Project Description

Verint Spin-off Quick Summary – December 19, 2019

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Resources from Verint

Spin-off Slide Deck Presentation – December 4, 2019

Spin-off Press Release – December 4, 2019

Investor Relations Contact Information

Other Resources

Verint Systems To Spin Off Cyber Intelligence Unit – CFO.com, December 5, 2019

Moody’s Places Verint Systems’ Ba2 CFR on Review For Downgrade After Spin-off Announcement – Business Insider, December 6, 2019

Overview

On December 4, 2019, Verint Systems announced that it would be spinning off its Cyber Intelligence business segment into its own, separately traded public company. The announcement came in conjunction with their announcement that the company would be receiving a $200mm minority investment from Apax Partners, in addition to a new stock buyback plan. The spin-off transaction is expected to be tax-free for existing Verint shareholders, and it is targeted to be completed in the first quarter of 2021.

Why the Spin-off?

Although management never gave any significant rationale for why they would be spinning off this segment, it is likely to realize the value of their faster growing segment in order to plow any proceeds from it back into its core business. Their core business, Customer Engagement, provides analytics and touch points in which businesses can substantially connect with their customers in order to provide a better experience. At this point in their business, Verint is undergoing a rather significant transition in their Engagement business, as they are currently attempting to shift that business to a cloud focused versus on-premise solution. The transaction, in addition to a substantial investment by a private equity firm that specializes in software business transitions, should allow management to focus on creating shareholder value via their on-prem to cloud transition in the Customer Engagement segment. For the spin-off, becoming an independent company allows it to have more control over corporate budgeting and grow independently of their parent company’s business model shift.

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Spin-off Overview

Company

Verint is a leading global provider of security and intelligence data mining software. Their solutions are deployed in over 100 countries, helping governments, critical infrastructure and enterprise organizations to neutralize and prevent terror, crime and cyber threats. Through data mining software, the Cyber Intelligence segment helps security organizations capture and analyze data from multiple sources and turn that data into actionable insights. Verint has over two decades of cyber intelligence experience leveraging data mining software, deep domain expertise and advanced intelligence methodologies to address a broad range of security missions for intelligence, cyber and physical security organizations.

Revenue growth has been relatively choppy over the last decade or so in this business, but over the past few years, the business has grown at around 10% per annum. There is a huge runway for increased cyber security spend, provided the tech is good enough. With cybersecurity threats attacking businesses and governments every single day, organizations are willing to spend top dollar to ensure the safety of their data.

Similar to most software companies, this is a pretty high margin business, with historical EBIT margins around 26% and projected margins as a standalone business even higher. Additionally, the industry is not very cyclical, considering that businesses always need top of the line cybersecurity protection in order to ensure that their business is safe from any cyber threats.

Industry

The cybersecurity industry as a whole is still in its nascent stages, growing quickly with many new firms popping up with innovative new technologies. As the pervasiveness of cyber threats continue to pop up globally, the industry will have a high degree of demand to respond to these threats. In the U.S. alone, the industry is expected to grow at approximately 5% per year for the next six years, per IBISWorld.

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From a secular tailwind perspective, there are a number of forces pushing the industry higher going forward. As previously discussed, the increased amount of cybersecurity threats and events have businesses much more concerned about the safety of their data. As such, they are much more willing to invest in the protection of that data than they were previously, leading to higher demand in the industry. This is leading to not only higher revenues and valuations for cyber security firms, but also to an increased number of these firms as a whole, leading to an industry ripe for consolidation.

Competition

Management has identified a number of other competitors within the Cyber Intelligence space, mostly focusing on companies that do a bit of a blend of cybersecurity and data consulting, both on the public and private side. These companies include BAE Systems, Elbit Systems, FireEye, Genetec, IBM, JSI Telecommunications, Palantir, and Rohde & Schwartz.

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Customers

The Cyber Intelligence business segment serves a vast number of customers, without any apparent concentration. They split these customers into two sub-segments: Government and Enterprise. Government customers include national security and law enforcement agencies that are using Verint solutions to prevent terrorism, collect intelligence and investigate security threats and to fight a wide range of criminal activity, such as arson, drug trafficking, homicides, human trafficking, identity theft, kidnapping, poaching, illegal immigration, financial crimes, and other organized crimes. Enterprise customers include commercial organizations and critical infrastructure, such as airports, transportation systems, power plants, public and government facilities that are using Verint solutions to improve efficiency and effectiveness of physical security and to detect and respond to cyber threats. In addition, telecommunication carriers are using Verint solutions to comply with certain government regulations, requiring them to assist the government in their evidence and intelligence collection processes.

Quality of Business

Although this business segment does not yet have the requisite financial data available to calculate more quantitative measures of business quality, logically speaking, this is a rather high quality business. While significant amounts of R&D spend is necessary to keep up technologically and headline risk is very apparent if the company ever fails, it is a pretty capital and asset light business that can deploy its security solutions to a new customer with essentially zero incremental cost, allowing the business to scale really well.

Capital Structure

Management has not commented at all yet regarding potential capital structures, but investors and analysts can assume that each business will have its own capital structure and access to capital markets in order to fund operations and growth.

Management

Management has not yet been determined or announced for the new, spin-off business. However, the parent company, Verint, did announce that they would be adding two new board members in conjunction with the Apax Partners investment in order to help lead their cloud transition. Andrew Miller will join Varint’s board, bringing experience as the former CFO of PTC, in addition to financial leadership roles at Cepheid, Autodesk, Market First Software, Cadence Design Systems and Silicon Graphics and his current board seat at iRobot. Additionally, Jason Wright, a partner at Apax, will join the board. Jason has 20 years of Tech and Telecom private equity experience, and has served on the board of several software companies.

Potential for Indiscriminate Selling

There are not many large catalysts for indiscriminate selling at the outset of trading for the spin-off, with the only clear one being index exclusion. Vanguard and BlackRock own ~15% of the outstanding shares of Verint, which means that those shares are likely included in those two firms index funds and ETFs. If the SpinCo is excluded from those funds, then the shares would likely have to be sold without any fundamental reason.

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Valuation

Considering there is not yet enough financial data to complete a full range of valuations, the best way to estimate the area this company will trade around at the consummation of the transaction is off a comps multiple based on stated competitors blended with parent company multiples. Based on this analysis, we estimate the enterprise value of the Cyber Intelligence business to be just shy of $2BN.pasted image 0 24

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Concluding Thoughts

Judging by Apax’s interest and investment in the Remainco, we could follow the incentives and view the Remainco as the preferable investment. However, I think the spin-off looks very interesting. It’s a pure play on cyber security, an area experiencing secular growth, and the business has high margins. I will continue to analyze this transaction, but it looks interesting.