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Morningstar | Solid Execution Facilitates Strong Results for Verint, but We Are Wary of Ambivalent Cloud Strategy

Verint delivered strong fiscal 2019 third-quarter results, exceeding expectations on both the top and bottom lines. Management also issued preliminary fiscal 2020 guidance implying robust earnings growth, suggesting that the business momentum will continue into next year. Strength was broad-based across both Customer Engagement and Cyber Intelligence, as enterprises continue to utilize the firm’s software for optimization of workflows across various customer touchpoints, and governments continue to utilize data mining solutions as a bulwark against security threats. Even in the midst of simplification and automation across products within both segments, stickiness continues to manifest through data and customization, leaving our narrow moat rating intact. We will also maintain our fair value estimate of $47 per share and see shares as fairly valued at current levels.

Revenue grew 8.3% year over year to $304 million, fueled by upticks in Customer Engagement and Cyber Intelligence of approximately 9% and 7%, respectively. GAAP gross margins widened by 310 basis points over last year to 63.4%, primarily driven by a continued de-emphasis of hardware within the Cyber Intelligence business. Similarly, operating margins expanded by 480 basis points to 11.1%, driven by operating leverage on the SG&A line.

An increased number of SaaS deployments undoubtedly played a role in the firm’s ability to leverage operating expenses. Management, however, seems reticent to fully embrace a cloud deployment model and instead is embracing a hybrid approach. From our vantage point, however, we think both economic as well as technical incentives, such as superior data accumulation to drive self-improving algorithms, will make an integrated cloud platform the deployment model of choice for Customer Engagement use cases over the longer term.

We have acknowledged that the Cyber Intelligence segment will probably make the adoption of cloud licenses slower for the business as a whole. Given the sensitivity of the use cases, as well as the regimented nature of the government end market, we anticipate that SaaS adoptions for this segment will substantially lag those of other verticals. Still, we are dubious as to whether the firm is investing enough in its cloud capabilities for its Workforce Engagement Management, or WEM, products.

We were intrigued by management comments around automation, which is a strategic focus for the company. Management frames the efforts as cost-saving initiatives, positing that the hiring rates of their customers across various client-facing departments are unsustainable. This is in contrast to competitors such as Nice, who frame their automation capabilities as avenues to facilitate greater engagement of human capital and allow employees to focus on value-added tasks and interactions. From our vantage point, we find Nice’s approach more constructive. We think engaged and motivated employees, and the impact they have on the customer experience, can’t be understated. While there are some issues conducive to self-service, there are many others in which the customer demands a certain empathy, understanding of context, and exigency that a bot may not be able to provide.