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Verint Systems Inc (VRNT) Q4 2019 Earnings Call Transcript

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Verint Systems Inc (NASDAQ: VRNT)
Q4 2019 Earnings Call
Mar 31, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Verint Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your host, Alan Roden, Senior Vice President, Corporate Development. Sir, please go ahead.

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 section of our website at verint.com, click on the Investor Relations tab, click on the webcast link, and select today's conference call.

I'd like to also 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 more detailed discussion of these and other risks and uncertainties that 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 31st, 2020, which will be filed today, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures, as we believe investors focus on these measures in comparing results between periods and among peer companies. Please see today's WebEx slides, our earnings releases in the Investor Relations section of our website at verint.com for a reconciliation of non-GAAP financial measures to GAAP measures.

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

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

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Thank you, Alan. Good afternoon, everyone, and thank you for joining us today. Our thoughts and prayers go out to everyone on this call and their families during this unprecedented time in our life. Today we will discuss the steps we're taking to operate through the COVID-19 pandemic and provide updates on three topics; our Customer Engagement results and strong cloud momentum; our Cyber Intelligence results and software model transition, which is ahead of plan; and the progress we are making toward our separation into two independent public companies.

Our top priority is ensuring the health and safety of all our employees around the globe, as we continue to serve our customers. Our employees remain fully engaged working either from home or from offices that have been authorized to remain open. We've made modifications, and we believe our business continuity plan is working well. We're working closely with our global base of customers to help them navigate the COVID-19 challenges, including the urgent need for advanced analytics to gain disability into their changing environment. Our engagement with customers is very high, and we are helping them through a variety of programs. I will discuss few examples later as we review each business.

Now, let me review our fiscal 2020 results. Our annual results on a GAAP basis were $1.3 billion of revenue and $0.43 of diluted earnings per share. On a non-GAAP basis, we achieved $1.34 billion of revenue and $3.59 of diluted EPS. On a constant-currency basis, non-GAAP revenue increased 8.3%. Non-GAAP EPS increased faster than revenue at 12% year-over-year. This was our third consecutive year of double-digit earnings growth on a non-GAAP basis. We are pleased with our full-year results, the growth we experienced over the last three years and the significant progress we are making with our strategic objective.

And now, let's review our Customer Engagement results. Last year, we experienced a notable shift in cloud adoption by large enterprises. And during Q4, we received many large cloud orders consistent with this trend, including an $18 million cloud renewal from a leading technology company and $8 million cloud order from a new healthcare customer, where we displaced an on-premise solution from another vendor, a $5 million order from an existing insurance customer that is migrating from Verint's on-premises solution to Verint's cloud solution, and multiple $3 million plus orders from customers that are expanding their cloud deployments.

Looking back at cloud adoption in our industry, much of the initial adoption was driven by SMB customers, and we believe that adoption by enterprise customers has been accelerating. Our customer and partner composition make us uniquely positioned to help both SMB and large enterprise customers, and we expand the mix of our business to continue shifting toward the cloud.

Verint offer the highly differentiated portfolio for large enterprise customers, and I'm pleased to share that the Social Security Administration selected Verint solutions for large projects, including $35 million in perpetual software licenses, plus services and supports to be delivered over several phases. The project award was initially announced by the Social Security Administration in July last year, and we had expected to begin recognizing revenue in fiscal 2020 Q4. Due to appeals, the start of the project is being delayed, and we now expect it to contribute to revenue in the current year.

Customer Engagement revenue last year increased 8.7% on a non-GAAP constant-currency basis, compared to the double-digit growth we expected without delay of the large project. Timing aside, we believe Verint selection by the customer for these large projects is a testimony to Verint's market leadership and our ability to win small, medium and large deals.

Growing cloud demand from large enterprises is evidenced by 93% year-over-year increase in deals with cloud TCV greater than $1 million. In response to this increased demand, we revised our commission plans to align our sales force with a Cloud First strategy. We've also started the SaaS conversion program to help our installed base of a lot of on-premises customers migrate to the cloud. We are currently generating more than $300 million of annual support revenue, which we expect to migrate to the cloud over time with uplift.

In addition to incentivizing our direct sales force, we are helping a growing channel partner network to offer cloud solutions to both the SMB and enterprise markets. We believe the reason we have become the partner of choice is our differentiated cloud solutions and our agnostic strategy. We believe that improved market adoption and the steps we've taken with our sales force and partner network will continue to drive our cloud growth.

To measure the progress toward the completion of our cloud transition, I would like to review four key cloud metrics. The first metric is non-GAAP cloud revenue growth, which came in at 46% in fiscal 2020. The second metric is new SaaS ACV growth, which came in at a strong 70%. The third metric is new perpetual license equivalent bookings, which we introduced last quarter to normalize booking growth for the cloud mix. In fiscal 2020, we achieved 7% growth on this metric, compared to the 10% we had expected with the large project. The fourth metric is the percentage of software revenue that is recurring. This metric measures how close we are to completing our cloud transition. And we are pleased to report that in fiscal 2020, this metric increased approximately 400 basis points to around 75%.

Looking at other companies that have already completed their transition, we believe we will substantially complete our transition within the next three years with a significant majority of our software revenue coming in as recurring revenue. This transition presents Verint with many long-term benefits, which Doug will discuss later, and we will continue to report these metrics going forward to provide visibility on our progress.

Now, let's spend a few minutes discussing the COVID-19 situation in our Customer Engagement business. Our customers are facing pricing issues as a result of COVID-19, including the urgent need for advanced analytics for improved visibility into their disrupted operations addressing the increase in self-service interaction volumes and managing the workforce new work-at-home dynamics.

Here are a few examples of how Verint solutions are helping our customers today. An example for advanced analytics is the Centers for Disease Control and Prevention or the CDC, a long-standing Verint customer. Our solution helps the CDC to collect and analyze interactions regarding COVID-19. And as you can imagine, the CDC has recently experienced a huge spike in website traffic, and Verint analytics helped them drive COVID-19 insights. An example for self-service is the work we are doing for our healthcare customers to help them [Phonetic] respond to high volumes of interactions in their self-service platform.

We enhanced our virtual agents with artificial intelligence, expanding the language library to better understand and automatically respond to questions specifically related to COVID-19. And an example for managing the increased work-at-home dynamic is a financial services customer that recently shifted to work from home and need advanced analytics to ensure compliance and gain visibility to the performance of their workforce. Over the last few weeks, our customers initially focused on deploying communication infrastructure to facilitate work from home, and now they are shifting their focus to analytics, productivity and compliance tools. Verint is well positioned to help them achieve mission-critical objectives.

Turning to Cyber Intelligence. We finished the year strong with multiple large orders in Q4, including an order for approximately $15 million, an order for $10 million, and five orders for approximately $5 million dollars each. We believe these large orders reflect ongoing demand for data mining solutions and strong competitive position with a global set of customers across more than 100 countries around the world. For the full year, we delivered 7.7% constant-currency non-GAAP revenue growth and a 13.1% increase in non-GAAP estimated fully allocated gross profit. Our transition to a software model is significantly ahead of plan, and is driving double-digit growth in our gross profit.

I would like to discuss the benefits of our software model transition. Historically, security organization purchased customized solutions incorporating software, hardware and integration services. This project-based approach resulted in close systems, limiting the pace of innovation, as upgrades were complex, costly and time-consuming. Today, we see our customers purchasing software solutions that are open, faster and easier to deploy and can be refreshed more quickly.

Over the last few years, we have shifted from a predominantly system integrator model to a software model, and are deriving less revenue from low-margin hardware and services. Our non-GAAP estimated fully allocated gross margins have improved over the last three years from about 60% to 62% to almost 66% last year, and we expect our gross margins to continue to expand over time.

Now, let's spend few minutes discussing the COVID-19 situation in our Cyber Intelligence business. Our customers are responsible for maintaining law and order in terms of fees and in terms of crisis. In the current environment, we've been asked by governments around the world to leverage our data mining software to help them address use cases directly related to COVID-19. Here are a few examples. A law enforcement agency responsible for quarantine enforcement asked for our help to efficiently monitor and enforce quantities from a centralized control center. Leveraging our facial recognition analytics with our security operation center solution, we're helping them ensure public safety by remotely managing the quarantine.

Another example is a government agency using our data mining software to analyze the internet and social media traffic for signs of greater criminal and terrorist activity in this time of increased uncertainty in their country. Sustained COVID-19 crisis can potentially lead to increased crime and terror all over the world, and we are proud to help our customers make the world safer.

Turning now to our plan to separate Verint into two public companies. Since our last earnings call. We've made significant progress across all tracks. On the tax side, we've met with the tax authorities in both the US and Israel, and our tax ruling process is under way. On the financial side, we've begun to prepare the required carve-out financials for Cyber Intelligence business. On the public reporting side, the transactional and SEC documents that are required to effectuate the spin are being drafted. And on the IT side, we've begun to execute the infrastructure and application separation plan. Overall, at this point, we are on track with the separation, and we'll continue to update you on future earning calls.

And now, let me turn over to Doug to discuss financials in more details. Doug?

Douglas Robinson -- Chief Financial Officer

Yeah, thanks, Dan. Good afternoon, everyone. As Dan discussed earlier, fiscal 2020 was a successful year for our cloud transition with strong growth across every key cloud metric. This is a new dashboard for our Customer Engagement business that we introduced last quarter, which includes our full year and Q4 results and can be found on our IR website. It includes all the key metrics for our Customer Engagement business, which we believe are helpful to understand the performance of our business as we go through the transition. Overall, we believe that the adoption of cloud is accelerating at large enterprises and if the changes we've made in our business position us well for continued success with our cloud transition.

We expect to substantially complete our move to the cloud and customer engagement within the next three years, and we believe the transitional benefit us in many ways. First, our move to the cloud will enable us to innovate faster for our customers. Second, a subscription model will make it easier to sell our software as it aligns with today's customers buying preferences. Third, it increases the lifetime value of each customer relationship. Fourth, it will help us drive greater adoption of our portfolio. And last, our visibility is increasing as a recurring revenue growth.

Turning to Cyber Intelligence. As Dan discussed today, fiscal 2020 was a successful year for our software model transition. This is a new dashboard for our Cyber Intelligence business that we introduced last quarter, which can also be found on our website. Similar to our Customer Engagement dashboard, it includes all the key metrics we believe are helpful to understanding the performance of our Cyber Intelligence business, as we go through our software model transition.

Overall, I'm very pleased with the progress we've made in fiscal 2020, particularly, with our 13% increase in estimated fully allocated gross profit, which I believe is a key metric to focus on as we go through our software model transition. The move to a software model in Cyber Intelligence will benefit us in many ways; first, faster innovation and software refresh cycles for our customers; second, greater competitive differentiation; third, higher gross margins; and last, higher operating margins.

Turning to our balance sheet. In Q4, Verint reached a milestone with our total assets exceeding $3 billion. Today, we have a very strong balance sheet with more than $550 million of cash and short-term investments and less than $450 million of net debt. Since our last call, we completed half of our $300 million stock buyback program, repurchasing $150 million of stock overall. Overall, our net debt to adjusted EBITDA ratio is approximately 1.4 times, a low level of leverage for our financial profile. All these numbers exclude the $200 million of proceeds we expect to receive from the first tranche of the Apax investment once closed.

In addition to a strong balance sheet, we believe that Verint's Customer Engagement and Cyber Intelligence Solutions are mission critical to our customers, and then Verint will be well positioned in the market in the event of a recession. In Customer Engagement, the majority of revenue comes from large enterprises concentrated in the financial services, healthcare, utilities, technology and government verticals. In total, more than 75% of our revenue comes from these verticals with less than 5% coming from the hospitality and travel industries. Our solutions help organizations remain compliant, reduce operating costs, eliminate fraud, which are all important objectives in both good and bad economies.

Furthermore, today around 75% of our software revenue is recurring. In Cyber Intelligence, we have customers across more than 100 countries with more than 75% of our revenue coming from government agencies, and the rest from large enterprises. Our customers help keep the world safe and are responsible for maintaining law and order in times of peace, as well as in times of crisis.

Turning to our outlook, we have been closely following the COVID-19 crisis. Considering the rapidly changing conditions arising from COVID-19 and uncertainty around its impact, we are unable to provide guidance for the current year at this time. Long-term, the growth drivers in both Customer Engagement and Cyber Intelligence are intact. Near term, we remain focused on our Cloud First and software model strategies.

With that operator, can we open up the call for questions?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Shaul Eyal of Oppenheimer. Your line is open.

Shaul Eyal -- Oppenheimer -- Analyst

Thank you. Good afternoon, guys. So, Dan, we totally understand that no one crisis -- financial crisis, global crisis, no one crisis is similar to it's prior. And if someone, who has already led a company through the 2008-2009 crisis, and I recall at that time, you could even add on top of that, that the parent company's issue that also had an impact on Verint. What are the puts and takes? Are you taking a super-ultra conservative stance here in pulling annual guidance, despite what should be improved visibility that we had seen over the course of the past few years, given the cloud adoption? Model has been improving, also from that perspective, which is different from what we had seen, let's say, 11, 12 years ago. How should we be thinking about it?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah, good question. So no one knows if we are headed to recession. So I'll give you some of the facts. First, we entered the year in February with a strong outlook and good coverage for 7% revenue growth in both segments. In Customer Engagement, visibility improved now with 75% of the software revenue being recurring, and in the Cyber Intelligence, visibility also improved with close to 75% of our targets already in product backlog or in recurring revenue. So obviously this is one data point.

When we look at the first two months, and today we are completing the first two months of our Q1, booking in February and March, it's actually a head year-over-year in both segments. But obviously, the third month of every quarter is a much bigger month. So things are changing day by day. There is clearly short term restrictions that our customers are placing on travel into their sites, and obviously travel restrictions that we have with our employees. And we believe that it's prudent to basically take the situation day by day and not to provide guidance at this point.

Shaul Eyal -- Oppenheimer -- Analyst

Got it. And I had a follow-up either Alan and Doug, who want to take it. As we think about the cloud contribution, it was more of a flattish performance this quarter. Is it strictly because of some missing contribution out of the social security related contract or is there anything else associated with that? And also, could you talk a little bit about some of the geographic trends you're seeing within the overall business environment? Thank you.

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. So I'll take it. So in Q4, cloud revenue increased 28% and for the year, it was $242 million with 46% growth for the year. And we know that cloud revenue consist of bundled SaaS and unbundled SaaS the way we offer to our customers. And we have a very strong cloud booking growth so that nice 70% [Phonetic] growth in new cloud ACV. And also a big increase in a number of large contracts TCV more than $1 million. We had 93% growth in large contracts, which is a very good signal that enterprise market is also adopting cloud, and obviously, the vast majority of our revenue is in the enterprise market, while we also play in SMB that's still a small part of what, of course, we do.

And we think that potentially, cloud will be accelerating as a result of the COVID-19 dynamics. We currently target to substantially complete the cloud transition in three years. But what we see now is customers are certainly finding it easier to update and upgrade into cloud because of all the physical access restrictions, so that could be potentially accelerating the cloud transition.

In terms of the geographical distribution in Q4, APAC and EMEA, we're on target. So it's only the Americas that was below target. And as we discussed before, we had the expectation that the Social Security Administration will contribute to Q4, and this project has been appealed. So it was actually awarded in July last year. And then following an appeal, we expect this to be finalized in Q4 in January. It was again reawarded by the Social Security Administration in March -- in early March, but it's going through a second appeal, and it's not quite done. We do expect it to be completed, and that we will, kind of, decide where we will get this revenue this year.

But we didn't see any impact of that in Q4 in APAC, although, we started to feel the corona dynamics in APAC already in Q4, but it was late in Q4. We believe that there are lagging effect between when the pandemic is causing restriction and where there is actually potential impact on the business.

Shaul Eyal -- Oppenheimer -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Daniel Ives of Wedbush. Your line is open.

Daniel Ives -- Wedbush -- Analyst

Yeah, thanks. So maybe just a bit of a follow-up. But, look, I think everyone understands unprecedented uncertainty. But to that point, why not you guys provide some framework in terms of ranges around guidance? I just wanted to understand that. I mean obviously, every uncertainty in deals can move around just give what we're seeing. I guess, just to maybe drill into that point, was that a thought process in wire right now? Thanks.

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. So we see the situation is changing by the day. We are -- as I mentioned before, we're very active right now with our customers. They are calling and asking for help. And we help them to adjust to the COVID-19 situation by using our analytics and adjusting it to apply to the current situation. And there is all kind of request that we address on both sides, on the security side as well. And the sales processes are ongoing. But it's very difficult at this point to predict whether there's going to be any impact going forward. The situation is changing by the day. Nobody knows how long it's going to take, including our customers.

And while, as I reported, February and March from a booking perspective, we're good. It's very difficult to look at the focus of the sales force and to put probabilities on whether this will be closed or pushed and for how long and rather than try to predict and then change it on a daily basis. We think that, again, it's more prudent not to give guidance. We also a little bit of the head of the cycle here, because we are now reporting Q4. So everything has started to change quickly over the last few weeks in the US and also in other countries -- every countries in different cycle. We already see some countries that already flattened the curve. We are kind of close to that point, and we see some countries that are early. So the impact is very different and trying to predict all that in a way of guidance we just felt is not responsible.

Daniel Ives -- Wedbush -- Analyst

Got you. And just maybe -- I mean for Doug. Obviously, you had an uncertainty in not giving guidance and just the environment. Just maybe talk about, how we should just think about things in terms of no cash flow profitability margins to make sure that despite some of the volatility on top line at least preservation from a margin perspective in cash as much as possible, some of the things you're doing? Thanks.

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. So, Doug, maybe you can give some more visibility into how we think about the scenarios. You can see that Q4, we had a very strong GAAP cash from operation. We actually grew cash in Q4 20% and for the year, we generated GAAP cash from operations of $240 million, which is 100 -- 10% growth for the year -- year-over-year. So we are generating cash, but Doug, please provide some more color on how we think about the impact of COVID-19.

Douglas Robinson -- Chief Financial Officer

Yeah. Sure, Dan. Yeah, we had a great cash here in fiscal 2020. Last couple of years, we've grown over $200 million in cash. Going into this year, we expect it to be another good cash generation year. Things are looking a little different right now. But we've got about 5 -- over $550 million of cash today on the balance sheet. So I think we're well positioned going forward with liquidity. We'll keep an eye on things and try to run decent margins and just, kind of, work at month by month as we go through the year in the near term here. But we do feel very good in terms of our liquidity and the current cash position.

Ryan MacDonald -- Needham & Company -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Dan Bergstrom of RBC Capital Markets. Your question please.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Yeah. Hey, thanks for taking my question here. You've talked about this a little bit, but with the Social Security Administration deal, great win by the way. Could you drill down into a little bit? What will you be providing them? How should we think about the deployment stages? And then what does delayed by appeal mean? Is that unusual or is that just a part of government contracts?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. Okay, so the Social Security Administration is looking to modernize their operation and put out an RFP, and there were a number of bidders. Basically, last July, a Verint partner was awarded system integrator, who is responsible for very large -- this very large project. So when they were awarded, they bid it as a pretty [phonetic] normal process. Other bidders have the right under the federal regulation to appeal. And the government decided to rebate, so all the bidders had an opportunity to resubmit proposal, which they did in early Q4. And we expected a partner to win, and we expected revenue to be in Q4. And what happened is that appeal to closure. Our partner did win again.

And -- but there was a second appeal. And at this point, we don't know how long that second appeal will last. But we do expect that -- the Social Security needs this type of technology, and our expectation is that we will eventually will be under contract. The contract is a perpetual software license. So we talked in the past about our transition to the cloud and that we expect it to substantially complete in three years. But we do have very large customers that we believe will decide to remain perpetual. And in this case, this is a perpetual contract. But it does have, in addition to $35 million of software, which is many pieces of our portfolio, it has services over several years, so it's a much bigger contract. And we expect it to contribute for quite some time.

In terms of the phases -- you asked about the phases, this is something that obviously the government decide and they can change their mind. We think that they need this technology. And obviously, in this environment, Social Security is getting a lot of calls, but if -- when we look at our Q4 forecast, we had a range that we focus at revenue from Social Security, similar to how we do with all other large deals. And we have many other deals that are large and that we announced an $18 million deal that we received in Q4. So this is very typical when we focus large deals.

So as we look back to Q4, they -- a number of large deals in the forecast, and some came in exactly within the expected range and some were pushed out, and this delay for the social security deal was clearly the largest single delay. And I'd like to point out that, if the FSA deal came in on time, we would have achieved 10% growth in new perpetual equivalent booking. We reported 7.3%, and obviously, that's a very important metric to measure the true growth of booking in a mixed cloud and perpetual environment. So this is a substantial deal that would have brought us to the 10% guidance that we gave. And while the deal slipped out of Q4, it is a great deal for Verint. And the award is a testimony that we are very differentiated competitively for large enterprises.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Great, Dan. Thanks. Very helpful. And then, speaking of the cloud, I believe you can gauge a couple of spot sales teams with the idea of pushing customers along, helping with the road map to the cloud. Just curious what they're hearing in customer conversations, and then, any change in customer preference for the cloud? Thanks.

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. So very clear, last year, the number of large deals over $1 million TCV gave us the complete confidence that the enterprise market is now ready to move to the cloud, and we engaged our customers in many conversation, including conversion of their existing installed base to the cloud or adding new capabilities. What's interesting is that, when we engage customers in conversion, usually, that's a good opening to discuss additional software module that we can add, and it's a natural time to expand.

So we adjusted the sales force behavior by adjusting the commission plan and giving them accelerators on cloud deals. So we clearly set the behavior of the sales force toward Cloud First and now our customers are more inclined to buy cloud. And that's why we saw a very strong increase in our recurring revenue. There was an increase of 400 bps in software revenue that came in as recurring, which is obviously very strong increase.

So the question is, how the situation with corona is going to impact customers? It's hard to tell. It's really too early. But we clearly see customers now seeing the benefits of being the cloud when there are restrictions on physical access to the office. That makes it easier to change the software into cloud. And as we discussed before, we have upgraded analytics with language models that are specific to the COVID-19 situation to help customers understand what our -- what their customers are calling about, and how they can improve response and shorten calls and gain productivity of their workforce and also improve the customer experience at the same time. So all that is obviously easier to do in the cloud, when there is travel restrictions.

We understand that the travel restrictions will be lifted at some point, hopefully, soon. So I can't say if this is going be a everlasting effect on customers in terms of their preference for the cloud, but it does demonstrate some of the clear benefits to our customers, where the infrastructure is in the cloud, and the vendor can do more a quick refresh of software without dependency on their IT or dependency on site access.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Great. Thanks, Dan.

Operator

Thank you. Our next question comes from Paul Coster of JPMorgan. Please go ahead.

Mark Strouse -- JPMorgan -- Analyst

Yeah, thanks for taking my questions. This is Mark Strouse on for Paul. Dan, you alluded to this a bit ago. But I just wanted to go back to the SSA deal. Can you just talk about the impact of total revenue? Was that full $35 million expected in the fourth quarter?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

No. As I mentioned, every large deal, we take a range. So when we do a forecast, we look at what we believe will be at the low end and high end of the range. We do expect Social Security to implement this in phases. But it's a perpetual deal. So, we also expect that the software that they need for phase one will be recognized -- the revenue will be recognized upfront and the services will be recognized over time. So at this point we have no reason to believe that the Social Security Administration will change the business model, and we still believe it's going to be a perpetual deal.

Mark Strouse -- JPMorgan -- Analyst

Okay. And then, as far as the Apax investment goes, are there any kind of material adverse conditions clause included in that investments? Let's say we do slip into a recession. Is there anything in that agreement that would allow either party to kind of exit either in tranche one or tranche two?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Okay. So there are differences in tranche one and two. So tranche one, as of today, we are on track to complete tranche one. We already went through the HSR process, and we're currently waiting for CFIUS clearance. Verint and Apax are working together through this regulatory process with CFIUS, and once this is cleared, we expect it to close before the next earning call. The investment agreement was filed so everybody can see that it does contain customary closing conditions. But pandemic is not [Indecipherable] to your question about the pandemic. So that's the first tranche.

And sort of the second tranche, just to remind you, the second $200 million tranche does not occur until the time of the spin, which we expect on February 1. So, if COVID-19 continue to impact the markets and the stock price of Verint at the time of the spin is down, our common stockholders are protected with a floor price, and the floor was negotiated already and it's part of the investment agreement. So basically, if the stock is below the floor, Apax does not have to invest the second tranche, but they can still invest and pay the price of the floor. And the floor is around $50 per share. But the exact calculation will be done at the time of the spin.

Mark Strouse -- JPMorgan -- Analyst

Okay. That's helpful. And then just one more quick one, if I can, maybe for Doug. Just given the uncertainty that you've talked about, can you talk about your plans this year for share buybacks, both regular and associated with the Apax deal?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Doug, can you take this?

Douglas Robinson -- Chief Financial Officer

Yeah, sure. Yeah. So you may remember, Mark, back in December, we announced a $300 million buyback program. So far, we've repurchased half of that, $150 million. We have plenty of cash in the balance sheet, and it's -- you were just asking about the Apax. We expect that cash will be coming in too. So we still would have another half on the buyback program to go over the year.

Mark Strouse -- JPMorgan -- Analyst

Okay. Very helpful. Thank you very much.

Douglas Robinson -- Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from Ryan McDonald of Needham. Your question, please?

Ryan MacDonald -- Needham & Company -- Analyst

Good afternoon, gentlemen. Thanks for taking my question. I guess, as we look at back over the past three weeks here -- and really, this is where we started to see the most uncertainty -- can you talk about how or in what areas the conversations have shifted the most, whether it'd be in Customer Engagement versus Cyber Intelligence?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yes. Let me start with Customer Engagement. I think the first a couple of weeks, our customers were moving their employees to work at home. They were highly focused on making the infrastructure to work. So software customers don't have laptops -- employees don't have laptops. So they had to go and purchase laptops and make sure they have connectivity. In some places, like in India, for example, it's hard for people to work at home. Some customers bought UPS devices for employees to make sure they have power at home. Really, the impact was very much focused on how do we ensure continuity with infrastructure to connect to our employees.

And then, what we start to see over the last week is more and more customers are looking now at the chaos that this restructured operation is generating. From financial services, there is a very big focus on compliance. How do they know that employees are adhering to the compliance regulations, for example, PCI compliance, and making sure that there is no violation and also fraud, because that new environment can potentially create issues with data privacy and lead to fraud. So that's one area.

The second area is workforce productivity: tools that help to manage their workforce at home, to gain better visibility at their work product and just to be more in control over the workforce.

And the third focus is on analytics, and they need to understand what are customers asking about. I'll give you an example. One of our customers, a large bank, they announced a program to customers that they don't have to pay their credit cards for three months, and they found out with our analytics that a large majority of their agent at home, when customers called, they insisted they need to pay the credit card on time or else they're going to be charged interest. So, visibility into how do we give employees at home the right knowledge to be able to address customer requests efficiently. And this is just obviously very new. So, we expect this trend to continue as they settle with infrastructure and look more into the productivity, compliance and analytics.

On the security side, we also have very high volume of discussion with customers. They basically are focusing on two things. One is directly related to COVID-19. Some of our law enforcement agencies are responsible for the COVID-19 enforcement, and clearly there are people that are ordered to be under quarantine and they don't respond, and it's very important to protect the public safety to make those quarantine enforced. So some of our data mining software -- and I mentioned one of our product with facial recognition that helps to make sure that the people are basically quarantined at home and adhering to the requirements.

But the other things that our customers focus on is a concern that in a time of crisis, there will be an increase in crime and terror, and they're trying to look for signals that help us to focus on this type of potential implications. We saw in some countries that the military is ordered to help ensure law and order, but that's obviously planned to be very short-lived, and there is a concern that some of the potential applications of this pandemic will create lawlessness and disorder, so they want to be prepared.

So there's a lot of discussion around how can our technology help them to address these issues.

Ryan MacDonald -- Needham & Company -- Analyst

Excellent. And then my second question is on the process with the spin-out. You mentioned that the tax ruling with the IRS and the ITA is in process. Can you talk about what the timeline we should expect here for when this can be completed, and is there a risk at all of delays to this process, I guess, given everything that's going on? Thanks.

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. So, we made a lot of progress since our last earning call. I'm not going to repeat. Tax ruling was one of the areas, and we think that our conversation so far has been favorable with both the IRS in the US and the ITA in Israel, where we need ruling for both. So a lot of progress was made. And at this point, we are on track, and will of course continue to monitor any COVID-19 situation and report on progress.

Ryan MacDonald -- Needham & Company -- Analyst

Great. Thank you.

Operator

[Operator Instructions] The next question comes from the line of Jeff Kessler of Imperial Capital. Please go ahead.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you for taking the question. On the security side, what -- you have several divisions inside of that business. What divisions are the ones that are most impacted right now and the ones that are being put in in terms of the most service? And the second part of that question is, going forward, what are you doing now in terms of raising and getting margins that are going to go up in the middle of COVID-19 that may help you transition some of what you're doing now operationally into a different period when things get back to normal? In other words, what are you learning now that you didn't know that may help your margins as you go into the next phase of this is business once the business is split off?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Yeah. I'll address the first question. The three use cases for our products in Cyber Intelligence has to do with physical security, cybersecurity and intelligence. And the way we see it now, cybersecurity, there is, again, a concern there will be an increase in cyber attacks. Lot of people at home, we already see increase in phishing and attempts to take advantage of people clicking on messages. And at this point, we don't see at this point any change in the cybersecurity area.

I think in physical security, one of the use cases I mentioned before about quarantine enforcement will leverage our stock [Phonetic] analytics to be able to help monitor quarantine and enforce quarantine remotely. So I think that's a benefit of our physical security. And in terms of our Cyber Intelligence, what I mentioned before is just gaining more insights into potential increase in criminal activity which will be in the dark web or other sources that governments are looking at to try to predict criminal events and preventing before they become severe.

So that's what we see right now. I think it's early, but I can say that customers around the world -- and we sell in more than 100 countries -- are on high alert, and we have tremendous amount of communications in terms of how can we help them address what they see as change. And it's not necessarily the same thing for every country. But almost every one of our country is at some point of where they are under the pandemic and they're trying to flatten the curve like we are in the US. So that's on the first side.

In terms of margins, most of the investment that we needed to improve margin is already behind us. It was to decouple the hardware and the software, to open the software and reduce the amount of customization. And we did see last year almost 400 bps of improvement in gross margin as a result of selling less hardware and less customizations. And the customer reaction is very positive because they see the opportunity to refresh the software faster, which is obviously more difficult when they buy everything customized. So the investment is behind us. And I believe this trend will continue.

There are some customers that will take longer because they prefer one throat to choke and they want to see Verint as a system integrator that provides them also the hardware. But we do see obviously every year -- as I mentioned before, we've improved gross margin from 60% to 62% and now almost 66%. That's the trend over several years that the investments we made in the product is actually working well and customers are embracing it.

Jeff Kessler -- Imperial Capital -- Analyst

Could you get to 70%?

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

That's our target. That's the target, definitely, within the next three years, to get to 70%. And we think that that's not only improving gross profit obviously, but improving the operating margin as well. So we do work toward MRO of increasing gross margin and profitability in this business, and that's part of the spin that we are preparing the Cyber Intelligence to be a separate public company with software company margins.

Jeff Kessler -- Imperial Capital -- Analyst

Okay. Great. Thank you very much. I appreciate it.

Operator

Thank you. At this time, I'd like to turn the call back over to Alan Roden for any closing remarks. Sir?

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

Thanks, operator. Before finishing the call, I'd like to provide an update on our Investor Day. Our Investor Day was originally scheduled for April, but given COVID-19, we plan to reschedule Investor Day to later in the year. We'll announce that date at a later time. Thank you for joining the call today, and hope everyone stays safe and healthy.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

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

Dan Bodner -- President, Chief Executive Officer and Chairman of the Board of Directors

Douglas Robinson -- Chief Financial Officer

Shaul Eyal -- Oppenheimer -- Analyst

Daniel Ives -- Wedbush -- Analyst

Ryan MacDonald -- Needham & Company -- Analyst

Dan Bergstrom -- RBC Capital Markets -- Analyst

Mark Strouse -- JPMorgan -- Analyst

Jeff Kessler -- Imperial Capital -- Analyst

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