Cognyte the neophyte!

We were asked to opine on $CGNT, the cyber security recent spin out from Verint ($VRNT).  First off, when we think of Verint we usually compare it to another Israeli technology company Nice Systems ($NICE).  Verint specializes in digital video surveillance and is able to analyze unstructured data such as email, fax and other communications for governments and businesses.  Nice Systems does the same thing with arguably a more private sector business focus and a bit higher growth rate than Verint has had in the past.  Both solid companies.  Verint has taken its cyber security analytics business and spun it out as $CGNT or Cognyte in order to focus exclusively on the Customer Engagement Solutions business.  

So what does stand alone $CGNT look like?  It’s revenues will be a tad shy of $500m in 2021 with 83% of sales to government and 17% private sector.  They are doing the dreaded/exciting transition to a SaaS model which can often come with bumps and bruises but result in a much higher valuation on price to sales as it becomes more and more recurring revenues.  Right now they are 50% recurring revenues software subscriptions.  Their products are either sold as appliances with software loaded or as a subscription where the customer uses their own internal equipment.  Either way this is an on-premise transaction, not installable over the cloud.  In a sense, this probably remains on-prem long term as the information being analyzed is the guts and heart of the data at an organization and requires more sensitivity care taking.  The company has $100m plus revenue in their professional services organization which looks like a break even proposition required to install Cognyte’s products at the customer.  

Ok, the good news they are profitable!  They will likely earn around $80m in EBITDA in 2021 and the management has laid out a goal of 80c EPS in FY22.  The software subscription business is growing around 10% during the pandemic which is likely depressed due to the difficulties installing on-premise type software at the moment.  The perpetual one time software sales (50% of total) are declining slightly during this transition to recurring revenues. The company sports an enterprise value of $1.8 billion with total software revenues of over $400m annually split 50/50 perpetual and recurring.

Its not expensive at 4-5x price to sales for a company transitioning to a SaaS model.  Lets be optimistic here and say a focused stand alone company can now grow their non-government business to a more balanced 50/50 ratio over time.  And post pandemic, it will be much easier to do on prem installs helping the company grow faster overall.  At the same time, transitions can be tricky and we do not have enough history to know if this management is up to the task.  What we know is their products are mission critical.   

In summary, we like this stock and think the risks of transition issues are largely priced in at the low p/s ratio.  Given its recent spin out, we would take a ½ position and get comfortable with managements growth goals of double digit top line and mid teens bottom line the next few years.  A reasonable target would be this company is able to growth fast enough that investors re-rate the stock to 7-10x sales in the next 12-24 months.  Having said that, again ½ position and see if we can own this at $25-28, not chase this name.  Also be cognizant of unlocks in the shareholder base that might create volatility such as Apax Partners which owns 3.7m shares.

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Robs Educated Guesses