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Verint Systems (NASDAQ:VRNT)
Q4 2017 Earnings Conference Call
March 28, 2018 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the Verint Systems Fourth-Quarter 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.

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

Thank you, operator, and good afternoon, and thank you for joining our conference call today. I'm here with Dan Bodner, Verint's CEO and president, and Doug Robinson, Verint's CFO. Prior to this call, we issued a press release that includes financial information for our fourth fiscal quarter and fiscal year ended January 31, 2018. Our Form 10-K 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 these and other risks and uncertainties could cause Verint's actual results to differ materially from those indicated in the forward-looking statements, please see our Form 10-K for the fiscal year ended January 31, 2018, when filed, and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures, as we believe investors focus on those measures in comparing results between periods and among our peers.

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

Before I turn the call over to Dan, I want to mention that at that the end of this call, I will be providing some details regarding our upcoming Investor Day. 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 fourth-quarter and full-year results. The momentum we experienced throughout the year continued in Q4, and we are pleased to have finished the year strong. We believe our over-achievement reflects ongoing demand for actionable intelligence solutions, and we are again raising our guidance for the current year.Looking back at the year, we launched many innovative analytics and automation capabilities, improved our execution, and completed our operational agility initiative.

Our annual results on a GAAP basis were $1.14 billion of revenue and $0.10 net loss per share. On a non-GAAP basis, we achieved revenue of $1.15 billion and diluted net income per share of $2.81. Our objective is to grow our earnings faster than revenue through margin expansion, and we are pleased to have increased non-GAAP earnings per share on -- 12% on revenue growth of 7%. Overall, we believe the investments and changes we've made over the last couple of years laid the foundation for continuous growth.

In the current year, we expect another year of high-single-digit revenue growth with margin expansion, resulting in double-digit non-GAAP earnings growth. Doug will discuss our guidance later. And now I would like to review our results and growth strategy by segment. Starting with customer engagement.

We are pleased with the momentum in our business throughout the year leading to a strong fourth quarter. Revenue in Q4 increased 11% year over year. For the full year, revenue increased 5%, with the cloud portion of our revenue increasing 25%. Our estimated non-GAAP fully allocated operating margin, which we will refer to as our segment margin, came in at 24.2% for the year, representing approximately 60 bps of margin expansion over the prior year.

In addition to strong financial results, we are pleased that in Q4 we continued with large competitive wins and displacements, as well as expansions with existing customers. Here are some examples. Nine million dollars in orders from a leading cable and telecommunications company. This three-year subscription order is for expanding the deployment of our self-service solution in the cloud for opening new accounts, billing inquiries, and resolution of technical issues.

This is a good example of how customers are using self-service automation to elevate the customer experience while reducing operating costs. Nearly $7 million in orders from a leading health insurance company. This customer, who is deploying multiple components from our portfolio, is a good example of the success of our land-and-expand strategy and our ability to help organizations modernize their operations over time. Approximately $5 million in orders from a leading property and casualty insurance company.

This new customer selected Verint's Knowledge Management solution deployed in the cloud, replacing an on-premises legacy solution from another vendor. This competitive displacement is a good example of how we are helping organizations move to the cloud. More than $5 million in orders from a leading investment and insurance company. This customer is using Verint's solution in both its contact centers and back-office operations and is now expanding and moving to the cloud in a three-year subscription deal.

This is a good example of how organizations are looking to orchestrate customer-engagement activities across the enterprise. Three million dollars in orders from a leading business-process outsourcer, bringing total orders from this customer to more than $7 million this year. This customer, who had previously deployed some of our solutions, decided to expand with Verint, displacing another vendor. This additional competitive displacement is another example of our successful execution of our land-and-expand strategy.

We believe behind these large-customer orders is our strategy to help organizations simplify, modernize, and automate their customer-engagement operations. I would like to explain in more detail what it means to simplify, modernize, and automate, and why it's important to our customers. First, to simplify customer engagement, we offer solutions that are open, easy to deploy, and simple to use, and are designed to integrate into organizations' current evolving technology environments. Our open portfolio is also compatible with leading providers of communication solutions, providing organizations with flexibility to select a more suitable communication solution while leveraging Verint's neutrality.

We believe this neutrality is particularly important now as the [Inaudible] communications market is going through disruption with new entrants offering new approaches to communication. Second, to modernize customer engagement, we offer organization a smooth transition to the cloud through our hybrid cloud model, including public cloud, private cloud, and perpetual-license models or combinations of these models. Our API-rich portfolio provides organizations the ability to easily share data across the enterprise. And third, our strategy is to infuse automation capabilities throughout our solution portfolio.

Our automation capabilities deliver intelligence and context in real time, reduce errors in manual work, help ensure adherence to compliance requirements, and enable customer experiences that are faster, personalized, and more enjoyable. With this strategy in mind, we have expanded our offering over the last several years to position Verint as a customer-engagement company across the entire enterprise. For most organizations, customer engagement is no longer just a contact center function. It's a responsibility shared across the enterprise, including contact centers, back office, branch operations, self-service, e-commerce, customer experience, marketing, IT, and compliance.

Today, our offering is one of the broadest in the market, cloud-ready, and incorporates the latest artificial intelligence and analytics technology in our industry. We believe that our strategy positions us well to address the new trends in our market and help organizations achieve exceptional customer experience at a lower operating cost. Looking ahead to the current year, we expect another year of growth as we continue to scale the business. And now turning to cyber intelligence.

Q4 revenue came in strong at $111 million, driving annual segment revenue growth of 11% year over year. Our non-GAAP segment margin expanded approximately 1 percentage point over the prior year, from 10.1% to 11%. We are pleased with this margin expansion and expect this trend to accelerate. During Q4, we continued to win many large deals around the world, including five large deals, each worth between $5 million and $15 million.

We are pleased with these large-customer wins and are focusing another year of double-digit revenue growth. We believe behind our cyber intelligence success is our ability to address three market trends that I would like to discuss. First, security threats are becoming more complex. As a result, security and intelligence organizations find it more difficult to detect, investigate, and neutralize threats.

They are seeking more advanced data-mining solutions designed to capture and analyze data from multiple sources to address the challenge of increased complexity. Second, to overcome this challenge, security organizations are seeking advanced data-mining solutions that automates and accelerates functions previously performed by humans. Security organizations are using data-mining solutions to help conduct investigations and generate actionable insights. And typically, data-mining solutions require intelligence analysts and data scientists to operate them.

However, there is a shortage of such qualified personnel globally, which can lead to elongated investigations and increased risk that security threats go undetected. And third, security organizations are looking for predictive intelligence as a force multiplier. Predictive intelligence is generated by correlating massive amounts of data from a wide range of disparate sources to uncover previously unknown connections to identify suspicious behaviors and to predict future events. Predictive intelligence is a force multiplier, or in other words, it enables security organizations to better prioritize and allocate their resources more effectively based on actionable intelligence.

Looking forward to the current fiscal year, we expect another strong year due to several factors. First, our data-mining software is already deployed in over 100 countries, and we continue to focus on helping governments, critical infrastructure, and enterprise organizations around the globe to neutralize and prevent terror, crime, and cyber threats. Our customer relationships provide us deep insight into their challenges, which we use to help develop new innovative solutions. Second, Verint offers a unique approach to security that we call Intelligence Powered Security.

This approach is based on over two decades of cyber intelligence experience combining data-mining software, deep domain expertise, and advanced intelligence methodologies. Third, we have an Intelligence Powered Security portfolio already deployed successfully to address a broad range of security missions for intelligence, cyber, and physical security organizations. Our portfolio leverages the latest artificial intelligence and predictive intelligence technologies, positioning Verint at the forefront of data-mining solutions for the security market. And fourth, we have a significant margin-expansion opportunity as the cyber intelligence market adopts a more traditional software model.

Today, we offer our solutions in two business models, a software model and a turnkey-solution model, which can include also hardware. We believe over time, our cyber intelligence business will evolve into more [Inaudible] model. So overall, we believe demand for innovative cyber intelligence solution is strong. And as a market leader, we're well-positioned for sustained growth.

And before handing the call over to Doug, I would like to highlight a few points. First, as discussed in prior calls, today we are providing some additional metrics in an effort to help investors understand the underlying drivers of our business. Second, following our over-achievement in Q4, we have increased confidence in the year and we are raising our annual non-GAAP guidance for both revenue and earnings for the second time since our last call. And third, we look forward to our Investor Day coming up in six weeks, where we will discuss growth trends in our industry and strategy in detail, and demonstrate our latest customer-engagement innovations.

And now let me turn the call over to Doug. Doug?

Doug Robinson -- Chief Financial Officer

Yes. Thanks, Dan. Good afternoon, everyone. Our discussion today will include non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP measures is available, as Alan mentioned, in our earnings release and in the IR section of our website. Differences between our GAAP and non-GAAP financial measures include adjustments related to acquisitions, including fair-value revenue adjustments, amortization of acquisition-related intangibles, certain other acquisition-related expenses, stock-based compensation, as well as certain other items that can vary significantly in amount and frequency. For certain metrics, it also includes adjustments related to foreign-exchange rates. I'll start my discussion today with the areas of revenue, gross margin, and operating margin.

In the fourth quarter, we generated $323 million of non-GAAP revenue. Non-GAAP segment revenues were $212 million in customer engagement and $111 million in cyber intelligence. This compares to $300 million of non-GAAP revenue in the fourth quarter of the prior year, with $191 million in customer engagement and $109 million in cyber intelligence. In terms of geography, in Q4 we generated non-GAAP revenue of $168 million in Americas, $102 million in EMEA, and $53 million in APAC.

This compares to $166 million in Americas, $92 million in EMEA, and $42 million in APAC in the fourth quarter of the prior year. For the full year, we generated $1.15 billion of non-GAAP revenue. Non-GAAP segment revenues were $755 million in customer engagement and $395 million in cyber intelligence. This compares to $1.073 billion of non-GAAP revenue in the prior year, with $716 million in customer engagement and $357 million in cyber intelligence.

In terms of geography, we generated non-GAAP revenue of $610 million in Americas, $356 million in EMEA, and $184 million in APAC. This compares to $582 million in the Americas, $323 million in EMEA, and $168 million in APAC in the prior year. Turning to gross margins. We believe we have an opportunity to expand our non-GAAP gross margins over time, and I'd like to share with you some additional data that explains what's driving our margin expansion in each of our segments.

In customer engagement, our business follows primarily software and services, and our non-GAAP gross margins in that segment were close to 70% for the year, similar to other software companies with the same product-services mix. We offer our solutions on-premises, in the cloud, and in a hybrid fashion. For the year, close to 60% of our revenue came from recurring sources, of which two-thirds was from maintenance and one-third for cloud. Product generated 24% and professional services generated 17% of our revenue.

Our maintenance-renewals rates in these segments are more than 90%. We believe that our gross margins have the opportunity to expand over time as we scale our cloud business and gain further efficiencies in professional services. In cyber intelligence, we offer our solutions on-premises or as turnkey projects, which can include hardware. Our cyber intelligence non-GAAP gross margins are lower than Verint's overall gross margins due to the mix of software and services and also the hardware we resell from third-party vendors.

For the year, 33% of our revenue came from recurring sources, primarily maintenance; 54% came from product, including software and hardware; and 13% came from services. Last year, approximately 10% of our cyber intelligence revenue was generated from pass-through hardware. Excluding this pass-through hardware, our gross margins in this segment would be similar to our customer engagement business, and we see an opportunity to get there over time. Turning to operating income.

During the fourth quarter, we generated non-GAAP operating income on a consolidated basis of $82 million, with strong operating margins of 25.4%. For the year, our non-GAAP operating income was $226.1 million, with an operating margin of 19.7%. On a fully allocated basis, our customer engagement non-GAAP operating margins were 24.2% and our cyber intelligence non-GAAP operating margins were 11% for the year. You can approximate our non-GAAP fully allocated segment operating margins by distributing our shared-service expenses, which are shown on our 10-K segmentation footnote, proportionately to our non-GAAP segment revenue.

We also present how we estimate non-GAAP fully allocated operating margins in the tables of our earnings release. Our adjusted EBITDA for the quarter came in at $89.8 million, or 27.8% of non-GAAP revenue. For the full year, our adjusted EBITDA came in at $256.6 million, or 22.3% of non-GAAP revenue. Now let's turn to other income and interest expense.

In the fourth quarter, non-GAAP other expense net totaled $2.7 million, reflecting $5.4 million of interest and other expense, net of $2.7 million of foreign-exchange gains, primarily related to balance sheet translations. For the full year, non-GAAP other expense net totaled $18 million, reflecting $21.5 million of interest and other expense, net of offsets, including $3.5 million of foreign-exchange gains, again primarily related to balance sheet translations. Our non-GAAP tax rate was 11.9% for the fourth quarter and 11.5% for the full year. As we've 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-rate jurisdictions.

For the quarter, we had 65.1 million average diluted shares outstanding. For the full year, we had 64.4 million average diluted shares outstanding. These results drove diluted non-GAAP EPS of $1.05 for Q4 and $2.81 for the full year. Now turning to the balance sheet.

As of January 31, 2018, we had $406 million of cash and short-term investments, including short-term and long-term restricted cash. Cash flow from operations on a GAAP basis for the year was $176 million. We ended the quarter with net debt of $417 million, including long-term restricted cash and excluding discounts and issuance costs primarily associated with our convertible debt. Before moving to Q&A, I'd like to discuss our non-GAAP guidance, which we are raising for both revenue and earnings for the year ending January 31, 2019.

Starting with revenue. In customer engagement, we expect mid-single-digit revenue growth of around 6%. In Cyber intelligence, we expect approximately 10% revenue growth. Overall, we expect revenue of $1.23 billion with a range of plus or minus 2%.

From an operating-margin perspective, we expect operating margins in the current year to improve more than 1%, compared to 0.6% in margin expansion last year. The acceleration in our margin expansion is the result of what we've discussed earlier. We expect our non-GAAP quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $5.5 million. Given the volatility in foreign-exchange rates, there 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 11% for the year, reflecting the amount of cash taxes we expect to pay this year. With respect to the new tax reform act, given our large amounts of U.S. NOLs, we do not expect much of a change in our cash taxes going forward. With regard to the new 606 revenue-accounting pronouncement, which is effective for us at the beginning of the current year, we do not see an overall material impact to our results.

And our guidance already reflects the changes required under 606. Based on these assumptions, and assuming approximately 65.9 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 $3.09, a $0.06 increase from our prior guidance. In addition to our annual guidance, we'd like to provide you some color on the progression of the year for modeling purposes. For non-GAAP revenue, in Q1, we expect revenue in the range of $280 million to $285 million.

We expect sequential increases in Q2 and Q3, followed by our usual and seasonally strong Q4. Relative to margins, given our recent momentum, we continue to invest for growth and expect Q1 operating expenses to increase a few million dollars from Q4 levels. In conclusion, we're pleased to finish the year strong and believe we are well-positioned for sustained growth in both customer engagement and cyber intelligence. This concludes my prepared remarks.

With that operator, can we open the line for questions?

Questions and Answers:


Certainly. [Operator instructions] And our first question comes from the line of Shaul Eyal with Oppenheimer. Your line is open.

Shaul Eyal -- Oppenheimer & Company -- Managing Director

Thank you. Good afternoon, Dan, Doug, Alan, congratulations on the quarterly beat, more so on the improved guidance for the fiscal year, second quarter in a row. [Inaudible] so, again, congratulations. Dan, on the heels of the quarterly beat and elevated guidance, what are the underlying drivers that provide you with the confidence to raise the guidance for the second time in a row?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Yes. Thank you, Shaul. So I'd say first is the growth drivers in the market. I think we overall see more favorable demand for actionable intelligence, especially unstructured data analytics and automation.

And that demand is across all the markets we serve. We discussed the growth drivers in customer engagement: simplify, modernize and automate, and moving to the cloud and automation are certainly driving spending for customers. And in cyber, it's the complexity of threats, the shortage of data scientists, and predictive intelligence being a force multiplier. These are all growth drivers that we've been preparing in the company for the last two years, making investments in analytics and in automation to be prepared to address them well.

And I think we started to see the fruits of these investments last year and we believe will continue into this year. Secondly, I think the spending environment that we see is positive, both from government and enterprises and globally. And customer engagement and cyber intelligence are two areas where we are market leaders and we see customers willing to spend in moving into the future. And thirdly, it's our execution.

With the completion of our operational agility initiative that we had last year and the momentum we saw in the business, we feel like we're starting the year in a positive way and ready to execute well on these growth drivers and positive spending environment. So it's really a good place to be right now, where we have a combination of strong driver, good spending, and strong execution.

Shaul Eyal -- Oppenheimer & Company -- Managing Director

Got it. Got it. And a follow-up, if I may. Dan, it appears cloud is coming along very well.

Any fresh thoughts of maybe accelerating or allocating more investments toward that specific activity?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Yes. Cloud is definitely a growth driver in the market. Our customers are more and more interested in moving to the cloud and spending. And usually while they're spending on cloud transition, they're also looking to expand the capabilities of their solution and modernizing.

So when we talk about simplify, modernize, and automate, modernization is generally customers moving into the future, addressing new requirements of customer engagement, such as omnichannel, but also at the same time, moving to the cloud. We are well-positioned with our hybrid cloud strategy to help customers to have a smooth transition. We talked about some examples before, the $5 million contract, where customers moved to the cloud and with our communication neutrality, they were able to choose the communication vendor of their choice that was best for them and at the same time with Verint and expand business application into the cloud. In some other examples, customers like to keep some of the solutions on-prem and move others to the cloud.

So the hybrid cloud is a great strategy. It's a differentiator. And we hear a lot of positive comments from our customers of how we really help them to move at the pace that they feel is right for them. So we grew 25% in cloud, now second year in a row.

So it's clearly a growth driver. It may accelerate. It's hard for us to predict, but it may very well accelerate. It's certainly something we are ready with our entire portfolio in the cloud.

And also from a margin perspective, we are very -- we have developed a scale that allows us to be very efficient. We have now -- we completed an agreement with a cloud infrastructure provider that is a global agreement. So we are well-positioned for global customers to give them cloud infrastructure anywhere they need and also in a very efficient and cost-effective way. So on any level, we feel that cloud acceleration is the right thing for Verint.

Shaul Eyal -- Oppenheimer & Company -- Managing Director

Thank you, Dan.


Our next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open.

Gabriela Borges -- Goldman Sachs -- Vice President

Good afternoon. Congrats on the quarter. Dan, a little more detail on the cyber intelligence business, if I could. You gave some qualitative comments earlier.

But specifically as it pertains to backlog, when you look at 4Q, how did the deal activity translate relative to your expectations? And then when you talk to customers year to date in 2018, maybe you could just shed some light on what are the projects or what are the types of technologies that are catalyzing the spending in cyber intelligence?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Yes. So the growth trends that I discussed in cyber also contributed to backlog. We actually started the year on February 1 with more than two-thirds of the year already in backlog, which is a good place to be obviously and gave us confidence about the year and the spending environment overall. And we also have a very healthy pipeline, and the pipeline grew quite a bit in cyber intelligence.

So that's another data point, that customers really see the data mining solutions that we have with an ROI. So -- while typically you think about security organizations looking to buy technology to improve security, at the same time, they also have to be cost-effective in how they spend money. And data-mining solutions, as we have said before, come with a lot of cyber analysts and data scientists that are needed to operate the technology. And part of what we have been doing is preparing for more automation in our solution to automate some of the functions that were previously performed by humans.

That makes data mining much more effective. They can leverage the capture of data from many different sources, analyzing the data and make it actionable, but making it also very practical in terms of the type of operation they run and how many data scientists they need to employ. And predictive intelligence is another very strong driver, and we invested -- we believe, we have the best solution in the market for predictive intelligence, which is a great force multiplier because it really allows security organizations to prioritize and deploy their resources based on where it's really needed. So there's also great ROI, not just in the security or intelligence operation, but also applying their resources overall.

So we think that the cyber-intelligence market is one that obviously has always been interested in new technology. And as new technology becomes available, our customers are very motivated to spend and use that technology to improve their intelligence collection and security that they provide to -- in their countries to the citizens.

Gabriela Borges -- Goldman Sachs -- Vice President

That's helpful. And a follow-up, if I could, on the gross-margin profile of the company. If I look historically, the ceiling for gross margin has been right around the 70% level. Is there a way to think about longer term, where margins could go or what that ceiling might look like with the positive mix benefit that you're seeing?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Well, part of our operational agility initiative last year was to create a modeling, and we discussed it last year several times, create the modeling for ongoing margin expansion. We have completed this initiative now, so we're driving now toward tomorrow. Let me give you some numbers. So last year, we improved the margin -- operating margin by 60 bps in customer engagement and 90 bps in cyber intelligence.

This year, we're going to accelerate and we expect to improve more than that in each of the segments. Where we have a lot of margin expansion is in cyber intelligence, where we can drive gross margins to above 70% while having OPEX leverage. So we're looking to accelerate the margin expansion to 1 point, point and a half, in cyber intelligence this year and continue to accelerate over time. We -- in cyber intelligence, we really are develop -- delivering data-mining software.

And if you look at our R&D organization, it's basically 99% software engineers. But because of the turnkey model, some of our customers prefer that Verint deliver also hardware. And that's obviously is reducing the gross margin. We see the trend that customers are getting more comfortable to source the hardware themselves.

We also have invested last year in productizing and making it easier for our customers to source the hardware themselves. So as the hardware components comes down and diminishes, we'll see gross-margin improvement. And in addition to the OPEX leverage, we can drive some margin-expansion acceleration over time. In cyber engagement -- sorry, customer engagement, our margin is 24%, 24.2% last year.

And we continue to improve gross margin, which is around 70%, based on cloud efficiencies, that we still have efficiencies that we were looking to drive as well as the professional-services component, which will drive efficiencies. So gross-margin expansion and OPEX leverage also in customer engagement. Bottom line, the margin expansion has been a focus for us, and we're looking this year to continue and grow earnings faster than revenue.

Gabriela Borges -- Goldman Sachs -- Vice President

I appreciate the details. Thank you.

Dan Bodner -- President, Chief Executive Officer, and Chairman



Thank you. Our next question comes from the line of Paul Coster with J.P.Morgan. Your line is open.

Paul Coster -- JP..Morgan -- Executive Director

Yes. Thanks for taking the question. Dan, I feel like we've sort of been here before on the cyber intelligence side with the desire and intent to move toward more of a products orientation, more of a software sale. What's different this time?

Dan Bodner -- President, Chief Executive Officer, and Chairman

I think two things are different, Paul. One is I think the market is readier and we see customers are more interested in doing that. And the second is we made investments over the last two years to make it easier for customers to move to a software model. That investment was in productization in making it easier for the customer to integrate the hardware and the software if they source the hardware themselves.

So I'm not suggesting that I can predict the pace that it's going to happen. But you may remember that we had the same situation with our customer engagement business, where we had about 10% hardware and now it's close to nothing. And we believe that time is right for the cyber intelligence market to expand margins.

Paul Coster -- JP..Morgan -- Executive Director

And why on the cyber intelligence side, are those customers now able to dispense with the need for the pass-through hardware? Is it because they're moving to hybrid cloud and it's just sort of easier to deploy? Or is there something else going on?

Dan Bodner -- President, Chief Executive Officer, and Chairman

So first, some of our products we already sell -- in cyber intelligence, we already sell software model and the customers are comfortable sourcing the hardware and then using either their own IT organization or a third party to integrate software and hardware the same way we do in the enterprise sector. So I think we -- some products, we made more progress because of the nature of the product and investments we made. And other products I think we need to complete that investment to just make it easier. Because the hardware at the end of the day, these are servers, storage, and network components.

And it's really the desire that customers sometimes have to have one throat to choke, so they prefer a turnkey model. And I think over time, they just either do it themselves or they use a local integrator to do this integration. But they don't expect the software vendor to do it.

Paul Coster -- JP..Morgan -- Executive Director

OK. My last question is, you separated these two businesses, recognized that there's limited synergies between the two of them, two different executives leading them, and so on. What is the latest thinking on a complete separation of these two businesses to create shareholder value?

Dan Bodner -- President, Chief Executive Officer, and Chairman

So last year, we were going through our agility initiative. And the main purpose of this was to create better execution in our business. And some of the things we did and we discussed for this improved execution was to strengthen the management teams, to align the compensation plans so the management -- each management team is focused on the performance, to develop more distinct brand identities for customers, but mostly to be more laser-focused on the unique customer needs in each -- of each segment. But the underlying technology that is behind our actionable intelligence vision has always been analytics and automation.

And that technology is really not different in those markets. It's about capturing data, analyzing data, gaining insights, and automating the functions that -- in that process. So where we are right now is -- we completed this operational agility, and we are focused on creating shareholder value through growing both businesses and at the same time, expanding margins.

Paul Coster -- JP..Morgan -- Executive Director

So it's OK. Thank you very much.


Thank you. And our next question comes from the line of Jonathan Ho with William Blair. Your line is open.

Jonathan Ho -- William Blair & Company -- Analyst

Good afternoon. I just wanted to start out with maybe asking for a little bit more color in terms of what you're actually seeing in the cloud transition among your customer base today. Are you actually seeing your customers shut down any of their on-premise infrastructure and move that to the cloud? Or is this for overflow? How should we be thinking about the trends in that space?

Dan Bodner -- President, Chief Executive Officer, and Chairman

So most of our growth today comes from new solutions, not so much shutting down on-prem, moving to the cloud. I did give a couple examples before about customers that we had on-prem that, as part of expansion, they moved also their on-prem solutions. But usually, they would do it as part of a bigger initiative when they're buying more capabilities. So it's still not common to see customers just having something working and one day they just say, we want it moved.

It does happen, but it's not very frequent. Because there's so much customers are looking to do with their budgets that, in most cases, they want to expand and add new capabilities around automation. And at that point, if they decide to move to the cloud, they will drag along on-prem solutions. So the majority of the growth, when we talk about 25% growth in our business, is from customers expanding with new solutions in the cloud.

Jonathan Ho -- William Blair & Company -- Analyst

Got it. And then, just in terms of the 10% of revenue that's maybe pass-through hardware, what should we assume is in the guidance over the percentage that maybe goes away on this side? I know it's relatively low margin, but is there any way you can maybe help us understand what component is already embedded in your guidance?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Yes. So what we said is that the operating margin for cyber intelligence improved from 10% to 11%, and we expect more than 1 point, so more than 12% operating margin in the current year. And that reflects the margin improvement that is partially resulting from the change in hardware. So it's already built into the cloud, into the model that we guided.

Jonathan Ho -- William Blair & Company -- Analyst

Thank you.

Dan Bodner -- President, Chief Executive Officer, and Chairman



Thank you. And our next question comes from the line of Jeff Kessler with Imperial Capital. Your line is open.

Jeff Kessler -- Imperial Capital -- Managing Director

Thank you. Two questions. First, there seems to be a race out there in the predictive analysis area, a lot of companies, particularly who are involved in cyber -- and actually, it's cyber and physical convergence, a lot of companies looking at trying to provide, let's say, a value-added product as you would describe like a force multiplier. To what extent do you believe you have a product that gets you to a point which is still effective but doesn't reach the point of, say, minority -- Tom Cruise in Minority Report, so that some people pulled back from it? There has to be a -- is there a balance here that you've been working on?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Yes. Look, it's -- you're right, it's a hot market, but also there's lots of companies that are trying to participate in this market. I think that we have great technology, we have 1,500 engineers in our -- close to 1,500 engineers across the company that obviously some are more focused on use cases of cyber, some are more focused on use cases of customer engagement. But it's a very high concentration of technology that's focused on predictive intelligence and machine-learning.

So in terms of technology, I think that Verint has the intellectual property needed to solve this problem effectively. But also as you pointed out, and I agree, in many cases, it's not about technology, it's about how the technology is being applied and whether the company has a good understanding of what the customer really needs to solve and what's practical. And that's why part of operational agility was not so much to create more technology synergies around the company. But operational agility was more about the use cases about making sure that we have the domain expertise, that we leverage the customer relationship.

And we've done -- over the last two years, we had a lot of discussions with customers about what do they really expect, not just on the technology, but what are the business problems that they're trying to solve. And I think we're getting very -- we got much better. We got much better at it. So the ability to accelerate growth and margin is really, what you said, Jeff, which is how well can we apply our technology to solve the customer problems, and we certainly are getting better with it.

Jeff Kessler -- Imperial Capital -- Managing Director

OK, second question. You've won a couple of awards this past year for your situational awareness platforms, which are -- which fall somewhat into the physical area. And I'm wondering, as you say you're going to be moving to a more software-based platform in cyber, does that imply that the hardware that is going to be bought for -- hopefully bought by the customers that you are working with integrators or sometimes with consultants, who are also helping them -- your customers to be more comfortable in buying their own hardware?

Dan Bodner -- President, Chief Executive Officer, and Chairman

Absolutely. Part of this is education of the integrators and involving them in delivering the hardware, and that's where we're going. And in some cases, the customer -- the end-user will choose the integrator. And in other cases, they expect us to bring the integrator along.

But that's our model. That's our model. Our value-add is in the software and there are integrators who know how to integrate software and hardware. That's their market and that's where we're going.

Jeff Kessler -- Imperial Capital -- Managing Director

OK. Great. Thanks very much.

Dan Bodner -- President, Chief Executive Officer, and Chairman



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 closing remarks.

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

Thank you, operator. Before ending the call, I'd like to provide some details regarding our upcoming Investor Day. Our Investor Day will take place on Monday, May 14, in Dallas in connection with our annual user event for our customer engagement business. The event will include presentations from management, product demos, and an opportunity to interact directly with Verint customers.

For planning purposes, the event will start at 2 p.m. on the 14th and will end around 6 p.m. For those investors that are interested in staying an additional day, you're welcome to participate in our user conference on Tuesday, May 15. To register, please see the Investor Relations portion of our website.

Thank you for joining us today, and we look forward to seeing you at our Investor Day and other investor events. Have a great evening.


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.

Duration: 23 minutes

Call Participants:

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

Dan Bodner -- President, Chief Executive Officer, and Chairman

Doug Robinson -- Chief Financial Officer

Shaul Eyal -- Oppenheimer & Company -- Managing Director

Gabriela Borges -- Goldman Sachs -- Vice President

Paul Coster -- JP..Morgan -- Executive Director

Jonathan Ho -- William Blair & Company -- Analyst

Jeff Kessler -- Imperial Capital -- Managing Director

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