Verint Systems Inc (NASDAQ: VRNT)Q1 2019 Earnings CallMay 29, 2019, 4:30 p.m. ET

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Operator

Good day, ladies and gentlemen, and welcome to the Verint Systems Inc. Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions how to participate will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Alan Roden, Senior Vice President of Corporate Development. Sir, you may begin.

Alan Roden — Senior Vice President, Corporate Development and Investor Relations

Thank you, operator. Good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO; and Doug Robinson, Verint's CFO.

Before getting started, I'd like to mention that accompanying our call today is a WebEx with slides. 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, click on the webcast link and select today's conference call.

I'd 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 the forward-looking statements. The forward-looking statements are made as of the date of this call, and 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 on how these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2019, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures, as we believe investors focus on those measures in comparing results between periods and among our peer companies. Our financial outlook and target provide only on non-GAAP basis. Please see today's WebEx slides or 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, or 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.

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

Dan Bodner — President, Chief Executive Officer and Chairman

Thank you Alan. Good afternoon everyone and thank you for joining us to review our first quarter results, outlook and three year targets. We are pleased to have started the year strong. Our first quarter results were ahead of our guidance for both revenue and EPS. And we are well positioned for year of double-digit revenue and EPS growth on a non-GAAP basis. We believe our strong results reflect the execution of our strategy, which we began two years ago to accelerate innovation in the areas of automation and cloud. We believe this strategy will enable us to sustain growth over the long run, and today, we are pleased to introduce three-year targets.

First, I would like to review our very strong Q1 results. Year-over-year revenue increased 9% on a GAAP basis, 11% on a non-GAAP basis and 13% on a non-GAAP constant currency basis. Year-over-year operating margins increased 190 basis points on a GAAP basis and 340 basis points on a non-GAAP basis, reflecting the significant operating leverage in our financial model. EPS came in at $0.02 on a GAAP basis and $0.73 on a non-GAAP basis, a 38% increase year-over-year. And cash from operations came in at $93 million, a 55% increase year-over-year, reflecting the underlying strength in our business. Overall, our results were strong across particularly every key metric. I'm very pleased with our Q1 performance, which makes the year more linear and gives us confidence to raise our annual guidance again.

Now I'd like to provide some Q1 highlights by business segments starting with Customer Engagement. In Customer Engagement Q1 non-GAAP revenue increased 14% on a reported basis and 16% on a constant currency basis. We are pleased with our results and are guiding to 11% non-GAAP revenue growth for the full year. Last week we had the opportunity to showcase our latest Customer Engagement innovations at our annual user event in Orlando, Florida. Attendance was up 20% year-over-year and we were pleased to have some of the world's greatest brands presenting at our conference including Uber, Verizon, AARP and Mastercard. We received very positive feedback on our latest solution, including our Voice of the Customer platform, which we announced during the events and which I will discuss in more detail later.

Overall, the energy generated by our customers, partners and employees was incredibly high. During the quarter, we continued to win new customers, displaced competitor and expand with existing customers, including in order for more than $10 million from a leading telecommunications company as this customer is standardizing on Verint's Customer Engagement platform, and we are displacing multiple point solutions from other vendors. This eight figure deal will be deployed on premise due to the customers' preference for an on-premise solution.

In the area of Cloud, we're seeing growing adoption and during the quarter we received many large cloud orders, including a $9 million order from a technology company, a $3 million order from a bank and a $2 million order from a healthcare company with various components of our portfolio deployed in the cloud. We are cutting across customers for many industries, the common threat is a desire to work with the vendor that can help them migrate to the cloud seamlessly.

Turning to Cyber Intelligence, Q1 revenue increased 5% year-over-year on a reported basis and 7% year-over-year on a constant currency basis. This compares to a very strong first quarter last year, in which revenue increased 13% year-over-year. Regarding margins we are pleased with our year-over-year improvements as we continue to make progress with the software model transition. During Q1, we received many large orders including orders for approximately $25 million, $15 million, $10 million and $5 million, reflecting the strength of our portfolio. Demand for our solutions remains strong and we're guiding to 10% non-GAAP Cyber Intelligence revenue growth for the year.

Earlier in the quarter, we had the opportunity to showcase our latest Cyber Intelligence innovation at our annual security user event in Italy. Attendance at this year event was up 20% year-over-year. And we were pleased to have customers attending from 70 countries. The theme of the event was the Art of Intelligence and included hands on demos actual case studies and opportunity for customers to learn from peers experiences. Customers' commented on our strong pace of innovation and the many innovative capabilities we demonstrated at events.

Turning to guidance, today we are raising fiscal '20 non-GAAP guidance for revenue by $5 million and for EPS by $0.05. This is the third time, we have raised guidance providing our initial annual guidance in early December. We first raised revenue guidance by $20 million on December 17, the second we raised guidance by $25 million on March 27th, and the third time is today by $5 million. In total, we have raised our top line guidance by $50 million to date, of which $30 million is from the ForeSee acquisition.

With regard to EPS, our strategy is to expand margins while accelerating the top line, and we are pleased with our margin expansion in Q1. Our new non-GAAP EPS guidance of $3.65 reflects continued margin expansion and 14% year-over-year growth.

I would now like to discuss our three year targets. Last year, we discussed our goal for long-term double-digit growth. Today, we are providing three year targets for Verint overall as well as some more details on our two segments. Overall, we are targeting the following for fiscal '22 on a non-GAAP basis. For revenue, we are targeting $1.65 billion reflecting 10% CAGR. For EPS, we're targeting $4.70, reflecting 14% CAGR.

Now let's take a closer look at our Customer Engagement three year targets. Last week during our Analyst event, to help investors understand our Cloud transition, we introduced three year targets for revenue, cloud revenue, recurring revenue and adjusted EBITDA margins. For non-GAAP Customer Engagement revenue, we're targeting 10% CAGR which would take our Customer Engagement revenue to $1.08 billion in three years. Our revenue target, a few points of contribution from maintenance conversion uplift, that Doug will discuss later, but let's not assume any future acquisitions. Assuming increasing market demand for Cloud, we expect our recurring revenue to be about 70% of our Customer Engagement revenue by fiscal '22.

With respect to margins, while we have already achieved, best-in-class margins we expect our adjusted EBITDA margins to continue to expand to around 30% driven by Cloud growth and greater scale. Overall, we believe we can continue to execute our Cloud transition, creating benefits for both our customers and Verint.

And we have discussed in prior calls, we believe that behind the leadership and strong momentum is our strategic decision to accelerate our investments in automation and cloud. More than ever before, our customers are focused on elevating the customer experience, and at the same time reducing operating costs, Automation is critical to achieving our customers objective and consequently a core strategic initiative for Verint. Based on input from our customers and our intimate knowledge of the industry, we have created a portfolio that infuses automation throughout the Customer Engagement process.

With respect to Cloud, we believe we are at the inflection point and more and more customers are moving from just talking about cloud to embracing it. The trends manifest itself in two ways. New cloud deployments and immigration from on-premise deployment to the Verint cloud. We've been preparing for cloud adoption to accelerate, and we are differentiated across three layers. First, our cloud applications offer customers very rich functionality with feature parity between on-premise and cloud which customers really like because it makes their transition to the cloud seamless. This is something that most of our competitors do not offer.

Second, we are flexible go-to-market approach, the large customer to operate some Verint solutions on-premise and some in the Verint Cloud and to migrate to the cloud at their own pace. And third, we invested in very strong cloud operations that are global, scalable, secured and efficient. In fact, our recent SaaS deployments target a best-in-class 80% gross margin.

As we have discussed over the last two years, we've been investing to accelerate innovation. Our financial targets with this strategy were to drive sustainable growth for mid single-digit two years ago to double-digit growth over the next three years, while at the same time expanding margins, and more than doubling our cloud revenue.

We have invested in organic R&D and also carefully analyze buy versus build decisions resulting in several tuck-in technology acquisitions intended to accelerate innovation. Our Customer Engagement R&D operation is very efficient, running at the level of 13% of revenue. This level is best-in-class compared to our peers with a very healthy ratio of 5.3 gross margin dollars for every R&D dollar invested.

Our estimated non-GAAP Customer Engagement operating margins of approximately 26% last year are also best-in-class due to strong competitive differentiation across our portfolio. Our post-acquisitions has been focused on adding technology to expand our portfolio strategically and shorten time to market. Over the last two years, our acquisitions have largely consisted of small companies without profits, and strategy has been to integrate technology quickly and to drive incremental revenue and earnings from our overall portfolio.

And now I would like to provide an example of buy versus build process using our recent ForeSee acquisition. Most of the customer has been an integral part of our Customer Engagement portfolio and with the market moving away from point solutions to VoC platform, we decided to accelerate our investment, both organically and inorganically to accelerate our time to market. We evaluated more than five different VoC assets before selecting ForeSee for it's superior digital customer experience technology, employee talents and domain expertise. As part of our diligence, we've evaluated not only ForeSee's technology and people, but also its operational strength and weaknesses, customer base and financials. We learned that ForeSee revenues were rapidly declining since their parent company bankruptcy, and they had significant losses including a $12 million loss in 2017 and a $15 million loss in 2018.

We also learned that their customer renewal rates was declining and was at low '60s in Q4 last year, suggesting that the revenue decline might accelerate into the current year. While ForeSee's historical financial profile presented obvious challenges, we decided to acquire ForeSee for $65 million based on their superior technology, people, domain expertise and the following integration plan. First our plan was focused on strategic target of integrating the ForeSee technology with the Verint's VoC platform. We quickly began — the technology integration, including merging their R&D and product management organizations.

Second, we increased the level of engagement with ForSee's customers to reduce attrition and retain them based on our clear roadmap to our broader VoC platform consistent with the market shift to platforms. And third, given their significant historical losses, we sacrificed revenue for profitability this year and completed swift operational integration coupled with rightsizing the organization. While renewal rates continue to decline to the low '50s in Q1, we believe we are taking the right steps toward achieving the strategic and financial objective that we targeted. Currently, we estimate that ForSee's revenues for the year will be between $30 million to $40 million based on the progress we've been making so far with the integration.

As discussed before, we raised guidance 3 times since the acquisition of ForeSee and our current guidance assumes the low end of the estimated range of $30 million of ForeSee revenue in our $900 million Customer Engagement revenue guidance. We generally measure the success of a tuck-in acquisition across two metrics, strategic and financial. In the case of ForeSee on the strategic side, we measure success based on sustainable growth of our Customer Engagement portfolio and accelerating time to market.

On the financial side, we achieved profitability on day one and now expect to achieve a revenue level this year that translates to a purchase price of 2x revenue or less. I'm pleased to report that last week during our annual customer conference we launched a new version of our VoC platform including the ForeSee technology and other innovations. We had more than 100 ForeSee customers at the event, and we received very positive feedback from both Verint customers and ForeSee legacy customers.

In summary, ForeSee is a good example of our thoughtful approach to buy versus build decision making. And now we leverage both internal R&D and technology acquisitions to accelerate our innovation.

Before turning to Cyber Intelligence, let me summarize Customer Engagement as follows. We believe the investments we've made over the last two years combined with market readiness will accelerate our transition to the cloud. And we expect the conversion of our maintenance stream to contribute a few points toward our 10% CAGR revenue target. While we will continue to evaluate tuck-in acquisitions using our buy versus build decision making process, our target do not assume any future acquisitions. And finally, we expect our Customer Engagement margins to continue to expand, driven by our growing scale and our shift to the cloud.

Turning to Cyber Intelligence. As we have discussed in prior calls, we expect non-GAAP revenue to grow at 10% CAGR over the next three years, which will take us to $575 million of revenue in fiscal '22. At this scale and with the transition to sort them all, we expect our adjusted EBITDA margin to exceed 20%, an improvement of over 450 bps over the next three years on a non-GAAP basis.

In addition to margin improvement. There are significant benefits to customers and to Verint for moving to a software model that I will discuss shortly. Behind our double-digit revenue growth is demand for data mining software as an effective tool to address security threats that are becoming more pervasive and complex. Data volumes are growing quickly, requiring legacy data mining tools to get refreshed at a rapid pace. As a result, security organizations are seeking innovative data mining software to better the tax, investigate and neutralize threats. As part of our innovation, we focused on automation to help customers shorten the investigative process and reduce dependancy on large numbers of intelligence analysts and data scientists.

With respect to moving to a software model, we believe there are significant benefits to our customers from productivation of our solution, making our software easier to implement and easier to refresh, which is critical in a rapidly evolving technology landscape. More and more customers have realized that the integrator model is limited in terms of system openness and their ability to quickly deploy software enhancements. The investments we've made in the software model creates even more competitive differentiation.

Now I would like to discuss R&D and Cyber Intelligence. Our R&D investment has been around 20% of revenue in recent periods in line with security peers and that's been focused on automation, unbundling the software and minimizing hardware customization and integration services by Verint. With respect to buy versus build in Cyber Intelligence, technology acquisitions have not been required for our transition to a software model and that transition has been driven primarily by organic R&D investments.

We are very happy with the margin expansion we've achieved to date including in Q1. Overall over the last two years, we achieved 300 basis points of EBITDA margin improvement and over the next three years, we are targeting an additional 450 basis points of expansion on a non-GAAP basis.

In summary, we believe the combination of our leadership position and market demand for advanced data mining software will enable us to continue to grow our Cyber Intelligence revenue at the 10% CAGR over the next three years. At the same time, we're making progress with transitioning the business to a software model, which will drive strategic and financial benefits to Verint.

Before handing the call over to Doug, I would like to highlight four elements of our growth strategy. First, as we discussed today, our goal is to grow revenue at 10% CAGR over the next three years, with margin expansion driving EPS CAGR of 14%. Secondm, we plan to pursue acquisitions opportunistically to drive additional shareholder value and put variance in an even stronger competitive position. Our long-term targets, do not assume any future acquisitions. Third, we expect strong cash generation and our primary cash usage will be for M&A however, if we cannot find desirable deals we will consider using any excess cash to repurchase shares.

And finally, our Board is committed to continued refreshments, ensuring we have the skills to drive shareholder value. Over the last three years, we added three new directors and we plan to bring on another Independent Directors during the current fiscal year. I would also like to say that given the success of our growth strategy, our strong performance and the value we're creating for our shareholders, we believe the proxy contest is entirely unwarranted. As the strategy is unfolded, we provide a new disclosure to help investors better understand the changes in our business. And as our track record clearly shows we have an ongoing practice of board refreshment.

I would like to thank our shareholders for the support we are receiving from them and we encourage shareholders to vote for all Verint nominees on the white proxy card. That is all we will have to say on the proxy side on today's call, including during the Q&A portion of the call we want to focus on our very strong performance.

Now let me turn the call over to Doug.

Douglas Robinson — Chief Financial Officer

Yes. Thanks, Dan and good afternoon everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available as 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, ammortization of acquisition related intangibles, certain other acquisition-related expenses, stock-based compensation, as well as certain other items that can vary significantly in amount in frequency. For certain metrics it also includes adjustments related to foreign exchange rates.

I'd like to start by looking at our Q1 performance. Our first quarter results were strong across practically every key metric Q1 non-GAAP revenue came in at $324 million and 11% year-over-year increase. As reported in a 13% on a constant currency basis. Our Q1 non-GAAP gross margins were approximately 67%, up 350 bps from Q1 last year with both segments showing year-over-year improvement. We were particularly pleased with the improvement in our Cyber Intelligence segments gross margins, which I'll discuss in a minute.

Our non-GAAP operating income came in at $62.3 million, up a very strong 35% year-over-year. Our growth in operating income to non-GAAP operating margins to 19.2%, a 340 bps increase from Q1 of last year. Our adjusted EBITDA for the quarter came in at $70.1 million, a 29.1% year-over-year increase. These strong results drove diluted non-GAAP EPS of $0.73 for the quarter, up 38% from the $0.53 EPS in Q1 of last year. We are also very pleased to have increased our GAAP cash from operations year-over-year by 55% to $93 million in Q1.

I would also like to mention that Q1 is the first quarter that we have had a year-over-year comparison on the same basis under ASC 606. The new accounting standard company's adopted last year. As you can see our year-over-year performance in Q1 was very strong and as reported in the same 606 basis as Q1 in the prior year. I mentioned this, because last year we were required to reported results under both 605 and 606, which created some confusion on the trends in our business. As we had discussed throughout last year we prepared for ASC 606 during fiscal '18 and therefore at the beginning of last year fiscal '19, we changed certain business practices and built our budget to align with 606 accounting.

As a result the disclosure in our 10-K and 10-Q showing our fiscal '19 results under 605 was not a meaningful comparison, because the results under 605 no longer accurately reflected our business performance once we implemented the business practice changes, I mentioned. We believe our results last year under 606 reflect our true performance, which is also demonstrated by our strong 22% increase in cash from operations last year, as well as our strong earnings and operating cash flow performance in Q1 of this year on the same 606 basis.

Our guidance for fiscal '20, which we've now raised several times also reflects the same steady state 606 compare. In other words, as we said previously, we believe our results last year would have been similar to what we reported, absent the 606 transition.

Now I'd like to review our Q1 results by segment. Turning to Customer Engagement, non-GAAP revenue increased 14% from last year. As reported and 16% on a constant currency basis. Today, we are reporting additional revenue metrics for our Customer Engagement segments including recurring revenue, non-recurring revenue.

Before reviewing these metrics for Q1. I'd like to start with some definitions. Recurring revenue includes cloud and maintenance and non-recurring revenue includes on-premise solutions and professional services. We are also breaking down cloud into SaaS an optional managed services. In Q1, non-GAAP recurring revenue increased 23% and non-GAAP non-recurring revenue increased 6.5% year-over-year. Non-GAAP cloud revenue came in at $56 million, an increase over 58% year-over-year. In Q1, our SaaS and managed services mix was about 75-25. On a fully allocated basis, our Customer Engagement non-GAAP gross margins were 68.4% and our non-GAAP operating margins were 23.3%. Overall. We are pleased with our strong Customer Engagement revenue growth and continued margin expansion in Q1.

Turning to Cyber Intelligence Q1 revenue increased 5% year-over-year on a reported basis and 7% year-over-year on a constant currency basis. This compares to a very strong first quarter in the prior year and which revenue increased 13% year-over-year. On a fully allocated basis Cyber Intelligence, non-GAAP gross margins increased 710 bps year-over-year to 65%, while our margins continue to benefit from our transition to a software model, in Q1, wee also had a very favorable mix. The improvement in gross margins took our non-GAAP fully allocated operating margins to a 11.1% in Q1. In summary, we are targeting another year of 10% non-GAAP annual revenue growth with expanding margins.

I'd now like to take you through our updated fiscal 2020 guidance. As Dan mentioned earlier, today we are raising our non-GAAP guidance for the third time since early December call. We now expect total revenue of $1.375 billion with a range of plus or minus 2% reflecting just over 10% growth for the year. By segment, we expect 10% growth in Cyber Intelligence and 11% growth in Customer Engagement. As Dan mentioned, our guidance assumes about $30 million of revenue from ForeSee. Overall, our 10% outlook for Customer Engagement reflects mid to high single-digit revenue growth excluding our recent acquisitions.

From an operating margin perspective. We expect 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 $5.75 million. Given the volatility in foreign exchange rates that could be future gains or losses related to balance sheet translations in our future results, which are not included in our guidance. We expect our non-GAAP tax rate to be approximately 10.5% for the year, reflecting the amount of cash taxes we expect to pay this year. Based on these assumptions and assuming approximately 67.5 million average diluted shares outstanding for the year, we are expecting non-GAAP diluted EPS at the midpoint of our revenue guidance to be approximately $3.65, a $0.05 increase from our prior guidance and $0.15 increase from the initial guidance in December. Our new EPS guidance reflects another year of 14% EPS growth.

In addition to our annual guidance, we'd like you to provide some color on the progression of the year for modeling purposes. For non-GAAP revenue in Q2, we expect revenue to increase approximately $10 million sequentially with an EPS of around $0.80. We expect another sequential increase in Q3 followed by our usual seasonally strong Q4.

I would like to discuss now our three year targets in more detail. As Dan mentioned earlier, today we are introducing three year non-GAAP targets for total revenue of $1.65 billion and earnings per share of $4.70. Driving these targets is Verint's core competency and Actionable Intelligence. These targets assume no adverse change in the economy although we believe we can perform relatively well in an economic downturn, based on historical experience.

I'll spend the next few minutes taking a closer look at our three year targets for each segment. Starting with the Customer Engagement, given the faster adoption of cloud that we have been seeing and the shift away from on-premise solutions, we expect non-GAAP non-recurring revenue to relatively flat over the next three years with non-GAAP recurring revenue increasing at a 15% CAGR to $750 million. This should drive recurring revenue to around 70% of our total Customer Engagement revenue compared to 59% last year.

Within cloud, we expect SaaS to grow faster than optional managed services and to represent 85% of our cloud revenue in three years. Within SaaS revenue, we have bundled SaaS and unbundled SaaS. Our SaaS revenue is substantially generated from bundled SaaS, which provides access to our software with standard managed services, which is what our customers prefer. However, occasionally, some customers and partners want license rights to our software separate for unbundled from managed services, which for accounting purposes are considered term licenses. The unbundled SaaS can be deployed in the cloud, either by Verint or cloud partner and renew like SaaS so is included in our recurring revenue.

I would like to give you a few examples of the unbundled SaaS. One example is when a cloud partner that hosts our software in their cloud without purchasing any of our standard managed services. Another example is a customer that refers to purchase both components from Verint, software and managed services, but separately due to the customers desire to have software deployment flexibility. Since unbundled SaaS is a small portion of our total cloud revenue, and the mix of bundled and unbundled SaaS is expected to be similar in fiscal '19 and in fiscal '20 the impact is not material.

Now let's discuss how the transition to more recurring revenue will positively affect our margins. Despite already having a very healthy 26% fully allocated non-GAAP operating margins and 28.3% adjusted EBITDA margins in our Customer Engagement business, looking forward, we see two factors we believe will have a positive impact on our margins. First, our margins will benefit as recurring revenue becomes a larger percentage of our revenue. This is because gross margins in our recurring revenue are in the mid to high '70s. While gross margins that are non-recurring revenue are in the mid '50s. As our recurring revenue grows at a 15% CAGR and becomes a greater part of our revenue, our gross margin should improve due to the more favorable mix.

Second, we expect to maintain our R&D expense at around 13% of Customer Engagement revenue. At the same time, we expect some operating leverage from SG&A, as we continue to scale the business. The combination of gross margin expansion and operating leverage is expected to drive our Customer Engagement non-GAAP operating income margins to approximately 27.5%, with adjusted EBITDA margins of around 30% in three years.

Before concluding, I'd like to spend a few minutes discussing dynamics between maintenance and cloud revenue. As we discussed on prior calls, we currently generate more than $300 million of maintenance revenue that we expect will move to the cloud gradually over time. The conversion of maintenance to cloud, could result in a significant revenue uplift for Verint as the dollar of maintenance revenue can convert to cloud revenue at a 2 times rate or higher. Today, we have a cloud first strategy, which we believe will facilitate this transition. Because of this conversion, we expect maintenance revenue to be flat to modestly declining over the next three years. This trend reflects growth in maintenance from new on-premise deployments, offset by some maintenance revenue converting to cloud revenue.

As we make this transition, we expect our non-GAAP estimated gross margins on recurring revenue to remain in the mid to high '70s due to the mix shift discussed earlier between SaaS, maintenance and managed services revenue. Overall, the transition from on-premise to cloud is expected to contribute to our revenue growth by a few points and to help our margin expansion over the next three years. If the transition occurs at a rate faster than we're expecting our cloud rate could accelerate.

Before concluding since we provided three year targets today, we thought it'd be helpful to also discuss our long-term capital allocation plans. Verint ended last year with $468 million of cash, and we expect to generate around $800 million of cash over the next three years. After deducting CapEx, we expect to have more than $1.1 billion of cash available for working capital and technology acquisitions or potentially a larger transaction. However, if we cannot find desirable deals we would consider using excess cash to repurchase stock.

Regarding our debt, we have $400 million of convertible debt due in June, 21 and $425 million of term loans due in June 2024. We do not plan to settle the convertible debt in shares and plan to refinance . As we get closer to maturity likely with another convertible note or additional term loan.

While we spend time today discussing our long-term targets, I'd like to end the call where we started with our strong Q1 results. We are very pleased to start the year strong and look forward to another successful year.

This concludes my prepared remarks. So with that operator, can we please open up the lines for questions.

Questions and Answers:

Operator

Certainly. (Operator Instructions) Our first question comes from Shaul Eyal with Oppenheimer. Your line is now open.

Shaul Eyal — Oppenheimer — Analyst

Thank you. Good afternoon. Congrats on the quarter and improved outlook as well as the increase in (inaudible). Dan, I want to ask — by asking with respect to your organic growth this year, can you help us reconcile with organic growth with your 10% organic target for the next two years in either words, what's driving this organic growth right now?

Dan Bodner — President, Chief Executive Officer and Chairman

Okay. Sure. That's a good question. So let me start with this year, and I'll break it down, and then we'll go into the next three years. So we gave guidance this year for $1.375 billion for both Cyber Intelligence, Customer Engagement. So let's start with the Cyber Intelligence. Our guidance for this year is $475 million that represents 10% growth. And now, we look at the organic, inorganic. We did one deal last year in November, we bought a company called Nowforce, we paid $4 million for this company at closing and this company did $2 million of revenue last year. So pretty much our guidance for this year is organic and also our guidance for the next — CAGR of 10% is organic.

Now let's move to Customer Engagement where we did more acquisitions. Our guidance for this year for Customer Engagements is $900 million and that's represent 11% growth. Over the last 12 months we acquired three companies. We acquired ForeSee with $65 million in December, plus we acquired two other small companies, one focused on WFM technology that we acquired mid last year for $27 million and one focused on the SMB technology that we acquired in February this year for $20 million.

So as I said before and Doug explained in our guidance ForeSee represents $30 million of inorganic revenue out of the $900 million guidance. And if you take all these three companies, ForeSee and the other two combined they represent a little over $40 million of inorganic revenue in our $900 million guidance, but they also contributed a little bit more than $10 million last year. So you can do the math and our 11% guidance this year is actually consistent with our target for mid to high single digit organic growth for this year and this 11% say growth is about two thirds organic and one third inorganic for this year.

Now taking this and moving into the next two years fiscal '21 and '22, we are targeting 10% organic growth. But that's inclusive also of the maintenance conversion and we discussed that maintenance convert to cloud, we're going to have some uplift. So that's going to start to contribute. Also a few points to our revenue growth in those years. So now you can see the bridge, if we're achieving mid to high single-digit organic growth and this year and also we don't need to expand our portfolio and achieve the same level in the next few years, plus this few points of maintenance conversion, this is how we got to set the target to 10% CAGR over the next three years. And of course if the maintenance conversion will accelerate this could be an upside.

Shaul Eyal — Oppenheimer — Analyst

Got it. Thank you for that elaborated answer. And maybe moving — giving you brought up ForeSee, so it would appear — now it is part of a broader force of a customer strategy. What's the long-term thinking from that perspective down the road on voiced over the customer business?

Dan Bodner — President, Chief Executive Officer and Chairman

Yes. So basically voice of the customer is an integral part of our portfolio, and we talked about what customers really want to achieve — our customers, they want to elevate the customer experience and reduce operational costs, and voice of the customer is a critical part of that and we've been investing in voice of the customer now for few years organically and inorganically. And ForeSee complements what we've built as the VoC platform that is omni-channel that has very strong analytics and also that uses a lot of automation to bring the insight into action. So ForeSee specifically is providing digital customer experience capabilities and we were impressed with the technology. ForeSee's been in the business for many years. We found great people with great talent in the company. And we also find a lot of domain expertise about digital customer experience.

We launched last week and Shaul you were in our user conference, so hopefully you're able to see the responses to the demonstration, we got very strong response from Verint customers and ForeSee customers. Yes. There was the main launch of main stage was our new version of VoC platform and what we do now is we combine customer — the customer voice — not only surveys, which include email service text surveys and voice surverys and so on, but also indirect feedback that we collect through a lot of voice calls and chats and emails and social media that basically bring back feedback to the organization on the customer experience, and the first step into customer experience is actually measuring it in terms of net promoter score and any other metric that can measure what the customer response is, but also brings that action quickly in real time into operations so that organization can actually take action and make improvements.

And as you know Verint has been very strong on the operational side and we now have voice of the customer that cut the cost marketing and operations and help people on both sides from marketing and from operation to measure the customer experience and to improve it, and do make sure that the action the corrective action of taking actually creating — a better net promoter score and elevating the customer experience for — on a sustainable basis.

So our — we see VoC as an integral part of our Customer Engagement portfolio. We expect our portfolio to grow 10%, and we still expect the VoC platform to contribute at 10% or better into this growth.

Shaul Eyal — Oppenheimer — Analyst

Thank you.

Alan Roden — Senior Vice President, Corporate Development and Investor Relations

Sure.

Operator

Thank you. And our next question comes from Daniel Ives with Wedbush. Your line is now open.

Daniel Ives — Wedbush Securities — Analyst

Yes. Thank you. Dan maybe you could talk about the commerce — the conversations you have with customers at the company maybe this year and how that compared with previous years. Is it — are deals becoming more strategic where Verint sits, maybe you can just start there from a high level?

Dan Bodner — President, Chief Executive Officer and Chairman

Yes. I think we had a much bigger conference. We had more attendance. Our customers talking to customers for most of the presentations actually by customers discussing their experiences and helping other customers leverage their experience to create ROI in their organizations. I would say that overall the energy level was up. Customers are much more interested in the cloud. We've always — we've always had people talking about moving to the cloud, but things like. what we've done with feature priority where our solutions have feature priority between on-premise and cloud really helped customers to make decision to transition, because they don't have to retrain users. We don't have to change processes. They really is a very seamless transition from on-prem to cloud. So that's, that was very well received. So I think we certainly are encouraged by — cloud is accelerating.

Automation was absolutely the number one discussion on the floor. We've — we showcased automation across our entire portfolio. We talked about how we automate not just one part of this, but you know the Customer Engagement process consist of a hierarchy of many different processes that are intertwined and working together and we showed how automation can really help create very quick ROI, and that was very well received. And I think we are helping customers to prioritize their automation projects and being able to actually invest now. And not just wait to the future to just wait until automation really going to bring value, because I think they got much more, much more convinced that there is value now. And they also heard that from other customers from peers that have implemented during automation and start to see very, very strong ROI. So there are very, very strong conference.

Daniel Ives — Wedbush Securities — Analyst

Okay. Maybe look obviously M&A is a hot topic. Maybe you can just talk about going forward in the next 12 months. Does it feel Verint will be more aggressive, less aggressive fees from an M&A, should we expect if there are yields focused on cloud as sort of a segment maybe just sit on that. Thanks.

Dan Bodner — President, Chief Executive Officer and Chairman

Yeah. So when we look at M&A. First, we know we operate in very fragmented market both in Customer Engagement and Cyber Intelligence. So we are basically, we have two programs within the M&A program. We have technology tuck-ins. This is actually a program that is run by our Head of Products and the part people are constantly looking at this build versus buy decisions. And again we wanted to stress that we are targeting 10% exclusive of any tuck-ins, but obviously if we can accelerate technology even faster, we will — and we get our both strategic and financial objectiveness we will continue with the tuck-ins. And then we have, another program that generally look at M&A in our market and whether we can create a strong IRR by either consolidating or growing the business, making ourselves more competitive, taking out synergies and so forth.

In terms of capital allocation, as we said, we plan to generate about $800 million of cash over the next three years and predominantly would like to use that as a dry powder for M&A, but if we don't find desirable opportunities then we will return the cash to shareholders.

Operator

Thank you. And the next question comes from Samad Samana with Jefferies. Your line is now open.

Samad Samana — Jefferies — Analyst

Hi. Thanks for taking my questions and nice quarter. Maybe first we definitely appreciate the increased disclosure and the amount of data provided today. It's lot to digest but certainly much appreciated. I think one of things that's that got to me was the SMB — acquisition that focuses on SMB and I know that a one of the growth factors for the company. I was wondering if maybe you could touch a little bit more about progress that you're making in the SMB channel, and then I have a couple of follow-ups on the financial results for the quarter.

Dan Bodner — President, Chief Executive Officer and Chairman

Yeah, the SMB company that we bought is called Monet. They focus on SMB technology. We quickly bought them into our portfolio and while they brought few channels, obviously we have a very large partner network. So the plan there is very quick seamless integration very strong collaboration with Monet people we found again very talented people there which you happy to bring over to the Verint team. And the plan is very simple, we are offering a bigger SMB portfolio to our partners and at the same time we are one of the few companies in SMB that can also help them to move from SMB to Enterprise in a very seamless way. So that's very important to our partners, they sometimes work with multiple SMB Partners and then they have to work with Enterprise partners separately and Verint can actually is a one-stop shop.

We've always been very strong in terms of developing partners,. I think generally partners find Verint to be very easy to do business with and as I mentioned, also before, while for the enterprise business, we go to market in both our direct sales force and partners currently and going forward, we are going after the SMB pocket — SMB market with partners only. We think that's a very efficient way. And we hope to scale the business quickly in this way with a bigger portfolio and this acquisition certainly helped us to accelerate the time to market for the SMB market.

Samad Samana — Jefferies — Analyst

That's helpful. And then maybe a follow on ForeSee, and I know a couple of questions have been asked, but if you could just maybe help us reconcile how the company did close to let's say $67 million in 2018 and then therein guided for $20 million contribution in 2019 or fiscal '20, which would be effectively calendar '19. I guess I'm just trying to understand — bridge the gap between that $67 million to the initial $20 million guidance and what the company saw when I gave that and then I guess for the incremental raised from the 20 number that 30 to 40 potential. Is it being that new business being driven by Verint or is that something that you had discounted inside of ForeSee when you made the acquisition that turned out to be better than expected. I guess just maybe be helping bridge that would be helpful for investors.

Dan Bodner — President, Chief Executive Officer and Chairman

Yes. Okay. So the $67 million last year was, with 15% — $15 million of losses. And there was bigger losses than the year before. Right. And we also found in diligence that they had renewal rates of the low 60's in Q4, and the Q4 is a big renewal quarter for any company. So clearly we expected that we have to do a few things. First to expect further customer attrition and while the technology is strong, I think customers are starting to move away from point solutions and ForeSee did not have the resources to develop a platform. They were trying and they were on way to develop a bigger platform, but they couldn't finish the job and obviously it makes sense for the ForeSee team to join forces with Verint and help us to complete a platform quickly and also this helps them to go back to their customers and give them a roadmap which we already did with most of their customers and as I said, we brought more than 100 ForeSee customers into our annual event and showcase the new release.

So the revenue this year is very much predicated on the idea that we're going to stop the attrition and we are giving customers a clear roadmap on how they can not only improve the ForeSee product but continue to expand with the Verint platform into other areas. So I also mentioned that in Q1, we had further attrition and renewal rates was at the low-50s, but we think we're taking the right steps.

So it let me reconcile the guidance first. In terms of guidance, we raised guidance three times. The first time that we raised guidance was in December when we acquired ForeSee and we wanted to give a slower. We wanted to tell investors that we paid $65 million and it's not a healthy company, we're not buying it for their revenue or losses, we're buying it for technology , but we believe and we had very strong conviction that we can do at least $20 million, which will be 3x revenue at that level.

Obviously, we were not happy with '20 and we were trying to get better, but that was the flow. And we raised guidance again in March by $25 million and part of that was because we started to see that we are taking the right steps with ForeSee and at that point, we felt that $30 million of guidance is more appropriate. So our $25 million increase in March was about $10 million attributable to ForeSee and $15 million to other parts of our business, including the Monte acquisition that we did in February it was about $5 million that we are taking into our guidance.

So that's kind of the way we thought about guidance. Today our view is that we should be able to generate $30 million to $40 million. We made the business profitable day one, and not only are profitable, but also integrated. So the R&D organization, the product management team already working hard on our roadmap, which is really the strategic objective of the acquisition. And the same time, the feedback we got last week on the floor in our annual event is giving us in the bit more comfort about where this is going to end this year.

Having said that even if we end up only with $30 million of profitable business, paying $65 million for $30 million our SaaS business is profitable. We certainly meeting our objectives for acquisitions. And if we can achieve $40 million the high end of the range is obviously even better multiple. Longer term, we think ForeSee is very important component of our VoC platform and I'm very pleased with the way we progressed with innovation.

Samad Samana — Jefferies — Analyst

I really appreciate that very thorough answer. And that's very helpful. And for the sake of everybody else in the Q&A behind me. I'll jump back in the queue of with my other questions, but thank you so much for that answer. That's very helpful.

Dan Bodner — President, Chief Executive Officer and Chairman

Okay. Sure (inaudible)

Operator

Thank you. (Operator Instructions) Our next question comes from Dan Bergstrom with RBC Capital Markets. Your line is now open.

Daniel Bergstrom — RBC Capital Markets — Analyst

Yes. Thanks for taking my question. Apologize for the background noise. Could you talk a little bit about the pace that maintenance conversion we should expect over the next several years. Understanding, it's still early, but I believe accelerating. Is that going to be largely customer driven or there are levers you could look to pull at some point to encourage conversion?

Dan Bodner — President, Chief Executive Officer and Chairman

Yes. That's a good question. I think the best thing we can do and we already did is what I mentioned before has future priority. The biggest objection that we hear from customers is that they got the product is working. You know there are under maintenance. We're refreshing the product already pretty often. So while they want to move to the cloud. They are more interested in moving to the cloud with solutions that don't have rather than actually transitioning the one they do have. So we have many customers that we saw new solutions in the cloud and they kept their existing solutions on-premise. And of course with the Verint flexibility you can do that, you can leave behind solution an on-prem and work seamlessly with new solutions that are in the cloud.

So the feature priority actually takes away the last objection, which is, I don't want to drop my operation. I don't want to move to the cloud and find a new application that require to change process or to train users on some new ways of doing business. And we took that away with a feature priority. So at this point, I think that what's driving our customers to convert is a simple financial analysis of what's more expensive to keep their own data center and they're all IT people that need to maintain the data center or to basically move to the cloud and outsource this operation to the Verint cloud.

And I think for many customers, the answer will be, let's move to Verint's because Verint is more efficient. We do it for many, many customers when we do a security patching, we forecast was at the same time. So for many customers will be, it's just more economical to take our solution and move to the Verint cloud. However, there will be some customers that will remain on-prem for a lot of different reasons. I announced today many cloud deals but also announced over $10 million due from a large telco that actually wanted to stay on-prem and that was a deal where we displaced many competitors because that standardized on Verint and we certainly discussed with them cloud, both in terms of converting our own solutions of cloud and converting the compared solutions of the cloud, and all of the discussions they are remaining on premise.

So we certainly can do both, but we are seeing customers moving more and more to the cloud. And we certainly took a lot of the objections that the customer have regarding cloud, we took that away and I think we're going to acceleration. So the bottom line is we discussed last week on the webcast, Doug mentioned that we expect about $10 million conversion this year, going to $20 million next year, going to $30 million the following year.

Daniel Bergstrom — RBC Capital Markets — Analyst

Great. Thanks.

Dan Bodner — President, Chief Executive Officer and Chairman

Sure.

Operator

Thank you. And our next question comes from Jeffrey Kessler with Imperial Capital. Your line is now.

Jeffrey Kessler — Imperial Capital — Analyst

Thank you, Dan, about this past December on your fourth quarter conference call you divided the cyber security business into three segments. And what I'm interested in finding out is three years ago, cyber security, because of emerging markets mainly, but perhaps because one of two of the segments, weren't performing that well was doing very poorly. We're not up to your expectations not up to investors' expectations. What has changed from then until now with regards to, one, the geographic split, let's call it disparity being done away, but more importantly what are those –which of those three parts or all those three parts have been improved to allow you to get this to a 10% growth area where it had been — it had actually been shrinking?

Dan Bodner — President, Chief Executive Officer and Chairman

Yeah so, just to remind everyone, the three parts of Cyber Intelligence include physical security, cyber security and the intelligence community. And I would say that generally speaking, automation is driving interest in all three parts of the security business, because the exponential growth in data is a problem for all security customers. In physical security, as you know, Jeff, explanation growth come from a lot of devices, and in cyber security just growth in terms of the networks and endpoints and of course the intelligence agencies are — have access to enormous amount of data. So the ability to automatically capture data, analyze data and put the insights to work is certainly something that is differentiating Verint, because it helps them to complete investigator — investigations fastener and doing so with fewer cyber analyst and data scientists that are very, very difficult to hire and retain.

So it's a combination of automating the investigated process and automating the collection and analysis of the data that I think contributed to improving growth rates in all parts of our security business.

Jeffrey Kessler — Imperial Capital — Analyst

Great, thank you. That's the question that I have. Thank you.

Alan Roden — Senior Vice President, Corporate Development and Investor Relations

Yeah, sure. Jeff.

Operator

Thank you. And I am showing no further questions in the queue at this time. I'd like to turn the call back to Alan Roden for any closing remarks.

Alan Roden — Senior Vice President, Corporate Development and Investor Relations

Thank you, operator. I'd like to thank everyone for joining us tonight. We look forward to seeing you in the future — on future calls. Take care. Have a good night.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may all disconnect. Everyone have a great day.

Duration: 70 minutes

Call participants:

Alan Roden — Senior Vice President, Corporate Development and Investor Relations

Dan Bodner — President, Chief Executive Officer and Chairman

Douglas Robinson — Chief Financial Officer

Shaul Eyal — Oppenheimer — Analyst

Daniel Ives — Wedbush Securities — Analyst

Samad Samana — Jefferies — Analyst

Daniel Bergstrom — RBC Capital Markets — Analyst

Jeffrey Kessler — Imperial Capital — Analyst

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