Tuesday, December 24, 2013

Verint and NICE Systems, a Cheap Way to Buy Big Data Stocks

Investors in Verint Systems  and its rival NICE Systems  have gotten used to some pretty solid performances in 2013. The two companies specialize in systems that capture and analyze customer and employee interactions. With the growth in data analytics that companies like NICE's partner IBM is seeing, you can expect both Verint and NICE to find it a lot easier to sell analytics as part of their packaged solutions (which is exactly what is happening.) Moreover, the shift toward analytics looks likely to favorably adjust their long term growth rates.

Verint Systems beats and raises
The recent third quarter results from Verint saw the company beat estimates and raise guidance.

  • The full-year revenue growth forecast was increased to 6.5%-7.5%, up from 6%-7% previously.

  • Full-year EPS guidance was raised to $2.75-$2.80. 

  • 2015 revenue and diluted EPS guidance were projected at of 7%-9% growth.

Verint differs from NICE by focusing more on security and government work, while NICE's strength lies in the enterprise (particularly in the financial sector) and call center markets. As such, the two Israeli companies will inevitably be discussed as merger candidates. The differences also mean that they report some contrasting results at times. Looking at Verint's quarter in detail, the standout performer was Verint's communications intelligence segment which recorded 30.6% revenue growth.

Source: Company presentations

If there was a disappointment, it was with the 3.3% rise in enterprise intelligence revenue. Verint's management argued that this was a consequence of weakness in Europe, because its Americas enterprise business was up "mid to high single digits."

NICE and Verint grow data analytics
Both companies are seeing growing analytics sales. The two already have an installed base of clients with their hardware solutions, so it's relatively easier for them to sell larger deals with analytics incorporated into the deal. Indeed, this is part of the reason why IBM has a deal with NICE, that involves incorporating its big data analytics within NICE's solutions.

The big advantages enjoyed by these companies is that their customers get to buy analytics and customer interaction capture systems (voice, video, online, and similar options) from one vendor. However, Foolish investors should note that the shift is changing some of the operating metrics.

  • Verint confirmed that it is seeing stronger average selling prices as its solutions are increasingly being sold with analytics.

  • Sales cycles appear to be getting longer as deal size and complexity increases.

  • Solutions that include analytics software are likely to see a trade-off between short-term revenue generation and longer-term service and support revenue.

  • Margins and cash flow should improve going forward as software tends to be higher margin.

Many of these factors are already playing out in Verint's results. During its conference call, Verint's management outlined that its operating cash flow would be around $160 million for the full year, and "we expect that cash flow to grow kind of commensurate with the earnings growth that we outlined in our guidance."  Assuming capital expenditures of around 1.8% of revenue (a conservative estimate) suggests that free cash flow generation will be around $144 million and $154 million for the next two years. These are impressive figures, especially given that its enterprise value (market cap plus debt) is only $2.28 billion.

Eagle-eyed readers will note that Verint's guidance implies no increase in margins next year, despite it selling more software analytics solutions. When pushed on the issue on the conference call, CEO Dan Bodner replied:

Our guidance is 7% to 9%... ...we are aiming at double-digit growth. So the trade-off here is between leverage that obviously exists in the software business and investing more organically to accelerate growth. And at this point, this is our initial guidance.

In other words, don't be surprised if Verint trades off its margin expansion in the near-term to generate stronger growth in future.

The bottom line
In conclusion, this was a pretty strong report from Verint. Along with NICE Systems, it represents a relatively cheap way to play the big data trend. These companies aren't over-researched glamor stocks, and I think this makes them even more interesting for Fools to look at. With a P/E ratio of 13.4 times 2014 estimates, Verint remains a good value.

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