Investors Are Watching Verint as Government Spy Budgets Shrink

  • CEO says emerging-market slowdown responsible for revenue drop
  • Verint says it's temporary; analysts see deeper problems

For the past three years, Verint Systems Inc. has reaped handsome profits selling spyware to developing nations.

The slowdown in emerging markets is squeezing government budgets, shrinking Verint’s intelligence business while earnings growth has come to a halt. Now the company, which makes software that sifts through communications such as text messages, phone calls and e-mail, finds itself under increased scrutiny -- from investors.

Verint said last week that it missed fourth-quarter revenue and profit forecasts by wide margins, and warned that security revenue may fall 10 percent to 15 percent this year. Chief Executive Officer Dan Bodner called the slowdown temporary, and blamed it on currency routs and budget deficits in countries such as Brazil, which has reduced the size of its orders after a 33 percent depreciation in the real last year amid the worst recession in decades.

Worried Investors

But Verint’s emerging-market pain comes on top of managerial missteps in its enterprise business, where it uses the same basic technology to run corporate call centers and help companies draw sales leads from customer interactions. With the stock trading near a three-year low, Bodner announced the company’s first-ever stock buyback program, and a three-city roadshow this month to meet with investors.

“Investors are worried there’s some kind of structural issue here,” said Jonathan Ho, an analyst with William Blair & Co. in Chicago who still rates the shares the equivalent of buy. “The company insists that it’s more temporary in nature, and that’s where the debate begins.”

Verint’s net income fell 8 percent to $191 million in the fiscal year ended March 31, while sales slipped 2 percent to $1.1 billion. Bodner expects overall revenue to remain flat in the 2017 fiscal year. Security revenue, which rose 7.5 percent to $505 million in the 2016 fiscal year, could fall as much as 15 percent in 2017, he said March 29. It fell 10 percent to $121 million in the fourth quarter.

Skeptical Analysts

While waiting out the slump in emerging markets, Verint will shift its focus to security needs in Western Europe, where the use of intelligence to deal with terrorism, immigration, and crime is on the agenda of governments, Bodner told investors on a March 29 conference call. He also expects a revamped sales strategy for corporate customers to bear fruit in the first quarter after initial attempts to grow through his 2014 acquisition of Kana Software Inc. by selling bigger-ticket software suites failed to gain traction, he said.

Alan Roden, vice president of investor relations at New York, Melville-based Verint, didn’t respond to e-mails and phone calls seeking further comment.

Some analysts remain skeptical. Credit Suisse Group AG downgraded Verint from neutral to underperform on March 29, citing competition in its enterprise business and a possible industry shift to cloud-based software, a departure from Verint’s main product, which is installed behind firewalls at clients’ physical locations.

“They want you to believe its an execution problem because execution problems can be fixed,” Michael Nemeroff, an analyst at Credit Suisse in New York, said by phone. “There could be some larger issues in the industry, it may be shrinking faster than anybody suspects.”

Global Demand

Bodner also has to account for the fact that demand for intelligence services doesn’t seem to be waning. The CEO himself said on the earnings call that fighting terrorism remains a high priority for countries around the world. Cyberbit, the year-old cybersecurity unit of Israeli defense company Elbit Systems Ltd., a competitor to Verint in the security space, announced a two-year, $22 million contract with an Asia-Pacific country in an April 4 statement.

“There are financial challenges for several countries,” Cyberbit head Adi Dar said in a phone interview. But “at the end of the day, we see countries find the budget for the things which matter.”

Elbit bought the communication intelligence assets of Verint’s competitor, Nice Systems Ltd. last year.

Stock Slide

Verint replaced the president of its communications and cyber intelligence business, Hanan Gino, with Elad Sharon, the unit’s chief operating officer, according to a Feb 3. filing.

Verint shares have lost about half their value since reaching a peak of $66.35 in June 2015. They were little changed at $34.01 at 2:20 p.m. in New York Thursday, about 11 times 12-month projected earnings. That compares with an industry average of 56 times, according to data compiled by Bloomberg.

Even shareholders who believe in Verint’s long-term prospects are growing restless. Ben Nahum, who helps oversee $2.1 billion in small-cap stocks at Neuberger Berman Group LLC, bought Verint shares back when its parent company, Comverse Technology, was entangled in an accounting scandal that he says unduly penalized Verint shares. After the stock reached a record high in June, it’s pretty much back to where it was when he bought it.

“It hasn’t been a rewarding experience for us or other long-term investors,” Nahum said. “They need to rethink their process in terms of capital allocation and the way the company’s constructed.”

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