VRNT - Verint Faces Slowing Customer Activity As SaaS Transition Proceeds

2023-06-05 17:20:10 ET

Summary

• Verint Systems Inc. provides customer experience management software for businesses worldwide.
• The company is almost substantially complete in its transition from a perpetual license to a SaaS business model.
• Verint Systems management is seeing prospects reduce their planned scope and existing customers delay their conversion to the SaaS platform.
• I'm Neutral (Hold) on Verint Systems stock, as macroeconomic conditions continue to steadily slow business activity.

A Quick Take On Verint

Verint Systems Inc. ( VRNT ) reported its FQ4 2023 financial results on March 29, 2023, beating both expected revenue and EPS estimates.

The company provides customer and stakeholder engagement software to organizations worldwide.

I previously wrote about Verint with a Hold rating.

However, given that many data points indicate a continued slowdown in business activity, reduced availability of bank financing in the U.S., and a growing cautiousness by clients and prospective customers, my near-term outlook on Verint Systems Inc. remains Neutral (Hold).

Verint Overview

Melville, New York-based Verint Systems Inc. was founded in 1994 and provides a suite of customer and stakeholder experience tools for organizations to improve their engagement and customer service capabilities.

The firm is headed by founder and CEO Dan Bodner. He became Chairman of the Board of the company in 2017.

The firm's primary offerings include:

• Forecasting and Scheduling

• Quality and Compliance

• Conversational AI

• Engagement Orchestration

• Experience Management

• Interaction Insights

• Real-Time Work

• Engagement Channels

• Knowledge Management

• Fraud and Security Solutions

The firm acquires customers via a direct sales model as well as through partner referrals, with customers typically starting off with a subset of its offerings and then growing in the number of products they use over time. This is known as a "land and expand" approach.

Verint's Market & Competition

According to a recent market research report by Mordor Intelligence, the market for customer engagement solutions was an estimated $15.5 billion in 2020 and is forecast to reach nearly $31 billion by 2026.

This represents a forecast CAGR of 12.65% from 2021 to 2026.

The main drivers for this expected growth are increasing usage of customers of smartphones and a desire by businesses to connect more frequently and meaningfully with prospects and customers in a more automated and cost-efficient manner.

Also, the Retail and Consumer Goods industries are expected to account for a considerable market share of demand for solutions, while the North American region is forecast to retain the highest market share by region, with the Asia Pacific region expected to produce high growth during the period.

Major competitive or other industry participants include:

• Avaya

• Aspect Software

• Calabrio

• Genesys

• IBM

• Nice Systems

• Nuance Communications

• OpenText

• Oracle

• Pegasystems

Verint's Recent Financial Trends

• Total revenue by quarter has grown according to the following chart:

• Gross profit margin by quarter has remained essentially flat in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter dropped sharply in the most recent quarter:

• Operating income by quarter has risen dramatically in the most recent quarter:

• Earnings per share (Diluted) grew substantially in the most recent quarter:

(All data in the above charts is GAAP)

In the past 12 months, VRNT's stock price has fallen 28.78% vs. that of Sprinklr, Inc. ( CXM ) stock's even performance, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $282.8 million in cash, equivalents and short-term investments and $408.9 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $111.8 million, of which capital expenditures accounted for $28.0 million. The company paid $76.1 million in stock-based compensation, or SBC, in the last four quarters, the second-highest trailing twelve-month figure in this category in the past eleven months.

Valuation And Other Metrics For Verint

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Sprinklr; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

VRNT's most recent Rule of 40 calculation was 16.5% as of FQ4 2023's results, so the firm is in need of improvement in this regard, especially with respect to revenue growth, per the table below:

(Source - Seeking Alpha)

Commentary On Verint

In its last earnings call ( Source - Seeking Alpha ), covering FQ4 2023's results, management highlighted the continued transition of the company from a perpetual license to a SaaS model as it expects to be 90% complete by its fiscal year 2025.

Leadership also reiterated its completely open platform, 'which easily fits into customers' existing ecosystems' as an advantage versus competitors.

Also, management said it has already had one customer purchase its Da Vinci with ChatGPT embedded 'to achieve automation of call summary' information.

However, management did not disclose any company or customer retention rate metrics.

Total revenue for FQ4 2023 was only 0.9% above FQ4 2022 revenue, and gross profit margin rose by 3.3 percentage points.

Selling, G&A expenses as a percentage of revenue fell by 7.8 percentage points while operating income rose by a whopping 136.5% to $48 million.

Looking ahead, management guided fiscal 2024 full-year revenue of $935 million at the midpoint of the range, which would mean a 3.6% revenue growth rate, if achieved.

The company's financial position is relatively strong, with ample liquidity, some long-term debt but strong free cash flow; its net debt-to-EBITDA multiple is 1.0x, a low figure.

VRNT's Rule of 40 performance has been mediocre in my most recent calculation.

Regarding valuation, the market has assigned VRNT a comparatively lower EV/Sales multiple than Sprinklr, which is not surprising given VRNT's much lower revenue growth rate as it continues its customer base conversion to its SaaS platform and business model.

The primary risk to the company's outlook is the combination of slowing conversions to its SaaS platform and a reduction in deal sizes as customers push out expenses and lower commitments.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Challeng(es)(ing)" one time, "Macro" one time and "Drop" two times.

The negative terms refer to an expected drop in perpetual license revenue in the coming period.

A potential upside catalyst to the stock could include a pause in the rise of the cost of capital, resulting in a reduction in negative pressure on the firm's valuation multiple.

However, given that many data points indicate a continued slowdown in business activity, reduced availability of bank financing in the U.S., and a growing cautiousness by clients and prospective customers, my near-term outlook on Verint Systems Inc. is Neutral (Hold).

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