2024-01-08 14:10:53 ET
Summary
- Verint's recent analyst day showcased a positive long-term growth outlook, but near-term results remain weak.
- In 3Q24, Verint outperformed consensus estimates at the EPS level, but non-GAAP recurring revenue fell and operating margins declined.
- Verint's strategy to drive more adoption of its bots could be a potential growth opportunity, but the company needs to demonstrate accelerated growth to justify a revaluation.
Overview
My recommendation for Verint ( VRNT ) is still a hold rating as I await VRNT to show better near-term results. The recent analyst day has made me feel more positive about VRNT's long-term growth outlook; however, I think the market is still focused on the near-term performance. In 3Q24, VRNT performance was better than consensus, but on a y/y basis, it is still weak. Note that I previously gave a neutral rating for VRNT due to the weak near-term growth outlook, as I expected the macro environment to continue weighing on performance. That was also why I did not find the share price attractive after the major selloff.
Recent results & updates
VRNT continues to face pressure from the macro environment, where 3Q24 non-GAAP recurring revenue fell to $161.2 million, although non-GAAP nonrecurring revenue increased 13% to $57.4 million. Non-GAAP operating margins also fell accordingly, declining by 150 bps to 24.5%. That said, on a relative basis to consensus estimates, VRNT outperformed at the EPS level, largely due to better-than-expected revenue performance as well as better EBIT margins. For reference, consensus expected 3Q24 revenue of $216.3 million and VRNT reported $218.7 million (note this is still a y/y decline); consensus expected EBIT of $47.2 million and VRNT reported $53.56 million; consensus expected 3Q24 EPS of $0.57 and VRNT reported $0.65 EPS.
I think the 3Q24 results have certainly improved the equity story narrative for VRNT, as it did better than what the market expected. The share price movement also reflected this reality. In addition, I thought the VRNT presentation at its analyst day gave a pretty good bull-case narrative over the medium and long term. From what I gathered at analyst day, VRNT seems to be in a good position to benefit from the AI adoption trend in the long run. One argument against AI is that it could lead to a decrease in labor costs for customers since fewer agents will be needed. On the other hand, it means that clients can put more money toward technology investments, and there is a chance that VRNT can get a piece of that pie. I believe that VRNT's bot offerings, which include 35 tools that automate various human functions, can result in substantial cost savings for customers when combined with VRNT's consumption-based pricing. Quoting management’s words, they believe that if AI reduces the total number of agents needed, the potential upsell from bots could still be an incremental $1.1 billion opportunity.
One important distinction about VRNT bots is how they are delivered. During the analyst day, management provided an update regarding their go-to-market strategy, which I am quite positive about. Firstly, VRNT bots have an open platform, which makes it easy to deploy the Bots into existing workflows. This is a very important point, as it means the bot can be deployed seamlessly. This should be a major plus, as no business wants to disrupt their workflow processes. This also makes it easier to measure the return on investments in these bots, as they can be deployed almost immediately. In addition, VRNT offers flexible paths to adoption, as the same workflows for human workforces can be facilitated via a hybrid model of humans and bots. In my opinion, this approach lowers the adoption barrier even further by letting customers adopt Verint for small, specified use cases initially and then gradually increasing adoption in areas that are most relevant to their needs.
From a medium-to-long-term perspective, it seems like VRNT has a pretty good strategy to grow. However, I think it is more important for VRNT to start generating stronger near-term results. For FY24, management maintained the $910 million total revenue guide (which implies 0.5% growth) but lowered the SaaS revenue growth guide for the year to 15%. For all the positive things mentioned in the analyst day, the lowered SaaS guide was not something I am happy about.
Valuation and risk
I am updating my model to reflect the current share price. I am not changing my growth assumptions, as FY24 is very likely going to be the same as what management guided. If it hadn’t, management would have provided an update during Analyst Day (which was held in December). For FY25, I am expecting some form of growth recovery as the macro environment should be in better shape (rates are likely to be cut, which reduces the cost of capital for many businesses), and its strategy to drive more Bots adoption should bear fruit. I used 5% because, over the past few years, growth seems to be dangling around the mid-single digits; hence, I expect the first step to higher growth is to at least recover to its historical level.
Like I said above, the medium-to-long-term growth outlook seems alright, but VRNT needs to show the market that growth can accelerate from here. Until then, I don’t think the market will drive VRNT valuation back to its historical ~3x forward revenue level. I assume the current 2.3x forward revenue will stay.
Where I could be wrong is that VRNT's strategy to drive more bots adoption could be a lot more successful than expected, which will likely steer the market’s attention to the long-term growth outlook as more bots imply more room for VRNT to upsell, which drives growth. The valuation paradigm would shift from near-term to long-term, and the valuation multiple is likely to rerate.
Summary
I am going to stick with my hold rating for VRNT as I await stronger near-term results, despite a positive long-term growth outlook showcased at the recent analyst day. Although VRNT's 3Q24 performance exceeded consensus expectations, y/y comparisons indicate ongoing weakness due to macroeconomic pressures. VRNT's lowered SaaS revenue growth guide for FY24 concerns me. While its strategic focus seems promising, VRNT needs to demonstrate accelerated growth to justify a revaluation.
For further details see:
Verint: Long-Term Outlook Positive, But Better Near-Term Results Needed