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Verint Systems Inc (VRNT) Q4 2018 Earnings Conference Call Transcript

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Verint Systems Inc  (NASDAQ: VRNT)
Q4 2018 Earnings Conference Call
March 27, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Verint Systems Incorporated Fourth Quarter 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 will be given at that time. (Operator Instructions)

I would now like to turn the conference over to Alan Roden, Senior Vice President, Corporate Development. 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 real-time during the call, please visit the IR portion of our website at verint.com, click on the Investor Relations tab, and click on the Webcast link and select today's conference call.

I'd like to mention that in addition to reviewing our fourth quarter and annual results and updating our guidance for the current year, we will be reviewing market trends and discussing our actual intelligence growth strategy.

Prior to the call, we issued a press release that includes financial information for our fourth quarter and fiscal year ended January 31, 2019. 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 at verint.com and also on the SEC website.

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 under 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 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, 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 peer companies. Our financial outlook is provided only on 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 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?

Daniel Bodner -- Chairman, President and Chief Executive Officer

Thank you, Alan. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full year results as well as our increased guidance for the current year. The momentum we experienced throughout the year continued in Q4 and we are pleased to have finished the year strong. Our financial results and over-achievement reflects the successful execution of the growth strategy we implemented approximately two years ago, which we have discussed on prior calls. This was another year of accelerating revenue growth and expanding margins with earnings growing faster than revenue.

Our annual results on a GAAP basis were $1.23 billion of revenue and $1 diluted net income per share. On a non-GAAP basis, we achieved revenue of $1.245 billion and diluted net income per share of $3.21. We delivered a 14% increase in non-GAAP earnings with nearly two points of operating margin expansion.

Cash from operations also came in very strong at $250 million, a 22% increase year-over-year.

As that momentum continues, we are raising guidance once again for the current year. Our guidance for the non-GAAP revenue is increasing by $25 million to $1.37 billion, representing 10% growth and acceleration from the prior year. We are also increasing our guidance for non-GAAP EPS by $0.10 the $3.60, representing 12% year-over-year growth.

Let me take a step back and discuss how we have created such strong momentum. Over the last several years, our customers and the market at large have expressed mounting business and security challenges and we've responded by infusing more automation innovation into our Actionable Intelligence platform. We believe that increasing our pace of automation and cloud innovation has further differentiated Verint as the vendor of choice in our markets. We now estimate the size of the Actionable Intelligence markets to be at approximately $10 billion and growing at a double-digit rate.

Verint is one of the industry's strongest research and development teams focused on Actionable Intelligence. With about 2, 000 in R&D out of total 6,000 professionals, we are innovating at an increasingly rapid pace. Our intellectual property is backed by close to 1,000 patents and applications worldwide, of course data capture, unstructured data analytics, artificial intelligence and automation.

Demonstrating our increased focus on automation just over the last 24 months, we have filed for 150 patents related to automation. Our Actionable Intelligence platform service the technology foundation for our broad portfolio across Customer Engagement and Cyber Intelligence. We believe the strength of our platform and the investments we've made in automation and cloud are behind our momentum and positive outlook.

Now, I would like to review our results by segments. Starting with Customer Engagements. Total revenue for the year was $811 million on a non-GAAP basis, representing a 7.5% increase year-over-year. We are pleased with our Customer Engagement momentum and expect revenue growth to accelerate again in the current year to 10%. Our strategy is to help organizations simplify, modernize and automate Customer Engagements to address two important business challenges. We believe these challenges has escalated and have become increasingly critical over the last couple of years, emerging as top priorities for organizations to address.

The first challenge is that, today, people demand better Customer Engagement and express organizations to make improvements to elevate their customer experience. Increasingly, organizations are recognizing this need and are looking for cost-effective ways to respond. A recent poll showed that 71% of boardrooms consider customer experience to be their top metric. Another poll showed that 81% of CMOs expect to compete and differentiate based on customer experience, a much larger percentage than just a few years ago.

The second challenge is that digital transformation is driving an increase in the number of customer interactions, causing organizations to hire and expand their workforce leading to unsustainable cost increases. According to industry research, the number of interactions is currently growing by more than 60% per year. And there are already tens of millions of people employed globally in customer service functions with workforce cost exceeding $1 trillion annually.

Historically, initiatives that we're focused, primarily on customer experience, often resulted in increased operating costs and initiatives that we're focused primarily on efficiencies often resulted in poor customer experience. More than ever before, organizations are focused on balancing these challenges, innovating customer experience and, at the same time, reducing operating costs. We believe the market is at an inflection point looking for new technology to address these escalating challenges.

Based on our customers' inputs, we identified this critical industry challenges early and started to infuse automation throughout our portfolio in response. We leveraged our Actionable Intelligence platform combined with the strong Customer Engagement expertise and today we deliver significant ROI for our customers across the enterprise. Our portfolio helps organizations elevate customer experience, while reducing operating costs and with automation across enterprise to many functions including contact centers, back office operations, digital and mobile, marketing as well as security and compliance.

Our software makes employees more productive, enables an emerging hybrid workforce, in which humans and robots work together, supports more interactions to be handled via self-service, captures the voice of the customer distilling it into Actionable insights and automates fraud and compliance functions. Overall, we believe that our simplified, modernized and automated strategy is differentiated and can drive double-digit revenue growth in Customer Engagements over the long run.

Turning to cloud. I'm pleased to report that our cloud growth rates have accelerated. We ended the fourth quarter with $200 million of cloud ARR on a non-GAAP basis, representing a year-over-year increase of approximately 40%. Based on this strong momentum, we expect cloud revenue in the current year to increase more than 40%. This will drive our cloud revenue to nearly $250 million for the year.

Behind this acceleration is increased market cloud adoption and the strength of the Verint cloud. Our cloud strategy is to help customers transition to the cloud at their own pace. Our entire Customer Engagement portfolio is offered in a hybrid cloud model for maximum customer flexibility and scales from SMB to very large enterprise customer. It's important to note that the $250 million of cloud revenue we expect this year will be generated predominantly from new customers or new cloud deployments.

Just recently, our customers have began to explore the conversion of their Verint Customer Engagement on-premise solution to the cloud. Such conversion could result in a significant revenue uplift for Verint as a dollar of maintenance revenue can convert to cloud revenue at a 2x rates. We currently generate over $300 million of maintenance revenue per year and future conversion to cloud presents a significant opportunity for increased revenue and profitability.

Based on our cloud leadership, increased market cloud adoption, the level of growth we have recently achieved and the potential for our installed base to migrate to the cloud, we're targeting strong cloud growth over the next three years with the CAGR of 30% to 40%.

Turning to our customer base. We have more than 10,000 customers, including more than 85% of the Fortune 100. Our strong customer relationships drive high renewal rates and the opportunity to land and expand with our broad and growing portfolio. During the quarter, we've received many large orders from existing customer and new customers, including many competitive displacements reflecting our strategy to help customers simplify, modernize and automate.

Here are few highlights of recent customer wins: A $6 million cloud order from a leading travel management company looking to modernize Customer Engagement by moving from several on-premises point solutions to the Verint cloud. This large order was a competitive displacements and we believe we were selected due to the strength of our cloud solutions and strong automation innovation; a $6 million order from a leading utilities company. This customer decided to deploy itself to our solutions on-premises and some in the cloud, taking advantage of our flexible hybrid cloud model; a $5 million order from a leading financial services company looking to infuse more automation into its operations. This was another competitive displacements and we believe we were selected due to our automation differentiation; a $2 million cloud order from a leading ridesharing (ph) company, looking to manage its rapidly growing workforce. We believe we were selected due to our ability to address business challenges across the enterprise, including call centers, back office operations and branches with a global cloud deployments; a $2 million cloud order from a leading financial services company, looking to gain customer experience insights. This was another competitive displacement and we believe we were selected due to our ability to capture and analyze voice of the customer across many channels; and, finally, I would like to highlight another Q4 win, which reflects our strong customer relationship and the success of our land and expand strategy. This leading telecommunications company gave us total of $20 million in orders in the year. Of which, a $7 million order came in in Q4.

In addition to our success in the enterprise market, today we generate around 15% of our Customer Engagement revenue from SMB customers. Over the last several years, we've invested in our SMB portfolio and today we offer SMB customers a purpose-built cloud solution designed to address their preferences for ease of deployments and ease of use. In addition, we expanded our partner program with a growing sets of cloud partners that sell our product to both SMB and enterprise customers. Verint partners benefit from our communication infrastructure neutrality open system approach and our strong domain expertise.

Overall, we are pleased with our strong finish to the year, particularly with our cloud acceleration. We're also pleased to be in a position to raise guidance in the current year, as well as provide a three-year outlook for strong cloud growth.

Turning to Cyber Intelligence. Total non-GAAP revenue for the year was $434 million, representing a 10% increase year-over-year. We are pleased with our continued momentum and expect to deliver another year of 10% growth. We're also pleased with the 2% margin expansion we achieved last year and will discuss a long-term targets for Cyber Intelligence margin expansion later in the call.

We live in the world where security threats are becoming more pervasive and complex. At the same time, data volumes are growing rapidly making legacy data mining tools less effective. As a result, security organizations are seeking more advanced data mining software to better detect, investigate and neutralize threats. We believe the Cyber Intelligence addressable market size is about $4 billion and the ongoing demand for advanced data mining software provides the sustained double-digit growth opportunity.

Our strategy is to introduce advanced data mining software that can further automate the intelligence and shorten the investigative processes for our customers, while reducing dependency on large numbers of intelligence analysts and data scientists. Today, we offer organizations a broad solution portfolio across three security domains; Cyber Intelligence, cybersecurity and situational intelligence.

In Cyber Intelligence, we help law enforcement and national security organizations capture a large amount of data from a variety of sources and turn it into Actionable Intelligence to help prevent crime and terror. In cybersecurity, we help government's cyber authorities an enterprise-c source, capture network and endpoint data and identify malware and cyber attacks.

And in Situation Intelligence, we help governments and enterprises capture a large amount of data from devices and databases and deliver Actionable insights to protect people and assets.

Our customer base in Cyber Intelligence is growing. Last year we added 100 new customers and we now have more than 1,000 customers globally across government and enterprise. Today, government customers represents approximately 80% of our Cyber Intelligence revenue. We provide our data mining software to diversified set of 400 government agencies across more than 100 countries. We have long-standing relationship with customers around the world and a significant portion of our Cyber Intelligence revenue comes from repeat business.

The remaining 20% of our revenue comes from enterprise customers. We have 600 enterprise customers across many verticals such as telecom service providers, financial services, retail and critical infrastructure, including many large companies who are leaders in their industries. In Q4, we continue to win many large deals around the world, including recently receiving an order of close to $20 million, two orders around $15 million each, and three orders in excess of $5 million each. We believe our success in winning these large deals in Q4 is due to our ability to anticipate market trends and quickly bring innovative solutions to markets.

We believe the combination of our leadership position and strong market demand for advanced data mining software will enable us to continue to grow revenue at a double-digit rate, supporting our outlook in an expanding customer base across governments and enterprises, providing us strong visibility.

As previously discussed, we're executing a plan for significant margin expansion in our Cyber Intelligence segment and I'm pleased to report on our progress and outlook. Over the last two years, we have invested to transition the business to a more software model. We have already achieved 3% margin improvement over the last two years and expect our margins to continue to expand this year as our revenue shift to more software and less pass through hardware.

Over the next three years, we are targeting an additional 5% margin expansion. driving our Cyber Intelligence adjusted EBITDA margins to more than 20%. Overall, we are pleased with the execution of our Cyber Intelligence strategy, driving strong revenue growth and ongoing margin expansion.

Before turning the call over to Doug, I would like to summarize as follows. We believe our strong results and over-achievement reflects the successful execution of the growth strategy we launched approximately two years ago. With this strategy, we are accelerating our pace of innovation to further differentiate Verint in a market that is increasingly embracing Actionable Intelligence solutions. We are experiencing strong momentum, driven by automation and cloud adoption. And, finally, we believe that our addressable market is growing at a double-digit rates and that we are well positioned for sustained growth and market leadership.

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

Douglas Robinson -- Chief Financial Officer

Yeah. Thanks, Dan; and good afternoon, everyone. Our discussion today will include non-GAAP financial measures, a reconciliation between our GAAP to 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, 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.

I'll start my discussion today reviewing our fiscal 2019 performance and then talk about what we're expecting for fiscal 2020. We finished the year with solid momentum and had strength across the business. Each of the quarters built upon one before and we are well positioned going into the New year.

For the full year, we generated $1.245 billion of non-GAAP revenue, up 8% from the prior year. We experienced strong growth in both of our segments with $811 million of non-GAAP revenue in Customer Engagement, up approximately 7.5% year-over-year and $434 million of non-GAAP revenue in Cyber Intelligence, up approximately 10% from last year.

We achieved expansion of our gross margins with full year non-GAAP gross margins of 66.6%, about a point higher compared to last year. We've experienced that expansion in both segments with Cyber Intelligence full year gross margins expanding 2 points.

For the year, our non-GAAP operating income increased 18% year-over-year to $267 million, driving an operating margin of 21.4% and approximately 2 point expansion. Our objective has been to grow earnings at a rate greater than revenue and we're very pleased with the operating margin improvement we experienced for the year.

Our adjusted EBITDA for the year was almost $300 million, up 16% from last year.

This performance drove diluted non-GAAP EPS of $3.21 for the year compared to $2.81 in the prior year, a 14% year-over-year increase. We are pleased with the earnings leverage we're achieving as we work to expand our gross margins in both segments and also in achieving some cost efficiencies with our operating expenses.

With respect to the balance sheet, at the end of Q4, we had $468 million of cash and short-term investments, including short-term and long-term restricted cash and investments. We had very strong cash flow from operations on a GAAP basis in Q4 of $84 million, resulting in $250 million of GAAP cash from operations for the full year, a 22% increase from last year. The strong year-over-year increase in GAAP cash flow from operations also demonstrates the positive business and earnings momentum we're achieving and speaks to the overall health of the business.

We ended the quarter with net debt of $351 million, including long-term restricted cash and investments and excluding discounts and issuance cost, primarily associated with our convertible debt.

When we look at our fiscal ended 2019 results, you can see the tremendous progress we've made over the last three years in terms of revenue and earnings growth. Looking to fiscal year ending 2020, we see that momentum continuing and are raising guidance to $1.37 billion of revenue, plus or minus 2%, and $3.60 earnings per share at the midpoint, both on a non-GAAP basis.

I would now like to provide you some new metrics to help you understand the momentum we're experiencing, starting with Customer Engagement. In Customer Engagement, in fiscal 2020, we expect revenue growth of about 10% on a non-GAAP basis. This is a higher rate of growth than we've experienced in the past several years, driven in part by an acceleration in our cloud business. We expect our cloud revenue to increase more than 40%, approaching $250 million.

Overall, we expect close to $900 million of non-GAAP revenue in Customer Engagement for fiscal 2020 with the majority of our revenue coming from three sources; cloud, maintenance and contract is already in place as of the beginning of the year. These three components represent about 70% of the annual revenue we expect to achieve and provides us good visibility into the year.

With respect to margins, we believe margins will continue to expand in Customer Engagement and expect an adjusted EBITDA margin of approximately 28.5% for the year. In Cyber Intelligence, in fiscal 2020, we expect revenue growth of around 10% with continuing margin expansion as we continue to shift to more of a software model.

Overall, we expect around $475 million of revenue with the majority of our revenue coming from contracts we already had in place at the beginning of the year, maintenance and some subscription. These three components also represent about 70% of the annual revenue we expect to achieve, providing us good visibility into the year. At this guidance level, we expect an adjusted EBITDA margin of approximately 16.5%.

Before going to Q&A, I'd like to provide some additional input for your fiscal 2020 models. We expect our non-GAAP quarterly interest and other expense, excluding the potential impact of foreign exchange, to be approximately $5.7 million. Given volatility and 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. And for share count, we expect to have approximately 67.5 million average diluted shares outstanding for the full year.

In addition to our annual guidance, we'd like to provide some color on the progression of the year for modeling purposes. For non-GAAP revenue in Q1, we expect revenue to increase around 8% year-over-year to $315 million. We expect sequential increases in Q2 and Q3 followed by our usual of seasonally strong Q4. Relative to margins, we expect earnings per share to increase approximately 14% year-over-year to around $0.60 in the first quarter, driven by continued margin expansion.

When we look beyond the current year, we are targeting sustained double-digit revenue growth and margin expansion over the next three years. In Customer Engagement, growth will be fueled by growing our cloud revenue, which we are targeting at 30% to 40% CAGR, which will enable us to double our cloud business in less than three years. And in Cyber Intelligence growth will be driven by demand for data mining solutions and the transition to a software model, which we are targeting it will take our Cyber Intelligence adjusted EBITDA margins to above 20%.

In conclusion, we will leave demand for our Actionable Intelligence solutions to remain strong and we continue to execute well on our growth strategy with a focus on automation and cloud. With the momentum of our Customer Engagement cloud business and the need for innovative data mining software in our cybersecurity business, we feel we are well positioned and are pleased to be raising revenue guidance to 10% growth with another year of expanding margins.

So, with that, operator, can we please open up the lines for questions?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Andy Miller of Jefferies. Your line is now open.

Samad Samana -- Jefferies -- Analyst

Hi, good afternoon. This is actually Samad Samana from Jefferies. Thanks for taking my questions today. Congrats on a great quarter and strong close to the year and impressive -- I think we are most impressed by the cloud revenue size and the growth forecast that the company gave there. And, Dan, I was just wondering, if maybe you could help us understand what the drivers of that high revenue growth are, first, for new customer additions versus maintenance conversion? And how we should think about the cadence of that opportunity? And I'm also just curious if there is any incentives or any sales with the sales organization to drive that very impressive cloud growth? And then I have a follow-up question.

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yes, yes. Thank you. I'll be happy to explain on cloud. So as we've discussed prior calls, enterprise customers have been interested in a move to the cloud and what we've seen lately is that they've accelerated the cloud adoption and cloud purchases. So what we expect this year, $250 million in cloud revenue is predominantly from new deployments, so either new customers or deployments to existing customers. But the main is conversion, basically has not started yet. We had a handful of customers that converted maintenance revenue into cloud and we expect our maintenance revenue grew last year, we actually expect maintenance revenue to grow this year as well, but we think that the conversion is about to begin.

But our growth this year, we have expect more than 40% with very little maintenance conversion. So it's all new deployments and it's really fueled by our readiness and the market readiness. So, I think the SMB market is -- obviously adopted cloud faster and I spoke about what we're doing for SMB customers and we see that as a growth opportunity, but we see more adoption also at the high-end of the market for larger enterprise customers.

So let me explain more why we feel very strong about our ability to address the customer needs and to help them move to the customer with their own pace. We have a differentiated offering in cloud that is spacing that based on four factors. One is very broad portfolio that is all available in the cloud and the sales force is leading with SaaS first. At the same time, we have a hybrid cloud model to give customers maximum flexibility and, as I mentioned, in some of the large wins that I discussed today we have customers that's clearly prefer to deploy some of our solutions in the cloud and some on-prem and they can actually deploy Verint solution on the Verint cloud, they can deploy it on the partner cloud, or they can deploy it on the cloud or own prem or any combination, and that's a great strength.

We also offer a very strong feature priority between on-prem and cloud, which make it easier to customers to move from on-prem to cloud, and all these are really, really strong differentiated cloud capabilities. In addition, I mentioned few customer wins where we have global deployments, so we are able to deliver cloud in many countries and you're dealing with all of the data privacy and the need to have data centers in different geographies and we have deployed across the globe and our offering also scaled from SMB all the way up to the enterprise.

So, I think that very strong offering. We believe that we are, today, the largest cloud vendor in our market, and remember we don't sell communication infrastructure products. So we've built a scale to be the largest and we also believe that we are the best vendor to provide customers clouds at the pace of our customer needs. So...

Samad Samana -- Jefferies -- Analyst

I think it's very helpful.

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yeah, go ahead.

Samad Samana -- Jefferies -- Analyst

Maybe just one follow-up. As you mentioned, the company has a really broad cloud portfolio and we think that's one of the things that's driving new business and new wins, I'm curious if there's -- which areas within that portfolio of cloud are particularly -- in the hybrid environment, which ones are the most popular to put in the cloud versus the ones that are being kept on-premise?

Daniel Bodner -- Chairman, President and Chief Executive Officer

So I think it's really more by enterprise function. Again, we sell across the enterprise, contact center, back office, digital, mobile marketing and so on. Marketing solution we sell to marketing usually have very, very high cloud adoption already. Well, the solution in the operation, typically large customers tend to do it slower. So it's not so much by product, it's more by adoption of the market, depends more on the market function and also how much IT really wants to move and modernize the organization. But we are ready across our portfolio and we see good traction with basically all our products moving to the cloud.

I want to mention, also, just one more thing just to have a complete response on the cloud dynamics that the maintenance conversion that is still ahead of us. We have seen opportunity to get a great revenue uplift, because a conversion could be typically at the 2x rate, because we basically are helping our customers not just to move the license from on-prem to cloud, but also to host the software for our clients and we have a very efficient hosting infrastructure that is more efficient to clients, which creates a great opportunity for them to save money, while moving to the cloud, and at the same time we get a revenue uplift and also increased profitability.

Samad Samana -- Jefferies -- Analyst

Great. That's very helpful. Thanks, again, and congrats on a great quarter.

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. Our next question comes from Gabriela Borges of Goldman Sachs. Your line is now open.

Gabriela Borges -- Goldman Sachs -- Analyst

Great. Good afternoon. Thanks for taking my question and for all the incremental detail on the cloud opportunity. I had a sit-down for Doug. Maybe, help us understand the implication for your typical perpetual license sale. I'm just wondering how we gauge the dynamic where if incremental growth is coming on via cloud, how do we avoid a scenario of perpetual license falls off more rapidly and you get a little bit of air pocket in the P&L? Thanks.

Douglas Robinson -- Chief Financial Officer

Yeah, sure. We see this is being migration. We expect a lot of customers will continue along with some perpetual licenses. At the same time, other customers are doing more on cloud, but we've modeled that in. We have some scenarios if we look at in terms of conversion rates and we feel comfortable we can absorb any fall off the perpetual license with the growth we have in the cloud going forward.

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yeah. In the same time, we have better margins on cloud than on our on-prem, so we have built at scale to what do we expect this year of $250 million, actually it was margin expansion if you look at the last couple of years, while we are building a cloud business we also are improving our gross margins. And we talked in the past about the fact that you know -- an on-prem implementation is software license and professional services and that's us implementation, multi-tenant size comes with margin of 80%. So the more our customers move to the cloud, we will expect to see continued margin expansion.

Gabriela Borges -- Goldman Sachs -- Analyst

That's very helpful. Thank you. And a follow-up is on the Cyber Intelligence business, maybe just give us a little bit of a sense of how customers are thinking about spending over the course of the year and the type of visibility that you have into that business relative to prior years? Thanks.

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yeah. So, our visibility is strong. We entered the year with approximately 70% of the expected revenue that we have visibility and that's pretty similar to last year, but of course we are expecting another 10% growth this year. So visibility of 70% is strong and it's been our experience over the last couple of years, where we were driving double-digit growth. I think the curse with the market is large -- is clearly demanding a more advanced data mining software. We have customers that are embedded with data and they needs the data mining software to be able to make sense of the data. I can give you an example of the cybersecurity customer that reported to us after we implemented our software in their SOC, Security Operating Center, that they were able to cut the investigation time from one week to four hours in average. And you know that the problem in the SOC today, there is a lot of alerts that require cyber analyst to follow-up on these alerts, investigate and find out if these are just false alarms or real malware and the ability to use data mining software and accelerates the investigation and achieve acceleration of one week to four hours obviously leads to -- being able to make the cyber analysis much more effective in protecting the organization. So there is an ongoing demand. We believe it's a double-digit growth opportunity. The market is growing double-digit and we are well positioned with a strong portfolio to grow at that pace.

Gabriela Borges -- Goldman Sachs -- Analyst

I appreciate the detail. Thank you.

Operator

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

Daniel Ives -- Wedbush Securities -- Analyst

Yeah. Thank you, and congrats again. So maybe you could just talk about the cloud transition in terms on call center, what you're seeing? How the conversations changed with customers, especially over the last three to six months versus where you were a year ago? Thanks.

Daniel Bodner -- Chairman, President and Chief Executive Officer

I think the sales force is still giving our customers the flexibility to choose the deployment that they prefer. From that perspective, I think, we continue to be neutral to customer preferences. But as we just see acceleration in customer adoption in the enterprise area and in SMB, I think what change is that we invested in creating more purpose-built solution for SMB, so we took a product downstream, we made an easier to deploy and easier to use and leveraging a growing ecosystem of partners, cloud partners, I think we are better positioned to address the strong demand for cloud in the SMB space. So acceleration for us in both areas and with our own strength and the ability to be very efficient with delivering these solutions, we're also very competitive in terms of price and in terms of the features, security quality, all the cloud features that are important to our customers in addition to the functionality of the application.

Daniel Ives -- Wedbush Securities -- Analyst

Got it. Okay. And when you're thinking even from a recurring revenue, from visibility, just given what's going on the model, how should we think about that from, like, an ARR perspective, increased visibility, maybe, in the model that we're seeing over the next 12 to 18 months, should we use to measure that or otherwise we should think about the business from a high level in terms of that visibility stream?

Douglas Robinson -- Chief Financial Officer

So. No -- yeah, you can certainly measure that. We have recurring revenue of approximately 60% and improving from last year. And with the cloud acceleration that we see and we gave a CAGR of 30% to 40% over the next three years, our recurring revenue would be approaching 70%, so we believe that some enterprise customers, we still prefer on-prem deployments but we clearly think that we are moving with much faster growth in cloud over the next few years that will improve recurring revenue. And, again, we think that this growth will partially come for maintenance conversion, but that's going to take some time and we certainly see a lot of new deployments as we saw so far that will be cloud deployments. And of course if the maintenance conversion is going to happen faster, then we have an upside opportunity.

Operator

Thank you. And our next question comes from Hugh Cunningham of Oppenheimer. Your line is now open.

Hugh Cunningham -- Oppenheimer -- Analyst

Hey, guys. Thanks for taking my question. I want to beat this to death, but on the cloud side it seems like the -- what we considered a concern about security on the cloud, that concern on the part of your customers has gone away and I'm wondering is there anything else that is holding customers back? And then on your side, it seems like you're maintaining sort of a neutral stand for your customers, giving them what they want, but are you going to maybe shift or tilt your approach a little bit in the future toward, maybe, pushing cloud more?

And then, finally, on the cyber side, you've seem so much more confident on Cyber Intelligence now and I think Doug mentioned margins above 20%. Well, I think it's three years out, but margins ultimately above 20%. Did I hear that right? And, one, I think that's higher than you used to talk about? And then specifically on the cyber side, what are you seeing in emerging markets? Are the emerging markets showing on continued signs of strength, any concerns or what's happening there? Thanks.

Daniel Bodner -- Chairman, President and Chief Executive Officer

So, yes, you heard right. The number 20% and, of course, those if you are able to see the slides on the WebEx, I think we make it also very clear there, but let me start with the cloud question and then we'll give some more details on Cyber Intelligence. So in terms of market adoption in security, there are -- as I mentioned before, there are customers that we believe, for many, many years to come, will still want to host solutions in their own data centers, but because of security and other reasons. So we don't think that 100% of our customers will transition to the cloud, but we see obviously a growing number of customers are comfortable with the security levels that we offering. And, yes, we have invested quite a bit in providing a high level of security to our customers over time.

So I think that pushing our customers is not a good idea, but I think the customers don't want be pushed, they want to be led to understand the benefits of cloud. I think that we are able to show them that some of the concerns they have are no longer real concern and at the same time some of the quality and cost efficiencies that we've introduced as we create more scale, we're able to pass some of these saving also to our customers. So, I think, we can help customers to get more comfortable in their journey to the cloud and do it faster, but we don't really need to push them there. These are very large companies and long-standing customers, we still have land and expand opportunity, they're buying more of our portfolio and I think they really value that we are a trusted partner overall.

We -- just to kind of summarize on these points, our projection for this year for more than 40% cloud growth would -- does not require further pushing of the customers, it's really based on the strong ARR that we've finished the year and based on projection of continue to behave the same way and we believe that our cloud adoption will get better over time. So, hopefully, that that answers the cloud question.

So, now, let's get some more details on Cyber Intelligence. We are discussing today with more confidence the margin expansion, because we've made investments over the last two years to transition our product to software model and make it easier for our customers to buy the software and provide the hardware -- the hardware themselves go through integrators. We've mentioned before that this is both an investment that we need to make in our products, but also it's market adoption. And, by now, we spoke to a lot of our customers and explain to them the benefits and we see that they really like the direction. We also have 3% margin expansion over the last two years and that's why we are comfortable to give today three-year targets for additional margin expansion of 5% over the next three years.

So for the number 20 -- 20% is, we have finished the year with 15.5% EBITDA margin in Cyber Intelligence and we expect to be over 20% within the next three years, so that's the margin expansion. It's really -- it's consistent with what we explained before that we used to sell hardware, that our customers prefer to buy the software and the hardware together from Verint and that we are in a transition to shift the past -- these past two hardware that really we don't make and we don't really in the business of filling hardware. So we're shifting that away and that's -- replacing that with, obviously, higher margin software revenue that overall increase our gross margin and EBITDA margin.

Hugh Cunningham -- Oppenheimer -- Analyst

Sure. And you successfully executed a similar transaction, I think, or process on CE, I might -- final part of my question, Dan, was on the emerging markets?

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yeah. So, we have a very diversified customer base now. We mentioned that we added 100 customers last year, more than 1,000 customers, about 400 government agencies, different government agencies, so on average four agencies per country. Obviously, some countries more, some less. But on the government side, we feel it's quite diversified -- of course many agencies in many countries and then we have 600 customers in enterprise and enterprise is going faster. So we are getting more scale and more densification in our Cyber Intelligence business. We do not see any issues with emerging markets right now that cause us to be concerned and we face strong demand and strong pipeline across the world.

Hugh Cunningham -- Oppenheimer -- Analyst

Thank you, Dan.

Operator

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

Jeff Kessler -- Imperial Capital -- Analyst

Thank you. I have a question here, and I'm going to get it out slowly, because it's kind of complicated. With the amount of new sensors that are out there either that range from highly sophisticated sensors at the high-end down to do-it-yourself sensors at the residential level, the amount of information and data that is going to responders as well as those who are out there to analyze this data is just growing at an exponential rate overwhelming the ability of, at the home level, police departments to respond and, at the larger level, obviously, discussions with regard to civil -- public/private partnerships and how much they can handle. What are you doing? And what opportunities do you see in the ability to provide responders with Actionable Intelligence, whether it's at very low level or at the -- obviously at the high level where there has been some backup in civil security types of programs, simply because they don't have either of the people or they don't have the budgets to handle the amount of data that they're dealing with?

Daniel Bodner -- Chairman, President and Chief Executive Officer

Yes. We refer to this as a data mining software for the IoT, Internet of Things, because they are more and more, like you said, sensors devices, but there is more and more devices connected to the Internet that generates data and the ability to collect the IoT data and apply data mining software, which is basically analytics and automation is really at the core of trying to bring insights and do more security with fewer people.

So we have, for example, a global semiconductor company with facilities all over the world that recently became a customer for situational intelligence and in this case we are helping them to collect data from the IoT and also fuse that data with their own databases that they have about their employees, their vendors, their access authorities into different parts of the facility and try to -- it will bring those insights to identify issues related to either people safety or protection of assets.

So the whole situation intelligence business, I think, is also an early stage opportunity for Actionable Intelligence and one that, I think at this point, just a leading -- the leading companies in their industries are starting to really adopt this. And, again, for those of you look at the slides that we have in conjunction with this call and they will be obviously posted, you can see that we list some of our Cyber Intelligence enterprise customers and they are very large companies and leaders in their industries.

Jeff Kessler -- Imperial Capital -- Analyst

Okay. A follow-up to that is, in the ability -- what is -- right now, we see that there is probably about 13%, 14% hiring going on just for IT personnel. How are you -- particularly on the -- what I would call your cybersecurity, it's going to call cyber -- cyber physical capabilities, what are you doing to get more revenues out of larger customers and particularly in areas like critical infrastructure to protect -- to involve them in the -- you want to quote that physical nature of making sure that that compliance is dealt with in HIPAA rules financial regs regarding protecting the cyber side of it, how do you get extra revenues from helping them on the -- you want to quote the quasi-physical area of making sure that data is secure?

Daniel Bodner -- Chairman, President and Chief Executive Officer

I think that a lot of these companies are building SOC for physical security that are becoming more and more similar to the cybersecurity SOC, because they can have -- as you said, they can hire people and have this people all over the place, they want to bring the data into a centralized operating center and in that center they want to make the data into Actionable insights and a force multiplier, so they can do more with fewer people. This is exactly the sweet spot for our Actionable Intelligence offering and the adoption of this technology, I believe, is still in the early stage in the physical security market. But in our Cyber Intelligence business, I mentioned that we are operating in three domains; the Cyber Intelligence, the cybersecurity and the situation intelligence, and this opportunity that you're discussing, Jeff, is around institution intelligence for physical security and critical infrastructure, and we have a strong solution in this area, as you know, and I think this market adoption will see also acceleration of our growth rates in this domain.

Jeff Kessler -- Imperial Capital -- Analyst

So you're seeing this as the infancy of this area?

Daniel Bodner -- Chairman, President and Chief Executive Officer

I think this area was more focused on deploying people and sensors and devices and much less interested in advance data mining software. I think that the governments and cybersecurity authorities were more advanced in understanding the power of intelligence. And, yes, this is infancy in terms of the intelligence situation -- bringing intelligence into the situational awareness market, what we call situation intelligence is still in an early stage.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you very much. I appreciate it.

Daniel Bodner -- Chairman, President and Chief Executive Officer

Sure, Jeff.

Operator

Thank you. And, ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Alan Roden for any closing remarks.

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

Thank you, operator. Before ending the call, I'd like discuss multiple upcoming investor events. On April 2nd and April 3rd, we're doing Investor Meetings in the Mid-Atlantic region and Midwest region hosted by Goldman Sachs. On April 8th and April 9th, we're doing Investor Meetings in Denver and Kansas City hosted by Wedbush. On April 9th and April 10th, we're doing Investor Meetings in San Francisco, Los Angeles hosted by Jefferies. And in May we will be participating in the Jefferies Software Conference in Los Angeles and the J.P. Morgan Technology Conference in Boston. We look forward to seeing you at these and other investor events. Thanks for joining our call today, and have a great evening.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.

Duration: 60 minutes

Call participants:

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

Daniel Bodner -- Chairman, President and Chief Executive Officer

Douglas Robinson -- Chief Financial Officer

Samad Samana -- Jefferies -- Analyst

Gabriela Borges -- Goldman Sachs -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

Hugh Cunningham -- Oppenheimer -- Analyst

Jeff Kessler -- Imperial Capital -- Analyst

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