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Verint Systems' (NASDAQ:VRNT) stock is undervalued at its current price, given its growth potential. The company was in the clutches of Comverse, which retarded its growth. Now that the company has acquired its parent company Comverse Technology (CTI), it has adopted an aggressive strategy to expand its market share and to embark on new product innovation. I believe the company has the potential to make inroads in the big data analytics and cyber security market. The stock has potential to give good returns.

About the Company

Verint was officially a wholly owned subsidiary of Comverse Technology, Inc. (NASDAQ:CMVT), an Israel-based leader of communication and billing software services. At the time of the initial public offering, Comverse Technology owned 79.5% of Verint's common stock. Today, Verint is an independent company after acquiring Comverse Technology on February 4, 2013. While VRNT has Israeli roots and has the majority of its R&D still conducted within Israel, the company's corporate headquarters is in Melville, New York.

The company has three business verticals namely 1) Enterprise Intelligence 2) Communication Security and Video Surveillance. The enterprise business is the major source of revenue, which contributes about 55% and other businesses constitute the remaining 45%. The company is strategically becoming a software company with its big data analytics and SaaS platform.

The company's regional revenue is given in the figure below

(click to enlarge)

Source: Company's SEC filling

(click to enlarge)

Source: Company's SEC filling

VRNT's future is tied to several secular themes, including growth in big data, where the firm has long been a pioneer in deriving business and demand for cyber security by government agencies owing to the increased threat of terrorism.

Potential Driver for the Company

Workforce Optimization Application Consolidation favors Verint

The demand for Workforce Optimization on to a single platform is on the rise in recent times, and is expected to increase further in the coming year. Verint is poised to gain from this surge in demand, as it has a broad WFO product portfolio, which puts it in a better position to gain market share from single solution vendors who lack the integrated suite offering.

According to Gartner, less than 10% of the Contact Centers use integrated Workforce Optimization (WFO), which implies a large untapped market for the integrated suite provider. According to Gartner, integrated WFO will increase to 30% by 2015. Verint being the leader in the WFO application will benefit the most from this increase in demand for integrated WFO application.

(click to enlarge)

The enterprise intelligence revenue has grown by 12% y-o-y in FY13. The company has invested heavily in R&D and Sales force strengthening, which will help the company gain market share in this segment. As the demand for integrated solutions is increasing, the demand for Verint Systems' solution will increase and therefore a growth of 14-15% is expected in this segment.

Communications and Cyber Intelligence will accelerate growth

Verint continues to gain large orders from the existing and new customers in communications security. The company aims to improve its overall security solutions by adding improved analytical solutions. The company is also getting orders from various governments for security intelligence from unstructured voice and video information.

The company has last year entered into the cyber security market for the government. According to marketsandmarkets, a research firm, the cyber security market is expected to be the fastest growing segment of the Information Technology sector in the next three to five years. According to the report, the cyber security market, which was ~$63.7 billion in 2011, is expected to be about $120.1 billion in 2017, at a CAGR of 11.3%.

The cyber security business is getting traction as the company recently bagged a surveillance order from the Indian government. Given its strong presence and experience in the security segment, the company is well positioned to get more contracts, as more and more governments across the world are concerned about the security threat.

Cross-selling opportunities and benefits of unified suite provide additional revenue opportunity

According to the company, only 15% of the customers have purchased more than one product from its suite of solutions. Only a few customers have purchased all the modules. Customers tend to prefer having a single vendor for the unified solutions. So in the coming time, it is expected that cross selling to the existing customers will increase.

Acquisitions are likely to focus on small, tuck-in technology plays

For acquisitions, management is largely looking for small, tuck-in acquisitions that extend the company's technology offerings, as it believes that the company has a fairly comprehensive suite of offerings with its current stable of products. I believe partners that provide additional technology offerings (which augment Verint's suite) are possible acquisition options, in addition to other, small companies that have developed key technology, whereby Verint treats acquisitions in this fashion as a form of outsourcing its R&D efforts.

Valuation

The stock is currently trading at forward P/E of 12.41. I believe that there is potential upside to the EPS and the multiples as is evident from the fact that big data analytics sales are gaining traction. The PEG ratio for the company is 1.12. At this level the stock looks attractive.

Conclusion

The company has swiftly changed its position from being a hardware vendor to software vendor. The company has become more aggressive post the re-merger with Comverse. The company has increased its investment in R&D and sales and marketing. The company has also entered in big data analytics and cyber security, which is gaining good traction. I believe that the company is in a good position to leverage its legacy in big data analytics. So the stock is worth buying at the current price.

Source: Verint: A Company With Good Potential