share this article!

On June 9, 2021, Verint Systems Inc
VRNT
. (NASDAQ
NDAQ
: VRNT, $46.25, Market Capitalization: $3.0 billion) announced 1Q22 results. Total non-GAAP revenue increased 6.8% YOY to $201.9 million (+2.7% vs. consensus), driven by growth in recurring revenue (+9.9%) and partially offset by fall in non-recurring revenue (-0.6%). Non-GAAP gross profit rose 8.0% to $135.8 million, and corresponding margin expanded 73 bps to 67.3%. Adjusted EBITDA increased 10.1% to $48.9 million (+19.6% vs. consensus) and corresponding margin improved to 24.2% (1Q21: 23.5%). Non-GAAP net income rose 26.9% to $33.0 million, and corresponding margin improved to 16.4% (1Q21: 13.8%). Non-GAAP diluted EPS came at $0.44 (1Q21: $0.40). Separately, on April 6, 2021, the company closed the second tranche of investment in which Apax Investor (an affiliate of Apax Partners) purchased $200 million of Series B convertible preferred stock at a conversion price of $50.25. As of April 30, 2021, Apax Partners has an ownership of ~12.9% on convertible basis.

For FY22E, revenue is expected to be $860 million +/- 2%. Cloud revenue growth is expected to be in the range of 30-35% YOY. New PLE Bookings growth is expected to be more than 10%. Diluted EPS is expected to be $2.23 at the midpoint of revenue guidance (previously: $2.20).

On December 4, 2019, with unanimous approval from the Board of Directors, Verint Systems Inc. announced its plan to separate into two independent publicly traded companies. Moreover, on December 9, 2020, VRNT unveiled name of the cyber intelligence business as Cognyte Software Ltd. On January 14, 2021, VRNT filed an amended Form 20-F with the SEC. Previously, on December 22, 2020, the company had filed Initial Form 20-F with the SEC. On January 15, 2021, the company announced details and timeline for the spin-off of “CGNT”. Each VRNT shareholder received one CGNT share for each VRNT share held by them as of the record date of January 25, 2021. Cognyte’s common stock started when-issued trading under the ticker “CGNTV” on January 28, 2021, while Verint did not trade in the when-issued market. The distribution date for the spin-off was February 1, 2021. Both the stocks commenced regular-way trading from February 2, 2021. Verint continues to trade on NASDAQ under the ticker “VRNT”, while Cognyte started to trade on NASDAQ under the ticker CGNT. The transaction was tax-free for the company and its shareholders.

MORE FOR YOU

We raise our target price on VRNT to $57.00 per share (previously: $54.00 per share) to reflect our raised sales estimate and multiple and reiterate our Buy rating. We are optimistic on VRNT’s long-term growth prospects amidst its cloud strategy and margin improvement prospects.

Key highlights of the conference call (1Q22)

Verint Systems Inc. (VRNT) reported strong 1Q22 numbers with topline (revenue) and bottom line (diluted EPS) exceeding VRNT’s internally set expectations. The strength in financial performance was supported by 39% YOY growth in non-GAAP cloud revenue in 1Q22.

o New software bookings, measured on Perpetual License Equivalent (PLE) basis grew 28% YOY supported by strong cloud momentum. More than 50% of new software bookings originated from SaaS following the continued uptrend in proportion of software bookings over past three years. Moreover, proportion of bookings coming from SaaS is expected to reach ~60% for FY22. Consequently, VRNT expects PLE bookings growth for FY22 to be >10%.

o Verint Systems Inc. is leveraging its open cloud platform and the megatrend of digital transformation to drive large customer wins in the cloud platform. In 1Q22, the company obtained ~$10 million order from one of the largest financial services companies. This is an existing customer transitioning from on premises solution to open cloud platform.

o Moreover, in early 2Q22, the company obtained ~$17 million order from one of the largest healthcare providers in the US (existing customer transitioning existing VRNT applications to the cloud platform while transitioning their communications platform to the cloud with a new vendor).

o VRNT’s management reckons that its open cloud platform, with wide range of pre built integrations with leading communications platform afforded its customers with the flexibility to choose between various communications vendors. Further, in 1Q22 a ~$4 million cloud platform based order was received working together with a partner and packaging VRNT’s platform with the partner’s communication platform, thereby providing the customer with fully integrated offerings.

o At VRNT’s Annual Engage User Conference, the company unveiled innovations including “real-time work” which consists of several cloud platform applications such as “Real-Time Agent Assist”, “Contextual knowledge” and “Verint Intelligent Virtual Assist”. These applications draw from VRNT’s AI capabilities to aid the agents of VRNT’s customers to effectively carry out customer service and support related activities.

o Post the Cognyte Software Ltd. spin-off in February 2021, VRNT has taken series of steps to strengthen its balance sheet. The company repurchased 1.6 million shares of common stock for $75 million, closed second tranche under the investment agreement with funds advised by Apax Partners and repaid ~$260 million of term loan facility. Consequently, VRNT’s balance sheet comprises of ~400 million of cash, term loan balance of $100 million and total net debt of ~$50 million.

o As per the VRNT’s management, the digital transformation disrupting the work force amidst the accelerating adoption of digital medium the COVID-19 pandemic has been a major catalyst to push the transition to cloud platforms. Moreover, the digital transformation has led capacity gap for VRNT’s customers to effectively deal with their end-customers. This development presents VRNT with the opportunity to enable companies to close this engagement gap.

Overall Results

1Q22 results

For 1Q22, Total non-GAAP revenue increased 6.8% YOY to $201.9 million (+2.7% vs. consensus), driven by growth in recurring revenue (+9.9%) and partially offset by fall in non-recurring revenue (-0.6%). The growth in recurring revenue was mainly due to strong growth in cloud revenue (+39.2%), and partially offset by decrease in support revenue. The decrease in non-recurring revenue was primarily due to fall in professional services revenue, and partially offset by growth in perpetual revenue. Non-GAAP gross profit rose 8.0% to $135.8 million, and corresponding margin expanded 73 bps to 67.3%. Adjusted EBITDA increased 10.1% to $48.9 million (+19.6% vs. consensus) and corresponding margin improved to 24.2% (1Q21: 23.5%). Non-GAAP operating income grew 13.9% to $42.6 million, and corresponding margin expanded 132 bps to 21.1%. Non-GAAP net income rose 26.9% to $33.0 million, and corresponding margin improved to 16.4% (1Q21: 13.8%). Non-GAAP diluted EPS came at $0.44 (1Q21: $0.40).

Investment Thesis

Post spin-off, Verint Systems Inc. (VRNT) has a broad portfolio of customer engagement offerings inclusive of cloud, analytics, and automation solutions. During lockdowns and in the wake of remote work environment trends, many companies expanded their digital customer service interactions such as automated chat, virtual assistants etc. In a bid to provide effective digital transformation and manage cloud migration for customer engagement, organizations are reaching out to vendors such as VRNT. Management estimates relevant TAM at ~$65 billion and expects it to grow at ~10% annually, thereby directly benefiting pure-play customer engagement companies such as VRNT.

To leverage the aforementioned opportunities, the company is undergoing a transformation to a Software as a service (SaaS) model and expects new software bookings from SaaS to approach ~60% by FY22E (FY21: 45%, FY20: 34%, FY19: 24%). Moreover, VRNT is expanding its cloud platform’s use cases beyond the customer contact center in the client’s organizations. In 4Q21, the company added solutions such as Engagement Data Management (aggregating customer engagement data across divisions to analyse and effectively leverage it) to the cloud platform. Moreover, in 1Q22, the company has augmented its offerings with “Real-Time work” (including cloud based, AI powered applications to facilitate VRNT’s client’s to better manage their customer service operations).

Verint Systems Inc. has bagged several large cloud deals across industries in 1Q22 and expects the momentum to continue for the rest of FY22E. Consequently, the company expects new Perpetual License Equivalent (PLE) bookings growth of >10% YOY for FY22E. During FY22-24E, the company expects aggressive cloud revenue compound-annual-growth rate (CAGR) of ~30% on new signings and conversions, although the decline in perpetual license revenues will affect top-line growth. The company is targeting ~$1 billion in revenue by FY24E, implying a commendable mid-to-high single-digit CAGR (%), with ~90% of non- GAAP software revenue derived from recurring sources (FY22E: approaching ~85%; FY21: 81%; FY20: 76%; FY19: 71%). Once the transition to the cloud model is complete, VRNT should be well-positioned to drive recurring revenue growth and margin expansion through higher scalability and profitability, relative to the perpetual license model. Management has guided for tougher comparables on FY22E margin, given unusual cost reduction measures in the previous year and higher costs as an independent company from now onwards. However, we take comfort in management’s slightly medium-term outlook, where they expect margins to start trending upwards as the business achieves scale.

Valuation

We value Verint Systems (VRNT) using blended 2022E EV/Sales and EV/Adjusted EBITDA multiples, based on relevant peers. We compare VRNT with listed companies engaged in customer and employee experience management including Medallia Inc.
MDLA
, NICE Ltd., Nuance Communications, Inc.
NUAN
, Pegasystems Inc.
PEGA

Verint Systems reported strong 1Q22 results, driven by large multi-year cloud orders (Cloud revenue growth: +39%) across multiple industries. Management reaffirmed cloud revenue growth estimate for FY22E at 30-35%. Moreover, the new PLE (Perpetual License Equivalents) bookings rose 28% YOY and is expected to grow at +10% for FY22E. We expect VRNT’s planned transition to the cloud business to shift majority of the revenue base to a high-margin recurring revenue stream. Accordingly, we raise our FY22E Sales; however, our FY22E Adjusted EBITDA is slightly lower due to lower realized margin than our expectation in 1Q22. Subsequently, we raise the EV/Sales multiple to 4.3x, and retain the EV/Adj. EBITDA multiple at 17.0x. Accordingly, we arrive at a higher average enterprise value of $3.8 billion. We consider lower net debt of $52 million (previously: $165 million), and non-controlling interest of $3 million to arrive at an Equity Value of $3.8 billion. Considering diluted shares outstanding of 66 million, we raise our target price on VRNT to $57.00 per share (previously: $54.00 per share). We reiterate our Buy rating on VRNT, given 23% upside from current levels and our confidence in its long-term growth prospects, driven by open cloud platform strategy and margin improvement prospects.

Company Description

Verint Systems (VRNT) Incorporated in Delaware in February 1994 and headquartered in Melville, New York, Verint Systems (NASDAQ: VRNT) helps companies to build customer relationships by connecting work, data and experiences across the enterprise. The company uses artificial intelligence, analytics, open cloud architecture and automation technology with deep domain expertise to close engagement capacity gap. The company employed ~4,300 professionals as of April 30, 2021.

Read More

share this article!