Saturday, August 18, 2012

This Data and Security Play is Holding Up Well

Verint Systems (NASDAQ: VRNT) gave results recently and demonstrated that tech is not quite dead yet!

The sector has been horribly beaten down by fears over Europe and whilst those fears are real, they haven’t shown up yet in companies like Verint. Everybody knew that this year was going to be tough in Europe, but so far, most companies haven’t reported a significant slowdown. All of which leads me to conclude that if the European problems can be dealt with in a more comprehensive fashion, there is upside in technology stocks like Verint Systems.

Verint Systems Results

Verint beat revenue and EPS estimates. A quick summary.
  • Non-GAAP revenues of $200m vs. estimates of $196.4m
  • Non-GAAP EPS of 53c vs. estimates of 49c
  • Full year revenue guidance unchanged at $860-880m vs. estimates of $871m
  • Full year EPS guidance of $2.55-2.70 vs. estimates of $2.64
It is a pretty good "beat," but Verint kept full year guidance unchanged and cited concerns over the macro-economic environment as the cause of the reluctance to raise them. Turning to the next quarter, management forecast a "modest sequential increase in revenues." I note that analysts are forecasting a 6.5% sequential rise to $213m and I’m not sure if this tallies with what Verint means by modest. No matter, these are good results and they mirror what rival Nice Systems (NASDAQ: NICE) said in May.  Verint’s gross margins declined but this is mainly due to the product mix, which can shift around for these types of companies.

Verint achieved growth in all territories but the particular strength was in the US.

($m)Q1 2011Q1 2012% of Q1 2012 Total
Europe’s performance was described as mixed -- a familiar refrain from conference calls -- which highlights that not all companies are seeing the kind of broad-based weakness that Cisco Systems (NASDAQ: CSCO) referred to earlier in the reporting season. Similarly, other companies like NetApp (NASDAQ: NTAP) have been severely sold off after investors reacted to weak guidance and questioned its European growth prospects.

In addition, NetApp -- in common with Verint -- has the financial sector as a key industry vertical. NetApp suggested this vertical could be weak in future. We shall see.

Financials are also a key vertical for F5 Networks (NASDAQ: FFIV), a stock that has also been sold off, despite giving upbeat guidance in the last results! Doubts about F5 Networks stemmed from the loss of a board member and the Executive VP of Worldwide Sales.  However, the former probably left because he has cancer and the latter left for a more senior position at another leading US technology company.
With regards to Verint and the financial sector, the results were fine and management did not specify any current weakness. All of this augers well for the companies mentioned above, although management did mention that deals were taking somewhat longer to close.

Reasons to Like Verint

I like the sector that Verint and chief rival Nice Systems are playing in. Their end demand is driven by regulatory and compliance drivers, as well as the need for companies to analyze customer interactions. Essentially, they sell enterprise intelligence solutions, which help corporations monitor customer interactions and optimize workflow. Verint is seeing its deal size increase over time, as customers are taking advantage of its increasingly broader product offerings. For example, previously a customer might have bought a data capture solution (video or voice recording), but now they are also buying data analytical solutions as well.

A breakdown of segmental revenues demonstrates how enterprise (including workflow and analytics) solutions are growing whilst pure video intelligence seems to be stagnating. Communications intelligence is growing strongly too.

Verint’s product applications are varied and cross many industry sectors. In financial services, Verint helps banks monitor branch activity, financial transactions and ATM fraud. Government is also a key vertical, with transportation security being a major issue. Simply put, expenditure on the need to monitor and analyze data in border controls and transit hubs is not something that governments can really cut back on significantly.

Similarly, in the retail sector, even if top line growth is hard to generate, retailers can increase margins by reducing theft and managing customer behavior. Verint helps them do this by capturing and monitoring customer behavior and allowing them to model how shoppers behave in their stores.

What Next for Verint?

I’ve always preferred Nice Systems to Verint because it has been far better at converting profits into cash flow. However, Verint has made great strides to improve this and cash conversion seems to be on the rise. Indeed, management said that cash flow was likely to rise in line with operating earnings in the near future. Longer term, Verint has a nascent cyber security solution, which it hopes will close deals in the second half and then contribute to revenues next year. Revenue and EPS growth are forecast to grow by close to 10% over the next two years.

Whilst the stock is not immune from macro-economic uncertainty, investors will want to take a close look at it because with a forward PE of 11, good cash flow generation and decent growth prospects, it could outperform, given a resolution to the current round of macro fears.

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