Verint Systems Inc (VRNT) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verint Systems Q3 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Alan Roden, Senior Vice President of Corporate Development. Sir, you may begin.

Thank you, operator, and good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's Chairman and CEO; Doug Robinson, our CFO, is under the weather and will not be joining the call today. In his place, I will be reviewing our financials and Doug will be available for further questions when he's feeling better.

Prior to the call, we issued a press release that includes financial information for our third fiscal quarter ended October 31, 2017. Our Form 10-Q will be filed shortly. Each of our SEC filings and earnings press releases is available under the Investor Relations link on our website and also on the SEC website.

Before starting the call, I'd like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance.

Actual results could differ materially from those expressed in or implied by 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 a more detailed discussion of how risk 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, 2017, 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 is provided only on a non-GAAP basis. Please see today's earnings release in the Investor Relations section of our website at verint.com for a reconciliation of non-GAAP financial measures to GAAP measures.

Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information but included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for information on comparative purposes. The non-GAAP financial measures Verint uses have limitations and may differ from those used by other companies.

At the end of today's call, I will discuss our plan for an Investor Day in May 2018 as well as some near-term investor events. But now I'd like to turn the call over to Dan. Dan?

Thank you, Alan. Good afternoon, everyone, and thank you for joining us today.

In the third quarter, on a GAAP basis, we delivered $281 million of revenue, representing 8% year-over-year growth. On a non-GAAP basis, we delivered $284 million of revenue, representing 9% year-over-year growth.

We're pleased with our third quarter results and our positive momentum and would like to highlight several accomplishments. First, revenue increased sequentially and year-over-year in both our Customer Engagement and Cyber Intelligence segments. Second, we expanded over new margins both sequentially and year-over-year, driven by top line growth as well as continued operational efficiencies. And third, we overachieved our non-GAAP revenue and EPS outlook every quarter this year.

We believe our strong results throughout this year reflect our market leadership in Actionable Intelligence. Looking ahead to next year, we believe our momentum will continue and that we're well positioned for another successful year in both segments with earnings growing faster than revenue. We also believe we will benefit next year from the investments we made this year as well as the completion of our operational agility initiative, which I will discuss a little later.

Now I'd like to review our third quarter results by segment. Starting with Customer Engagement. Q3 GAAP revenue was $182 million. Non-GAAP revenue was $185 million, representing approximately a 6% year-over-year increase. We're pleased that revenue increased sequentially in both Q2 and Q3, and we expect to finish the year strong with another quarter of sequential growth in Q4.

Our Q3 estimated non-GAAP fully allocated operating margin, which we refer to as our segment margin, came in at 24.5%, representing approximately 1 percentage point of margin expansion over the same period in the prior year.

Overall, for the current full year, we expected [foreign] results for our Customer Engagement segment. For revenue, cloud continues to be a strong growth driver, and we expect around 5% revenue growth overall with the cloud portion of our revenue growing faster at a rate of approximately 25%.

We expect approximately 60% of our revenue to be generated from recurring sources and are pleased with the rapid growth of our cloud business accompanied by expanding margins. For margins, we expect segment margins to expand to around 24% this year.

Behind the strong results is our market leadership, commitment to innovation and competitive differentiation. Verint is a customer engagement company focused on helping organizations simplify and modernize Customer Engagement. We're a market leader offering one of the broadest portfolios of cloud and hybrid solutions in the industry. Our solutions incorporate advanced artificial intelligence and analytics technology to help our customers unlock the potential of automation and drive operational efficiencies. Later, I will discuss the automation market trends, driven by the recent advances in artificial intelligence technology.

Now let's discuss some of the orders we received during the quarter as we continue to execute our land-and-expand strategy. We received approximately $5 million in orders from a leading business process outsourcer for our speech analytics solution. This customer previously deployed multiple components of our portfolio, some on-premises and some in the cloud, and is now adding our speech analytics solution. This is a good example of the demand we're seeing for speech analytics and the progress of our land-and-expand strategy.

Next, we received orders from a leading shipping company, bringing total orders from this customer to $8 million over the last year for multiple components of our portfolio. This customer is now deploying a new solution for robotics process automation in the front- and back-office operations. This is a good example of customers looking to leverage robotics automation technology to gain efficiencies and improve customer service.

We received orders from a BPO company, bringing total orders from this customer to nearly $5 million this year. This customer is expanding deployment of our cloud self-service solution to shift the directions from the contact center to automate self-service responses and improve the customer experience.

And finally, we received nearly $4 million in orders from a global logistics company as part of a new strategic initiative to modernize their Customer Engagement operation. This customer is adding multiple components of our portfolio, including knowledge management, chat and e-mail solutions. This is a good example of an organization evolving their operations in multiple steps to achieve their long-term strategic objective and modernize their Customer Engagement operations.

We are pleased with many competitive wins during the quarter and believe customers are choosing Verint solutions due to our competitive differentiation in 3 areas: offering customers a broad and expanding solution portfolio; offering customers cloud flexibility; and offering customers advanced automation solutions.

In cloud, we continue to see a preference from our customers for deployment flexibility for they can choose between cloud, on-premises or hybrid deployment models. We have now achieved scale and efficiency in our cloud operations, position us well as a strong cloud vendor for our customers.

We also enable our many partners, including ACD cloud partners with a strong cloud portfolio. We recently entered into a global agreement with a leading cloud infrastructure provider that provides our customers an efficient option for worldwide cloud deployment. Overall, we believe we're well positioned to continue to benefit from the cloud growth trends.

And next in automation. Organizations are increasingly recognizing that their effective adoption of automation is potentially game changing in driving increased loyalty, satisfaction, revenue and efficiencies. Verint's strategy is to help our customers simplify and modernize their Customer Engagement operations by infusing automation throughout our portfolio, driven by artificial intelligence technologies such as machine learning, robotics and natural language processing.

Here are some examples of leading-edge automation capabilities we have recently announced. We introduced a new automated quality management solution that we believe is the biggest innovation over the last decade in call center quality monitoring.

Traditionally, quality management is a manual process performed by supervisors listening and evaluating sample calls, a time-consuming and often subjective process. Verint's new solution offers organizations consistent and unbiased automated scoring of all interactions. Benefits of our new solution include reducing the amount of time spent on tedious tasks, generating consistent and continuous performance feedback and improving compliance, adherence and training.

Another example is introduction of new mobile and artificial intelligence capabilities into our workforce management solutions, designed to drive effectiveness across the workforce. Our new mobile capabilities enable agents to more easily control their schedules, including requesting time offs and swapping shifts. Artificial intelligence enables virtual existence capabilities to help agents more easily manage their schedules. With these new capabilities, organizations can improve employee satisfaction and deliver enhanced customer experiences.

In the area of robotics process automation, we continue to advance our solution as many organizations have repetitive tasks that don't require human decision-making and are good candidates for automation. Robotic process automation can perform these repetitive, time-consuming, tedious tasks through bots, enabling employees to focus on more important customer-related activities.

Overall, we believe automation plays a vital role in the future of Customer Engagement and represents a new growth opportunity for Verint. We're well positioned in this area today, and we'll continue to invest and plan to launch new automation capabilities during Q4.

In summary, we believe our customer engagement competitive differentiation is largely a result of our broad and expanding portfolio, cloud flexibility and automation innovation. Our strategy is to continue to land and expand, leveraging our base of more than 10,000 customers and to continue to invest to address growth trends in cloud and automation.

Now turning to Cyber Intelligence. Our Q3 revenue increased 15% year-over-year to $99 million. Our Q3 Cyber Intelligence segment margin was close to 11%, representing approximately 1 percentage point of expansion over the same period in the prior year.

We're pleased with our Q3 results. This was the third quarter in a row of double-digit year-over-year revenue growth. Our 15% growth in Q3 followed 19% year-over-year growth in Q1 and 12% in Q2.

Also, revenue increased sequentially in both Q2 and Q3, and we expect revenue to again increase sequentially in our fourth quarter to over $100 million. This will result in around 10% growth for the year overall. I would like to note that, last year, we had a very strong fourth quarter, and as a result, this Q4 will be relatively flat compared to last year.

During the quarter, we continued to win many deals around the world, including 3 large deals each worth between $5 million and $10 million. We have a strong pipeline and expect to win several additional large deals in Q4. It's important to note that we have customers across many parts of the security industry, including national security, law enforcement, cybersecurity, enterprise security and critical infrastructure. And some of our customers prefer to obligate requirements and award large contracts, which are deployed over time, while other customers purchase our solutions in small pieces for faster deployments. Regardless of our customers' purchasing preferences for large or small deals, with our broad portfolio, we're helping our customers deploy projects of all sizes.

We are a leading global provider of security and intelligence data mining software, and longer term, we see several growth trends in the Cyber Intelligence industry. We believe we're well positioned to benefit from some of these trends and are targeting a return to our historical double-digit revenue growth rates with margin expansion.

Today, I would like to highlight how we're addressing the following 3 trends that can have a positive impact on our long-term growth. First, criminal and terrorists are getting more sophisticated, and it's getting more difficult for security organizations to respond to these evolving threats with existing solutions, driving the need for new solutions within enhanced intelligence and predictive analytics.

To address these trends, we offer powerful data mining software developed by engineers with deep domain expertise, including real-world experience leveraging intelligence methodologies to help fight crime and terror.

Second, very significant shortage of qualified cyber analysts and data scientists worldwide and security organizations are struggling with resource scarcity and cost. Our data mining, advanced analytics and machine learning technologies help automate, accelerate and successfully complete investigations, reducing dependency on cyber analysts and data scientists.

And third, security organizations are facing a fragmented vendor market and are looking for partners with comprehensive product portfolios capable of executing holistic vision. Our position as a trusted partner with governments around the world, combined with our ability to offer a broad portfolio across intelligence, cyber and physical security, provides us visibility into our customers' emerging threats and makes us a strategic partner to customers. Our strategy is to continue to expand our portfolio, both organically and through tuck-in acquisitions, to help our customers to meet evolving threats.

In summary, we're pleased with our Cyber Intelligence revenue growth this year and believe we are well positioned to achieve our annual revenue outlook. Longer term, we believe that the growth trends we've discussed today support sustained long-term growth with margin expansion.

Before discussing our guidance, I would like to provide an update on our initiative to increase operational agility. In the beginning of the year, we discussed the different operating models of our 2 segments with the hybrid cloud model in Customer Engagement and a turnkey project model in Cyber Intelligence. We also discussed our plan to transition to a corporate structure of 2 operating segments along with a shared services model.

We've largely completed this agility initiative and would like to report on our progress as follows: We have separate management team through each segment that are directly responsible for sales, marketing, products and services in their respective markets. We've established a shared services structure between the 2 segments and designed a shared services allocation model.

We have aligned compensation plans with the performance goals for each segment. We've upgraded and enhanced our business systems to allow for better tracking and reporting of financial and operational metrics that are pertinent to each segment. And we will shortly launch a new website with new messaging that is more customer-centric and focused on the specific needs of customers in each segment. We're pleased with the changes we've made and believe our greater operational agility has already contributed to improve business performance.

Turning to guidance. We are pleased with our momentum in both segments and expect to finish the year with a strong fourth quarter. Later, Alan will discuss our initial outlook for next year, which reflects another year of growth in both segments and expanding margins that will drive earnings faster than revenue.

And now let me turn the call over to Alan to further discuss our financial results and guidance. Alan?

Thanks, Dan. Our discussions today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available in our earnings release and the IR section of our website. Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including fair-value revenue adjustments, amortization of acquisition-related intangibles and certain other acquisition-related expenses; stock-based compensation; as well as certain items that can vary significantly in amount and frequency from period to period. For certain metrics, the differences also include adjustments related to foreign exchange rates.

I'll start my discussion today with the areas of revenue, gross margin and operating margin. In the third quarter, we generated $284 million of non-GAAP revenue. Segment revenues were $185 million in Customer Engagement and $99 million in Cyber Intelligence. This compares to $260 million of non-GAAP revenue in the third quarter the prior year with $174 million in Customer Engagement and $86 million in Cyber Intelligence.

In terms of geography, in Q3, we generated non-GAAP revenues of $150 million in Americas; $88 million in EMEA; and $46 million in APAC. This compares to $138 million in the Americas, $75 million in EMEA and $47 million in APAC in the third quarter the prior year.

Q3 non-GAAP gross margins were approximately 65%. As we discussed in the past, due to product, services and revenue mix within or across segments, overall gross margin can fluctuate significantly from period to period. From a segment perspective, our Customer Engagement business is primarily software and services, and our non-GAAP gross margins in that segment were in the high 60s for the quarter similar to other software companies with the same product services mix.

Our non-GAAP gross margins in our Cyber Intelligence segment are lower than Verint's overall gross margins, reflecting the mix of hardware, software and services, including from third-party vendors in that business. For the year, we continue to expect our total non-GAAP gross margins to be in the mid-60s, similar to last year.

During the quarter, we generated non-GAAP operating income of $55.8 million with non-GAAP operating margin of 19.7%. Our adjusted EBITDA for the quarter came in at $63.3 million or 22.3% of non-GAAP revenue.

Now let's turn to other income and interest expense. In the third quarter, non-GAAP other expense net totaled $6.9 million, reflecting $5.4 million of interest and other expense and $1.5 million of charges from foreign exchange. Our non-GAAP tax rate was 12% for the third quarter. As we discussed previously, we expect to enjoy a low non-GAAP tax rate for several years due to our NOLs and the amount of income we generate in low-tax jurisdictions. For the quarter, we had 64.6 million average diluted shares outstanding. These results drove diluted non-GAAP EPS of $0.66 for the quarter, representing 12% year-over-year growth, driven by revenue growth and margin expansion.

Now turning to the balance sheet. At the end of Q3, we had $414 million of cash and short-term investments, including both short-term and long-term restricted cash. Cash flow from operations on a GAAP basis for the 9 months ended October 31, 2017, came in at $96 million, a $24 million increase compared to $72 million during the same period in the prior year. We ended the quarter with net debt of $410 million, including both short-term and long-term restricted cash and excluding discounts and issuance costs primarily associated with the convertible debt.

Before moving to Q&A, I'd like to discuss our non-GAAP guidance for the year ending January 31, 2018. Starting with revenue. Our outlook at the midpoint remains unchanged with a narrower range. In Customer Engagement, we expect around 5% revenue growth. In Cyber Intelligence, we expect around 10% revenue growth, and overall, we expect revenue of $1.14 billion with a range of plus or minus 1%.

From an operating margin perspective, we expect operating margins in the current year to improve slightly from last year. In Customer Engagement, we expect segment margins to slightly improve to around 24%, and in Cyber Intelligence, we expect segment margins to be more than 10%.

You can approximate our segment margins by distributing our shared service expenses, which are shown in our 10-Q segmentation footnote, proportionally to our year ended January 31, 2017, annual non-GAAP segment revenue. We also present how we estimate segment margins in the tables in our earnings release.

We expect our quarterly interest and other expense to be approximately $6 million, excluding the potential impact of foreign exchange. Given volatility in FX rates, there could be future gains or losses related to the balance sheet translations in our future results, which are not included in our guidance.

We expect our tax rate to be approximately 11% for the year, reflecting the amount of cash taxes we expect to pay for the year. Based on these assumptions and assuming approximately 64.3 million average diluted shares outstanding for the year, we expect diluted EPS at the midpoint of our revenue guidance to be approximately $2.75.

Looking ahead to next year, the year ended January 31, 2019, we expect total non-GAAP revenue of $1.215 billion with a range of plus or minus 2%, reflecting around 5% year-over-year revenue growth in Customer Engagement and around 10% year-over-year revenue growth in Cyber Intelligence. At the midpoint of our revenue range, we expect $3 non-GAAP diluted EPS. Our initial guidance reflects close to 7% revenue growth year-over-year and 9% earnings growth year-over-year as we expect to expand non-GAAP operating margins again next year.

In conclusion, we expect to finish the year strong and believe we are well positioned for sustained long-term growth in both Customer Engagement and Cyber Intelligence. That concludes our prepared remarks. So with that, operator, please open the line for questions.

(Operator Instructions) And our first question comes from the line of Shaul Eyal with Oppenheimer.

Dan, can you talk to us about the correlation we're seeing between your Customer Engagement growth in recent quarters and Verint's innovation -- recent innovation in this segment.

Yes, I'll be happy to discuss innovation. I think there is a correlation. I think our results reflect better execution overall, and I think the operational agility initiatives contributed to that. But clearly, we've accelerated innovation. We discussed a lot of automation announcement that we made in Q3. We are planning more announcements coming in Q4. And we think that automation is one of the growth drivers in this industry into the future. Automation is now, obviously, a big buzzword in many industries. But specific in Customer Engagement, there are great opportunities, not only to cut costs by automating processes but also to improve the customer experience overall, drive customer loyalty, providing customers much faster and more accurate answers, responses to the questions. So overall, increasing revenue, and of course, creating efficiencies, which is a big business impact for our customers. We see the Customer Engagement industry overall looking to modernize. Cloud is one growth trend as customers are looking to modernize moving to the cloud. And we discussed that we've innovated in cloud to a point that we're able to offer flexibility that the customers really appreciate. And regardless of whether they choose on-premise or cloud or hybrid, we're still able to improve margins because we are very efficient now in our cloud delivery, both products and services. So between the innovation we had in cloud and in automation, we think this will be good growth for this year and the future. And of course, our very broad portfolio that we continue to expand with new capabilities and that, obviously, go to our land-and-expand strategy. We have 10,000 customers. The majority of these customers still have very few solutions from Verint. We have a large portfolio of many products, around 25 products with multiple use cases for some of these products. So lots of potential to continue to sell new capabilities to our customer base. We feel like we're winning. We're more differentiated. And we're winning more deals and landing with new customers as well as expanding with the current customers. So innovation has been a good factor, and I think will continue to be.

And our next question comes from the line of Gabriela Borges with Goldman Sachs.

The first one is on the Cyber Intelligence outlook. I think it was right around this time last year that you gave the initial rate on fiscal '18 and now looking into fiscal '19 the rate for 10% year-over-year growth. Could you just compare and contrast the visibility and the pipeline that you have in the business looking out over the next year versus how it was a year ago?

Yes, okay. So in regards to visibility, it's really driven by a number of factors. It's first of all, our customer relationships. We've been in this business for more than 2 decades. We have intimate relationships with customers, and we have discussion with customers relative to their needs and ability to purchase. And in addition to the customer intimacy, of course, is the orders that we have secured already, and it's the pipeline that we have. Our pipeline is growing. And as I discussed before, in a pipeline, we have many large deals. It's unclear to us whether customers eventually will prefer to obligate requirements and actually award those orders with one large lump sum or maybe we'll do it on a piecemeal basis. But regardless, we think we have large opportunities with customers. We have also a broad portfolio in Cyber Intelligence. And similar to my previous response to Shaul, we feel like we are accelerating innovation. And with this new solution portfolio, our customers are telling us that they want to expand and buy new solutions. One of the big trends there in Cyber Intelligence is that customers feel like they need to move on with technology because the existing solutions they have are just not keeping up with all the technology innovation in telecommunication, in social media and so forth. So we see here an opportunity. We're very well positioned with data mining software, and part of visibility is the demand and -- interest and demand that we see from customers to look into the new data mining capabilities and try to do more intelligence -- predictive intelligence and do that with less manual processes with less analysts and data scientists, which are just difficult to hire and retain and very costly. So all these trends with innovation we are continuing to have is giving us the visibility into guiding to 10% growth next year.

And that's helpful. And as a follow-up, if I could, on the EPS guidance. Dan, you sort of mentioned in the prepared remarks how you've overachieved on the guidance through the first 3 quarters of the year. Maybe just help us understand the decision to maintain full year guidance on EPS. Are there onetime items that may have shifted in terms of timing throughout the year or linearity or that may reverse in 4Q? And the same sort of question for the fiscal '19 guide. Is there a point in time, you think, when we might be able to get back up to more material margin leverage in the model looking at what you've have done historically in the low 20% EBIT range?

Yes, so we are pleased with the progression this year, no question, and that's why I mentioned overachieving because, obviously, this was not the situation last year. So we have good discipline in our execution, and we expect to finish the year as planned. This year, we are guiding to 10% EPS growth. So that's a pretty good margin expansion, and we talked about innovation. We are investing in innovation in Customer Engagement, and we are investing in innovation in Cyber Intelligence. And this investment, we believe, will help us to sustain long-term growth and accelerate growth over time. So there is a balance between putting more money into margin expansion and putting more money in R&D. When you look at the -- our hiring that we've done year-over-year, we continue to expand, and most of hiring is in R&D. So I'm pleased that we are able to get to 10% EPS growth this year, and at the same time, invest to accelerating growth over time.

And our next question comes from the line of Paul Coster with JPMorgan.

So the economic backdrop looks pretty good at the moment, Dan, and your narrative is with the entire team, there are a lot of the innovations taking place. And as you noted, the 25% growth in the cloud, a subset of your CE business, yet the overall growth rate next year and this year is only about 5%. What is the disconnect? Is there something that's holding you back? Is there some legacy business that's not growing? And an adjacent question, is there a chance -- an opportunity here if you were to double down on the cloud and accelerate that segment so that it's a bit more impactful on the top line by obviously making acquisitions, maybe steering more of your investment in that direction?

Yes, yes. Very good questions. So things that are kind of holding us down. For example, our professional service is declining, and that's by design. We have -- part of innovation is we decreased the attachment rates of special services to deployment. And that's a good thing for our customers and that's a good thing for margins. So it is down year-over-year in terms of revenue, but it's obviously a positive trend. And we have also less professional services when we deploy in the cloud, so that's another good benefit. In terms of cloud overall, we are committed to the cloud. There's no doubt. And we can certainly accelerate a portion of revenue we get from cloud during -- due to some acquisitions. I agree with that. At the same time, we strongly believe -- and this is very strong feedback we get from customers, that while the SMB customers are more inclined to move to the cloud faster, the enterprise customers do prefer the hybrid cloud and they want flexibility. And in most of our deals, customers are asking for multiple deployment model, and eventually they choose the one that they think is best for them at any particular time. And SMB is too small for us. If you remember, we talked about it at the beginning of the year, and we are also making some investments, but we think that SMB will grow over time. Most of our business is still in the enterprise, and we're very focused on providing our customers the deployment flexibility. But in many cases, it's a competitive differentiation, where our competitors are not able or not willing to provide the flexibility. So cloud growth, yes, we see cloud continue to grow. Our recurring revenue will continue to grow. And at the same time, we will be a hybrid model company. So I don't expect in the near future that we will not offer on-prem, and that's a very important part of our strategy and very important to our customers.

And our next question comes from the line of Nandan Amladi with Deutsche Bank.

So Dan, as we look to sort of secular trends and customer care moving from telephony-based to more of the online channels, how much of your new bookings are coming from these omnichannel or online-type products? And how competitive are your offerings in that space relative to some of the sort of pure cloud-based online customer care software providers?

Yes. So this is area where we're very strong. Our products are omnichannel. And if you compare differentiation, even their legacy products, such as recording, used to be voice recording. We now record any type of interaction. It could be voice through telephony. It could be voice through Skype or any other type of IP voice. It could be chat, SMS, e-mails, social media. So we have an omnichannel recorder. So we have made investments to make our entire portfolio omnichannel. We, obviously, have analytical solutions that are helping customers to analyze the customer experience across different channels and also make some decisions how to improve services because, as you know, customers tend to get different experiences using different channels. We are a provider of e-mail channels, chat channel, community, social media channels. We provide these type of solution. The only channel we decided not to provide is the ACD capability. We believe that ACD neutrality is the better strategy for us. And there are many, many ACD providers, including cloud providers and we're partnering with many of them. We have integration with all the leading ACD providers. And we think that we could provide our customers a choice of keeping their ACD or upgrading ACD regardless of what they do with any other channel or, more importantly, what they do with their analytics and automation strategy. We believe that as customers look at modernizing customer engagements, it's not about getting a better ACD. The ACDs are pretty much similar functionally, but it's really moving forward. And we're very well positioned to help customers moving forward, again, with cloud, with analytics and with automation.

And a follow-up on the cloud segment. You said for many quarters now that it's growing at a roughly 20%, 25% clip. How big is that segment now? And how big will it be in 2 or 3 years?

Yes, so we have 60% recurring revenue, and that's approximately -- 1/3 is our cloud revenue and 2/3 is maintenance. That's how we get to 60%. So it's close to 20% of revenue -- of over revenue that are in this bucket of cloud revenue. And again, we continue to believe that cloud will grow faster than overall revenue next year and probably beyond. And if we choose to do cloud acquisitions, as Paul indicated, then obviously that can accelerate growth even further.

And our next question comes from the line of Dan Bergstrom with RBC Capital Markets.

So you mentioned land and expand in the Q&A here. The land-and-expand strategy really in Customer Engagements, but a little over 1 year old at this point. Could you talk about the opportunity in the install base or in customers that you've sold to over the last year as deals anniversary and come up for renewal? You provided several examples of this in the prepared remarks. I'm assuming there's a nice opportunity to upsell additional modules to them?

Yes. I would love to give metrics, but at this point, we just don't have them. So it will be more directional than quantitative. But I would say that -- I mentioned 25 products, give or take, and multiple use cases for this product. So we have really a big portfolio. Most of our customers have a small portion of that. And we provided the ability, which we call Start Anywhere. So this is now -- there's no blueprint where they have to go to a certain upgrade path to get to a capability. They can really pick and choose what they need. So a customer may decide I don't have a community channel. I want to start a social community customer service. And that's where they're going to go next. Some other customer will decide self-service is now something I want to get into. It's very difficult to predict because customers have different priorities based on their particular situation. But generally, what we hear from customers that they don't like to buy very large projects and obligate lots of products into one big deal. They feel like they have better business impact if they do it on a more gradual basis. And that's why we have a land-and-expand strategy and a Start Anywhere strategy. We believe it's working very well. This strategy makes us a trusted partner. We very often are being asked by our customers to advise them on what are the business benefits they can have. We're helping them to establish their ROI, the return on investment case, that they need to present internally. And most of our solutions are now -- are being sold based on ROI case where our customers go to their management and present a compelling ROI. Automation is one area where obviously the ROI is very compelling, and that's why we see a lot of interest, and we've decided to accelerate our investment in automation. And the ROI is cost efficiencies and also the ability to measure increased customer loyalties and customer satisfaction. So this is how we approach the land-and-expand strategy. We're trying to start to develop some metrics to be more quantitative about how deep we go, but if -- the opportunity is very, very large. If we are able to sell a larger part of our portfolio to our customer base, we have lots of -- customers with very large footprint, and we can do very well if this will pick up in it's -- in pace.

Great. And then you mentioned automation there and automation was highlighted in your prepared remarks. I noticed you held a number of customers' events in November highlighting the role of automation and also the new products there. Just curious as to customer response or feedback out of those events?

Great. I think customers are very, very interested in this topic. It's considered to be an important part of the future of Customer Engagement. It's important to understand that this -- we're not offering automation solution. This is not a new product. This is really infusing machine learning, deep learning, cognitive capabilities, natural language processes. It's infusing technologies that create new business benefits. But we incorporate that into existing products which makes it easier for customers. They don't have to develop bots and have them totally isolated from the business flow -- through the business process flow, but in our case, we incorporate it into our solution. So we get a lot of excitement about our quality monitoring automation. As I mentioned before, it's really a major announcement in the quality monitoring space, and I'm looking forward to announce a few more new capabilities in automation in Q4. So we absolutely accelerating the pace.

And our next question comes from the line of Jeff Kessler with Imperial Capital.

We're looking at the virtual negative unemployment going on in the cyber and the -- cyber and cyber analyst area. You mentioned that you're beginning to -- you've been building up your predictive analytics and other analytics that will help you both analyze better and cut back on the need for humans, so to speak, to make those decisions. Could you talk a little bit about the investments that you're making in that area? And what type of return are -- can you get from both a qualitative and a quantitative measure from the investment you're making there?

Okay. So you mentioned the cybersecurity use case where there's shortage in cyber analysts. Yes, we see the same type of situation also in overall Cyber Intelligence. Any data mining solutions that carry behind them a lot of services and that require data scientists have the same type of challenge. And the amount of data that can be collected is obviously growing exponentially. And the ability to find insights into data is becoming more and more complex. And a big part of an investigation, whether it's a cybersecurity investigation or any other security investigation, a big part of that is just collecting data, and it's going through alerts. There's lots of systems that provides alerts, and many of these alerts could be just benign, just alerts that a human needs to look, and say, okay, this is an event, but it's not suspicious, and it's not causing me any reason to investigate further. So a lot of the data scientists that work is in aggregating data from a lot of disparate systems, looking at alerts and investigating alerts just to the point of deciding whether it's interesting or not. And a lot of these tedious tasks are now being automated. So at the end of the day, in order to complete a complex investigation, there will still be people involved, and they'll have to make judgments. And they have to be people with skills in data mining, what we call data scientist or cyber analysts. But much fewer of them will be needed then relative to the solutions that the market has now. The level of solutions that are existing in the market today require these type of skilled people to spend too much time on tasks that are really not necessary to be spent by this level of skills or human at all. And that's our focus. That's our focus: automating the collection and the alerts of Verint.

Okay. And just a follow-up to that. A year ago or 1.5 years ago, the weakness you saw in the cyber side of the business was chiefly centered in your emerging markets. Can you characterize what the business outlook or what the business currently looks like there? Is it just stable at this point? Is it recovering? Or are you going through a process in which the way -- the growth rate may change for the better relative to where you were again 1.5 years ago.

Yes, so we discussed last year an unprecedented decline in the emerging markets. And we mentioned that our business is approximately 50-50 between emerging markets and developed markets. And that we believe that the decline is temporary. So that decline was for 3 quarters. Q4 last year was strong. Strong sequential growth in Q4. I think more than 20% growth from Q4 last year, from Q3 to Q4, and then this year, obviously, we see good growth every quarter. So this was a temporary decline. And when we look at the orders that we received this year, it's pretty much back to the same mix of 50-50 between emerging markets and developed markets. So the decline in emerging markets, which we at the time discussed is potentially related to currency devaluation and commodity pricing and so forth. We refer to that as a temporary decline because the security needs in those countries are pretty strong. And that's what we see this year that the need to modernize and invest in technology, to take security to the next level is something that countries cannot afford not to invest.

Was there any change in the way you went to emerging markets to change in the way you sold to your emerging markets to help this? Or was it for those factors that you -- just due to those factors that you just cited?

No, we did not have to do anything to help them. Our customers told us last year that they have very healthy interest in our products but are just not able to pay. So it was a matter of waiting and getting their budgets, and then they're resuming purchasing.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Alan Roden for any closing remarks.

Thank you, operator. Before ending the call, I'd like to announce that we will be holding an Investor Day next May in connection with our Customer Engagement user conference in Dallas. We'll provide more specifics early next year, including the dates, agenda and details on how to register. In addition, I'd like to discuss 2 upcoming investor events. Tomorrow, we'll be participating in the Imperial Capital Investor Conference in New York City. And next Tuesday, JP Morgan will be hosting investor meetings at our offices in Melville, New York. If you're interested, please get in contact with your JPMorgan representative so you can attend. I want to thank you for participating in today's call, and look forward to seeing you on our next conference call. Have a great night. Take care.

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