Image Source: Verint Systems Investor Presentation
Actionable intelligence leader Verint Systems continues to deliver on its strategy in its ‘Customer Engagement’ segment, while its ‘Cyber Security’ segment is taking advantage of a number of trends. Management’s initial guidance for next fiscal year impressed.
By Kris Rosemann
Simulated Best Ideas Newsletter portfolio idea Verint Systems (VRNT) turned in a solid fiscal third quarter report December 6 as momentum stemming from investments in advanced analytics, automation, and cloud across its actionable intelligence portfolio are driving expectations for ongoing demand growth. Organizations need this actionable intelligence to create an engaged workforce and smarter customer engagements, and its cybersecurity business is taking advantage of the necessity for protection against ever-advancing cyber threats. Initial guidance for the company’s next fiscal year (ending January 2020) impressed as it called for better-than-previously expected top-line growth and ongoing double-digit earnings per share growth. We’re sticking with our fair value estimate of $57 per share.
Revenue at Verint Systems in its fiscal third quarter (ended October 31) grew 8.3% on a year-over-year basis as its ‘Customer Engagement’ segment revenue led the way with an 8.7% advance. Management is excited about the progress it is making in automation, which it believes is a key differentiator for its business by providing it with advantages in customer innovation and robotics process automation. Its customer engagement strategy is based on four pillars: 1) offer customers a broad portfolio across all areas of the enterprise; 2) offer a full portfolio in the cloud, making it easier for organizations to transition to SaaS via a hybrid cloud strategy; 3) offer communications infrastructure and neutrality to provide flexibility in future infrastructure choices; and 4) infuse automation across the entire customer engagement portfolio.
In its ‘Cyber Intelligence’ segment, which grew revenue by 7.4% in its fiscal third quarter on a year-over-year basis, management points to strong demand for its data mining software, and ongoing momentum in large deals highlights its strength in automation and data analytics. The company expects three key trends to continue driving demand growth for its cybersecurity offerings: 1) security threats becoming increasingly more complex; 2) a shortage of data scientists and cyber analysts forcing security organizations to seek out automation to make up the difference; and 3) security organizations are looking for predictive intelligence. These trends, coupled with what we believe to be a sound strategy in customer engagement, lead management to target double-digit annual revenue growth over the long haul.
In its fiscal third quarter, Verint’s non-GAAP gross margin expanded one percentage point from the year-ago period to 66%, while its non-GAAP operating margin leapt approximately three percentage points to 22.5% despite R&D spending as a percentage of revenue expanding slightly to 17%, which only further showcases the company’s dedication to innovation. GAAP earnings per share in the quarter leapt to $0.29 from $0.04 in the year-ago period, and non-GAAP earnings per share advanced nearly 29% on a year-over-year basis. Though the company’s strong free cash flow generation has eased our concerns with the discrepancy between its GAAP and non-GAAP earnings performance in the past, a narrowing gap between the two measures is comforting as it relates to potentially boosting the market’s conviction in this idea.
Free cash flow generation remains strong at Verint, and through the first three quarters of the fiscal year ending January 2019, the measure jumped 51% to ~$104 million thanks to ongoing strength in cash flow from operations. At the end of the quarter, the company held Net debt, including long-term restricted cash, cash equivalents, time deposits, and investments of just under $358 million, down from ~$417 million at the beginning of the fiscal year.
Management reiterated its guidance for the current fiscal year with non-GAAP revenue expected to be $1.24 billion with ~7% ‘Customer Engagement’ segment revenue growth and ~10% ‘Cyber Intelligence’ segment revenue growth, and non-GAAP earnings per share guidance comes in at ~$3.15, which represents ~12% year-over-year growth. Looking ahead to next fiscal year, Verint expects non-GAAP revenue growth to come in at ~7% ($1.325 billion target) and non-GAAP earnings per share growth to be ~11% ($3.50 target) as it works to continue expanding non-GAAP operating margins.
We continue to highlight Verint Systems as an idea in the simulated Best Ideas Newsletter portfolio, and upside to our fair value estimate may exist if management is able to continue delivering margin expansion and hit its long-term target of double-digit top-line growth.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.