NEW YORK, May 23, 2019 /PRNewswire/ -- Report entitled
"A Short Cloud Call" outlines how Verint faces 60-70% downside risk
to approximately $17.00 to
$25.00 per share due to the market's
misunderstanding of the Company's flat-to-negative organic sales
growth, which, obfuscated by frequent M&A, a "beat-and-raise
cookie jar," and aggressive accounting measures, is misunderstood
by the Street. With the market valuing Verint like a high-flying
SaaS company on an aggressive and low-quality measure of adjusted
earnings, Spruce Point believes that the stock's recent surge is
unsustainable and will correct as recent accounting-driven benefits
are anniversaried.
- Low-Quality M&A Obfuscates Organic Growth And Appears To
Facilitate "Beat & Raises": Since FY15, Verint has spent
~$1B on M&A. KANA, its biggest
acquisition, failed spectacularly in our view, as sales growth
immediately turned negative once the acquisition was anniversaried.
Verint has continued to pursue smaller tuck-in acquisitions since,
but most deals go unannounced, and are not explicitly named in SEC
filings. We believe that, after taking into account M&A, FX,
and the effects of ASC 606, organic growth was in the low single
digits in FY18 and negative in FY19, far below reported top-line
growth in the high single digits. Last quarter, management raised
guidance by just $20M upon acquiring
ForeSee Results, Inc., whereas court filings indicate that ForeSee
was generating $80M in sales at the
time of the bankruptcy of its former parent, Answers Corp. (2016),
and was projected to grow to $130M by
this year. We believe that subsequent sales growth characterized as
organic was largely driven by this and other acquisitions, and that
its underreported inorganic sales contribution created a "cookie
jar" which Verint used to beat Q4 and raise FY20 guidance.
- Aggressive Accounting Measures Flatter Performance And Boost
Executive Compensation: Verint includes in "cloud revenue" sales
from term-based licenses, which can be recognized up-front under
newly-adopted accounting standards (ASC 606) and thus inflate
management's depiction of recurring cloud sales. Management's
adoption of ASC 606 boosted revenue by $47M (5%) and net income by a massive
$51M (75%) in FY19 – far out of line
with NICE Ltd., its closest peer, whose revenue declined with the
change. Newly-capitalized commission costs and questionable
add-backs accounted for ~25% of FY19 Adj. EBITDA and ~65% of
Non-GAAP Net Income, both of which would have seen zero growth in
FY19 (vs. reported mid-single-digit growth) without capitalized
commissions alone. Management performance metrics are padded by
even more questionable add-backs which appear nowhere in Company
filings but the notes to its proxy. Spruce Point believes that
management would have missed five of its six comp targets in
FY18-19 without these add-backs.
- Key Executives With Dubious Pasts: Dan
Bodner has been CEO of Verint since its founding in 1994.
For much of the 1990s and 2000s, it was a subsidiary of Comverse
Technology, whose CEO, CFO, and GC orchestrated a massive options
backdating scandal during this time. All three sat on Verint's
Board and were the sole members (with Bodner) of key Board
committees. A later investigation found that Verint had carried out
aggressive business practices under Bodner to decrease sales
volatility and inflate reserves. CFO Douglas Robinson worked for Computer Associates
for 17 years through the 1990s and 2000s, including stints as a
senior member of the finance department. CA was similarly shown to
have engaged in aggressive revenue recognition practices to inflate
sales and earnings. Though Robinson was never implicated, his close
association with CA's finance department at the time of the fraud
concerns us.
- Slow-Growing Call Center Software Provider Priced Like A
High-Growth SaaS Company: The Street believes that VRNT trades at a
~35% discount to peers based on an improper view of Adj. EBITDA and
net debt. Even then, the avg. analyst price target of $66 yields just 8% upside. After restating EBITDA
for questionable add-backs and newly-capitalized expenses, and
after removing non-transparent restricted cash items from
liquidity, we find that VRNT trades at almost exactly its peer
median multiple, despite contracting organic sales and stagnant
cash flow. Meanwhile, insiders are dumping the stock just as it
approaches all-time highs (up 45% Ytd). We believe that its current
multiples – its highest in recent history, and comparable to
high-quality take-outs SAAS and BSFT – are unsustainable as M&A
fails to grow cash flow, as it falls further behind call center
software peers and out-of-favor with SaaS-oriented investors, and
as it laps FY19 ASC 606 tailwinds. We value the slow-growing
Company at an EV/EBITDA multiple of 8-10x for a price target of
$17-25, yielding 60-70%
downside.
Spruce Point Capital has a short position in Verint Systems Inc.
and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities.
Contact
Sean
Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC