and commitment to Verint's CX Automation strategy. A third SaaS metric related to AI momentum is Bundled SaaS pipeline. As of the end of Q1, our advanced stage pipeline for the remainder of the year was up more than 20% year-over-year, with over 80% of the pipeline including bots, reflecting the fact that our AI innovation is only available in the Verint Cloud. Our other SaaS metrics were also strong across the board and can be found on our IR dashboard. I would like to talk more about our AI business outcome strategy with our large customer base.
Today, Verint delivers workflows to about 4 million contact-center agents. As discussed at our Investor Day, we are enhancing these workflows with AI-powered bots, which expand the Verint revenue opportunity significantly. To monetize this opportunity, we offer our customer base a hybrid cloud architecture enabling them to quickly deploy Verint's latest AI innovation in our cloud without the need for large, disruptive, and risky rip and replace programs for their existing systems. Also our flexible AI consumption pricing model enables our customer base to deploy bots at low volumes initially and then easily expand as they prove the value from the AI business outcomes we deliver. We also provide our customers future proof pricing strategies that allow them to redirect investments from agent-based applications toward investments in AI-powered bots.
We see customers in our base increasing their agent capacity with AI-powered bots and using the extra capacity in multiple ways, to elevate customer experience, to eliminate hiring, to empower agents with upsell offers, and to reduce labor costs. We believe our ability to deploy bots with a flexible consumption model will enable us to accelerate our revenue growth as strong AI business outcomes drive more adoption of our bots and a greater volume consumption by our customers. Turning to our guidance for fiscal '25, given our strong start to the year, we are bumping up our revenue and EPS guidance for the full year. On a non-GAAP basis, our revenue outlook for fiscal '25 is now $933 million, reflecting a bit more than 5% growth compared to fiscal '24 adjusted revenue.
We expect gross margin to increase again this year, and we are raising our gross margin expansion guidance from 100 basis points to approximately 150 basis points year-over-year. The combination of revenue growth and continued margin expansion is expected to drive operating income up high-single digits for the year faster than our revenue growth. And for diluted EPS, we now expect $2.90 at the midpoint of our revenue guidance. Regarding below the line assumptions, we expect interest and other expense net to average around $500,000 per quarter. Net income from a non-controlling interest of around $250,000 per quarter. And for the full year, we expect a cash tax rate of around 12% and around 72.5 million fully diluted shares. Let me also discuss how we see the year progressing.
We expect bundled and unbundled SaaS dynamics to be similar to last year. For bundled SaaS, we expect revenue to increase sequentially throughout the year. In fact, we expect our bundled SaaS revenue growth rates to accelerate each quarter on a year-over-year basis. For unbundled SaaS, we expect the quarterly cadence of revenue to be similar to last year, driven by the timing of unbundled renewals. For Q2 total revenue, we expect a range of $210 million to $214 million, reflecting a sequential increase in bundled revenue to more than $70 million, driven by AI adoption, a lower amount of unbundled SaaS revenue compared to Q1 driven by the Q2 volume of renewable contracts, and a sequential decrease in non-recurring revenue and support as expected.
For EPS at the midpoint of the Q2 revenue range, we expect non-GAAP diluted EPS to be $0.52. Looking at the second half of the year, we expect revenue in Q3 to be similar to Q2 and to finish the year with a strong Q4, driven by both strong bundled SaaS growth and a large volume of unbundled renewals similar to last year. Turning to our balance sheet, we continue to be in a very good financial position. Our net debt remains well under one times last 12-month EBITDA and is further supported by our strong cash flow. And with regard to cash flow, we are targeting a greater than 40% increase in free cash flow to approximately $180 million for the full year. As we previously discussed, our largest use of cash generation is expected to be stock buybacks.
In Q1, we purchased approximately $37 million of shares of common stock, and in Q2, we will continue buying back shares as part of our previously announced $200 million stock buyback program. In summary, we are pleased to have exceeded both our revenue and non-GAAP diluted EPS guidance in Q1. We are pleased with our strong bundled SaaS bookings growth, large wins with some of the world's leading brands, and significant AI business outcomes reported by our customers. As we discussed today, Verint's AI-powered bots deliver economic benefits to our customers and also to Verint. We are focused on accelerating the deployment of AI-powered bots to our large customer base. And finally, we are pleased to raise both revenue and EPS guidance for the current year as we work towards becoming a Rule of 40 company in fiscal '27, with revenue acceleration and margin expansion along the way.
With that, operator, please open the line for questions.
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