WSFS Financial Q4 2024 Earnings Call Transcript

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Provided by Quartr
March 27, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. And welcome to the Verint Systems Inc. Q4 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Frenkel, Investor Relations and Corporate Development Please go ahead.

Speaker 1

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, then click on the Webcast link and select today's conference call.

Speaker 1

I'd also like to draw your attention to the fact that certain matters discussed in this call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward looking statements. The forward looking statements are made as of 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.

Speaker 1

For a 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 ks for the fiscal year ended January 31, 2024, when filed and other filings we make with the SEC. The financial measures discussed today include non GAAP measures as we believe investors focus on these measures in comparing results between periods and among our peer companies. Please see today's slide presentation, our earnings release and 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 it provides 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.

Speaker 1

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

Speaker 2

Thank you, Matt. I'm pleased to report a strong finish for the year with Q4 revenue and non GAAP diluted EPS coming in ahead of our expectations. Behind the momentum is the Verint open platform we introduced last year, which enables Verint to deliver tangible AI business outcomes better than any other vendor in our market. The market today is looking to increase the access to nation and Verint is leading the way. Throughout the last year, we built that momentum driven by our AI differentiation and we are raising current year outlook to reflect market demand for AI powered CX Automation.

Speaker 2

Today, I will start with our 4th quarter trends, then I will discuss our open platform differentiation, and finally, I will review our fiscal 2025 outlook and 3 year targets. In Q4, revenue grew 12% year over year, a couple of $1,000,000 above our guidance, driven by strong SaaS revenue growth of 28%. Non GAAP diluted Q4 EPS came in at $1.07 up 42% year over year, $0.08 ahead of our guidance driven by our revenue overachievement and strong margin expansion. At our Investor Day, we discussed how the Verint open platform and team of AI powered bots drive bundled SaaS growth. We also discussed how we are tracking AI demand using the bundled SaaS booking metric.

Speaker 2

I'm pleased to report that in Q4, bundled SaaS new ACV bookings increased 16% year over year and the 12 month pipeline for Bundle SaaS increased over 20% year over year. We expect demand for AI to not only drive bundled SaaS growth, but also free cash flow acceleration. For the current year, we expect over 40% growth in free cash flow. And over the next 3 years, as AI continues to drive growth in bundled SaaS, free cash flow will grow faster than revenue. The customer engagement industry has been challenged for many years with a growing number of interactions and higher customer expectations.

Speaker 2

Today, brands realize that hiring more workers and increasing labor expenses is no longer a sustainable solution. CX Automation provides brands with significant economic benefits and at the same time increases the addressable market for Verint. For brands, the economic benefits come from the lower costs due to the higher workforce productivity and increased customer loyalty. For Verint, the addressable market increases over time as a portion of the large amount that labor saving by brands will shift to purchasing the AI platform. Today, we estimate there are tens of millions of people around the world involved in customer engagement across contact centers, back office and branches and the industry is ripe for CX Automation Platforms that can deliver AI business outcomes.

Speaker 2

We believe Verint is uniquely positioned to lead the emerging CX Automation category due to 3 factors. 1st, our large customer base across many industries and geographies, which consists of 4,000,000 agents currently using the Verint platform and looking to add AI powered bots. 2nd, the customer data we have in the platform is critical to train the bots. And 3rd, our open platform is designed to deliver AI business outcomes better than any other vendor in our market. Successfully delivering AI business outcomes requires much more than just Gen AI models.

Speaker 2

It requires the combination of 3 key ingredients: the latest commercial and proprietary AI technology, relevant customer data, and business workflows. The Verint Open platform and our team of 40 AI powered bots help brands deliver tangible AI business outcomes across the enterprise. Let's look at what makes the Verint open It starts with the Verint da Vinci, which acts as the factory for our bots. Verint da Vinci allows us to combine the latest commercial, open source and proprietary AI and deliver it to all Verint bots from the core of the platform. As they emerge from the factory, Verint bots are training continuously on real time behavioral data available in the platform Data Hub.

Speaker 2

Finally, the Verint open platform leverages the workflows customers use every day, enabling brands to benefit from AI business outcomes now. Verint is innovating at a fast pace and our large team of AI powered bots is growing. The Verint bots augment not just the agents, but also the supervisor, analysts and other roles. Each Verint bot delivers specific AI business outcome and our customers may purchase 1 or a team of bots to drive greater ROI. Some of the Verint bots use Gen AI models, while other bots use proprietary models that are specifically designed for CX Automation.

Speaker 2

An example of a bot using Verint's proprietary AI, customer and workforce data and workflows is the TimeFlex bot, which we announced last week. The business problem this bot solves is the inability of agents to dynamically change their schedules. Today, if agents need to get out of their shift to take a child to the doctor or to watch the soccer game, very often this request will be denied because of limited supervisor resources to modify the schedule in real time and find a suitable replacement. In other words, the scheduling process is just too manual to provide agents with the work life balance they increasingly expect. The TimeFlexBot delivers AI business outcome to solve this problem.

Speaker 2

Agents can make unlimited schedule changes with no additional supervisors needed. The Board augments the existing supervisors by automating the approval of schedule change requests. For example, a Verint customer using the TimeFlex BOSS reported reduced employee attrition, higher employee engagement and 1,000,000 of dollars in annual savings. Like other Verint bots, the Verint TimeFlex bot can be quickly deployed into existing customer ecosystems, reducing operating costs and elevating employee and customer experience. Let me now turn to our Q4 wins.

Speaker 2

In Q4, we continue to have significant wins across existing customers and new logos, driven by our highly differentiated open platform and quick ROI we deliver to our customers. We had approximately 50 orders in the quarter with over $1,000,000 TCV each, including from some of the world's leading brands such as AT and T, HSBC, Goldman Sachs, Instacart and UPS. We had more than 100 new logos in the quarter, including the results company Christian Dior and Suncor. And as I discussed earlier, our 12 month pipeline for bundled SaaS grew over 20% year over year reflecting demand for AI innovation. I would like to double click on 1 large Q4 order.

Speaker 2

In January, we announced a $49,000,000 TCV order with a 5 year term from a leading healthcare company. This large contract came from an existing Verint customer that was looking to add AI innovation now. Verint's open approach enabled the customer to deploy a hybrid cloud platform, so they could keep what they had on premises and at the same time, leap forward with AI innovation in the very cloud. Let me share some additional details of this order. 50% of the revenue will be in bundled SaaS, including more than 10 Verint bots hosted in the Verint cloud.

Speaker 2

The other 50% of the revenue will be in unbundled SaaS. The order enables the customer to leverage the openness of the platform and import their own large language models into the Verint platform to future proof their AI investments. Also the order enables the customer to migrate their unbundled SaaS solutions to bundled SaaS at their own pace anytime during the 5 year term. We believe this 8 digit order is a great example of our open platform and hybrid cloud approach deliver AI business outcomes now. We are pleased with a strong finish to fiscal 2024 and are raising our outlook for the current year.

Speaker 2

We believe the perpetual license headwinds from the SaaS transition are now behind us And going forward, we expect growing AI demand to provide tailwinds to our bundled SaaS growth driving overall revenue growth acceleration. Looking beyond this year, Verint is a CX Automation category leader and we believe increasing demand for AI coupled with our differentiated open platform create a roadmap to achieve our targets for a rural of 40 company in fiscal 20 27. And now, I would like to turn the call over to Grant to discuss the financials in more detail. Grant?

Speaker 3

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 IT facilities and infrastructure realignment, as well as certain other items that can vary significantly in amount and frequency from period to period.

Speaker 3

Let me start with an overview of our Q4 results. Revenue increased a very strong 12% year over year to $265,000,000 a couple of $1,000,000 ahead of our guidance. The large increase was driven by approximately 28% increase in SaaS revenue from a combination of new business as well as the unbundled SaaS renewals that we discussed during our Q3 conference call. Non GAAP gross margins came in strong at 74.7%, up 3 20 basis points year over year. We are pleased with our gross margin, which has steadily expanded since the spin of our security business 3 years ago.

Speaker 3

We believe our ability to increase gross margins reflects the strength of our AI innovation and the business outcomes we deliver to our customers. The combination of our revenue overachievement and strong gross margins drove non GAAP diluted EPS of $1.07 $0.08 ahead of expectations. During our Investor Day, we discussed how we are innovating at a very fast pace in our bundled SaaS offerings and that we expect bundled SaaS to be our main growth driver going forward. I am pleased to report that in Q4, bundled SaaS new ACV bookings increased 16% year over year. I'm also pleased to report that as of the end of Q4, our 12 month bundled SaaS pipeline increased more than 20% year over year driven by demand for our AI innovation.

Speaker 3

Our pipeline growth is a leading indicator and we expect bundled SaaS new ACV bookings to accelerate this year and the acceleration in bundled SaaS bookings is also expected to drive free cash flow acceleration and later I will discuss our free cash flow outlook. Before turning to guidance, I would like to discuss Q4 highlights related to the AI investments we are making to support our roadmap for becoming a rule of 40 company. 1st, we continued our investment in AI, ending the year with 1300 engineers in R and D and Cloud Operations. 2nd, we expanded our customer success team with additional resources to drive AI adoption. And third, we aligned our services catalog to our AI offerings, expanding our value realization service offerings and divesting a manual managed services offering.

Speaker 3

Regarding the services alignment to AI, in Q4, we decided to divest our manual quality managed service offering, which is being replaced by an AI powered bot. The transaction closed on January 31, the last day of our fiscal year. To assist you in your modeling, the offering generated $25,000,000 of revenue last year and you can find the quarterly breakdown in our press release and on our website. Turning to our revenue outlook. We believe the AI momentum we experienced last year will continue and we expect our revenue growth to accelerate this year.

Speaker 3

There are 2 primary drivers for our faster growth. First, the customer engagement market is ripe for automation. AI adoption is driving strong demand for our bundled SaaS solutions and we expect bundled SaaS new ACV bookings growth to accelerate from the 16% we delivered in Q4 to 20% this year. 2nd, we have completed our perpetual to SaaS transition and expect perpetual revenue to be flat in fiscal 2025, eliminating prior headwinds from this transition. Our revenue outlook for fiscal '25 is approximately $930,000,000 reflecting 5% growth compared to fiscal 'twenty four as adjusted for the divestiture we just discussed.

Speaker 3

Turning to our overall guidance for fiscal 2025. On a non GAAP basis, again, for revenue, we expect approximately $930,000,000 plus or minus 2%. We expect gross margin to increase approximately 100 basis points following strong expansion we had last year. The combination of revenue growth and continued operating margin expansion is expected to drive operating income up approximately 7% year over year. And for diluted EPS, we expect $2.89 at the midpoint of our revenue guidance.

Speaker 3

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 11% and approximately 72,500,000 fully diluted shares. Let me also discuss how we see the year progressing. Similar to last year, we expect bundled SaaS revenue to grow steadily throughout the year and the level of unbundled SaaS revenue each quarter to fluctuate driven by the timing of renewals. More specifically, adjusted for the divestiture, we expect double digit revenue growth in Q4, again similar to last year and low single digit revenue growth in the 1st 3 quarters of the year. For Q1, we expect revenue in a range of $212,000,000 to $216,000,000 up from an adjusted $210,000,000 in Q1 of last year.

Speaker 3

At the midpoint of the revenue range, we expect diluted EPS to be $0.54 Turning to free cash flow. At this point in our SaaS journey, I am pleased to report that our free cash flow growth is accelerating. We define free cash flow as our GAAP cash from operations less our CapEx, which includes purchases of property and equipment and capitalized software development costs. Looking to fiscal 2025, we are targeting a greater than 40% increase in free cash flow to approximately $180,000,000 Turning to our balance sheet. We continue to be in a very good financial position.

Speaker 3

Our net debt remains well under 1 times last 12 month EBITDA and is further supported by our strong cash flow. Over the last few years, we have steadily repurchased shares at an increasing pace and have reduced our share count by 3 $600,000,000 of free cash flow and expect our largest use of cash to be share buybacks, which will further reduce share count. In summary, we are pleased to have overachieved revenue and non GAAP diluted EPS in Q4 and to be in a position to raise guidance for the current year. As we discussed today, Verint's AI powered bots deliver economic benefits to both Verint and brands. These economic benefits drive our roadmap to become the rule of 40 company in 3 years with revenue acceleration and margin expansion along the way.

Speaker 3

With that operator, please open the line for questions.

Operator

And our first question comes from Shaw Iyal from TD Cowen. Your line is now open.

Speaker 4

Thank you. Good afternoon, gentlemen. Congrats on completing a successful year and raising guidance. Correct me if I'm wrong, I think it's been a while since you've raised your revenue guidance. Again, if I recollect and serves me well, so again, congrats.

Speaker 4

Dan, I wanted to ask what has been driving the recent momentum and what is likely to continue to drive what seems to be healthy demand trends? And also as my follow-up question, any changes within the competitive landscape, especially in light of the changing AI environment? Thank you.

Speaker 2

Sure. Thank you, Yael. Yes, we completed the transition. So what's driving our momentum now is in one word is AI, but I'll give you an answer that is more than one word. So we believe the momentum that we had in Q3 and continued in Q4 is driven by the strong demand in the market for sales automation.

Speaker 2

Now we see now that the open platform that we announced last year was Engage in the summer is resonating very well with customers. And the success we see now is across new logos, customer extensions and also renewals. So we had more than 100 new logos in Q4 and they were primarily driven by AI differentiation. We were driving big expansion projects as some of our large customers are starting to move into AI and we discussed the health care provider that was adding more than 10 bots in the Verint cloud and that's resulted in a $50,000,000 order approximately. And we also see very strong renewal activity in Q4 and that's really what's driving the 28% SaaS revenue growth that we had in Q4.

Speaker 2

So as you kind of look into what is this SaaS automation demand and also your question about competitor, we believe that behind our differentiation is that we drive AI business outcomes now. And we do it better than any other vendor in the market. And the reason we can do it better is because our platform is designed to deliver AI business outcomes. So we saw some really good leading indicators in Q4 and we expect it to continue in the current year. So we mentioned SaaS bundle SaaS booking, which is basically what drive AI the way AI drives our growth has been up 16% and the pipeline that we have for the next 12 months is over 20% growth.

Speaker 2

And based on where we are right now in Q1, we believe that we'll do 20% growth in Q1 and we expect it for the rest of

Speaker 3

the year,

Speaker 2

bundled sales bookings going at the ACV booking going at 20% driven by AI. So to answer your differentiation, I think the best way to do it is through examples. So let me give you a few. I'll start with this large order, the $49,000,000 order. And this customer has tens of thousands of employees.

Speaker 2

And other vendors in our market are basically all having the same story. They told these customers, hey, if you want to move forward, you have to move your entire infrastructure to the cloud first. And this customer realized that would take them several years and huge disruption and it's a risky project. And they really wanted something now and Verint told them you can have AI business outcomes now. And the result is that they're investing in AI.

Speaker 2

They will deploy 10 bots. They are deploying now 10 bots. They're avoiding this very long risky and disruptive rip and replace project. So we are very differentiated in that sense. The customer will move their telephony and other applications that they have now on premises.

Speaker 2

They will move it to the cloud, but we're very they can do it at their own pace. So the AI innovation is in the cloud, but because we have a hybrid cloud platform, AI innovation is connected to everything they have now. It's working. They like it. They don't see the urgency to do anything with what's working, so they can look forward with AI Business Outcomes now.

Speaker 2

Another example, this one is from EMEA. This is a new logo for Verint, a little bit smaller, but several 1,000 pretty large customers, several 1,000 people in their workforce. And they originally issued an RSP and invited Verint and many other vendors in the market. Again, the RFP was very much at the beginning was for the entire contact center moving to the cloud. But after they learned from Verint about our open approach and our ability to support the hybrid cloud, they really fell in love with this idea of AI business outcomes now.

Speaker 2

So they basically canceled the RFP and awarded the contract to Verint. And maybe the 3rd example, I'll give you one from Australia. This customer, again, a Q4 win, competitive process against other competitors, the usual suspects. And this one has about 1,000 people, close to 1,000 people. So again, a little smaller.

Speaker 2

But what's interesting about this customer is that part of their business priority was to provide personal customer service to their customers. So they did not really want to automate too many things in terms of bots answering the phones, because they believe that people should talk to people. They also did not want to offshore their employees. They really are 100% Australian employees, which they know cost them more than offshoring and definitely cost them more than bots, but this was part of their business model. So they realized they have to pay more for those Australian employees, but they were looking for Saks automation to reduce costs and it was urgent for them.

Speaker 2

They needed to do it now. So it became a key requirement in this competitive process. And the outcome was that they chose Verint. I was in Australia in Q4, so I met the customer face to face. And it was interesting because they were talking to me about the box that they didn't purchase.

Speaker 2

So they purchased quite a few, but they were always so excited about deploying even more bots. And we kind of went through this large portfolio of bots that Verint has in the platform and discussed what is the business outcome that each bot can deliver? What is their business priority? Why we should do this one before the next one, what level of consumption is right for their model and so on and so on. So I think another example of when customers really focusing on AI business outcomes now, Verint is very differentiated.

Speaker 4

Thank you so much for that.

Operator

And thank you. And our next question comes from Peter Levine from Evercore ISI. Your line is now open.

Speaker 5

Great. Thanks guys for taking my question. Maybe Dan or Grant, maybe help us understand the monetization of these bots. I think you have 40 plus bots. Walk us through what you're charging?

Speaker 5

Is it usage? Is it per seat? And

Speaker 2

maybe if you can give us like some

Speaker 5

kind of uplift to ACV from the adoption of these boats?

Speaker 2

Yes. So I'll start, Grant, and feel free to add anything you that I missed. But the concept is very typical to how AI is being deployed and especially where it's all about AI business outcomes. We are aligning the pricing of the bot to the outcomes that the customer is expecting, so they can see the ROI, they can measure the ROI and they can increase the usage based on the results that they actually measure. So many of our customers that have bought AI in Q4 And I can say that with new logos almost entirely all the SaaS ACV, the bundled SaaS ACV that we got from new logos was about AI and bots.

Speaker 2

So it's definitely resonating well with our customers that are trying to expand with Verint, but also with how we win new logos. It's all about you can start applying those bots to your business model at any volume that is right for you to begin with. We're not dictating to the customer what is the initial consumption level. In some cases, we have minimum consumptions because we're not going to do this for a $10,000 deal, but our customers also don't want to to bother to deploy small projects. So to your question how do we what's the unit of measure for the bot, it really depends on what the bot is doing.

Speaker 2

So in the case of the TimeSplit spot that I discussed before, right, the business problem is, it's employee engagement. Employees are not able to change their schedules. So sometimes it's urgent things in their life, but they can't change their schedule. So customers see attrition. Customers see some difficult relations with employees that just show no they don't show up.

Speaker 2

They ask for approval. The approval is denied. They don't show up because they have to go and do something personal. So there's a lot of issues. So they can measure this in loss of attrition avoiding attrition.

Speaker 2

So that's kind of one measurement. The other thing is that there are customers who are trying to hire supervisors to measure be more flexible and do all the schedule changes in real time, it's really not practical. But if they try to do that, they can also measure how many supervisors they want to hire and how they can avoid this cost. And they compare that to the TimeFlex bot. So if they want, if they have, let's say, 1,000 employees, they can decide, I'm just going to give TimeFlex to 200 employees and I'm going to measure their ROI.

Speaker 2

And if I see that it's what I like, I will just increase the entitlement in the Verint cloud and grow to as many as employees as I need. But every VOD has its own business outcome. Of course, sometimes we deliver a team of bots because the business problem that customers try to solve requires several bots working together. So it's the ROI obviously will be bigger. But more importantly, the way we design the platform is that the customer can measure on a very granular basis the ROI.

Speaker 2

So AI is now a big buzzword and our message to customers which is very differentiated is you're not buying from Verint AI Technology. You're buying from Verint AI Business Outcome and you should be able to measure the ROI.

Speaker 5

And sorry, I jumped on late if you discussed it. But from your last question, you talked about 20% bookings growth throughout the year. If I look at the full year guide, obviously, there was a $25,000,000 headwind. Then what's the disconnect between I think the uptick you're seeing in bookings growth, ACV growth to the call it mid single digits revenue growth number?

Speaker 2

Yes. So what we discussed in Investor Day is that because of AI and because AI is only available in bundled SaaS, right, the best way to look at our AI momentum is to look at bundled SaaS growth. But what we had last year is unbundled SaaS booking declined, because the customers are shifting into the bundled SaaS. So the result is 16% bundled SaaS booking growth in Q4 and we're basically guiding to 20%. So we'll go from 16% in Q4, 20% we expect in Q1 and 20% we expect for the full year.

Speaker 2

But in unbuzzled SaaS, which does not include AI, we do not expect growth. So it's became a small part of our booking. So it's about 20% of our booking, but the unbundled SaaS booking is not expected to grow. There is no AI involved there. But as I explained before, our customers that have unbundled SaaS solutions can renew in unbundled SaaS and they can add bundled SaaS AI on top of it and it's all working as one hybrid platform.

Speaker 2

So they don't have to do any migration in order to expand in bundled SaaS, but we expect that AI is going to drive bundled SaaS expansions.

Speaker 1

Okay. So bundled SaaS as

Speaker 5

a percentage of bookings is how much, 80% you said?

Speaker 2

It's about 80%, yes. And it's also more than 80% of our pipeline and that's where the growth of the company we explained in Investor Day that the growth in our journey to the rule of 40 is based on bundled slots growth and bundled slots is the best metric to measure AI adoption and bot attachment rate. All that is actually translated into bundle SaaS growth. So bundle SaaS booking is the metric that will demonstrate success in AI and also success toward that rule of 40 target that we have.

Speaker 5

Thank you.

Operator

And thank you. And our next question comes from Joshua Riley from Needham. Your line is now open.

Speaker 6

All right. Thanks for taking my questions and nice job finishing out the year here. What if anything are you doing within the direct sales force to make them successful at selling the AI bots when the competitive landscape for some of these bots is a little more complex and different than the core workforce management solution that you've historically dominated in the enterprise market?

Speaker 2

Yes. That's very interesting topic. So we launched the platform with the bots mid last year and at the time we had 25 bots, now we have 40. So we are innovating in a very fast pace. Number of bots is increasing and I expect we'll continue to innovate throughout this year with more and more bots.

Speaker 2

And having that many bots in the platform is differentiating because customer it's an open platform. Customers can choose the one that is the most compelling for them at any given time and they can expand and so on. But what we did with the direct sales force last year is first we enabled them on this open platform, so they can explain the benefits of being open and flexibility in a modular approach of 2 bots, so you can buy any bots at any given time. But the other things that we did is we shifted the discussions from technology to business outcomes. And the sales force is pretty good because they've been an enterprise sales force always selling applications not infrastructure.

Speaker 2

So they're very good at understanding business issues and solving problems. So I'll give you an example about a customer that we engaged with, they wanted AI business outcomes now, but their IT just made big investment in AI platform. So IT wanted to standardize AI in the company and they were basically kind of not really very interested in any other AI. They just made a big investment. So what Essentials did is, again, we explained the open approach, they explained to the business users, why they can solve some really business problems now.

Speaker 2

But more and more more importantly, they engage with IT and explain that, hey, if you have LLMs, if you have large language models that you develop, we can import your LLMs into our platform because we are totally open. Verint da Vinci will take any commercial, open source proprietary as well as customer provided LLMs. And when IT realized that they don't have to really develop contact center business outcomes, because their lens will be in the platform doing that for them in the Verint platform. This whole discussion went away from let's compare whose AI technology is better, right? We just neutralized this whole discussion.

Speaker 2

And it was about providing them ROI now and IT was really thrilled because it's a win, right? Whatever they develop is being leveraged by Verint, combining the Verint data, so we can train their LLMs on our data and fresh 20 fourseven and embedding their LLMs into our workflows, so that it can be with no disruption provided to the agents at their fingertips. So all these things that we bring in the platform, we're definitely saving them time and providing the value that they were expecting now. So I think that sales force is really focusing not on whose eye is better, but what are the business issues, prioritize those issues and look at how do you solve these issues and this could be increasing capacity for the agents, increasing capacity for the supervisors, it could be elevating employee experience, elevating customer experience. There's a lot of different priorities that companies have, but each company can find a box that will do something they really need now.

Speaker 6

Got it. That's helpful. And then just on gross margin, recurring gross margin was stronger than what we had modeled in the quarter. Maybe can you give us some more color on what's driving that higher margin? And how do we think about the I think you mentioned the 100 basis point improvement in gross margin this year.

Speaker 6

How do we think about the mix there between the recurring and the non recurring gross margin? Thanks.

Speaker 2

Grant, that's for you.

Speaker 3

Yes. So the recurring gross margin, obviously strong. And in the Q4 specifically, that was on the back of the unbundled SaaS, the volume of the renewals. So that obviously drove the strong expansion that maybe you didn't have in your models for the Q4. But going forward, obviously, we have and I mentioned this right, the revenue will once again have a similar combination of the steady bundled SaaS growing sequentially throughout the quarters in fiscal 2025 and that large, once again, volume.

Speaker 3

And it's a different, I should make this clear, it's a different set of contracts that are coming up that will be weighted to the Q4 again and providing once again the strong expansion of the gross margin overall. So I think it will be and you'll see it be kind of similar, but what's driving the expansion year to year, 2024 going into 2025 is once again, we are expecting operational improvements in the bundled SaaS. And once again, given that that is driving the bookings or driving the revenue growth and the revenue seeing some operational expansion within the bundled SaaS, all of that will help to drive the over a 100 basis points that once again we're looking for this year.

Speaker 6

Got it. And then just a quick follow-up on that. How much of the managed services business, is that factored into that 100 basis point improvement as well?

Speaker 2

Or could that

Speaker 6

all It is. No, that's

Speaker 3

it. It's factored in, but it's the operational improvement of bundled SaaS is obviously driving a good portion of that.

Speaker 6

Got it. Thanks guys. You bet.

Operator

And thank you. And one moment for our next question. And our next question comes from Timothy Horan.

Speaker 7

Thanks guys. Can you give us a sense of how big the bundled SaaS is and what percentage of revenue that is? Secondly, I think you have a guidance out there for 10% growth in a couple of years. It sounds like bookings are going a lot better. I mean, can you maybe see that happening in more like 18 months or so?

Speaker 7

And then 3rd, when you these chatbots, when customers spend $1,000 on them, do you have a sense of how much you're saving in labor or other expenses in total? Thank you.

Speaker 2

Yes. Let me start and Grant you can give the SaaS percentage later. Yes. So I think that when customers are looking for AI, first, they're looking for the best solution that can give them the best ROI, right? So it's not just about I need to buy AI, but it's the ability to drive business outcomes.

Speaker 2

I think that the gross margin expansion is and we have it now steady, it's the result of really innovation. So when you're delivering strong ROI for customers, they are not really pressuring your pricing. So we're kind of sharing the benefits of the ROI between what the customer get from labor saving to what we get from innovation in bundled SaaS. Now how much ROI? So I gave in the Investor Day some examples that different bots create different savings.

Speaker 2

So the containment bots can reduce the cost of one interaction from $5.50 to just $0.50 dollars So that's a 1 to 10 ratio in terms of cost versus return. And this is successful containment. This is not just deflection of the call where the customer calls, talks to a bot and then never calls back. This is where we measure that on basis of we really replaced a person with a bot that gave a full answer to the customers are trying to do. So again, the quality of the bots are very important.

Speaker 2

There's a lot of companies that talk about IVAs and how they can do self-service, but successful self-service meaning successful containment, not just deflection. But on that basis, this bot is generating 1:10 ratio. When you look at the TimeFlex bots, it depends on how much the customer is investing today in flexibility, but we also see customers that have 1 to 10 ratio of ROI, some have lower than that. But many customers today, if the employee want to change their shift once a day, they fire them. They just can't afford employee not adhering to the schedule every day they want to change.

Speaker 2

With the TimeFlex bots, we have a customer reporting that employees are changing schedule 5 times a day. They want a coffee break. They take 15 minutes of the schedule and they schedule themselves for a coffee break and they take 15 minutes later in somewhere else. So again, the ROI is going to be a little bit customized and we are helping customers to generate their own ROI models, so they can do their internal business justification. But it's always pretty big.

Speaker 2

This is why AI is so exciting. We're talking about the market has shifted completely from let's just move my telephony to the cloud to now I need to increase the ex automation. This shift is because the ROI is huge and because AI just makes it possible now. It wasn't possible a year ago, definitely not 5 years ago, but it is possible now. We architected the whole platform to do this.

Speaker 2

So it's open with data and DaVinci AI at the core and all these things are actually making these business outcomes possible now. And

Operator

Pardon me speakers.

Speaker 1

Justin, it sounds like we lost down. I think Grant can

Speaker 3

Yes. Let me go ahead and address the second part on the bundled SaaS. So you're exactly right. Bundled SaaS is driving the acceleration of growth. What we laid out there in Investor Day, right, was the mid single digit growth and accelerating modestly 26% and then getting the 10% growth in 27%.

Speaker 3

And I highlighted that's on the back of the bundled SaaS bookings, which then drives the revenue over time. Just to answer the question for perspective, the bundled SaaS in fiscal 2024 and again, I'll adjust for the managed services divestiture, it made up 28 $250,000,000 a little over $250,000,000 of revenue for bundled SaaS, was roughly 28% of our overall revenue, again, excluding divestiture. And as you look at this and what we have trajectory, it will grow about 4 points and make up 32% of the $930,000,000 of revenue right around that ballpark. And we expect it to continue just on the pace that we had modeled, is going to continue to increase towards 37% in 26% and would be 40% of our overall revenue by the fiscal 'seventeen, again, driving that 10% growth on the back of that line.

Speaker 4

So that's

Speaker 2

kind of the magnitude that we see.

Speaker 3

We'll still have unbundled SaaS, which as Dan mentioned, we give the customers flexibility. They don't have to migrate all of that unbundled SaaS or term licenses. They can get AI without any disruption of the conversion migration. And we expect that will come over time as well. So hopefully that answered the question.

Speaker 7

Very helpful. Thank you.

Speaker 1

You bet.

Operator

And thank you. Okay, thank you. And I would now like to turn the call back over to Matthew Frankel for closing remarks.

Speaker 1

Great. Thank you, Justin, and thank you everyone for joining us today. Of course, feel free to reach out with any questions you have. And we look forward to speaking to you again soon. Have a good night.

Operator

This concludes today's conference call. Thanks for participating. You may now disconnect.

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Earnings Conference Call
WSFS Financial Q4 2024
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