Sunday, June 16, 2013

Verint Systems Reports Mixed Results

You can either pay sky high evaluations for big data plays or buy a backdoor entry into the sector with a company like Verint Systems (NASDAQ: VRNT). Companies that already use Verint's customer interaction capture hardware will increasingly want to buy its data analytics software and services in order to analyze the captured data. I’m sympathetic to the argument, and hold its rival and potential partner NICE Systems(NASDAQ: NICE). With that said, recent results from Verint were a mixed bag, and the stock looks fairly valued for now.

Verint reports mixed data

Verint’s first quarter numbers were pretty much in line with expectations, but as I wrote about the last results, investors would have been justified in expecting a bit more from the company. Its management was upbeat last time but, like a lot of technology companies, this quarter's results were mixed.

In short, Europe, the Middle East and Africa proved to be a headwind, while the Asia-Pacific region’s growth was strong enough to counter it. European growth is now expected to be near flat for the full year versus previous expectations of small growth. This affected its core Enterprise Intelligence business and meant that it only grew by 1.2% in the quarter as opposed to the total revenue growth of 2.6%.

In order to see how Verint generates its revenues, I’ve broken out 2013 segmental revenues below.

In geographic terms, the first quarter saw 54.6% of its $205 million in revenues coming from the Americas, with Europe, the Middle East and Africa contributing 20%, as opposed to 25% for the first quarter last year, and Asia-Pacific with 25.4%. While the Europe, Middle East and Africa decline of $9 million was unwelcome it wasn’t enough to put a dampener on the overall results.

Communications intelligence is an area where Verint is stronger than NICE, and it demonstrated an impressive 7.2% revenue growth. The government vertical is large for Verint -- traditionally around 25% of revenues -- and there were some concerns that it would be affected by the sequester. Clearly these worries turned out to be misguided, and Verint’s international exposure certainly helped. In addition, this type of intelligence gathering and surveillance activity is not going away anytime soon.

However, the biggest positive surprise was probably that the video intelligence segment revenues only fell by 1.7% after declining 13.4% over the last year. There was some discussion in the conference call of increased interest following the tragic events in Boston and such events emphasize the need for expenditure on these types of solutions. Elsewhere in the segment a $4 million order came in from a big box retailer in order to help it reduce shrinkage.

Long term growth drivers

Putting these elements together demonstrates that the key drivers of Verint’s future growth are still in place. As argued in the conference call, customers likely want to buy solutions from a single vendor and as Verint already has a substantial installed base with its data capture solutions, it can expect future growth. In addition it has a number of secular drivers in its favor. For example, even in a slow economic environment, financial institutions generate growth by investing in analyzing existing customer interactions. Similarly reducing fraud and money laundering will always be a part of a financial firm or contact center’s operations.

Indeed, a quick look at NICE Systems' recent results revealed these positive underlying trends. Similar to Verint it kept full year guidance intact. NICE is seeing an increased willingness among its customers to sign bigger deals and integrate its analytics solutions with its product sales. NICE is well positioned to do this, particularly to its string verticals like financials and contact centers, because of its partnership with IBM (NYSE: IBM). Back in October, NICE announced that it would be integrating IBM’s big data analytics software within its solutions. It’s a mutually beneficial solution because IBM will get entry into NICE’s installed base while also giving NICE added functionality with which it can add value to customers.

The interesting thing about IBM’s results is that they somewhat presaged weaker conditions for IT enterprise spending and set the tone for a disappointing IT earnings season. The fact that NICE and Verint reported results that were pretty much in line and kept full year growth expectations is therefore somewhat of a net positive.

Where next for Verint?

Full year guidance is for 6%-7% growth and earnings of around $2.75 and free cash flow generation of around $100 million. At the current price this makes for a forward PE of around 12.8 and a free cash flow yield of around 5.3%. All of which is pretty fair value for a company forecast to generate single digit earnings growth over the next couple of years. I suspect the stock is also being supported on the back of speculation over a possible acquisition by NICE. It’s worth monitoring but hard to make a case that it is great value right now despite the positive long term prospects.

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