Tuesday, October 30, 2012

Is Verint the Next Big Data Play?

Verint Systems $VRNT followed its rival Nice Systems $NICE and lowered full year guidance. I don’t think Verint did quite the same kind of ‘sandbagging’ job that Nice appeared to do but nonetheless the stock declined. Both stocks are interesting, not least because they offer a back door way into ‘big data’ analytics demand, but without the hefty valuations and expectations that the usual big data plays have.

What Happened?

Essentially, revenues and EPS came in ahead of market estimates but full year guidance was lowered with management signaling weakness in European Governmental spending as being the major problem. Furthermore, full year guidance was lowered

  • Full year revenue guidance of $850-870m vs. $860-880m previously
  • Full year EPS guidance of $2.50-2.75 vs. $2.55-2.70 previously

Verint only lowered revenue guidance (at the mid-point) by 1.1% which is far less than Nice did when it lowered its number by 4.2% recently. The familiar refrain of weaker European revenues was cited as the main cause. That said there is also a currency effect here. Indeed, Verint pointed out that on as constant currency basis Q2 European revenues actually went up $1m rather than the $3m reported decline.

No matter the outlook is weaker. In common with Nice, Verint thinks that Q3 will be weaker but Q4 will turn in stronger numbers. I’m not sure what to make of this argument. My initial thought was that both managements are seeing current order delays and then thinking that they will be pushed in to Q4?

Then I remembered that Nice categorically argued that its full year guidance assumptions were based on current run rates. Verint were so clear about this and my suspicion is that this is why Nice took down guidance more than Verint did. If my hunch is correct that Nice may offer more upside if conditions improve.

Back Door Big Data Analytics Play?

Ok let’s not delude ourselves here. These stocks are workforce optimization plays. They help enterprises and Governments manage and monitor interactions and optimize workflow. Strictly speaking this is not ‘big data analytics’, however as an integrated solution provider it is seeing growing revenues from its data analytics products because its customers require increasingly sophisticated ways to make sense of the mass of unstructured data being captured. Naturally, they prefer to buy this from a single vendor.

Of course the bullish case here is that once they both start reporting analytics as a product line, this part of the business will be valued in line with the rest of the big data sector and ‘hey presto’ Verint sees a multiple expansion to put it in line with something like Informatica $INFA or what the market might be pricing in for Adobe Systems, Google $GOOG or IBM’s $IBM analytics solutions.

Speaking of which, the market has spent the summer downgrading expectations for data analytics. Informatica has had a torrid time of it recently and is a smaller company competing against some very big players, nevertheless it trades on 35x earnings. In comparison, Verint trades on 11x forward estimates. Its management spent a lot of time blaming macro factors for the recent poor results but I am not so sure. Other competitors are not reporting anything like as weak numbers and it maty well be that the competition has stepped up the game.

Google offers a lot of analytics for free mainly because it is a support for its revenue generating platforms. It's offering isn't as sophisticated as the kind of solution that Adobe or IBM offer but it could step its offerings because its operations generate huge amounts of data to be analyzed.

Perhaps the most interesting company in the space is IBM. It offers an integrated solution of business intelligence (BI) as well as possessing the data warehousing solution. So not only can they store data but they can also provide the analytics to make sense of a mass of unstructured data held within the data warehouse. Many companies mat appreciate the opportunity to buy from one vendor.

The 'big data' pitch is a beautiful idea but I don’t think Verint even needs this sort of thing. The stock is hardly expensive as it is.

Long Term Drivers

The longer term drivers are pretty good and the current weakness for Verint and Nice may prove to be a temporary reaction to growth fears in Europe. In the end the kind of regulatory and compliance driven solutions that Verint offers won’t lose their importance. For example Governments can’t simply switch off the need to analyze terror and security threats just because they need to cutback spending growth.

Corporations can’t just ignore surveillance and monitoring requirements nor are they likely to stop needing to capture and analyze customer interactions. Considering the latter, this is a need with a demonstrable return on investment which means that even in bad times Verint’s solutions are attractive. Instead of, say investing a new plant, a customer could invest in workflow optimization in order to reduce operating costs or increase revenues from data (video, emails, phone calls, website interaction etc.) generated by existing customers. This is where Verint comes in.

Where Next for Verint?

Investors need to look out for as few things. Its enterprise revenues are expected to increase sequentially in Q3 and Q4 while the more lumpy revenues at security (large projects) are expected to decline in Q3 then pick up in Q4. We shall see.

I happen to buy the long term story here and picked up some Nice Systems stock after it warned. I think on a risk/reward basis the stock looks cheap because it does appear to have assumed the worst in its guidance. Verint hasn’t quite down that but if you believe that this is a temporary blip then both stocks look good value.