Secular tailwinds, very strong growth at a discount; initiate at Buy
* Source of opportunity
We are buyers of VRNT as we see the company as a unique blend of
growth, profitability, and scale that is trading well below peers. Verint’s
double-digit growth is being driven by increased adoption of the company’s
analytics platform within the Security and Customer Service segments.
Adoption is accelerating as a result of Verint’s capability to operationalize
analytics of unstructured data (Voice, Video, and unstructured text) in highvolume
and speed use cases. The company has announced nearly $200mn
in security signings in just the past two quarters and should garner more
meaningful synergies from the recent KANA acquisition this year and next.
* Catalyst
We see 28% upside to shares over the next year as we expect increased
investor visibility into Verint’s double-digit growth and improved confidence
in growth sustainability with Verint’s demonstrated success in cyber
security and customer service, two of the strongest segments in software.
We believe investor confidence in product differentiation will also improve
as the company’s technology (i.e., advanced data capture and processing
with classification, correlation, and anomaly detection analytics) is harder to
replicate than many investors perceive. Validation is likely to come from
high-profile deal signings, follow-through on previously announced wins,
and execution to mid-teens EPS growth over the next three years as growth
stabilizes at ~10% and margins expand to ~25% (up from 22% this year).
* Valuation
Our $68, 12-month price target is based on a 10-year DCF assuming 23%
FCF margins on $2.4bn in 2023 revenue. Our target implies a 2015E
EV/Sales of 3.7x and EV/FCF of 18x vs. peers of 4.7x and 27x, respectively.
* Key risks
Slower-than-expected adoption of analytics technology within the contact
center, an inability to navigate the transition to SaaS within customer
service, and lumpiness in large deals in the government vertical.