Verint Systems: Cognyte Spin-Off To Unlock Significant Value

Verint Systems: Cognyte Spin-Off To Unlock Significant Value

With the spin-off of its Cyber Intelligence unit on the way, Verint Systems (VRNT) looks set for a valuation boost. Recently IPO’d Palantir (PLTR) shines the spotlight on the value-unlocking opportunity – given the many similarities between the spinco and PLTR, there is a good case, in my view, for a significant re-rating from the implied ~1x EV/Sales multiple it currently commands within VRNT. The next steps include a 20F filing, as well as an investor day early next year, both of which will offer more color on the separation. With improving trends across both businesses, an undemanding multiple, and a separation catalyst on the way, VRNT offers investors a highly favorable risk/reward.

FY22 Guidance Offers a Look into Verint Post-Spin

Management has been making all the right noises on the planned separation so far, and the level of disclosures offered on the recent quarterly call was more of the same. Not everything is finalized, though, as the FY22 guidance showed – the company is still guiding both segments, Customer Engagement and Cyber Intelligence (Cognyte) as if the two were operating under the same entity. But come January, and soon after end-FY21, both businesses will split into individual public companies. Management did offer some new insight into the Cognyte spin-off, though, citing ~$15m of dis-synergies per company in FY22 and a higher leverage on each business (spinco and remainco) post-spin.

50917416 16086544186715603

Source: Investor Presentation

Cloud-Driven Growth at Remainco

Remainco, i.e., the retained Customer Engagement business, is on track to hit its ~$1bn revenue target by F24, which implies a solid mid-to-high single-digit % CAGR. The quality, though, is the key highlight – the revenue base will shift to ~90% recurring on an accelerated ~30% CAGR in the cloud, with two-thirds of software bookings from SaaS. Not only does this represent a step-up in its strategic shift, but it also comes with much-improved economics, underpinning further margin expansion post-separation.

50917416 1608654432761692

Source: Company Filings, Author’s Est

Broadening the Recurring Revenue Base at Spinco

The FY22 guide for the spinco, Cognyte, was also bullish, with growth expected to hit ~10% in FY22 before accelerating further in FY23-24. This bodes well for the segment’s valuation multiple, even ahead of the separation. Plus, there’s also the improving profitability to factor in – VRNT has ample room to improve margins via the growing “recurring” revenue portions of the business, which has grown from 55% to 70% in recent years. The broader recurring revenue base has translated into stronger gross margins, which were up 500bps in the most recent quarter. With the acceleration that began in the higher-margin recurring revenue strategy now a permanent driver for the segment, I see ample runway for further margin expansion in FY22/23 after lapping the post-spin dis-synergies in FY22.

50917416 16086544521702597

Source: Company Filings, Author’s Est

A Value Unlocking Spin-off

If the recent IPO of Palantir Technologies is anything to go by, a standalone data analytics/cyber intelligence stock could command significantly higher valuations. To be clear, the size of the opportunity set for both companies is different – in its IPO filing, Palantir cited a $119bn market opportunity, while on its most recent earnings call, VRNT pegged its cyber intelligence addressable market at $25bn, with a double-digit runway in the coming years.

50917416 16086544653140075

Source: Investor Presentation

That said, Cognyte does have a more predictable earnings stream going for it. Palantir, by comparison, has similar gross margins but a more uneven growth profile despite its larger addressable market. Palantir has also never been profitable since its founding, while Cognyte generates >20% EBITDA margins. While I don’t expect Cognyte to command a similar valuation, I think the current implied valuation significantly underestimates the value to be unlocked.

Sum-Of-Parts Highlights the Cognyte Opportunity

VRNT currently trades at a steep discount to its closest peer on the Customer Engagement side, NICE Ltd. (NICE), at ~18x fwd P/E. But with the planned Apax investment and a spin-off on the horizon, there’s ample room for multiple expansion, in my view.

ChartData by YCharts

To frame the value-unlocking opportunity from the spin, I think a sum-of-parts approach works best. Assuming a ~13x EBITDA multiple for CE, a discount to its peers, to account for the slower growth profile, we can then back into an implied Cognyte valuation of ~1.4x EV/Revenue, which strikes me as cheap given the best-in-class data analytics/cyber intelligence player Palantir commands an ~50x EV/Revenue multiple.

USD ‘bn
Market Cap4.1
(+) Net debt0.1
Enterprise value4.2
(-) Customer Engagement @ 13x EV/EBITDA3.5
= Implied Cyber Intelligence EV0.7
(/) Cyber Intelligence FY22e Revenue0.5
= Implied Cyber Intelligence EV/Revenue1.4x

Source: Company Filings, Author’s Est

Upcoming catalysts include a virtual investor day for Cognyte in early-2021 and a virtual investor day for the Customer Engagement business a week after that. A quick review of the risk factors which could make me less constructive on Verint are as follows:

  • COVID-driven disruptions to Verint’s business.
  • Execution risks with regard to the spin-off – should the planned separation not proceed as planned, for instance, I think the stock could de-rate given the run-up post-announcement. Any hiccups in the planned investment by Apax could also weigh on the valuation.
  • Finally, as Verint is mainly exposed to enterprise and government clients, slower spending could weigh on revenues and margins across both segments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

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