Image Source: Verint
The Best Ideas Newsletter idea is trying to break through the mid-$40s level, which has been illusive since late 2015.
By Brian Nelson, CFA
Verint Systems (VRNT) put up a very strong fiscal second-quarter (ended July 31) in early September when it beat bottom-line expectations by $0.14 and the top line by over $5 million. Not only did the top and bottom line come in ahead of expectations, but management increased its earnings-per-share outlook for the fiscal year ending January 31, 2018, to $2.75 at the midpoint. With shares trading at ~$40 each, that means Verint sports a multiple under 15 times current-year fiscal earnings, comparatively cheap (on a forward basis, the S&P 500 is trading over 17 times). Management also had some exciting things to say about fundamentals in the recent press release September 6:
In Customer Engagement, we continue to expand our portfolio, offer our existing customers new solutions and win many new customers. We expect our on-going investments in innovation, such as new automation and artificial intelligence capabilities, will contribute to faster growth in the second half of this year and longer term.
In Cyber Intelligence, our double-digit revenue growth in the first half of the year was driven by demand for data mining solutions to address terrorism, crime, cyber-attacks, and other threats that remain pervasive around the world. We believe ongoing security threats present a long-term growth opportunity for Verint and we continue to invest to meet global customer demand.
All in, we like Verint’s fundamental momentum, and its exposure to fast-growing cybersecurity spending should propel performance for many years to come. The company’s total addressable market has expanded from $3 billion in 2012 to $8 billion in 2016, and we think it will only get bigger. It seems like every month or so, we hear of another massive security breach, the latest with Equifax (EFX), for example, and Verint’s offerings are right in the sweet spot: “used for predictive intelligence, complex investigations, security threat analysis, and to prevent crime and terrorism.” The company is all about “actionable intelligence,” with more than 80% of the Fortune 100 as customers.
Verint’s financials reveal a very capital-light entity. The company’s free cash flow, as defined by cash flow from operations less all capital spending, remains solid. During the six months ended July 31, for example, net cash provided by operating activities totaled $98.5 million, while purchases of property and equipment came in at $16.2 million, good enough for free cash flow generation of $82.3 million during the half-year thus far. We continue to include Verint in the Best Ideas Newsletter portfolio as an interesting idea within the cybersecurity industry (HACK), and it looks like its technicals want to break out, too. We’d like to see the company’s share price break through the mid-$40s.
Software – Security: CHKP, FEYE, FTNT, IMPV, PANW, PFPT, SYMC, VRSN