EUR 850.00 For Business Accounts Only

Morningstar | Verint Reports Robust 2Q, Raising FVE to $53 per Share

Verint Systems reported a solid second quarter of fiscal 2019 and we are raising our fair value estimate to $53 per share, from $48 previously, and maintaining our narrow economic moat rating. As we have expected, we continue to see sustained revenue growth from the customer engagement segment, but also a continued recovery for the cyber intelligence business. The firm raised guidance on the basis of durable growth, and we have increased our expectations for the firm. We currently see shares as fairly valued.

Verint's cyber intelligence segment saw some positives for the second quarter in a row, with management expecting 10% revenue growth for the segment. We've iterated for the past few quarters that management's plan to have customers source cyber intelligence hardware from third parties, instead of from Verint, while Verint only provides the software, would take some time to play out. We believe we are beginning to see the positive impact of these changes, with an increasing number of customers sourcing the hardware themselves, improving the margins of the cyber intelligence segment, which has historically lagged the higher growth customer engagement segment. We posit that economies are improving in emerging markets, allowing Verint to capture new government customers as they invest and spend to build out their cyber intelligence capabilities. While we are pleased with the recovery here, we still expect the vast majority of future growth to emanate from the cyber intelligence segment.

We continue to believe Verint's businesses are buoyed by numerous salient trends such as multi-channel customer feedback and unstructured data, but the firm still has to demonstrate that it can demonstrate meaningful, sustainable growth from these secular tailwinds. Long term, we will continue to closely watch the improvements in the cyber intelligence segment.

Last quarter, Verint received questions regarding its reported pursuit of Israeli security vendor NSO for approximately $1 billion. Our view was that Verint would have to deploy equity to finance such a deal. We note that Verint's cash and marketable securities sit at $419 million, while long-term debt sits at $772. Since last quarter, reports came out that Verint is no longer pursuing a tie up with NSO. We think this is the correct strategic move, particularly as Verint's cyber intelligence segment has weighed down the growth in the customer engagement segment. Verint trades at cheaper multiples compared with its nearest competitor Nice Ltd., and we believe Nice has benefited from divesting its defense and intelligence businesses while focusing on recurring revenue businesses for enterprise customers.

From our vantage point, one of Verint's overhangs has been expectations around whether the business would ultimately split into two companies. Investors have long questions the inherent synergies in cyber intelligence versus customer engagement. While we certainly believe they both revolve around data analysis, cyber intelligence has historically been more cyclical, while customer engagement has seized on secular growth opportunities. We think the disconnect between the fundamental valuation for Verint and its competitor Nice, reaffirm that thesis. While it has been frequently rumored that Verint would split up and the firm has previously implemented separate ERPs systems for the two segments, we have not seen any traction on this front. Longer term, we would encourage the firm to reinvest in the higher growth customer engagement segment and avoid expensive acquisitions in the same vein as the rumored NSO deal.