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As the bear market continues for a large cohort of software companies, the number of potential bargains accumulates. Some of these companies could even get acquired at higher prices in the coming years. Accordingly, I am keeping tabs on some of the companies that look like potential winners in a stronger macroeconomic environment, especially given the promising capabilities of applying artificial intelligence to improve products and businesses.
Verint Systems Inc. (NASDAQ:VRNT), a Contact Center as a Service (CCaaS) company, popped onto my radar after a disastrous 19.4% post-earnings loss earlier this month that took the stock to a near 3 1/2 year low.
After apparently stabilizing the first 8 months of the year, VRNT suddenly finds itself at a 3 1/2 year low. (Tradingview.com)
It is hard to imagine that a company at the forefront of innovating in the CCaaS industry, and now pushing forward with artificial intelligence capabilities, is worth little more than it was shortly after stock markets crashed following the pandemic. I understand the disappointment in the latest results. However, this sell-off looks like a significant de-risking event that creates the beginning of a long-term investing opportunity.
The price/sales valuation for VRNT has not been this low since early 2016. (Seeking Alpha)
Guidance: Revenue Exit Stage Right
Seemingly, VRNT’s biggest crime for the latest quarter was to concede about 10M of its previous revenue guidance for the second half of 2023 into the following year. (The guidance assumes stable economic conditions in the second half of the year). This shift equates to $102M million of new SaaS annual contract value (ACV) versus prior expectations of $112M. When asked by an analyst to provide the timing for a trough in the elongating sales cycle, management failed to offer a timeline. However, they did offer what should have been encouraging news: the company’s sales pipeline for the next 12 months grew 20%. This growth provides evidence of pent-up demand. Moreover, the projected shift in bookings simply mirrors one-quarter shifts that happened from Q1 to Q2 and Q2 to Q3 (expected). In Q2, the company closed the revenue shift from Q1.
The company provided other reassuring data points on sales activity:
- Average term length of new orders is still around 2 1/2 years
- Q2 SaaS (software as a service) ARR (annual recurring revenue) year-over-year growth of 17%
- The percentage of software revenue that is recurring increased to 86% versus 84% a year ago
- Q2 new SaaS ACV booking level in Q2 roughly flat year-over-year
- Q2 total deals up 30% year-over-year. The smaller deals (given the flat booking level) come from customers starting small with new AI features. Verint expects these customers to grow bookings over time. The company further explained that its consumption-based pricing model makes it easier for customers to make an initial small purchase and then to increase consumption from there.
Additional notes on guidance:
- No change in earnings guidance thanks to improving gross margin driven by increased bundling of SaaS offerings. Diluted EPS and adjusted EBITDA remain the same at 5% year-over-year growth for both metrics.
- No change in expectations for $190M of non-GAAP cash from operations
- Cash generation growth at double digits (faster than revenue growth)
- On schedule for 88% of annual software revenue from recurring sources
- 18-20% increase in full-year SaaS revenue, about $530M at the midpoint
- The $10M shift in ACV bookings creates a $25M reduction in revenue expectations for the year to $910M
The healthy cash generation and expectations for continued strength in cash generation support the company’s confidence in carrying out its $200M authorization for buybacks. To-date, the company has spent $100M of this authorization. These repurchases have obviously not prevented multi-year lows, but they should apply brakes to the stock’s decline from motivated sellers.
Other Points of Potential Concern
A heavy dependence on Q4 renewals could be unnerving analysts who do not want to wait to see the near future. However, the heavy weight on fourth quarter performance was well recognized as recently as Q1 results. Verint expects “approximately $55 million of renewal revenue in Q4 compared to only $15 million in Q3.” For gross margins, the company expects “a larger sequential increase in Q4, driven by the significant sequential revenue increase from the concentration of renewals.”
Another potential point of concern could be Verint’s lack of plans to increase hiring in sales. The company wants to “focus on getting the salespeople [they] have today to build the pipeline.” While this plan sounds like good sales efficiency, it also suggests the company is not expecting a burst of growth in the near term.
Here Comes the Bot Collective to the Rescue
Artificial intelligence (AI) capabilities are key to the bullish case for Verint. A successful rollout of the company’s group of bots will solidify a promising future for the company.
Verint is launching a host of specialized bots that improve their performance on specific tasks. The company can leverage and model customer engagement data going back 20 years. A Data Insights Bot allows for natural language queries to generate insights from customer engagement data. An Interaction Wrap-Up Bot provides a handy summary of the automated chat to give a live agent important context and reduce the customer’s need to repeat details from the case. The Forecasting and Extended Forecasting Bots scan historical data, scenarios, and external context to select the right forecasting models for workforce planning. Verint has 30+ bots in its platform with plans to launch 15 more by the end of this year and add another 30 next year. These bots present an attractive option for customer support departments to augment an existing workforce without struggling to find new hires.
As a result, Verint claims that it is well-positioned at this early stage of the AI adoption cycle with its Da Vinci AI system in its platform.
Conclusion: The Trade
There is no rush to buy into the middle of the current selling in VRNT, especially so soon after a disappointing collapse of an extended period of price consolidation. New multi-year lows create a torrent of falling knives. However, at some point, I expect buying interest to reappear. One simple trigger point is to buy at a new post-earnings closing high (also see “Anatomy of A Bottom: Do Not Argue With Sellers – Celebrate With Buyers” for additional cases and rules for this kind of buying). If Verint goes into its next earnings without closing above $25, then I will likely buy a small “no regret” position in the stock if it is within 10% or so of $25.
In the meantime, be careful out there!
