Verint Surveillance Revenue Steep Drop

Verint's painful decline in (or perhaps out of) the surveillance market continues. In their most recent quarterly report for Q3 2012, revenue for Verint's video surveillance division dropped 22%. In this note, we examine the long-term trend since 2007, compared to Avigilon and Axis, why this is happening and what this means for Verint.

Verint said the cause of the steep drop was 'a few large customers':

"Video Intelligence revenue decreased approximately 22%, or $7.0 million, from $32.2 million in the three months ended October 31, 2011 to $25.2 million in the three months ended October 31, 2012. The decrease was primarily attributable to a $7.3 million decrease in product revenue primarily due to a reduction in product deliveries associated with a few large customers, partially offset by an increase in product deliveries to other customers, in the three months October 31, 2012."

Verint seems to live and die by a relatively small number of large corporate or government accounts (Wal-Mart being the most famous but certainly many other big organizations). While Verint may be holding on to most of the historic accounts, it does not seem they are doing well at winning new accounts that seem to be overwhelmingly going to the likes of Milestone, Genetec, etc.

Now, Verint's surveillance revenue is at an annual run rate of ~$100 million USD though as recently as 2007 and 2009, comparable division revenue was $144 million.

Additionally, while gross margins are still fairly solid, given the companies high pricing, they did decline notably:

"Product gross margins in our Video Intelligence segment decreased to 53% in the three months ended October 31, 2012 , compared to 56% in the three months ended October 31, 2011 due to a decrease in product revenue, resulting in lower absorption of overhead costs."

Comparing the Decline

In 5 years, Verint's surveillance revenue has declined ~30% from ~$144 million to ~$100 million. However, this does not capture the full magnitude of the problem. In the meantime, the overall surveillance market has grown. Even if you estimate a modest 10% annual rate, for Verint to stay on pace, 2012 revenue should have been ~$230 million.

In the interim, many companies have caught up or zoomed past Verint. For example:

• Avigilon, a company with a similar end to end model, had not even a million in 2007 sales when Verint was doing ~$144 million. Now, this quarter (Q3 2012), the two companies had the same revenue.
• Back in 2007, Axis was not even double Verint's revenue (~$250 million to ~$144 million). Now, Axis does more than 6 times the revenue of Verint.

Given Verint's tightly controlled channel model and its limited innovation, the company has clearly fallen way beyond the market and it is not clear how they can come back save a massive shift in strategy.