UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
þ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 20182019
|
| |
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 001-34807
Verint Systems Inc.Inc
(Exact Name of Registrant as Specified in its Charter)
|
| | | |
Delaware | | 11-3200514 |
(State or Other Jurisdiction of Incorporation or Organization)
| | (I.R.S. Employer Identification No.) |
| | | |
175 Broadhollow Road | | |
Melville, | New York | | 11747 |
(Address of Principal Executive Offices) | | (Zip Code) |
|
| | | |
| (631) | 962-9600 | |
(Registrant’s Telephone Number, Including Area Code) |
|
| | | | |
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| | | | The NASDAQ Stock Market, LLC |
Common Stock, $.001 par value per share | | VRNT | | (NASDAQ Global Select Market) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑
No o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑
No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filerþ | ☑ | Accelerated filero | ☐ |
Non-accelerated filero | ☐ | Smaller reporting companyo | ☐ |
| | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
There were 65,271,64866,823,995 shares of the registrant’s common stock outstanding on November 15, 2018.2019.
|
| | |
Verint Systems Inc. and Subsidiaries |
Index to Form 10-Q |
As of and For the Period Ended October 31, 20182019 |
| | Page |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are often identified by future or conditional words such as “will”, “plans”, “expects”, “intends”, “believes”, “seeks”, “estimates”, or “anticipates”, or by variations of such words or by similar expressions. There can be no assurance that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes,advances and challenges and evolving industry standards, and customer challenges, such as the proliferation and strengthening of encryption, and the transition of portions of the software market to the cloud,standards; to adapt to changing market potential from area to area within our markets,markets; and to successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer needs, while simultaneously preserving our legacy businesses and migrating away from areas of commoditization;
risks due to aggressive competition in all of our markets, including with respect to maintaining revenues, margins, and sufficient levels of investment in our business;business and operations;
risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have;
risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, reputational considerations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas, management distraction, post-acquisition integration activities, and potential asset impairments;
risks relating to our ability to effectively and efficiently enhance our existing operations and execute on our growth strategy and profitability goals, including managingproperly manage investments in our business and operations, managingexecute on growth initiatives, and enhance our cloud transitionexisting operations and our revenue mix,infrastructure, including the proper prioritization and enhancingallocation of limited financial and securing our internal and external operations;other resources;
risks associated with our ability to effectivelyretain, recruit, and efficiently allocate limited financialtrain qualified personnel in regions in which we operate, including in new markets and human resources to business, developmental, strategic, or other opportunities, and risk that such investmentsgrowth areas we may not come to fruition or produce satisfactory returns;enter;
risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators;
integrators and risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers (“OEMs”) for certain components, products, or services, including companies that may compete with us or work with our competitors;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information, including information that may belong to our customers or other third parties, and with security vulnerabilities or lapses, including cyber-attacks, information technology system breaches, failures, or disruptions;
risks that our products or services, or those of third-party suppliers, partners, or OEMs which we use in or with our offerings or otherwise rely on, including third-party hosting platforms, may contain defects, develop operational problems, or may be vulnerable to cyber-attacks;
risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, fluctuations in foreign exchange rates, and challenges associated with a significant portion of our cash being held overseas;
risks associated with political factors related to our business or operations, including reputational risks associated with our security solutions and our ability to maintain security clearances where required, as well as risks associated with a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for applicable projects, and reputational risks associated with our security solutions;customers;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate, including, among others, with respect to trade compliance, anti-corruption, information security, data privacy and protection, tax, labor, government contracts, and regulations relatedrelating to our security solutions;
risks associated withown operations as well as to the use of our ability to retain and recruit qualified personnel in regions in which we operate, including in new markets and growth areas we may enter;solutions by our customers;
challenges associated with selling sophisticated solutions, including with respect to educating ourassisting customers onin understanding and realizing the benefits of our solutions, or assisting them in realizing such benefits, and developing, offering, implementing, and maintaining a broad and sophisticated solution portfolio;
challenges associated with pursuing larger sales opportunities, including with respect to longer sales cycles, transaction reductions, deferrals, or cancellations during the sales cycle,cycle; risk of customer concentration,concentration; challenges associated with our ability to accurately forecast when a sales opportunity will convert to an order, or to accurately forecast revenue and expenses, including as a result of our Customer Engagement segment cloud transition and our Cyber Intelligence segment software model transition, and increased volatility of our operating results from period to period;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property, or claim infringement on their intellectual property rights;rights, or claim a violation of their license rights, including relative to free or open source components we may use;
risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position or our ability to incur additional debt, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of the successor to CTI’s business operations, Mavenir Inc. (“Mavenir”), being unwilling or unable to provide us with certain indemnities to which we are entitled;
risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, internal controls, and personnel, and our ability to successfully implement and maintain enhancements to the foregoing, and adequate systems and internal controls for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays; and
risks associated with changing accounting principles or standards, tax laws and regulations, tax rates, and the continuing availability of expected tax benefits.benefits;
risks associated with market volatility in the prices of our common stock and convertible notes based on our performance, third-party publications or speculation, or other factors and risks associated with actions of activist stockholders;
risks associated with the planned issuance of preferred stock to an affiliate of Apax Partners, including with respect to Apax’s significant ownership position and potential that its interests will not be aligned with those of our common stockholders; and
risks associated with the planned spin-off of our Cyber Intelligence business, including the possibility that the spin-off transaction may not be completed in the expected timeframe or at all, that it does not achieve the benefits anticipated, or that it negatively impacts our operations or stock price.
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in “Risk Factors” under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2018.2019 and under Item 1A of our Quarterly Report on Form 10-Q for the quarter ended April 30, 2019. You are cautioned not to place undue reliance on forward-looking
statements, which reflect our management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
Part I
Item 1. Financial Statements
|
| |
VERINT SYSTEMS INC. AND SUBSIDIARIES |
Index to Condensed Consolidated Financial Statements (Unaudited) |
| Page |
| |
| |
| |
| |
| |
| |
| |
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | October 31, | | January 31, | | October 31, | | January 31, |
(in thousands, except share and per share data) |
| 2018 | | 2018 |
| 2019 | | 2019 |
Assets |
| |
|
| |
|
| |
|
| |
|
Current Assets: |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents |
| $ | 353,422 |
|
| $ | 337,942 |
|
| $ | 412,838 |
|
| $ | 369,975 |
|
Restricted cash and cash equivalents, and restricted bank time deposits |
| 32,457 |
|
| 33,303 |
|
| 24,185 |
|
| 42,262 |
|
Short-term investments | | 49,434 |
| | 6,566 |
| | 13,973 |
| | 32,329 |
|
Accounts receivable, net of allowance for doubtful accounts of $2.9 million and $2.2 million, respectively |
| 311,492 |
|
| 296,324 |
| |
Accounts receivable, net of allowance for doubtful accounts of $5.7 million and $3.8 million, respectively | |
| 346,741 |
|
| 375,663 |
|
Contract assets | | 70,076 |
| | — |
| | 65,611 |
| | 63,389 |
|
Inventories |
| 21,737 |
|
| 19,871 |
|
| 24,001 |
|
| 24,952 |
|
Deferred cost of revenue |
| 9,651 |
|
| 6,096 |
| |
Prepaid expenses and other current assets |
| 85,310 |
|
| 82,090 |
|
| 96,732 |
|
| 97,776 |
|
Total current assets |
| 933,579 |
|
| 782,192 |
|
| 984,081 |
|
| 1,006,346 |
|
Property and equipment, net |
| 95,875 |
|
| 89,089 |
|
| 109,698 |
|
| 100,134 |
|
Operating lease right-of-use assets | | | 105,367 |
| | — |
|
Goodwill |
| 1,364,452 |
|
| 1,388,299 |
|
| 1,448,726 |
|
| 1,417,481 |
|
Intangible assets, net |
| 192,186 |
|
| 226,093 |
|
| 205,307 |
|
| 225,183 |
|
Capitalized software development costs, net |
| 11,557 |
|
| 9,228 |
| |
Long-term deferred cost of revenue |
| 4,283 |
|
| 2,804 |
| |
Other assets |
| 101,643 |
|
| 82,915 |
|
| 129,268 |
|
| 117,883 |
|
Total assets |
| $ | 2,703,575 |
|
| $ | 2,580,620 |
|
| $ | 2,982,447 |
|
| $ | 2,867,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
| |
|
| |
|
| |
|
| |
|
Current Liabilities: |
| |
|
| |
|
| |
|
| |
|
Accounts payable |
| $ | 79,372 |
|
| $ | 84,639 |
|
| $ | 66,144 |
|
| $ | 71,621 |
|
Accrued expenses and other current liabilities |
| 181,452 |
|
| 224,765 |
|
| 223,329 |
|
| 212,824 |
|
Contract liabilities |
| 306,240 |
|
| 196,107 |
|
| 339,232 |
|
| 377,376 |
|
Total current liabilities |
| 567,064 |
|
| 505,511 |
|
| 628,705 |
|
| 661,821 |
|
Long-term debt |
| 775,342 |
|
| 768,484 |
|
| 785,170 |
|
| 777,785 |
|
Long-term contract liabilities |
| 27,512 |
|
| 24,519 |
|
| 40,445 |
|
| 30,094 |
|
Operating lease liabilities | | | 94,163 |
| | — |
|
Other liabilities |
| 120,158 |
|
| 149,770 |
|
| 99,374 |
|
| 136,523 |
|
Total liabilities |
| 1,490,076 |
|
| 1,448,284 |
|
| 1,647,857 |
|
| 1,606,223 |
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity: |
| |
|
| |
|
| |
|
| |
|
Preferred stock - $0.001 par value; authorized 2,207,000 shares at October 31, 2018 and January 31, 2018, respectively; none issued. | | — |
| | — |
| |
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 66,937,000 and 65,497,000 shares; outstanding 65,272,000 and 63,836,000 shares at October 31, 2018 and January 31, 2018, respectively. |
| 67 |
|
| 65 |
| |
Preferred stock - $0.001 par value; authorized 2,207,000 shares at October 31, 2019 and January 31, 2019, respectively; none issued. | | | — |
| | — |
|
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 68,497,000 and 66,998,000 shares; outstanding 66,824,000 and 65,333,000 shares at October 31, 2019 and January 31, 2019, respectively. | |
| 68 |
|
| 67 |
|
Additional paid-in capital |
| 1,572,806 |
|
| 1,519,724 |
|
| 1,645,279 |
|
| 1,586,266 |
|
Treasury stock, at cost - 1,665,000 and 1,661,000 shares at October 31, 2018 and January 31, 2018, respectively. |
| (57,598 | ) |
| (57,425 | ) | |
Treasury stock, at cost - 1,673,000 and 1,665,000 shares at October 31, 2019 and January 31, 2019, respectively. | |
| (58,072 | ) |
| (57,598 | ) |
Accumulated deficit |
| (161,580 | ) |
| (238,312 | ) |
| (110,459 | ) |
| (134,274 | ) |
Accumulated other comprehensive loss |
| (154,148 | ) |
| (103,460 | ) |
| (158,002 | ) |
| (145,225 | ) |
Total Verint Systems Inc. stockholders' equity |
| 1,199,547 |
|
| 1,120,592 |
|
| 1,318,814 |
|
| 1,249,236 |
|
Noncontrolling interests |
| 13,952 |
|
| 11,744 |
|
| 15,776 |
|
| 11,568 |
|
Total stockholders' equity |
| 1,213,499 |
|
| 1,132,336 |
|
| 1,334,590 |
|
| 1,260,804 |
|
Total liabilities and stockholders' equity |
| $ | 2,703,575 |
|
| $ | 2,580,620 |
|
| $ | 2,982,447 |
|
| $ | 2,867,027 |
|
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | Three Months Ended October 31, | | Nine Months Ended October 31, | | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands, except per share data) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | |
| | |
| | | | | | |
| | |
| | | | |
Product | | $ | 111,670 |
| | $ | 94,827 |
| | $ | 327,576 |
| | $ | 279,056 |
| | $ | 116,331 |
| | $ | 111,670 |
| | $ | 330,538 |
| | $ | 327,576 |
|
Service and support | | 192,313 |
| | 185,899 |
| | 571,941 |
| | 537,442 |
| | 208,536 |
| | 192,313 |
| | 633,893 |
| | 571,941 |
|
Total revenue | | 303,983 |
| | 280,726 |
| | 899,517 |
| | 816,498 |
| | 324,867 |
| | 303,983 |
| | 964,431 |
| | 899,517 |
|
Cost of revenue: | | |
| | |
| | | | | | |
| | |
| | | | |
Product | | 33,124 |
| | 32,840 |
| | 100,917 |
| | 98,708 |
| | 30,533 |
| | 33,124 |
| | 88,077 |
| | 100,917 |
|
Service and support | | 72,182 |
| | 69,383 |
| | 218,842 |
| | 205,928 |
| | 76,771 |
| | 72,182 |
| | 237,562 |
| | 218,842 |
|
Amortization of acquired technology | | 5,933 |
| | 9,182 |
| | 18,879 |
| | 28,246 |
| | 5,968 |
| | 5,933 |
| | 18,262 |
| | 18,879 |
|
Total cost of revenue | | 111,239 |
| | 111,405 |
| | 338,638 |
| | 332,882 |
| | 113,272 |
| | 111,239 |
| | 343,901 |
| | 338,638 |
|
Gross profit | | 192,744 |
| | 169,321 |
| | 560,879 |
| | 483,616 |
| | 211,595 |
| | 192,744 |
| | 620,530 |
| | 560,879 |
|
Operating expenses: | | |
| | |
| | | | | | |
| | |
| | | | |
Research and development, net | | 51,587 |
| | 47,157 |
| | 155,993 |
| | 141,911 |
| | 57,694 |
| | 51,587 |
| | 173,548 |
| | 155,993 |
|
Selling, general and administrative | | 99,902 |
| | 97,304 |
| | 311,482 |
| | 302,605 |
| | 116,306 |
| | 99,902 |
| | 364,292 |
| | 311,482 |
|
Amortization of other acquired intangible assets | | 7,585 |
| | 7,048 |
| | 22,721 |
| | 26,727 |
| | 7,778 |
| | 7,585 |
| | 23,130 |
| | 22,721 |
|
Total operating expenses | | 159,074 |
| | 151,509 |
| | 490,196 |
| | 471,243 |
| | 181,778 |
| | 159,074 |
| | 560,970 |
| | 490,196 |
|
Operating income | | 33,670 |
| | 17,812 |
| | 70,683 |
| | 12,373 |
| | 29,817 |
| | 33,670 |
| | 59,560 |
| | 70,683 |
|
Other income (expense), net: | | |
| | |
| | | | | | |
| | |
| | | | |
Interest income | | 1,319 |
| | 654 |
| | 3,246 |
| | 1,793 |
| | 1,404 |
| | 1,319 |
| | 4,517 |
| | 3,246 |
|
Interest expense | | (8,686 | ) | | (8,891 | ) | | (27,670 | ) | | (26,997 | ) | | (10,102 | ) | | (8,686 | ) | | (30,143 | ) | | (27,670 | ) |
Loss on early retirement of debt | | — |
| | — |
| | — |
| | (1,934 | ) | |
Other (expense) income, net | | (489 | ) | | (565 | ) | | (2,194 | ) | | 2,529 |
| |
Other income (expense), net | | | 1,082 |
| | (489 | ) | | 1,201 |
| | (2,194 | ) |
Total other expense, net | | (7,856 | ) | | (8,802 | ) | | (26,618 | ) | | (24,609 | ) | | (7,616 | ) | | (7,856 | ) | | (24,425 | ) | | (26,618 | ) |
Income (loss) before provision for income taxes | | 25,814 |
| | 9,010 |
| | 44,065 |
| | (12,236 | ) | |
Income before provision for income taxes | | | 22,201 |
| | 25,814 |
| | 35,135 |
| | 44,065 |
|
Provision for income taxes | | 5,601 |
| | 5,944 |
| | 2,153 |
| | 9,504 |
| | 9,218 |
| | 5,601 |
| | 6,120 |
| | 2,153 |
|
Net income (loss) | | 20,213 |
| | 3,066 |
| | 41,912 |
| | (21,740 | ) | |
Net income | | | 12,983 |
| | 20,213 |
| | 29,015 |
| | 41,912 |
|
Net income attributable to noncontrolling interests | | 1,293 |
| | 577 |
| | 3,227 |
| | 1,984 |
| | 1,302 |
| | 1,293 |
| | 5,200 |
| | 3,227 |
|
Net income (loss) attributable to Verint Systems Inc. | | $ | 18,920 |
| | $ | 2,489 |
| | $ | 38,685 |
| | $ | (23,724 | ) | |
Net income attributable to Verint Systems Inc. | | | $ | 11,681 |
| | $ | 18,920 |
| | $ | 23,815 |
| | $ | 38,685 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) per common share attributable to Verint Systems Inc.: | | |
| | |
| | | | | |
Net income per common share attributable to Verint Systems Inc.: | | | |
| | |
| | | | |
Basic | | $ | 0.29 |
| | $ | 0.04 |
| | $ | 0.60 |
| | $ | (0.38 | ) | | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.36 |
| | $ | 0.60 |
|
Diluted | | $ | 0.29 |
| | $ | 0.04 |
| | $ | 0.59 |
| | $ | (0.38 | ) | | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.35 |
| | $ | 0.59 |
|
| | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding: | | |
| | |
| | | | | | |
| | |
| | | | |
Basic | | 65,122 |
| | 63,759 |
| | 64,690 |
| | 63,152 |
| | 66,799 |
| | 65,122 |
| | 66,181 |
| | 64,690 |
|
Diluted | | 66,200 |
| | 64,588 |
| | 65,885 |
| | 63,152 |
| | 67,442 |
| | 66,200 |
| | 67,452 |
| | 65,885 |
|
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| | | | Three Months Ended October 31, | | Nine Months Ended October 31, | | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | | $ | 20,213 |
| | $ | 3,066 |
| | $ | 41,912 |
| | $ | (21,740 | ) | |
Other comprehensive (loss) income, net of reclassification adjustments: | | |
| | |
| | | | | |
Net income | | | $ | 12,983 |
| | $ | 20,213 |
| | $ | 29,015 |
| | $ | 41,912 |
|
Other comprehensive income (loss), net of reclassification adjustments: | | | |
| | |
| | |
| |
|
|
Foreign currency translation adjustments | | (11,780 | ) | | 779 |
| | (45,509 | ) | | 21,883 |
| | 20,635 |
| | (11,780 | ) | | (6,938 | ) | | (45,509 | ) |
Net (decrease) increase from foreign exchange contracts designated as hedges | | (262 | ) | | (829 | ) | | (8,199 | ) | | 2,272 |
| | (1,502 | ) | | (262 | ) | | 1,416 |
| | (8,199 | ) |
Net increase (decrease) from interest rate swap designated as a hedge | | 1,266 |
| | — |
| | 1,878 |
| | (1,021 | ) | |
Benefit (provision) for income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges | | 27 |
| | 29 |
| | 823 |
| | (242 | ) | |
Other comprehensive (loss) income | | (10,749 | ) | | (21 | ) | | (51,007 | ) | | 22,892 |
| |
Net (decrease) increase from interest rate swap designated as a hedge | | | (2,498 | ) | | 1,266 |
| | (9,056 | ) | | 1,878 |
|
Benefit from income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges | | | 674 |
| | 27 |
| | 1,758 |
| | 823 |
|
Other comprehensive income (loss) | | | 17,309 |
| | (10,749 | ) | | (12,820 | ) | | (51,007 | ) |
Comprehensive income (loss) | | 9,464 |
| | 3,045 |
| | (9,095 | ) | | 1,152 |
| | 30,292 |
| | 9,464 |
| | 16,195 |
| | (9,095 | ) |
Comprehensive income attributable to noncontrolling interests | | 1,144 |
| | 688 |
| | 2,908 |
| | 2,383 |
| | 1,416 |
| | 1,144 |
| | 5,157 |
| | 2,908 |
|
Comprehensive income (loss) attributable to Verint Systems Inc. | | $ | 8,320 |
| | $ | 2,357 |
| | $ | (12,003 | ) | | $ | (1,231 | ) | | $ | 28,876 |
| | $ | 8,320 |
| | $ | 11,038 |
| | $ | (12,003 | ) |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Verint Systems Inc. Stockholders’ Equity | | | | |
| | Common Stock | | Additional Paid-in Capital | | | | | | Accumulated Other Comprehensive Loss | | Total Verint Systems Inc. Stockholders’ Equity | | | | Total Stockholders’ Equity |
(in thousands) | | Shares | | Par Value | | | Treasury Stock | | Accumulated Deficit | | | | Non-controlling Interests | |
Balances at January 31, 2017 | | 62,419 |
| | $ | 64 |
| | $ | 1,449,335 |
| | $ | (57,147 | ) | | $ | (230,816 | ) | | $ | (154,856 | ) | | $ | 1,006,580 |
| | $ | 8,460 |
| | $ | 1,015,040 |
|
Net (loss) income | | — |
| | — |
| | — |
| | — |
| | (23,724 | ) | | — |
| | (23,724 | ) | | 1,984 |
| | (21,740 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 22,493 |
| | 22,493 |
| | 399 |
| | 22,892 |
|
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 43,182 |
| | — |
| | — |
| | — |
| | 43,182 |
| | — |
| | 43,182 |
|
Common stock issued for stock awards and stock bonuses | | 1,369 |
| | 1 |
| | 12,975 |
| | — |
| | — |
| | — |
| | 12,976 |
| | — |
| | 12,976 |
|
Treasury stock acquired | | (7 | ) | | — |
| | — |
| | (278 | ) | | — |
| | — |
| | (278 | ) | | — |
| | (278 | ) |
Initial noncontrolling interest related to business combination | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,300 |
| | 2,300 |
|
Capital contributions by noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 580 |
| | 580 |
|
Dividends to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (716 | ) | | (716 | ) |
Cumulative effect of adoption of ASU No. 2016-16 | | — |
| | — |
| | — |
| | — |
| | (869 | ) | | — |
| | (869 | ) | | — |
| | (869 | ) |
Balances at October 31, 2017 | | 63,781 |
| | $ | 65 |
| | $ | 1,505,492 |
| | $ | (57,425 | ) | | $ | (255,409 | ) | | $ | (132,363 | ) | | $ | 1,060,360 |
|
| $ | 13,007 |
| | $ | 1,073,367 |
|
| | | | | | | | | | | | | | | | | | |
Balances at January 31, 2018 | | 63,836 |
| | $ | 65 |
| | $ | 1,519,724 |
| | $ | (57,425 | ) | | $ | (238,312 | ) | | $ | (103,460 | ) | | $ | 1,120,592 |
| | $ | 11,744 |
| | $ | 1,132,336 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 38,685 |
| | — |
| | 38,685 |
| | 3,227 |
| | 41,912 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (50,688 | ) | | (50,688 | ) | | (319 | ) | | (51,007 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 44,199 |
| | — |
| | — |
| | — |
| | 44,199 |
| | — |
| | 44,199 |
|
Common stock issued for stock awards and stock bonuses | | 1,440 |
| | 2 |
| | 8,883 |
| | — |
| | — |
| | — |
| | 8,885 |
| | — |
| | 8,885 |
|
Treasury stock acquired | | (4 | ) | | — |
| | — |
| | (173 | ) | | — |
| | — |
| | (173 | ) | | — |
| | (173 | ) |
Capital contributions by noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
Dividends to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (760 | ) | | (760 | ) |
Cumulative effect of adoption of ASU No. 2014-09 | | — |
| | — |
| | — |
| | — |
| | 38,047 |
| | — |
| | 38,047 |
| | — |
| | 38,047 |
|
Balances at October 31, 2018 | | 65,272 |
| | $ | 67 |
| | $ | 1,572,806 |
| | $ | (57,598 | ) | | $ | (161,580 | ) | | $ | (154,148 | ) | | $ | 1,199,547 |
| | $ | 13,952 |
| | $ | 1,213,499 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Verint Systems Inc. Stockholders’ Equity | | | | |
| | Common Stock | | Additional Paid-in Capital | | | | | | Accumulated Other Comprehensive Loss | | Total Verint Systems Inc. Stockholders’ Equity | | | | Total Stockholders’ Equity |
(in thousands) | | Shares | | Par Value | | | Treasury Stock | | Accumulated Deficit | | | | Non-controlling Interests | |
Balances as of January 31, 2019 | | 65,333 |
| | $ | 67 |
| | $ | 1,586,266 |
| | $ | (57,598 | ) | | $ | (134,274 | ) | | $ | (145,225 | ) | | $ | 1,249,236 |
| | $ | 11,568 |
| | $ | 1,260,804 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 1,576 |
| | — |
| | 1,576 |
| | 2,185 |
| | 3,761 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,298 | ) | | (4,298 | ) | | (106 | ) | | (4,404 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 14,890 |
| | — |
| | — |
| | — |
| | 14,890 |
| | — |
| | 14,890 |
|
Common stock issued for stock awards and stock bonuses | | 448 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock acquired | | (8 | ) | | — |
| | — |
| | (474 | ) | | — |
| | — |
| | (474 | ) | | — |
| | (474 | ) |
Balances as of April 30, 2019 | | 65,773 |
|
| 67 |
|
| 1,601,156 |
|
| (58,072 | ) |
| (132,698 | ) |
| (149,523 | ) |
| 1,260,930 |
|
| 13,647 |
|
| 1,274,577 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 10,558 |
| | — |
| | 10,558 |
| | 1,713 |
| | 12,271 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (25,674 | ) | | (25,674 | ) | | (51 | ) | | (25,725 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 17,966 |
| | — |
| | — |
| | — |
| | 17,966 |
| | — |
| | 17,966 |
|
Common stock issued for stock awards and stock bonuses | | 998 |
| | 1 |
| | 9,543 |
| | — |
| | — |
| | — |
| | 9,544 |
| | — |
| | 9,544 |
|
Distribution to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (655 | ) | | (655 | ) |
Balances as of July 31, 2019 | | 66,771 |
|
| 68 |
|
| 1,628,665 |
|
| (58,072 | ) |
| (122,140 | ) |
| (175,197 | ) |
| 1,273,324 |
|
| 14,654 |
|
| 1,287,978 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 11,681 |
| | — |
| | 11,681 |
| | 1,302 |
| | 12,983 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 17,195 |
| | 17,195 |
| | 114 |
| | 17,309 |
|
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 16,614 |
| | — |
| | — |
| | — |
| | 16,614 |
| | — |
| | 16,614 |
|
Common stock issued for stock awards and stock bonuses | | 53 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distribution to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (294 | ) | | (294 | ) |
Balances as of October 31, 2019 | | 66,824 |
|
| $ | 68 |
|
| $ | 1,645,279 |
|
| $ | (58,072 | ) |
| $ | (110,459 | ) |
| $ | (158,002 | ) |
| $ | 1,318,814 |
|
| $ | 15,776 |
|
| $ | 1,334,590 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Verint Systems Inc. Stockholders’ Equity | | | | |
| | Common Stock | | Additional Paid-in Capital | | | | | | Accumulated Other Comprehensive Loss | | Total Verint Systems Inc. Stockholders’ Equity | | | | Total Stockholders’ Equity |
(in thousands) | | Shares | | Par Value | | | Treasury Stock | | Accumulated Deficit | | | | Non-controlling Interests | |
Balances as of January 31, 2018 | | 63,836 |
| | $ | 65 |
| | $ | 1,519,724 |
| | $ | (57,425 | ) | | $ | (238,312 | ) | | $ | (103,460 | ) | | $ | 1,120,592 |
| | $ | 11,744 |
| | $ | 1,132,336 |
|
Net (loss) income | | — |
| | — |
| | — |
| | — |
| | (2,215 | ) | | — |
| | (2,215 | ) | | 990 |
| | (1,225 | ) |
Other comprehensive (loss) income | | — |
| | — |
| | — |
| | — |
| | — |
| | (19,961 | ) | | (19,961 | ) | | 48 |
| | (19,913 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 14,898 |
| | — |
| | — |
| | — |
| | 14,898 |
| | — |
| | 14,898 |
|
Common stock issued for stock awards and stock bonuses | | 180 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Treasury stock acquired | | (4 | ) | | — |
| | — |
| | (173 | ) | | — |
| | — |
| | (173 | ) | | — |
| | (173 | ) |
Capital contributions by noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
Dividends to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (760 | ) | | (760 | ) |
Cumulative effect of adoption of ASU No. 2014-09 | | — |
| | — |
| | — |
| | — |
| | 38,047 |
| | — |
| | 38,047 |
| | — |
| | 38,047 |
|
Balances as of April 30, 2018 | | 64,012 |
| | 66 |
| | 1,534,622 |
| | (57,598 | ) | | (202,480 | ) | | (123,421 | ) | | 1,151,189 |
|
| 12,082 |
| | 1,163,271 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 21,980 |
| | — |
| | 21,980 |
| | 944 |
| | 22,924 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (20,127 | ) | | (20,127 | ) | | (218 | ) | | (20,345 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 15,113 |
| | — |
| | — |
| | — |
| | 15,113 |
| | — |
| | 15,113 |
|
Common stock issued for stock awards and stock bonuses | | 893 |
| | 1 |
| | 8,879 |
| | — |
| | — |
| | — |
| | 8,880 |
| | — |
| | 8,880 |
|
Balances as of July 31, 2018 | | 64,905 |
|
| 67 |
|
| 1,558,614 |
|
| (57,598 | ) |
| (180,500 | ) |
| (143,548 | ) |
| 1,177,035 |
|
| 12,808 |
|
| 1,189,843 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 18,920 |
| | — |
| | 18,920 |
| | 1,293 |
| | 20,213 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (10,600 | ) | | (10,600 | ) | | (149 | ) | | (10,749 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 14,188 |
| | — |
| | — |
| | — |
| | 14,188 |
| | — |
| | 14,188 |
|
Common stock issued for stock awards and stock bonuses | | 367 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Balances as of October 31, 2018 | | 65,272 |
| | $ | 67 |
|
| $ | 1,572,806 |
|
| $ | (57,598 | ) |
| $ | (161,580 | ) |
| $ | (154,148 | ) |
| $ | 1,199,547 |
|
| $ | 13,952 |
|
| $ | 1,213,499 |
|
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | Nine Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2019 | | 2018 |
Cash flows from operating activities: | | |
| | |
| | |
| | |
|
Net income (loss) | | $ | 41,912 |
| | $ | (21,740 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| | |
| |
Net income | | | $ | 29,015 |
| | $ | 41,912 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | |
|
Depreciation and amortization | | 66,231 |
| | 79,879 |
| | 67,880 |
| | 66,231 |
|
Stock-based compensation, excluding cash-settled awards | | 50,509 |
| | 50,397 |
| | 56,164 |
| | 50,509 |
|
Amortization of discount on convertible notes | | 8,829 |
| | 8,377 |
| | 9,306 |
| | 8,829 |
|
Non-cash gains on derivative financial instruments, net | | (3,760 | ) | | (292 | ) | | (460 | ) | | (3,760 | ) |
Loss on early retirement of debt | | — |
| | 1,934 |
| |
Other non-cash items, net | | (1,972 | ) | | 307 |
| | 3,894 |
| | (1,972 | ) |
Changes in operating assets and liabilities, net of effects of business combinations: | | |
| | |
| | |
| | |
|
Accounts receivable | | 35,879 |
| | (15,824 | ) | | 26,791 |
| | 35,879 |
|
Contract assets | | (999 | ) | | — |
| | (2,175 | ) | | (999 | ) |
Inventories | | (4,404 | ) | | (2,232 | ) | | (605 | ) | | (4,404 | ) |
Deferred cost of revenue | | 2,184 |
| | 1,503 |
| |
Prepaid expenses and other assets | | (8,443 | ) | | (12,947 | ) | | (109 | ) | | (6,259 | ) |
Accounts payable and accrued expenses | | (17,841 | ) | | 13,145 |
| | (10,161 | ) | | (17,841 | ) |
Contract liabilities | | (29,940 | ) | | (14,129 | ) | | (29,598 | ) | | (29,940 | ) |
Other, net | | (6,535 | ) | | 7,796 |
| | (13,472 | ) | | (6,535 | ) |
Net cash provided by operating activities | | 131,650 |
| | 96,174 |
| | 136,470 |
| | 131,650 |
|
| | | | | | | | |
Cash flows from investing activities: | | |
| | |
| | | | |
Cash paid for business combinations, including adjustments, net of cash acquired | | (27,370 | ) | | (28,071 | ) | | (51,481 | ) | | (27,370 | ) |
Purchases of property and equipment | | (22,933 | ) | | (26,445 | ) | | (28,388 | ) | | (22,933 | ) |
Purchases of investments | | (53,868 | ) | | (8,305 | ) | | (31,760 | ) | | (53,868 | ) |
Maturities and sales of investments | | 10,620 |
| | 5,244 |
| | 49,994 |
| | 10,620 |
|
Cash paid for capitalized software development costs | | (4,767 | ) | | (909 | ) | | (12,431 | ) | | (4,767 | ) |
Change in restricted bank time deposits, and other investing activities, net | | (21,128 | ) | | (111 | ) | | 4,755 |
| | (21,128 | ) |
Net cash used in investing activities | | (119,446 | ) | | (58,597 | ) | | (69,311 | ) | | (119,446 | ) |
| | | | | | | | |
Cash flows from financing activities: | | |
| | |
| | | | |
Proceeds from borrowings, net of original issuance discount | | — |
| | 424,469 |
| |
Repayments of borrowings and other financing obligations | | (4,317 | ) | | (410,536 | ) | | (4,671 | ) | | (4,317 | ) |
Payments of debt-related costs | | (206 | ) | | (7,107 | ) | | (212 | ) | | (206 | ) |
Purchases of treasury stock | | (173 | ) | | — |
| | (474 | ) | | (173 | ) |
Dividends paid to noncontrolling interest | | (760 | ) | | (716 | ) | |
Payments of contingent consideration for business combinations (financing portion) | | (10,681 | ) | | (7,210 | ) | |
Dividends or distributions paid to noncontrolling interests | | | (949 | ) | | (760 | ) |
Payments of deferred purchase price and contingent consideration for business combinations (financing portion) | | | (27,975 | ) | | (10,681 | ) |
Other financing activities, net | | (429 | ) | | (320 | ) | | — |
| | (429 | ) |
Net cash used in financing activities | | (16,566 | ) | | (1,420 | ) | | (34,281 | ) | | (16,566 | ) |
Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (3,864 | ) | | 447 |
| | (1,251 | ) | | (3,864 | ) |
Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | (8,226 | ) | | 36,604 |
| |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents | | | 31,627 |
| | (8,226 | ) |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 398,210 |
| | 369,329 |
| | 412,699 |
| | 398,210 |
|
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 389,984 |
| | $ | 405,933 |
| | $ | 444,326 |
| | $ | 389,984 |
|
| | | | | | | | |
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period to the condensed consolidated balance sheets: | | | | | | | | |
Cash and cash equivalents | | $ | 353,422 |
| | $ | 312,666 |
| | $ | 412,838 |
| | $ | 353,422 |
|
Restricted cash and cash equivalents included in restricted cash and cash equivalents, and restricted bank time deposits | | 32,212 |
| | 62,664 |
| | 23,778 |
| | 32,212 |
|
Restricted cash and cash equivalents included in other assets | | 4,350 |
| | 30,603 |
| | 7,710 |
| | 4,350 |
|
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 389,984 |
|
| $ | 405,933 |
| | $ | 444,326 |
|
| $ | 389,984 |
|
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Description of Business
Unless the context otherwise requires, the terms “Verint”, “we”, “us”, and “our” in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence isIn a necessity in a dynamic world of massive information growth, because it empowersour solutions empower organizations with crucial, actionable insights and enablesenable decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more informed, timely, and effective decisions. Today, over 10,000 organizations in more than 180 countries, including over 85 percent of the Fortune 100, use Verint solutions to optimize customer engagement and make the world a safer place.
Verint delivers itsVerint’s Actionable Intelligence solutions, through two operating segments: Customer Engagement Solutions (“Customer Engagement”)deployed in the cloud and Cyber Intelligence Solutions (“Cyber Intelligence”). Please referon premises, to Note 15, "Segment Information" for further details regarding our operating segments.make more informed, timely and effective decisions.
We have established leadership positions inOur Actionable Intelligence leadership is powered by developing highly-scalable,innovative, enterprise-class software built with artificial intelligence, analytics, automation, and servicesdeep domain expertise established by working closely with advanced, integrated analytics for both structuredsome of the most sophisticated and unstructured information.forward-thinking organizations in the world. Our innovative solutions are developed by a large research and development (“R&D”) team is focused on actionable intelligence and is comprised of approximately 1,800 professionals and backed1,900 professionals. Our innovative solutions are backed-up by close toa strong IP portfolio with over 1,000 patents and patent applications worldwide.worldwide across areas including data capture, artificial intelligence, unstructured data analytics, predictive analytics and automation.
To help our customers maximize the benefits of our technology over the solution lifecycle and provide a high degree of flexibility, we offer a broad range of services, such as strategic consulting, managed services, implementation services, training, maintenance, and 24x7 support. Additionally, we offer a broad range of deployment options, including cloud, on-premises, and hybrid, and software licensing and delivery models that include perpetual and term-based licenses and software as a service (“SaaS”).
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.
Preparation of Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 20182019 filed with the U.S. Securities and Exchange Commission (“SEC”), except for the recently adopted accounting pronouncements described below. The condensed consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods ended October 31, 20182019 and 2017,2018, and the condensed consolidated balance sheet as of October 31, 2018,2019, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 20182019 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2018.2019. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 20182019 filed with the SEC. The results for interim periods are not necessarily indicative of a full year’s results.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned or otherwise controlled subsidiaries, and a joint venture in which we hold a 50% equity interest. The joint venture is a variable interest entity in which we are the primary beneficiary. Noncontrolling interests in less than wholly owned subsidiaries are reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our stockholders’ equity.
We hold an option to acquire the noncontrolling interests in two majority owned subsidiaries and we account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
ThereExcept for the accounting policy for leases appearing below, implemented as a result of adopting Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), there have been no material changes in our significant accounting policies during the nine months ended October 31, 2018, other than the impacts of adopting the accounting pronouncements described below,2019, as compared to the significant accounting policies described in Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2018.2019.
Goodwill, Other Acquired Intangible Assets, and Long-Lived AssetsLeases
For business combinations, the purchase pricesWe determine if an arrangement is a lease at inception. Operating lease assets are allocated to the tangiblepresented as operating lease right-of-use (“ROU”) assets, and intangiblecorresponding operating lease liabilities are presented within accrued expenses and other current liabilities (current portions), and as operating lease liabilities (long-term portions), on our condensed consolidated balance sheets. Finance lease assets acquiredare included in property and equipment, and corresponding finance lease liabilities assumedare included within accrued expenses and other current liabilities (current portions), and other liabilities (long-term portions), on our condensed consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. Goodwill is assigned, at the acquisition date, to those reporting units expected to benefit from the synergies of the combination.
We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating segment, on an annual basis as of November 1, or more frequently if changes in facts and circumstances indicate that impairment in the value of goodwill may exist. As of October 31, 2018, our reporting units are Customer Engagement, Cyber Intelligence (excluding situational intelligence solutions), and Situational Intelligence, which is a component of our Cyber Intelligence operating segment.
In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we elect to bypass a qualitative assessment, or if our qualitative assessment indicates that goodwill impairment is more likely than not, we perform quantitative impairment testing. For quantitative impairment testing performed prior to February 1, 2018, we performed a two-step test by first comparing the carryingpresent value of the reporting unitremaining lease payments over the lease term at commencement date. Our leases do not provide an implicit interest rate. We calculate the incremental borrowing rate to its fair value. Ifreflect the carrying value exceeded the fair value,interest rate that we would have to pay to borrow on a second step was performed to compute the goodwill impairment. Effective with our February 1, 2018 adoption of Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, if our quantitative testing determines that the carrying value of a reporting unit exceeds its fair value, goodwill impairment is recognized incollateralized basis an amount equal to the lease payments in a similar economic environment over a similar term, and consider our historical borrowing activities and market data in this determination. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that excess, limited to the total goodwill allocated towe will exercise that reporting unit, eliminating the needoption. Lease expense for the second step.
We utilize some or all of three primary approaches to assess the fair value of a reporting unit: (a) an income-based approach, using projected discounted cash flows, (b) a market-based approach, using valuation multiples of comparable companies, and (c) a transaction-based approach, using valuation multiples for recent acquisitions of similar businesses made in the marketplace. Our estimate of fair value of each reporting unitminimum lease payments is based on a number of subjective factors, including: (a) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our estimated cash flows, (e) selection of peer group companies for the public company and the market transaction approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.
Acquired identifiable intangible assets include identifiable acquired technologies, customer relationships, trade names, distribution networks, non-competition agreements, sales backlog, and in-process research and development. We amortize the cost of finite-lived identifiable intangible assets over their estimated useful lives, which are periods of ten years or less. Amortization is based on the pattern in which the economic benefits of the intangible asset are expected to be realized, which typically is on a straight-line basis. The fair values assigned to identifiable intangible assets acquired in business combinations are determined primarily by using the income approach, which discounts expected future cash flows attributable to these assets to present value using estimates and assumptions determined by management. The acquired identifiable finite-lived intangible assets are being amortized primarilyrecognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we believe approximatesaccount for as a single lease component. Some of our leases contain variable lease payments, which are expensed as incurred unless those payments are based on an index or rate. Variable lease payments based on an index or rate are initially measured using the patternindex or rate in whicheffect at lease commencement and included in the measurement of the lease liability; thereafter, changes to lease payments due to rate or index updates are recorded as rent expense in the period incurred. We have elected not to recognize ROU assets and lease liabilities for short-term leases that have a term of twelve months or less. The effect of short-term leases on our ROU assets and lease liabilities was not material. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, we do not have any related party leases and our sublease transactions are utilized, over their estimated useful lives.de minimis.
Other Recently Adopted Accounting Pronouncements
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606)842). ASU No. 2014-092016-02 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition840, Leases, and requires entitieslessees to recognize revenue when controlROU assets and liabilities for leases with lease terms of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.more than twelve months. We adopted ASU No. 2014-092016-02 as of February 1, 20182019 using the modified retrospective transition method.method of applying the new standard at the adoption date. Results for reporting periods beginning on or after February 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance. Disclosures required under the new standard will not be provided for dates and periods before February 1, 2019.
The new standard provided a number of optional practical expedients in transition. We elected the transition package of practical expedients available in the standard, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs and the practical expedient to not account for lease and non-lease components separately. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The adoption of ASU No. 2016-02 resulted in the recognition of ROU assets of approximately $100.4 million and lease liabilities
for operating leases of approximately $110.4 million on our consolidated balance sheet as of February 1, 2019 with no material impact to our consolidated statements of operations. The ROU assets are lower than the operating lease liabilities primarily because previously recorded net deferred rent balances were reclassified into the ROU assets. There was no impact to our accumulated deficit upon adoption of the standard. The adoption of the new standard also resulted in significant additional disclosures regarding our leasing activities. Please refer to Note 2, “Revenue Recognition”14, Leases for further details.
In January 2016,February 2018, the FASB issued ASU 2016‑01, Financial Instruments—Overall (Subtopic 825-10)No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Recognition and MeasurementReclassification of Financial Assets and Financial Liabilities, associated withCertain Tax Effects from Accumulated Other Comprehensive Income, which provides companies the recognition and measurement of financial assets and liabilities, with further clarifications made in February 2018 with the issuance of ASU No. 2018-03, Technical Corrections and Improvementsoption to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amended guidance requires certain equity investments that are not consolidated and not accounted for under the equity method to be measured at fair value with changes in fair value recognized in net income rather than as a component ofreclassify from accumulated other comprehensive income (loss). It further states that an entity may choose to measure equity investments that do not have readily determinable fair values using a quantitative approach, or measurement alternative, which is equal to its cost minus impairment, if any, plus or minus changesretained earnings the stranded tax effects resulting from observable price changesthe Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The stranded tax effect represents the difference between the amount previously recorded in orderly transactions forother comprehensive income at the identical or a similar investment ofhistorical U.S. federal tax rate that remains in accumulated other comprehensive loss at the same issuer.time the 2017 Tax Act was effective and the amount that would have been recorded using the newly enacted rate. We adopted this amended guidance on February 1, 2018, using a prospective transition approach, which2019, and the adoption did not have an impact on our condensed consolidated financial statements.
We concluded that all equity investments within the scope of ASU No. 2016-01, previously accounted for under the cost method, do not have readily determinable fair values. Accordingly, the value of these investments beginning February 1,In June 2018, has been measured using the measurement alternative, as noted above. As of October 31, 2018, the carrying amount of our equity investments without readily determinable fair values was $6.0 million. During the nine months ended October 31, 2018, we did not recognize any impairments or other adjustments.
In August 2016, the FASB issued ASU No. 2016-15, Statement2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting,to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of Cash Flows (Topic 230): ClassificationASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of Certain Cash Receipts and Cash Payments, which providesthe guidance on stock compensation payments to nonemployees would be aligned with the intentrequirements for share-based payments granted to employees. Adoption of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The clarifications provided by this guidance did not have a materialstandard had an immaterial impact on our condensed consolidated statement of cash flows.financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We retrospectively adopted ASU No. 2016-18 on February 1, 2018 and as a result, we now include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the condensed consolidated statements of cash flows. Prior to adoption of this new guidance, we reported changes in restricted cash and restricted cash equivalents as cash flows from investing activities. We typically have restrictions on certain amounts of cash and cash equivalents, primarily consisting of amounts used to secure bank guarantees in connection with sales contract performance obligations, and expect to continue to have similar restrictions in the future.
As a result of the adoption of ASU No. 2016-18, we adjusted the previously reported condensed consolidated statement of cash flows for the nine months ended October 31, 2017 as follows:
|
| | | | | | | | | | | | |
| | Nine Months Ended October 31, 2017 |
(in thousands) | | As previously reported | | Adjustments | | As Adjusted |
Net cash provided by operating activities | | $ | 96,174 |
| | $ | — |
| | $ | 96,174 |
|
Net cash used in investing activities | | (88,693 | ) | | 30,096 |
| | (58,597 | ) |
Net cash used in financing activities | | (1,420 | ) | | — |
| | (1,420 | ) |
Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (758 | ) | | 1,205 |
| | 447 |
|
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 5,303 |
| | 31,301 |
| | 36,604 |
|
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 307,363 |
| | 61,966 |
| | 369,329 |
|
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 312,666 |
| | $ | 93,267 |
| | $ | 405,933 |
|
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, whichclarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If an entity determines that substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. If this threshold is not met, in order to be considered a business the set of transferred assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. Our February 1, 2018 prospective adoption of this standard will require future transactions to be evaluated under the new framework.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. This update better aligns risk management activities and financial reporting for hedging relationships, simplifies hedge accounting requirements, and improves disclosures of hedging arrangements. We early adopted this standard on February 1, 2018 on a prospective basis. The effects of this standard on our condensed consolidated financial statements were not material.
New Accounting Pronouncements Not Yet Effective
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting forrequires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs in cloud computing arrangements. to capitalize and which costs to expense. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods, with early adoption permitted. We plan to adopt this guidance prospectively to eligible costs incurred on or after February 1, 2020 and are currently reviewing this standardin the process of evaluating potential changes to assess the impact on our condensed consolidated financial statements.related processes and internal controls.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to
The Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This standard is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods, with early adoption permitted. We are currently reviewing this standard to assess the impact on our condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting,to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. While we continue to assess the potential impact of this standard, webut do not expect the adoption of this standard tothat it will have a material impact on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. This new standard changes the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. The new standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. A modified retrospective adoption method is required, with a cumulative-effect adjustment to the opening retained earnings balance in the period of adoption. We are currently reviewingevaluating the impact of adopting this standard but do not expect its adoption to assess thehave a significant impact on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the entity must recast its comparative period financial statements and provide disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on February 1, 2019 using the effective date as our date of initial application. Consequently, financial information will not be updated and disclosures required under the new standard will not be provided for dates and periods before February 1, 2019.
The new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
We currently anticipate that the adoption of this new standard will materially affect our consolidated balance sheets by recognizing new right-of-use assets and lease liabilities for operating leases. The impact on our results of operations and cash flows is not expected to be material. We are implementing a new lease accounting system and updating our processes in preparation for the adoption of the new standard, including the requirement to provide significant new disclosures about our leasing activities. Please refer to Note 14, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended January 31, 2018 for additional information about our leases, including the future minimum lease payments for our operating leases at January 31, 2018.
On February 1, 2018, we adopted ASU No. 2014-09, RevenueWe derive our revenue primarily from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts that were not completed aslicensing of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under ASU No. 2014-09, while prior period amounts are not adjustedour software products and continue to be reported in accordance with our historic accounting under prior guidance. For contracts that were modified before the effective date of ASU No. 2014-09, we recorded the aggregate effect of all modificationsrelated services and support based on when identifying performance obligations and allocating the transaction price in accordance with the practical expedient provided for under the new guidance,which permits an entity to record the aggregate effect of all contract modifications that occur before the beginningcontrol of the earliest period presented in accordance withsoftware passes to our customers or the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
Under the new standard, an entity recognizes revenue when its customer obtains control of promised goods or services are provided, in an amount that reflects the consideration that the entity expectswe expect to receivebe entitled to in exchange for thosesuch goods or services. ToRevenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction, including mandatory government charges that are passed through to our customers.
We determine revenue recognition for contracts that are within the scope of new standard, we performthrough the following five steps:
1) IdentifyIdentification of the contract(s)contract, or contracts, with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with the customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance, and (iii) we determine that collectionIdentification of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the
promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or in the case of a new customer, published credit and financial information pertaining to the customer. Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer purchase order to specify the different goods and services, the associated prices, and any additional terms for an individual contract. Multiple contracts with a single counterparty entered into at the same time are evaluated to determine if the contracts should be combined and accounted for as a single contract.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the contextDetermination of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we must apply judgment to determine whether promised goods or services are capable of being distinct and are distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. Generally, our contracts do not include non-distinct performance obligations, but certain Cyber Intelligence customers require design, development, or significant customization of our products to meet their specific requirements, in which case the products and services are combined into one distinct performance obligation.
3) Determine the transaction price
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer. We assess the timingAllocation of transfer of goods and services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less, which is the case in the majority of our customer contracts. The primary purpose of our invoicing terms is not to receive or provide financing from or to customers. Our Cyber Intelligence contracts may require an advance payment to encourage customer commitment to the project and protect us from early termination of the contract. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price, if we assessed that a significant future reversal of cumulative revenue under the contract will not occur. Typically, our contracts do not provide our customers with any right of return or refund, and we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or refund.
4) Allocate the transaction price to the performance obligations in the contract
IfRecognition of revenue when, or as, performance obligations are satisfied.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a serieshas commercial substance, and collectability of distinct goods or services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, we must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. We allocate the variable amount to one or more distinct performance obligations but not all or to one or more distinct services that forms a part of a single performance obligation, when the payment terms of the variable amount relate solely to our efforts to satisfy that distinct performance obligation and it results in an allocation that is consistent with the overall allocation objective of ASU No. 2014-09. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. We determine standalone selling price (“SSP”) based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives, and internally approved pricing guidelines related to the performance obligation.probable.
5) Recognize revenue when (or as) the entity satisfies a performance obligation
We satisfy performance obligations either over time or at a point in time depending on the nature of the underlying promise. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. In the case of contracts that include customer acceptance criteria, revenue is not
recognized until we can objectively conclude that the product or service meets the agreed-upon specifications in the contract.
We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customers. Revenue is measured based on consideration specified in a contract with a customer, and excludes taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer.
Shipping and handling activities that are billed to the customer and occur after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of revenue. Historically, these expenses have not been material.
Nature of Goods and Services
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products, and the sale of hardware products, and (b) service and support revenue, including revenue from installation services, post-contract customer support (“PCS”), project management, hosting services, cloud deployments, SaaS, application managed services, product warranties, business advisory consulting, and training services.
Our software licenses typically provide for a perpetual right to use our software, though we also sell term-based software licenses that provide our customers with the right to use our software for only a fixed term, in most cases between a one- and three-year time frame. Generally, our contracts do not provide significant services of integration and customization and installation services are not required to be purchased directly from us. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We have concluded that the software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered or made available for download to the customer. We rarely sell our software licenses on a standalone basis and as a result SSP is not directly observable and must be estimated. We apply the adjusted market assessment approach, considering both market conditions and entity specific factors such as assessment of historical data of bundled sales of software licenses with other promised goods and services in order to maximize the use of observable inputs. Software SSP is established based on an appropriate discount from our established list price, taking into consideration whether there are certain stratifications of the population with different pricing practices. Revenue for hardware is recognized at a point in time, generally upon shipment or delivery.
Contracts that require us to significantly customize our software are generally recognized over time as we perform because our performance does not create an asset with an alternative use and we have an enforceable right to payment plus a reasonable profit for performance completed to date. Revenue is recognized over time based on the extent of progress towards completion of the performance obligation. We use labor hours incurred to measure progress for these contracts because it best depicts the transfer of the asset to the customer. Under the labor hours incurred measure of progress, the extent of progress towards completion is measured based on the ratio of labor hours incurred to date to the total estimated labor hours at completion of the distinct performance obligation. Due to the nature of the work performed in these arrangements, the estimation of total labor hours at completion is complex, subject to many variables and requires significant judgment. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known. We use the expected cost plus a margin approach to estimate the SSP of our significantly customized solutions.
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training, and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are performed. Professional services that are billed on a time and materials basis are recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation. We determine SSP for our professional services based on the price at which the performance obligation is sold separately, which is observable through past transactions.
Our SaaS contracts are typically comprised of a right to access our software, maintenance, and hosting fees. We do not provide the customer the contractual right to take possession of the software at any time during the hosting period under these contracts. The customer can only benefit from the SaaS license and the maintenance when combined with the hosting service as the hosting service is the only way for the customer to access the software and benefit from the maintenance services. Accordingly, each of the license, maintenance, and hosting services is not considered a distinct performance obligation in the context of the
contract, and should be combined into a single performance obligation (“SaaS services”) and recognized ratably over the contract period. Our SaaS customer contracts can consist of fixed, variable, and usage based fees. Typically, we invoice a portion of the fees at the outset of the contract and then monthly or quarterly thereafter. Certain SaaS contracts include a nonrefundable upfront fee for setup services, which are not distinct from the SaaS services. Non-distinct setup services represent an advanced payment for future SaaS services, and are recognized as revenue when those SaaS services are satisfied, unless the nonrefundable fee is considered to be a material right, in which case the nonrefundable fee is recognized over the expected benefit period, which includes anticipated SaaS renewals. We determine SSP for our SaaS services based on the price at which the performance obligation is sold separately, which is observable through past SaaS renewal transactions. We satisfy our SaaS services by providing access to our software over time and processing transactions for usage based contracts. For non-usage based fees, the period of time over which we perform is commensurate with the contract term because that is the period during which we have an obligation to provide the service. The performance obligation is recognized on a time elapsed basis, by month for which the services are provided.
Customer support revenue is derived from providing telephone technical support services, bug fixes and unspecified software updates and upgrades to customers on a when-and-if-available basis. Each of these performance obligations provide benefit to the customer on a standalone basis and are distinct in the context of the contract. Each of these distinct performance obligations represent a stand ready obligation to provide service to a customer, which is concurrently delivered and has the same pattern of transfer to the customer, which is why we account for these support services as a single performance obligation. We recognize support services ratably over the contractual term, which typically is one year, and develop SSP for support services based on standalone renewal contracts.
Our Customer Engagement solutions are generally sold with a warranty of one year for hardware and 90 days for software. Our Cyber Intelligence solutionsare generally sold with warranties that typically range from 90 days to three years and, in some cases, longer. These warranties do not represent an additional performance obligation as services beyond assuring that the software license and hardware complies with agreed-upon specifications are not provided.
Disaggregation of Revenue
The following table provides information about disaggregated revenue for our Customer Engagement and Cyber Intelligence segments by product revenue and service and support revenue, as well as by the recurring or nonrecurring nature of revenue for each business segment. Recurring revenue is the portion of our revenue that we believe is highly likely to continuebe renewed in the future, and primarily consists of initial and renewal PCS, SaaS, application managed services, sales-and-usage based royalties, and subscription licenses recognized over time.future. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers' renewal decisions.
For our Customer Engagement segment:
Recurring revenue primarily consists of cloud revenue and initial and renewal support revenue.
| |
◦ | Cloud revenue consists primarily of software as a service (“SaaS”) revenue with some optional managed services revenue. |
| |
◦ | SaaS revenue consists predominately of bundled SaaS (software with standard managed services) with some unbundled SaaS (software licensing rights sold separately from managed services and accounted for as term-based licenses). Unbundled SaaS can be deployed in the cloud either by us or a cloud partner. |
| |
◦ | Bundled SaaS revenue is recognized over time and unbundled SaaS revenue is recognized at a point in time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one- and three-year time frame. |
Nonrecurring revenue primarily consists of our perpetual licenses, consulting, implementation and term-basedinstallation services, and training.
For our Cyber Intelligence segment:
Recurring revenue primarily consists of initial and renewal support, subscription software licenses, which are recognized at a pointand SaaS in time,certain limited transactions.
Nonrecurring revenue primarily consists of our perpetual licenses, long-term customization projects including software customizations that are recognized over time as control transfers to the customer using a percentage of completion (“POC”) method, consulting, implementation and installation services, training, and hardware.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, 2018 | | Nine Months Ended October 31, 2018 |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
Revenue: | | | | | | | | | | | | |
Product | | $ | 52,353 |
| | $ | 59,317 |
| | $ | 111,670 |
| | $ | 156,245 |
| | $ | 171,331 |
| | $ | 327,576 |
|
Service and support | | 145,114 |
| | 47,199 |
| | 192,313 |
| | 428,485 |
| | 143,456 |
| | 571,941 |
|
Total revenue | | $ | 197,467 |
| | $ | 106,516 |
| | $ | 303,983 |
| | $ | 584,730 |
| | $ | 314,787 |
| | $ | 899,517 |
|
| | | | | | | | | | | | |
Revenue by recurrence: | | | | | | | | | | | | |
Recurring revenue | | $ | 112,274 |
| | $ | 40,349 |
| | $ | 152,623 |
| | $ | 330,890 |
| | $ | 119,238 |
| | $ | 450,128 |
|
Nonrecurring revenue | | 85,193 |
| | 66,167 |
| | 151,360 |
| | 253,840 |
| | 195,549 |
| | 449,389 |
|
Total revenue | | $ | 197,467 |
| | $ | 106,516 |
| | $ | 303,983 |
| | $ | 584,730 |
| | $ | 314,787 |
| | $ | 899,517 |
|
To conform with the presentation described above, the classification of Customer Engagement unbundled SaaS revenue for the three and nine months ended October 31, 2018 in the tables below has been updated to reflect $4.7 million and $11.6 million, respectively, of recurring revenue which had previously been presented within nonrecurring revenue.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, 2019 | | Three Months Ended October 31, 2018 |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
Revenue: | | | | | | | | | | | | |
Product | | $ | 60,828 |
| | $ | 55,503 |
| | $ | 116,331 |
| | $ | 52,353 |
| | $ | 59,317 |
| | $ | 111,670 |
|
Service and support | | 157,108 |
| | 51,428 |
| | 208,536 |
| | 145,114 |
| | 47,199 |
| | 192,313 |
|
Total revenue | | $ | 217,936 |
| | $ | 106,931 |
| | $ | 324,867 |
| | $ | 197,467 |
| | $ | 106,516 |
| | $ | 303,983 |
|
| | | | | | | | | | | | |
Revenue by recurrence: | | | | | | | | | | | | |
Recurring revenue | | $ | 141,378 |
| | $ | 47,498 |
| | $ | 188,876 |
| | $ | 116,943 |
| | $ | 40,349 |
| | $ | 157,292 |
|
Nonrecurring revenue | | 76,558 |
| | 59,433 |
| | 135,991 |
| | 80,524 |
| | 66,167 |
| | 146,691 |
|
Total revenue | | $ | 217,936 |
| | $ | 106,931 |
| | $ | 324,867 |
| | $ | 197,467 |
| | $ | 106,516 |
| | $ | 303,983 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended October 31, 2019 | | Nine Months Ended October 31, 2018 |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
Revenue: | | | | | | | | | | | | |
Product | | $ | 169,298 |
| | $ | 161,240 |
| | $ | 330,538 |
| | $ | 156,245 |
| | $ | 171,331 |
| | $ | 327,576 |
|
Service and support | | 467,169 |
| | 166,724 |
| | 633,893 |
| | 428,485 |
| | 143,456 |
| | 571,941 |
|
Total revenue | | $ | 636,467 |
| | $ | 327,964 |
| | $ | 964,431 |
| | $ | 584,730 |
| | $ | 314,787 |
| | $ | 899,517 |
|
| | | | | | | | | | | | |
Revenue by recurrence: | | | | | | | | | | | | |
Recurring revenue | | $ | 394,068 |
| | $ | 140,486 |
| | $ | 534,554 |
| | $ | 342,532 |
| | $ | 119,238 |
| | $ | 461,770 |
|
Nonrecurring revenue | | 242,399 |
| | 187,478 |
| | 429,877 |
| | 242,198 |
| | 195,549 |
| | 437,747 |
|
Total revenue | | $ | 636,467 |
| | $ | 327,964 |
| | $ | 964,431 |
| | $ | 584,730 |
| | $ | 314,787 |
| | $ | 899,517 |
|
The following table provides a further disaggregation of revenue for our Customer Engagement segment.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Customer Engagement revenue: | | | | | | | | |
Recurring revenue | | | | | | | | |
Cloud | | $ | 61,429 |
| | $ | 37,656 |
| | $ | 156,327 |
| | $ | 107,119 |
|
Support | | 79,949 |
| | 79,287 |
| | 237,741 |
| | 235,413 |
|
Total recurring revenue | | 141,378 |
| | 116,943 |
| | 394,068 |
| | 342,532 |
|
Nonrecurring revenue | | 76,558 |
| | 80,524 |
| | 242,399 |
| | 242,198 |
|
Total Customer Engagement revenue | | $ | 217,936 |
| | $ | 197,467 |
| | $ | 636,467 |
| | $ | 584,730 |
|
ContractBalances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
|
| | | | | | | | |
(in thousands) | | October 31, 2019 | | January 31, 2019 |
Accounts receivable, net | | $ | 346,741 |
| | $ | 375,663 |
|
Contract assets | | 65,611 |
| | 63,389 |
|
Long-term contract assets (included in Other assets) | | 1,168 |
| | 1,375 |
|
Contract liabilities | | 339,232 |
| | 377,376 |
|
Long-term contract liabilities | | 40,445 |
| | 30,094 |
|
|
| | | | |
(in thousands) | | October 31, 2018 |
Accounts receivable, net | | $ | 311,492 |
|
Contract assets | | 70,076 |
|
Long-term contract assets (included in other assets) | | 1,289 |
|
Contract liabilities | | 306,240 |
|
Long-term contract liabilities | | 27,512 |
|
We receive payments from customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled amounts related to our significantly customized solutions as the right to consideration is subject to the contractually agreed upon billing schedule. We expect billing and collection of a majority of our contract assets to occur within the next twelve months and had no asset impairment related to contract assets in the period. There are two customers in our Cyber Intelligence segment that combined accounted for a combined $43.3$59.6 million and $62.3$84.3 million of our aggregated accounts receivable and contract assets (unbilled amounts previously included in accounts receivable) at October 31, 20182019 and January 31, 2018,2019, respectively. These customers areamounts result from both direct and indirect contracts with governmental agencies outside of the U.S. which we believe present insignificant credit risk.
Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract.
Revenue recognized during the three and nine months ended October 31, 2019 and 2018 from amounts included in contract liabilities at February 1, 2018the beginning of each period was $51.0$294.9 million and $258.8 million, respectively. During the three and nine months ended October 31, 2018, we transferred $19.8 million and $42.2 million to accounts receivable from contract assets recognized at February 1, 2018, as a result of the right to the transaction consideration becoming unconditional. We recognized $11.5 million and $53.2 million of contract assets during the three and nine months ended October 31, 2018, respectively. Contract assets recognized during the period, primarily related to our rights to consideration for work completed but not billed on long-term Cyber Intelligence contracts.
RemainingPerformanceObligations
RemainingPerformanceObligations
Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The majority of our arrangements are for periods of up to three years, with a significant portion being one year or less. We had $936.4 million$1.0 billion of remaining performance obligationsRPO as of October 31, 2018.2019. We elected to exclude amounts of variable consideration attributable to sales- or usage-based royalties in exchange for a license of our IP from the remaining performance obligations. We currently expect to recognize approximately 64%two-thirds of our remaining revenue backlog over the next twelve months and the remainder thereafter. The timing and amount of revenue recognition for our remaining performance obligations is influenced by several factors, including seasonality, the timing of PCSsupport renewals, and the revenue recognition for certain projects, particularly in our Cyber Intelligence segment, that can extend over longer periods of time, delivery under which, for various reasons, may be delayed, modified, or canceled. Further, we have historically generated a large portion of our business each quarter by orders that are sold and fulfilled within the same reporting period. Therefore, the amount of remaining obligations may not be a meaningful indicator of future results.
Costs to Obtain and Fulfill Contracts
We capitalize commission expenses paid to internal sales personnel and agent commission expenses that are incremental to obtaining customer contracts. We have determined that these commission expenses are in fact incremental and would not have occurred absent the customer contract. Capitalized sales and agent commissions are amortized on a straight-line basis over the period the goods or services are transferred to the customer to which the assets relate, which ranges from immediate to as long as six years, if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. A portion of the initial commission payable on the majority of Customer Engagement contracts is amortized over the anticipated PCS renewal period, which is generally four to six years, due to the commissions being paid on PCS renewal contracts not being commensurate with amounts paid on the initial contract.
Total capitalized costs to obtain contracts were $29.1 million as of October 31, 2018, of which $5.1 million is included in prepaid expenses and other current assets and $24.0 million is included in other assets on our condensed consolidated balance sheet. During the three and nine months ended October 31, 2018, we expensed $10.8 million and $32.4 million, respectively, of sales and agent commissions, which are included in selling, general and administrative expenses and there was no impairment loss recognized for these capitalized costs.
We capitalize costs incurred to fulfill our contracts when the costs relate directly to the contract and are expected to generate resources that will be used to satisfy the performance obligation under the contract and are expected to be recovered through revenue generated under the contract. Costs to fulfill contracts are expensed to cost of revenue as we satisfy the related performance obligations.Total capitalized costs to fulfill contracts were $14.0 million as of October 31, 2018, of which $9.7 million is included in deferred cost of revenue and $4.3 million is included in long-term deferred cost of revenue on our condensed consolidated balance sheet. The amounts capitalized primarily relate to direct costs that enhance resources under our SaaS arrangements. During the three and nine months ended October 31, 2018, we amortized $6.0 million and $13.8 million, respectively, of fulfillment costs.
Financial Statement Impact of Adoption
We adopted ASU No. 2014-09 utilizing the modified retrospective method. The cumulative impact of applying the new guidance to all contracts with customers that were not completed as of February 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new standard, the following adjustments were made to accounts on the consolidated balance sheet as of February 1, 2018:
|
| | | | | | | | | | | | |
(in thousands) | | Balance at January 31, 2018 | | Adjustments from Adopting ASU No. 2014-09 | | Balance at February 1, 2018 |
Assets: | | | | | | |
Accounts receivable, net | | $ | 296,324 |
| | $ | 53,682 |
| | $ | 350,006 |
|
Contract assets | | — |
| | 69,217 |
| | 69,217 |
|
Deferred cost of revenue | | 6,096 |
| | 2,056 |
| | 8,152 |
|
Prepaid expenses and other current assets | | 82,090 |
| | (829 | ) | | 81,261 |
|
Long-term deferred cost of revenue | | 2,804 |
| | 2,193 |
| | 4,997 |
|
Deferred income taxes | | 30,878 |
| | (2,248 | ) | | 28,630 |
|
Other assets | | 52,037 |
| | 14,912 |
| | 66,949 |
|
| | | | | | |
Liabilities: | | | | | | |
Accrued expenses and other current liabilities | | 220,265 |
| | (46,062 | ) | | 174,203 |
|
Contract liabilities | | 196,107 |
| | 139,517 |
| | 335,624 |
|
Long-term contract liabilities | | 24,519 |
| | 6,518 |
| | 31,037 |
|
Deferred income taxes | | 35,305 |
| | 963 |
| | 36,268 |
|
| | | | | | |
Stockholders' Equity: | | | | | | |
Total stockholders' equity | | 1,132,336 |
| | 38,047 |
| | 1,170,383 |
|
In connection with the adoption of the new revenue recognition accounting standard, we decreased our accumulated deficit by $38.0 million, due to uncompleted contracts at February 1, 2018, for which $17.2 million of revenue will not be recognized in future periods under the new standard. Upon adoption, we deferred $4.2 million of previously expensed contract costs and reversed $2.9 million of expenses due to the new standard precluding the recognition or deferral of costs to simply obtain an even profit margin over the contract term, which was acceptable under prior contract accounting guidance. We capitalized $16.9 million of incremental sales commission costs at the adoption date directly related to obtaining customer contracts and are amortizing these costs as we satisfy the underlying performance obligations, which for certain contracts can include anticipated renewal periods. The acceleration of revenue that was deferred under prior guidance as of February 1, 2018, was primarily attributable to being able to recognize minimum guaranteed amounts upon delivery of our software rather than over the term of the arrangement, the ability to recognize professional services revenue in advance of achieving billing milestones, no longer requiring the separation of promised goods or services, such as software licenses, technical support, or unspecified update rights on the basis of vendor specific objective evidence, and the impact of allocating the transaction price to the performance obligations in the contract on a relative basis using SSP rather than allocating under the residual method, which allocates the entire arrangement discount to the delivered performance obligations.
The net change in deferred income taxes of $3.2 million is primarily due to the deferred tax effects resulting from the adjustment to accumulated deficit for the cumulative effect of applying ASU No. 2014-09 to active contracts as of the adoption date.
We made certain presentation changes to our condensed consolidated balance sheet on February 1, 2018 to comply with ASU No. 2014-09. Prior to adoption of the new standard, we offset accounts receivable and contract liabilities (previously presented as deferred revenue on our consolidated balance sheet) for unpaid deferred performance obligations included in contract liabilities. Under the new standard, we record accounts receivable and related contract liabilities for noncancelable contracts with customers when the right to consideration is unconditional. Upon adoption, the right to consideration in exchange for goods or services that have been transferred to a customer when that right is conditional on something other than the passage of time were reclassified from accounts receivable to contract assets. In addition, we reclassified amounts related to billings in excess of costs and estimated earnings on uncompleted contracts, which under prior guidance was included in accrued expenses and other liabilities on our condensed consolidated balance sheet to contract liabilities upon adoption.
Impact of ASU No. 2014-09 on Financial Statement Line Items
The impact of adoption of ASU No. 2014-09 on our condensed consolidated balance sheet as of October 31, 2018 and on our condensed consolidated statement of operations for the three and nine months ended October 31, 2018 was as follows:
|
| | | | | | | | | | | | |
| | As of October 31, 2018 |
(in thousands) | | As Reported | | Balances without Adoption of ASU No. 2014-09 | | Effect of Change Higher (Lower) |
Condensed Consolidated Balance Sheet | | | | | | |
Assets: | | | | | | |
Accounts receivable, net | | $ | 311,492 |
| | $ | 266,497 |
| | $ | 44,995 |
|
Contract assets | | 70,076 |
| | — |
| | 70,076 |
|
Deferred cost of revenue | | 9,651 |
| | 11,170 |
| | (1,519 | ) |
Prepaid expenses and other current assets | | 85,310 |
| | 86,462 |
| | (1,152 | ) |
Long-term deferred cost of revenue | | 4,283 |
| | 1,214 |
| | 3,069 |
|
Other assets | | 101,643 |
| | 79,330 |
| | 22,313 |
|
| | | | | | |
Liabilities: | | | | | | |
Accrued expenses and other current liabilities | | 181,452 |
| | 216,637 |
| | (35,185 | ) |
Contract liabilities | | 306,240 |
| | 207,199 |
| | 99,041 |
|
Long-term contract liabilities | | 27,512 |
| | 26,700 |
| | 812 |
|
Other liabilities | | 120,158 |
| | 119,236 |
| | 922 |
|
| | | | | | |
Stockholders' Equity: | | | | | | |
Total stockholders' equity | | 1,213,499 |
| | 1,141,307 |
| | 72,192 |
|
While the tables below indicate that calculated revenue for the three and nine months ended October 31, 2018 without the adoption of ASU No. 2014-09 would have been lower than the revenue we are reporting under the new accounting guidance, this lower calculated revenue results not only from the impact of the new accounting guidance, but also from changes we made to our business practices in anticipation and as a result of the new accounting guidance. These business practice changes adversely impact the calculation of revenue under the prior accounting guidance and include, among other things, the way we manage our professional services projects, offer and deploy our solutions, structure certain customer contracts, and make pricing decisions. While the many variables, required assumptions, and other complexities associated with these business practice changes make it impractical to precisely quantify the impact of these changes, we believe that calculated revenue under the prior accounting guidance, but absent these business practice changes, would have been closer to the revenue we are reporting under the new accounting guidance.
|
| | | | | | | | | | | | |
| | Three Months Ended October 31, 2018 |
(in thousands) | | As Reported | | Balances without Adoption of ASU No. 2014-09 | | Effect of Change Higher (Lower) |
Condensed Consolidated Statement of Operations | | | | | | |
Revenue: | | | | | | |
Product | | $ | 111,670 |
| | $ | 109,224 |
| | $ | 2,446 |
|
Service and support | | 192,313 |
| | 192,849 |
| | (536 | ) |
| | | | | | |
Cost of revenue: | | | | | | |
Product | | 33,124 |
| | 30,315 |
| | 2,809 |
|
Service and support | | 72,182 |
| | 72,847 |
| | (665 | ) |
| | | | | | |
Expenses and Other: | | | | | | |
Selling, general and administrative | | 99,902 |
| | 102,463 |
| | (2,561 | ) |
Provision (benefit) for income taxes | | 5,601 |
| | 5,401 |
| | 200 |
|
Net income | | 20,213 |
| | 18,086 |
| | 2,127 |
|
|
| | | | | | | | | | | | |
| | Nine Months Ended October 31, 2018 |
(in thousands) | | As Reported | | Balances without Adoption of ASU No. 2014-09 | | Effect of Change Higher (Lower) |
Condensed Consolidated Statement of Operations | | | | | | |
Revenue: | | | | | | |
Product | | $ | 327,576 |
| | $ | 300,116 |
| | $ | 27,460 |
|
Service and support | | 571,941 |
| | 562,701 |
| | 9,240 |
|
| | | | | | |
Cost of revenue: | | | | | | |
Product | | 100,917 |
| | 94,243 |
| | 6,674 |
|
Service and support | | 218,842 |
| | 219,319 |
| | (477 | ) |
| | | | | | |
Expenses and Other: | | | | | | |
Selling, general and administrative | | 311,482 |
| | 319,481 |
| | (7,999 | ) |
Provision (benefit) for income taxes | | 2,153 |
| | (1,647 | ) | | 3,800 |
|
Net income | | 41,912 |
| | 7,210 |
| | 34,702 |
|
The adoption of ASU No. 2014-09 had no impact to cash provided by or used in operating, investing, or financing activities on our condensed consolidated statement of cash flows.
| |
3. | NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC. |
The following table summarizes the calculation of basic and diluted net income (loss) per common share attributable to Verint Systems Inc. for the three and nine months ended October 31, 20182019 and 20172018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 12,983 |
| | $ | 20,213 |
| | $ | 29,015 |
| | $ | 41,912 |
|
Net income attributable to noncontrolling interests | | 1,302 |
| | 1,293 |
| | 5,200 |
| | 3,227 |
|
Net income attributable to Verint Systems Inc. | | $ | 11,681 |
| | $ | 18,920 |
| | $ | 23,815 |
| | $ | 38,685 |
|
Weighted-average shares outstanding: | | |
| | | | |
| | |
Basic | | 66,799 |
| | 65,122 |
| | 66,181 |
| | 64,690 |
|
Dilutive effect of employee equity award plans | | 643 |
| | 1,078 |
| | 1,271 |
| | 1,195 |
|
Dilutive effect of 1.50% convertible senior notes | | — |
| | — |
| | — |
| | — |
|
Dilutive effect of warrants | | — |
| | — |
| | — |
| | — |
|
Diluted | | 67,442 |
| | 66,200 |
| | 67,452 |
| | 65,885 |
|
Net income per common share attributable to Verint Systems Inc.: | | |
| |
|
| | |
| |
|
|
Basic | | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.36 |
| | $ | 0.60 |
|
Diluted | | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.35 |
| | $ | 0.59 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands, except per share amounts) | | 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) | | $ | 20,213 |
| | $ | 3,066 |
| | $ | 41,912 |
| | $ | (21,740 | ) |
Net income attributable to noncontrolling interests | | 1,293 |
| | 577 |
| | 3,227 |
| | 1,984 |
|
Net income (loss) attributable to Verint Systems Inc. | | $ | 18,920 |
| | $ | 2,489 |
| | $ | 38,685 |
| | $ | (23,724 | ) |
Weighted-average shares outstanding: | | |
| | |
| | | | |
Basic | | 65,122 |
| | 63,759 |
| | 64,690 |
| | 63,152 |
|
Dilutive effect of employee equity award plans | | 1,078 |
| | 829 |
| | 1,195 |
| | — |
|
Dilutive effect of 1.50% convertible senior notes | | — |
| | — |
| | — |
| | — |
|
Dilutive effect of warrants | | — |
| | — |
| | — |
| | — |
|
Diluted | | 66,200 |
| | 64,588 |
| | 65,885 |
| | 63,152 |
|
Net income (loss) per common share attributable to Verint Systems Inc.: | | |
| | |
| | | | |
Basic | | $ | 0.29 |
| | $ | 0.04 |
| | $ | 0.60 |
| | $ | (0.38 | ) |
Diluted | | $ | 0.29 |
| | $ | 0.04 |
| | $ | 0.59 |
| | $ | (0.38 | ) |
We excluded the following weighted-average potential common shares from the calculations of diluted net income (loss) per common share during the applicable periods because their inclusion would have been anti-dilutive:
|
| | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Common shares excluded from calculation: | | |
| | |
| | | | |
Stock options and restricted stock-based awards | | 1,545 |
| | 546 |
| | 1,122 |
| | 432 |
|
1.50% convertible senior notes | | 6,205 |
| | 6,205 |
| | 6,205 |
| | 6,205 |
|
Warrants | | 6,205 |
| | 6,205 |
| | 6,205 |
| | 6,205 |
|
|
| | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Common shares excluded from calculation: | | |
| | |
| | | | |
Stock options and restricted stock-based awards | | 546 |
| | 600 |
| | 432 |
| | 1,205 |
|
1.50% convertible senior notes | | 6,205 |
| | 6,205 |
| | 6,205 |
| | 6,205 |
|
Warrants | | 6,205 |
| | 6,205 |
| | 6,205 |
| | 6,205 |
|
In periods for which we report a net loss attributable to Verint Systems Inc., basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.
Our 1.50% convertible senior notes (“Notes”) will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the Warrants (as defined in Note 7, “Long-Term Debt”) unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share.
Our Note Hedges (as defined in Note 7, “Long-Term Debt”) do not impact the calculation of diluted net income per share under the treasury stock method, because their effect would be anti-dilutive. However, in the event of an actual conversion of any or all of the Notes, the common shares that would be delivered to us under the Note Hedges would neutralize the dilutive effect of
the common shares that we would issue under the Notes. As a result, actual conversion of any or all of the Notes would not increase our outstanding common stock. Up to 6,205,000 common shares could be issued upon exercise of the Warrants. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 7, “Long-Term Debt”.
On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we announced that Valor Parent LP, an affiliate of Apax Partners, will invest up to $400 million in us, in the form of convertible preferred stock. Further details regarding the separation of our businesses and the convertible preferred stock investment appear in Note 17, “Subsequent Events”.
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of October 31, 20182019 and January 31, 2018:
2019:
| | | | October 31, 2018 | | October 31, 2019 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | | | | | | | | | |
Cash and bank time deposits | | $ | 297,540 |
| | $ | — |
| | $ | — |
| | $ | 297,540 |
| | $ | 371,669 |
| | $ | — |
| | $ | — |
| | $ | 371,669 |
|
Money market funds | | 52,640 |
| | — |
| | — |
| | 52,640 |
| | 41,169 |
| | — |
| | — |
| | 41,169 |
|
Commercial paper | | 3,242 |
| | — |
| | — |
| | 3,242 |
| |
Total cash and cash equivalents | | $ | 353,422 |
| | $ | — |
| | $ | — |
| | $ | 353,422 |
| | $ | 412,838 |
| | $ | — |
| | $ | — |
| | $ | 412,838 |
|
| | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | |
Bank time deposits | | $ | 49,434 |
| | $ | — |
| | $ | — |
| | $ | 49,434 |
| | $ | 13,973 |
| | $ | — |
| | $ | — |
| | $ | 13,973 |
|
Total short-term investments | | $ | 49,434 |
| | $ | — |
| | $ | — |
| | $ | 49,434 |
| | $ | 13,973 |
| | $ | — |
| | $ | — |
| | $ | 13,973 |
|
|
| | | | | | | | | | | | | | | | |
| | January 31, 2019 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 359,266 |
| | $ | — |
| | $ | — |
| | $ | 359,266 |
|
Money market funds | | 10,709 |
| | — |
| | — |
| | 10,709 |
|
Total cash and cash equivalents | | $ | 369,975 |
| | $ | — |
| | $ | — |
| | $ | 369,975 |
|
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 32,329 |
| | $ | — |
| | $ | — |
| | $ | 32,329 |
|
Total short-term investments | | $ | 32,329 |
| | $ | — |
| | $ | — |
| | $ | 32,329 |
|
|
| | | | | | | | | | | | | | | | |
| | January 31, 2018 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 337,756 |
| | $ | — |
| | $ | — |
| | $ | 337,756 |
|
Money market funds | | 186 |
| | — |
| | — |
| | 186 |
|
Total cash and cash equivalents | | $ | 337,942 |
| | $ | — |
| | $ | — |
| | $ | 337,942 |
|
| | | | | | | | |
Short-term investments: | | | | | | | | |
Corporate debt securities (available-for-sale) | | $ | 2,002 |
| | $ | — |
| | $ | — |
| | $ | 2,002 |
|
Bank time deposits | | 4,564 |
| | — |
| | — |
| | 4,564 |
|
Total short-term investments | | $ | 6,566 |
| | $ | — |
| | $ | — |
| | $ | 6,566 |
|
Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.
During the nine months ended October 31, 20182019 and 2017,2018, proceeds from maturities and sales of short-term investments were $10.6$50.0 million and $5.2$10.6 million, respectively.
Nine Months Ended October 31, 20182019
During the nine months ended October 31, 2018,2019, we completed one transaction which qualified as a business combination in our Customer Engagement segment, which was not material to our condensed consolidated financial statements.
Year Ended January 31, 2018
During the year ended January 31, 2018, we completed seventwo business combinations:
On February 1, March 20, October 3, November 3, December 19, and December 21, 2017, we completed acquisitions of businesses in our Customer Engagement operating segment. One of the transactions was an asset acquisition that qualified as a business combination, and in another, the sellers retained a noncontrolling interest.
On July 1, 2017,2019, we completed the acquisition of a SaaS workforce optimization company focused on the small and medium-sized business in(“SMB”) market as part of our Cyber Intelligence operatingstrategy to expand our SMB portfolio. This company has been integrated into our Customer Engagement segment.
On July 25, 2019, we completed the acquisition of a SaaS company focused on cloud-based knowledge management solutions as part of our strategy to add additional artificial intelligence and machine learning capabilities into our portfolio. This company is being integrated into our Customer Engagement segment.
These business combinations were not individually material to our condensed consolidated financial statements.
The combined consideration for these business combinations was approximately $134.8$58.4 million, including $106.0$53.2 million of combined cash paid at the closings.closings or shortly thereafter, partially offset by $2.0 million of cash acquired. For fiveone of thesethe business combinations, we also agreed to make potential additional cash
payments to the respective former shareholders aggregating up to approximately $47.3$9.1 million, contingent upon the achievement of certain performance targets over periods extending through January 2022.2021. The fair value of these contingent consideration obligations was estimated to be $25.9$5.2 million at the applicable acquisition dates.date. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. All of the $34.1 million of goodwill associated with these business combinations was assigned to our Customer Engagement segment, $15.7 million of which is deductible for income tax purposes.
Revenue and net income (loss) attributable to these acquisitions for the nine months ended October 31, 2019 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $1.0 million and $4.1 million for the three and nine months ended October 31, 2019, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the nine months ended October 31, 2019 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, goodwill, deferred income taxes, and reserves for uncertain income tax positions. During the three months ended October 31, 2019, we updated the provisional purchase price allocation that was recorded at July 31, 2019 resulting from one of the transaction's proximity to the end of the reporting period, including the valuation and useful life determination for the acquired customer relationships, developed technology, and trade names. The changes to purchase price allocation did not have a material impact on our condensed consolidated financial statements.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the nine months ended October 31, 2019:
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | |
Cash | | $ | 53,209 |
|
Fair value of contingent consideration | | 5,200 |
|
Total purchase prices | | $ | 58,409 |
|
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 1,309 |
|
Other current assets, including cash acquired | | 6,081 |
|
Other assets | | 3,365 |
|
Current and other liabilities | | (4,984 | ) |
Contract liabilities - current and long-term | | (3,060 | ) |
Deferred income taxes | | (1,330 | ) |
Net tangible assets | | 1,381 |
|
Identifiable intangible assets: | | |
Customer relationships | | 10,500 |
|
Developed technology | | 11,400 |
|
Trademarks and trade names | | 1,000 |
|
Total identifiable intangible assets | | 22,900 |
|
Goodwill | | 34,128 |
|
Total purchase prices allocation | | $ | 58,409 |
|
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from seven years to nine years, five years, and four years to five years, respectively, the weighted average of which is approximately 6.5 years.
Year Ended January 31, 2019
ForeSee Results, Inc.
On December 19, 2018, we completed the acquisition of all of the outstanding shares of ForeSee Results, Inc. and all of the outstanding membership interests of RSR Acquisition LLC (together, “ForeSee”), a leading cloud Voice of the Customer (“VOC”) vendor with software solutions designed to measure and benchmark a 360-degree view of the customer across every touch point. ForeSee is based in Ann Arbor, Michigan.
The purchase price of $65.2 million consisted of (i) $58.9 million of cash paid at closing, funded from cash on hand, partially offset by $0.4 million of ForeSee’s cash received in the acquisition, resulting in net cash consideration at closing of $58.5 million; (ii) a post-closing deferred purchase price adjustment of $6.0 million which was paid in April 2019; and (iii) $0.3 million of other purchase price adjustments. The acquired business is being integrated into our Customer Engagement operating segment.
The purchase price for ForeSee was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts the expected future cash flows to present value using estimates and assumptions determined by management.
Among the factors contributing to the recognition of goodwill as a component of the ForeSee purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. The $35.3 million of goodwill has been assigned to our Customer Engagement segment. For income tax purposes, $1.1 million of this goodwill is deductible and $34.2 million is not deductible.
In connection with the purchase price allocation for ForeSee, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculated fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The
estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $9.8 million of current and long-term contract liabilities, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not been received, we recorded a $10.2 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $5.5 million of which is included within prepaid expenses and other current assets, and $4.7 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.
Transaction and related costs directly related to the acquisition of ForeSee, consisting primarily of professional fees and integration expenses, were $0.9 million and $2.9 million for the three and nine months ended October 31, 2019, respectively, and were expensed as incurred and are included in selling, general and administrative expenses.
The following table sets forth the components and the allocation of the purchase price for our acquisition of ForeSee:
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Price: | | |
Cash | | $ | 58,901 |
|
Deferred purchase price consideration | | 6,000 |
|
Other purchase price adjustments | | 262 |
|
Total purchase price | | $ | 65,163 |
|
| | |
Allocation of Purchase Price: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 7,245 |
|
Other current assets, including cash acquired | | 8,101 |
|
Other assets | | 6,075 |
|
Current and other liabilities | | (12,910 | ) |
Contract liabilities - current and long-term | | (9,821 | ) |
Deferred income taxes | | (11,504 | ) |
Net tangible liabilities | | (12,814 | ) |
Identifiable intangible assets: | | |
Customer relationships | | 19,400 |
|
Developed technology | | 20,000 |
|
Trademarks and trade names | | 3,300 |
|
Total identifiable intangible assets | | 42,700 |
|
Goodwill | | 35,277 |
|
Total purchase price allocation | | $ | 65,163 |
|
The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of five years and nine years, four years, and four years, respectively, the weighted average of which is approximately 6.1 years. The acquired identifiable assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Other Business Combinations
During the year ended January 31, 2019, we completed three other business combinations:
On July 18, 2018, we completed the acquisition of a business that has been integrated into our Customer Engagement operating segment.
| |
• | On November 8, 2018, we completed the acquisition of a business that has been integrated into our Cyber Intelligence operating segment, in which we had a $2.2 million, or approximately 19%, noncontrolling equity investment prior to the acquisition. |
On November 9, 2018, we acquired certain technology and other assets for use in our Customer Engagement operating segment in a transaction that qualified as a business combination.
These business combinations were not individually material to our consolidated financial statements.
The combined consideration for these business combinations was approximately $51.3 million, including $33.1 million of combined cash paid at the closings. For two of these business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $35.5 million, contingent upon the achievement of certain performance targets over periods extending through January 2021. The fair value of these contingent consideration obligations was estimated to be $15.9 million at the applicable acquisition dates. The acquisition date fair value of our previously held equity interest was approximately $2.2 million and was included in the measurement of the consideration transferred. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $81.4$25.1 million of goodwill associated with these business combinations, $77.6$14.3 million and $3.8$10.8 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively. Forrespectively, and for income tax purposes $14.5 million of this goodwill is deductible and $66.9 million is not deductible.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $0.7$0.2 million and $2.0$0.6 million for the three months ended October 31, 2018 and 2017, respectively, and $2.4 million and $3.2 million for the nine months ended October 31, 2018 and 2017, respectively.2019. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for thosethe business combinations completed subsequent to October 31, 20172018 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes, and reserves for uncertain income tax positions.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations, other than ForeSee, completed during the year ended January 31, 2018, including adjustments identified subsequent to the respective valuation dates, none of which were material:
2019:
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | |
Cash | | $ | 33,138 |
|
Fair value of contingent consideration | | 15,875 |
|
Fair value of previously held equity interest | | 2,239 |
|
Total purchase prices | | $ | 51,252 |
|
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 1,897 |
|
Other current assets, including cash acquired | | 6,901 |
|
Other assets | | 9,432 |
|
Current and other liabilities | | (2,151 | ) |
Contract liabilities - current and long-term | | (771 | ) |
Deferred income taxes | | (7,914 | ) |
Net tangible assets | | 7,394 |
|
Identifiable intangible assets: | | |
Customer relationships | | 7,521 |
|
Developed technology | | 10,692 |
|
Trademarks and trade names | | 500 |
|
Total identifiable intangible assets | | 18,713 |
|
Goodwill | | 25,145 |
|
Total purchase prices allocation | | $ | 51,252 |
|
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | |
Cash | | $ | 106,049 |
|
Fair value of contingent consideration | | 25,874 |
|
Other purchase price adjustments | | 2,897 |
|
Total purchase prices | | $ | 134,820 |
|
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 4,184 |
|
Other current assets, including cash acquired | | 15,108 |
|
Other assets | | 2,765 |
|
Current and other liabilities | | (12,512 | ) |
Deferred revenue - current and long-term | | (4,424 | ) |
Deferred income taxes | | (8,550 | ) |
Net tangible liabilities | | (3,429 | ) |
Identifiable intangible assets: | | |
Customer relationships | | 24,812 |
|
Developed technology | | 29,614 |
|
Trademarks and trade names | | 2,456 |
|
Total identifiable intangible assets | | 56,882 |
|
Goodwill | | 81,367 |
|
Total purchase price allocations | | $ | 134,820 |
|
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives rangingof from twoseven years to ten years, from three years to five years, and from one year to sevenfour years, respectively, the weighted average of which is approximately 6.36.6 years.
Other Business Combination Information
The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general, and administrative expenses in our condensed consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
For the three months ended October 31, 20182019 and 2017,2018, we recorded a chargebenefit of $0.5$0.3 million and a benefitcharge of $6.7$0.5 million, respectively, and for the nine months ended October 31, 20182019 and 2017,2018, we recorded benefitsa charge of $4.2$0.1 million and $3.8a benefit of $4.2 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair values of the remaining contingent consideration obligations associated with business combinations was $53.7$36.9 million at October 31, 2018,2019, of which $25.2$20.9 million was recorded within accrued expenses and other current liabilities, and $28.5$16.0 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $1.6$6.0 million and $0.1$1.6 million for the three months ended October 31, 20182019 and 2017,2018, respectively, and $13.6$29.7 million and $9.4$13.6 million for the nine months ended October 31, 2019 and 2018, and 2017, respectively.
| |
6. | INTANGIBLE ASSETS AND GOODWILL |
Acquisition-related intangible assets consisted of the following as of October 31, 20182019 and January 31, 2018:2019:
| | | | October 31, 2018 | | October 31, 2019 |
(in thousands) | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
Intangible assets, with finite lives: | | |
| | |
| | |
| |
Intangible assets with finite lives: | | | |
| | |
| | |
|
Customer relationships | | $ | 431,235 |
| | $ | (292,419 | ) | | $ | 138,816 |
| | $ | 461,611 |
| | $ | (319,568 | ) | | $ | 142,043 |
|
Acquired technology | | 273,456 |
| | (225,886 | ) | | 47,570 |
| | 295,119 |
| | (238,522 | ) | | 56,597 |
|
Trade names | | 26,486 |
| | (20,761 | ) | | 5,725 |
| | 13,724 |
| | (7,057 | ) | | 6,667 |
|
Non-competition agreements | | 3,047 |
| | (2,972 | ) | | 75 |
| |
Distribution network | | 4,440 |
| | (4,440 | ) | | — |
| | 4,440 |
| | (4,440 | ) | | — |
|
Total intangible assets | | $ | 738,664 |
| | $ | (546,478 | ) | | $ | 192,186 |
| | $ | 774,894 |
| | $ | (569,587 | ) | | $ | 205,307 |
|
|
| | | | | | | | | | | | |
| | January 31, 2019 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | |
| | |
| | |
|
Customer relationships | | $ | 452,918 |
| | $ | (299,549 | ) | | $ | 153,369 |
|
Acquired technology | | 285,230 |
| | (221,145 | ) | | 64,085 |
|
Trade names | | 12,859 |
| | (5,130 | ) | | 7,729 |
|
Distribution network | | 4,440 |
| | (4,440 | ) | | — |
|
Total intangible assets | | $ | 755,447 |
| | $ | (530,264 | ) | | $ | 225,183 |
|
|
| | | | | | | | | | | | |
| | January 31, 2018 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets, with finite lives: | | |
| | |
| | |
|
Customer relationships | | $ | 438,664 |
| | $ | (281,592 | ) | | $ | 157,072 |
|
Acquired technology | | 273,156 |
| | (212,571 | ) | | 60,585 |
|
Trade names | | 26,820 |
| | (18,570 | ) | | 8,250 |
|
Non-competition agreements | | 3,047 |
| | (2,861 | ) | | 186 |
|
Distribution network | | 4,440 |
| | (4,440 | ) | | — |
|
Total intangible assets | | $ | 746,127 |
| | $ | (520,034 | ) | | $ | 226,093 |
|
The following table presents net acquisition-related intangible assets by reportable segment as of October 31, 20182019 and January 31, 2018: 2019:
|
| | | | | | | | |
| | October 31, | | January 31, |
(in thousands) |
| 2019 |
| 2019 |
Customer Engagement |
| $ | 201,327 |
|
| $ | 218,738 |
|
Cyber Intelligence |
| 3,980 |
|
| 6,445 |
|
Total |
| $ | 205,307 |
|
| $ | 225,183 |
|
|
| | | | | | | | |
| | October 31, | | January 31, |
(in thousands) |
| 2018 |
| 2018 |
Customer Engagement |
| $ | 186,549 |
|
| $ | 213,963 |
|
Cyber Intelligence |
| 5,637 |
|
| 12,130 |
|
Total |
| $ | 192,186 |
|
| $ | 226,093 |
|
Total amortization expense recorded for acquisition-related intangible assets was $13.5$13.7 million and $16.2$13.5 million for the three months ended October 31, 20182019 and 2017,2018, respectively, and $41.6$41.4 million and $55.0$41.6 million for the nine months ended October 31, 20182019 and 2017,2018, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
|
| | | | |
(in thousands) |
| |
|
Years Ending January 31, |
| Amount |
2020 (remainder of year) |
| $ | 13,848 |
|
2021 |
| 48,724 |
|
2022 |
| 45,290 |
|
2023 |
| 37,266 |
|
2024 |
| 27,259 |
|
2025 and thereafter |
| 32,920 |
|
Total |
| $ | 205,307 |
|
|
| | | | |
(in thousands) |
| |
|
Years Ending January 31, |
| Amount |
2019 (remainder of year) |
| $ | 13,265 |
|
2020 |
| 44,390 |
|
2021 |
| 36,255 |
|
2022 |
| 32,370 |
|
2023 |
| 25,323 |
|
2024 and thereafter |
| 40,583 |
|
Total |
| $ | 192,186 |
|
Goodwill activity for the nine months ended October 31, 20182019, in total and by reportable segment, was as follows:
|
| | | | | | | | | | | | |
| | | | Reportable Segment |
(in thousands) | | Total | | Customer Engagement | | Cyber Intelligence |
Nine Months Ended October 31, 2019: | | | | | | |
Goodwill, gross, at January 31, 2019 | | $ | 1,484,346 |
| | $ | 1,326,370 |
| | $ | 157,976 |
|
Accumulated impairment losses through January 31, 2019 | | (66,865 | ) | | (56,043 | ) | | (10,822 | ) |
Goodwill, net, at January 31, 2019 | | 1,417,481 |
| | 1,270,327 |
| | 147,154 |
|
Business combinations, including adjustments to prior period acquisitions | | 35,706 |
| | 35,706 |
| | — |
|
Foreign currency translation and other | | (4,461 | ) | | (4,064 | ) | | (397 | ) |
Goodwill, net, at October 31, 2019 | | $ | 1,448,726 |
| | $ | 1,301,969 |
| | $ | 146,757 |
|
| | | | | | |
Balance at October 31, 2019: | |
|
| | |
| | |
|
Goodwill, gross, at October 31, 2019 | | $ | 1,515,591 |
| | $ | 1,358,012 |
| | $ | 157,579 |
|
Accumulated impairment losses through October 31, 2019 | | (66,865 | ) | | (56,043 | ) | | (10,822 | ) |
Goodwill, net, at October 31, 2019 | | $ | 1,448,726 |
| | $ | 1,301,969 |
| | $ | 146,757 |
|
|
| | | | | | | | | | | | |
| | | | Reportable Segment |
(in thousands) | | Total | | Customer Engagement | | Cyber Intelligence |
Year Ended January 31, 2018: | | | | | | |
Goodwill, gross, at January 31, 2018 | | $ | 1,455,164 |
| | $ | 1,307,136 |
| | $ | 148,028 |
|
Accumulated impairment losses through January 31, 2018 | | (66,865 | ) | | (56,043 | ) | | (10,822 | ) |
Goodwill, net, at January 31, 2018 | | 1,388,299 |
| | 1,251,093 |
| | 137,206 |
|
Business combinations, including adjustments to prior period acquisitions | | 14,526 |
| | 14,526 |
| | — |
|
Foreign currency translation and other | | (38,373 | ) | | (37,405 | ) | | (968 | ) |
Goodwill, net, at October 31, 2018 | | $ | 1,364,452 |
| | $ | 1,228,214 |
| | $ | 136,238 |
|
| | | | | | |
Balance at October 31, 2018: | |
|
| | |
| | |
|
Goodwill, gross, at October 31, 2018 | | $ | 1,431,317 |
| | $ | 1,284,257 |
| | $ | 147,060 |
|
Accumulated impairment losses through October 31, 2018 | | (66,865 | ) | | (56,043 | ) | | (10,822 | ) |
Goodwill, net, at October 31, 2018 | | $ | 1,364,452 |
| | $ | 1,228,214 |
| | $ | 136,238 |
|
No events or circumstances indicating the potential for goodwill impairment were identified during the nine months ended October 31, 2018.2019.
The following table summarizes our long-term debt at October 31, 20182019 and January 31, 2018:2019:
|
| | | | | | | | |
| | October 31, | | January 31, |
(in thousands) | | 2019 | | 2019 |
1.50% Convertible Senior Notes | | $ | 400,000 |
| | $ | 400,000 |
|
2017 Term Loan | | 415,438 |
| | 418,625 |
|
Other debt | | — |
| | 92 |
|
Less: Unamortized debt discounts and issuance costs | | (26,018 | ) | | (36,589 | ) |
Total debt | | 789,420 |
| | 782,128 |
|
Less: current maturities | | 4,250 |
| | 4,343 |
|
Long-term debt | | $ | 785,170 |
| | $ | 777,785 |
|
|
| | | | | | | | |
| | October 31, | | January 31, |
(in thousands) | | 2018 | | 2018 |
| | | | |
1.50% Convertible Senior Notes | | $ | 400,000 |
| | $ | 400,000 |
|
2017 Term Loan | | 419,688 |
| | 422,875 |
|
Other debt | | 131 |
| | 250 |
|
Less: Unamortized debt discounts and issuance costs | | (40,095 | ) | | (50,141 | ) |
Total debt | | 779,724 |
| | 772,984 |
|
Less: current maturities | | 4,382 |
| | 4,500 |
|
Long-term debt | | $ | 775,342 |
| | $ | 768,484 |
|
Current maturities of long-term debt are reported within accrued expenses and other current liabilities on our condensed consolidated balance sheet.
1.50% Convertible Senior Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021 (“Notes”), unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Prior Credit Agreement, as defined and further described below.a prior credit agreement.
The Notes are unsecured and are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods. If converted, we currently intend to pay cash in respect of the principal amount of the Notes. We currently expect to refinance the Notes at or prior to maturity with new convertible notes or other debt.
The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the other specified conditions for conversion have been satisfied.
As of October 31, 2018,2019, the Notes were not convertible.
In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the “debt discount”) is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component of the Notes are presented as a reduction of long-term debt and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at October 31, 2018.2019.
As of October 31, 2018,2019, the carrying value of the debt component was $363.6$377.1 million, which is net of unamortized debt discount and issuance costs of $33.2$20.9 million and $3.1$2.0 million, respectively. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the Notes was approximately 5.29% at October 31, 2018.2019.
Based on the closing market price of our common stock on October 31, 2018,2019, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of October 31, 2018,2019, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of October 31, 2018,2019, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreements
Prior Credit Agreement
In April 2011, we entered into a credit agreement with certain lenders, which was amended and restated in March 2013, and further amended in February, March, and June 2014 (as amended, the “Prior Credit Agreement”). The Prior Credit Agreement provided for senior secured credit facilities, comprised of $943.5 million of term loans, of which $300.0 million was borrowed in February 2014 and $643.5 million was borrowed in March 2014 (together, the “2014 Term Loans”), the outstanding portion of which was scheduled to mature in September 2019, and a $300.0 million revolving credit facility (the “Prior Revolving Credit Facility”), scheduled to mature in September 2018, subject to increase and reduction from time to time, in accordance with the terms of the Prior Credit Agreement.
In June 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent issuance of 5,750,000 shares of common stock to retire $530.0 million of the 2014 Term Loans and all $106.0 million of then-outstanding borrowings under the Prior Revolving Credit Facility.
The 2014 Term Loans incurred interest at our option at either a base rate plus a margin of 1.75% or an Adjusted LIBOR Rate, as defined in the Prior Credit Agreement, plus a margin of 2.75%.
2017 Credit Agreement
On June 29, 2017, we entered into a new credit agreement (the “2017 Credit Agreement”) with certain lenders and terminated the Prior Credit Agreement.a prior credit agreement.
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”) and a $300.0 million revolving credit facility maturing on June 29, 2022 (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement. The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility will be accelerated to March 1, 2021 if on such date any Notes remain outstanding.
The majority of the proceeds from the 2017 Term Loan were used to repay all $406.9 million that remained outstanding terms loans under the 2014 Term Loans at June 29, 2017 upon termination of the Prior Credit Agreement. There were no borrowings under the Prior Revolving Credit Facility at June 29, 2017.our prior credit agreement.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million. This discount is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
On January 31, 2018, we entered into an amendment to the 2017 Credit Agreement (the “2018 Amendment”) providing for, among other things, a reduction of the interest rate margins on the 2017 Term Loan from 2.25% to 2.00% for Eurodollar loans, and from 1.25% to 1.00% for ABR loans. The vast majority of the impact of the 2018 Amendment was accounted for as a debt modification. For the portion of the 2017 Term Loan which was considered extinguished and replaced by new loans, we wrote
off $0.2 million of unamortized deferred debt issuance costs as a loss on early retirement of debt during the three months ended January 31, 2018. The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining term of the 2017 Term Loan.
For loans under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the “Leverage Ratio”).
As of October 31, 2018,2019, the interest rate on the 2017 Term Loan was 4.27%4.15%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 4.45%4.32% at October 31, 2018.2019. As of January 31, 20182019 the interest rate on 2017 Term Loan was 3.58%4.52%.
We are required to pay a commitment fee with respect to unused availability under the 2017 Revolving Credit Facility at a rate per annum determined by reference to our Leverage Ratio.
The 2017 Term Loan requires quarterly principal payments of approximately $1.1 million, which commenced on August 1, 2017, with the remaining balance due on June 29, 2024. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2017 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
2017 Credit Agreement Issuance Costs
We incurred debt issuance costs of approximately $6.8 million in connection with the 2017 Credit Agreement, of which $4.1 million were associated with the 2017 Term Loan, and $2.7 million were associated with the 2017 Revolving Credit Facility, which were deferred and are being amortized as interest expense over the terms of the facilities under the 2017 Credit Agreement. As noted previously, during the three months ended January 31, 2018, we wrote off $0.2 million of deferred debt issuance costs associated with the 2017 Term Loan as a result of the 2018 Amendment. Deferred debt issuance costs associated with the 2017 Term Loan are being amortized using the effective interest rate method, and deferred debt issuance costs associated with the 2017 Revolving Credit Facility are being amortized on a straight-line basis.
Future Principal Payments on Term Loan
As of October 31, 2018,2019, future scheduled principal payments on the 2017 Term Loan were as follows:
|
| | | | |
(in thousands) | | |
Years Ending January 31, | | Amount |
2020 (remainder of year) | | $ | 1,063 |
|
2021 | | 4,250 |
|
2022 | | 4,250 |
|
2023 | | 4,250 |
|
2024 | | 4,250 |
|
2025 and thereafter | | 397,375 |
|
Total | | $ | 415,438 |
|
|
| | | | |
(in thousands) | | |
Years Ending January 31, | | Amount |
2019 (remainder of year) | | $ | 1,063 |
|
2020 | | 4,250 |
|
2021 | | 4,250 |
|
2022 | | 4,250 |
|
2023 | | 4,250 |
|
2024 and thereafter | | 401,625 |
|
Total | | $ | 419,688 |
|
Interest Expense
The following table presents the components of interest expense incurred on the Notes and on borrowings under our credit agreements for the three and nine months ended October 31, 20182019 and 2017:2018: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
1.50% Convertible Senior Notes: | | | | | | | | |
Interest expense at 1.50% coupon rate | | $ | 1,500 |
| | $ | 1,500 |
| | $ | 4,500 |
| | $ | 4,500 |
|
Amortization of debt discount | | 3,143 |
| | 2,982 |
| | 9,306 |
| | 8,829 |
|
Amortization of deferred debt issuance costs | | 296 |
| | 281 |
| | 877 |
| | 833 |
|
Total Interest Expense - 1.50% Convertible Senior Notes | | $ | 4,939 |
| | $ | 4,763 |
| | $ | 14,683 |
| | $ | 14,162 |
|
| | | | | | | | |
Borrowings under Credit Agreements: | | | | | | | | |
Interest expense at contractual rates | | $ | 4,435 |
| | $ | 4,448 |
| | $ | 13,810 |
| | $ | 13,047 |
|
Impact of interest rate swap | | 261 |
| | — |
| | 261 |
| | — |
|
Amortization of debt discounts | | 17 |
| | 17 |
| | 50 |
| | 50 |
|
Amortization of deferred debt issuance costs | | 396 |
| | 392 |
| | 1,171 |
| | 1,162 |
|
Total Interest Expense - Borrowings under Credit Agreements | | $ | 5,109 |
| | $ | 4,857 |
| | $ | 15,292 |
| | $ | 14,259 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
1.50% Convertible Senior Notes: | | | | | | | | |
Interest expense at 1.50% coupon rate | | $ | 1,500 |
| | $ | 1,500 |
| | $ | 4,500 |
| | $ | 4,500 |
|
Amortization of debt discount | | 2,982 |
| | 2,829 |
| | 8,829 |
| | 8,377 |
|
Amortization of deferred debt issuance costs | | 281 |
| | 267 |
| | 833 |
| | 790 |
|
Total Interest Expense - 1.50% Convertible Senior Notes | | $ | 4,763 |
| | $ | 4,596 |
| | $ | 14,162 |
| | $ | 13,667 |
|
| | | | | | | | |
Borrowings under Credit Agreements: | | | | | | | | |
Interest expense at contractual rates | | $ | 4,448 |
| | $ | 3,858 |
| | $ | 13,047 |
| | $ | 11,493 |
|
Impact of interest rate swap agreement | | — |
| | — |
| | — |
| | 254 |
|
Amortization of debt discounts | | 17 |
| | 17 |
| | 50 |
| | 48 |
|
Amortization of deferred debt issuance costs | | 392 |
| | 396 |
| | 1,162 |
| | 1,451 |
|
Total Interest Expense - Borrowings under Credit Agreements | | $ | 4,857 |
| | $ | 4,271 |
| | $ | 14,259 |
| | $ | 13,246 |
|
| |
8. | SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION |
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of October 31, 20182019 and January 31, 2018: 2019:
|
| | | | | | | | |
| | October 31, | | January 31, |
(in thousands) | | 2019 | | 2019 |
Raw materials | | $ | 11,057 |
| | $ | 10,875 |
|
Work-in-process | | 6,743 |
| | 5,567 |
|
Finished goods | | 6,201 |
| | 8,510 |
|
Total inventories | | $ | 24,001 |
| | $ | 24,952 |
|
|
| | | | | | | | |
| | October 31, | | January 31, |
(in thousands) | | 2018 | | 2018 |
Raw materials | | $ | 9,517 |
| | $ | 9,870 |
|
Work-in-process | | 6,018 |
| | 6,269 |
|
Finished goods | | 6,202 |
| | 3,732 |
|
Total inventories | | $ | 21,737 |
| | $ | 19,871 |
|
Condensed Consolidated Statements of Operations
Other income (expense) income,, net consisted of the following for the three and nine months ended October 31, 20182019 and 20172018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency gains (losses), net | | $ | 1,531 |
| | $ | (1,458 | ) | | $ | 1,119 |
| | $ | (5,372 | ) |
(Losses) gains on derivative financial instruments, net | | (268 | ) | | 1,051 |
| | 460 |
| | 3,760 |
|
Other, net | | (181 | ) | | (82 | ) | | (378 | ) | | (582 | ) |
Total other income (expense), net | | $ | 1,082 |
| | $ | (489 | ) | | $ | 1,201 |
| | $ | (2,194 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency (losses) gains, net | | $ | (1,458 | ) | | $ | (1,474 | ) | | $ | (5,372 | ) | | $ | 2,384 |
|
Gains on derivative financial instruments, net | | 1,051 |
| | 834 |
| | 3,760 |
| | 292 |
|
Other, net | | (82 | ) | | 75 |
| | (582 | ) | | (147 | ) |
Total other (expense) income, net | | $ | (489 | ) | | $ | (565 | ) | | $ | (2,194 | ) | | $ | 2,529 |
|
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the nine months ended October 31, 20182019 and 20172018:
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 |
Cash paid for interest | | $ | 14,736 |
| | $ | 13,618 |
|
Cash payments of income taxes, net | | $ | 22,324 |
| | $ | 18,344 |
|
Non-cash investing and financing transactions: | | |
| | |
Accrued but unpaid purchases of property and equipment | | $ | 4,443 |
| | $ | 3,487 |
|
Inventory transfers to property and equipment | | $ | 1,334 |
| | $ | 1,265 |
|
Liabilities for contingent consideration in business combinations, including measurement period adjustments | | $ | 8,969 |
| | $ | 9,100 |
|
Capital leases of property and equipment | | $ | 473 |
| | $ | 1,929 |
|
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 |
Cash paid for interest | | $ | 15,618 |
| | $ | 14,736 |
|
Cash payments of income taxes, net | | $ | 20,286 |
| | $ | 22,324 |
|
Non-cash investing and financing transactions: | | |
| | |
Accrued but unpaid purchases of property and equipment | | $ | 3,899 |
| | $ | 4,443 |
|
Inventory transfers to property and equipment | | $ | 595 |
| | $ | 1,334 |
|
Liabilities for contingent consideration in business combinations, including measurement period adjustments | | $ | 5,200 |
| | $ | 8,969 |
|
Finance leases of property and equipment | | $ | 377 |
| | $ | 473 |
|
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the nine months ended October 31, 20182019 and 2017.2018. Under the terms of our 2017 Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.
Share Repurchase ProgramPrograms
On March 29, 2016, we announced that our board of directors had authorized a common stock repurchase program of up to $150.0 million over two years. This program expired on March 29, 2018. We made a total of $46.9 million in repurchases under the program.
On December 4, 2019, we announced that our board of directors had authorized a new share repurchase program whereby we may repurchase up to $300 million of common stock over the period ending on February 1, 2021 (on or shortly before the closing of the planned business separation described below). Please refer to Note 17, “Subsequent Events”, for more information regarding the separation of our businesses and this share repurchase program.
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost, but may from time to time be retired. We periodically purchase treasury stock from directors, officers, and other employees to facilitate income tax withholding by us or the payment of required income taxes by such holders in connection with the vesting of equity awards.
During the nine months ended October 31, 2019, we repurchased approximately 8,000 shares of treasury stock for a cost of $0.5 million to facilitate income tax withholding and payment requirements upon vesting of equity awards. During the nine months ended October 31, 2018, we acquired approximately 4,000 shares of treasury stock for a cost of $0.2 million. During the nine months ended October 31, 2017, we received approximately 7,000 shares of stock in a nonmonetary transaction valued at $0.3 million.
At October 31, 2018,2019, we held approximately 1,673,000 shares of treasury stock with a cost of $58.1 million. At January 31, 2019, we held approximately 1,665,000 shares of treasury stock with a cost of $57.6 million. At January 31, 2018,
Issuance of Convertible Preferred Stock
On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we held approximately 1,661,000 sharesannounced that an affiliate of treasuryApax Partners will invest up to $400 million in us, in the form of convertible preferred stock. Further details regarding the separation of our businesses and the convertible preferred stock with a cost of $57.4 million.investment appear in Note 17, “Subsequent Events”.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges.
Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our
condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income (loss) as presented in our condensed consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the nine months ended October 31, 2018:2019:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges | | Unrealized Loss on Interest Rate Swap Designated as Hedge | | Foreign Currency Translation Adjustments | | Total |
Accumulated other comprehensive loss at January 31, 2019 | | $ | (981 | ) | | $ | (3,043 | ) | | $ | (141,201 | ) | | $ | (145,225 | ) |
Other comprehensive income (loss) before reclassifications | | 915 |
| | (7,358 | ) | | (6,895 | ) | | (13,338 | ) |
Amounts reclassified out of accumulated other comprehensive income (loss) | | (358 | ) | | (203 | ) | | — |
| | (561 | ) |
Net other comprehensive income (loss) | | 1,273 |
| | (7,155 | ) | | (6,895 | ) | | (12,777 | ) |
Accumulated other comprehensive income (loss) at October 31, 2019 | | $ | 292 |
| | $ | (10,198 | ) | | $ | (148,096 | ) | | $ | (158,002 | ) |
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges | | Unrealized Gain on Interest Rate Swap Designated as Hedge | | Foreign Currency Translation Adjustments | | Total |
Accumulated other comprehensive income (loss) at January 31, 2018 | | $ | 3,312 |
| | $ | — |
| | $ | (106,772 | ) | | $ | (103,460 | ) |
Other comprehensive (loss) income before reclassifications | | (9,452 | ) | | 1,878 |
| | (45,190 | ) | | (52,764 | ) |
Losses reclassified out of accumulated other comprehensive (loss) income | | (2,076 | ) | | — |
| | — |
| | (2,076 | ) |
Net other comprehensive (loss) income, current period | | (7,376 | ) | | 1,878 |
| | (45,190 | ) | | (50,688 | ) |
Accumulated other comprehensive (loss) income at October 31, 2018 | | $ | (4,064 | ) | | $ | 1,878 |
| | $ | (151,962 | ) | | $ | (154,148 | ) |
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statement of operations, with presentation location, for the three and nine months ended October 31, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, | | |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Location |
Unrealized gains (losses) on derivative financial instruments: | | | | | | | | | | |
Foreign currency forward contracts | | $ | 38 |
| | $ | (108 | ) | | $ | (34 | ) | | $ | (196 | ) | | Cost of product revenue |
| | 47 |
| | (120 | ) | | (37 | ) | | (214 | ) | | Cost of service and support revenue |
| | 271 |
| | (676 | ) | | (201 | ) | | (1,168 | ) | | Research and development, net |
| | 186 |
| | (424 | ) | | (125 | ) | | (730 | ) | | Selling, general and administrative |
| | 542 |
| | (1,328 | ) | | (397 | ) | | (2,308 | ) | | Total, before income taxes |
| | (55 | ) | | 134 |
| | 39 |
| | 232 |
| | (Provision) benefit for income taxes |
| | $ | 487 |
| | $ | (1,194 | ) | | $ | (358 | ) | | $ | (2,076 | ) | | Total, net of income taxes |
| | | | | | | | | | |
Interest rate swap agreement | | $ | (261 | ) | | — |
| | (261 | ) | | — |
| | Interest expense |
| | (261 | ) | | — |
| | (261 | ) | | — |
| | Total, before income taxes |
| | 58 |
| | — |
| | 58 |
| | — |
| | Benefit from income taxes |
| | $ | (203 | ) |
| $ | — |
|
| $ | (203 | ) |
| $ | — |
| | Total, net of income taxes |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, | | |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | Location |
Unrealized (losses) gains on derivative financial instruments: | | | | | | | | | | |
Foreign currency forward contracts | | $ | (108 | ) | | $ | 141 |
| | $ | (196 | ) | | $ | 407 |
| | Cost of product revenue |
| | (120 | ) | | 145 |
| | (214 | ) | | 378 |
| | Cost of service and support revenue |
| | (676 | ) | | 825 |
| | (1,168 | ) | | 2,339 |
| | Research and development, net |
| | (424 | ) | | 461 |
| | (730 | ) | | 1,322 |
| | Selling, general and administrative |
| | (1,328 | ) | | 1,572 |
| | (2,308 | ) | | 4,446 |
| | Total, before income taxes |
| | 134 |
| | (252 | ) | | 232 |
| | (539 | ) | | Benefit (provision) for income taxes |
| | $ | (1,194 | ) | | $ | 1,320 |
| | $ | (2,076 | ) | | $ | 3,907 |
| | Total, net of income taxes |
| | | | | | | | | | |
Interest rate swap agreement | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (254 | ) | | Interest expense |
| | — |
| | — |
| | — |
| | 934 |
| | Other income (expense), net |
| | — |
| | — |
| | — |
| | 680 |
| | Total, before income taxes |
| | — |
| | — |
| | — |
| | (389 | ) | | Provision for income taxes |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 291 |
| | Total, net of income taxes |
10. INCOME TAXES
Our interim provision (benefit) for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
On December 22, 2017,For the Tax Cuts and Jobs Acts (“2017 Tax Act”) was enacted in the United States. The 2017 Tax Act significantly revises the Internal Revenue Code of 1986, as amended, and it includes fundamental changes to taxation of U.S. multinational corporations. The key provisions impacting our January 31, 2019 year include a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, new limitations on the tax deductions for interest expense and executive compensation, elimination of the alternative minimum tax (AMT) and the ability to refund unused AMT credits over a four-year period, and new rules related to uses and limitations of net operating loss carryforwards. New international provisions add a new category of deemed income from our foreign operations, eliminate U.S. tax on foreign dividends (subject to certain restrictions), and add a minimum tax on certain payments made to foreign related parties. Our estimated annual effective tax rate for the three and nine months ended October 31, 2018 includes provisional amounts for certain 2017 Tax Act provisions related2019, we recorded an income tax provision of $9.2 million on pre-tax income of $22.2 million, which represented an effective income tax rate of 41.5%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to our foreign operations. We expect to utilize a portion of our net operating loss carryforward and release the valuation allowance on the deferred tax asset for that net operating loss carryforward for a net impact of $0.U.S. taxation of certain foreign activities and limitations on certain tax deductions, offset by lower statutory rates in several foreign jurisdictions.
Compliance with the 2017 Tax Act will require significant complex computations not previously required by U.S. tax law. It is unclear how certain provisions of the 2017 Tax Act will be applied absent further legislative, regulatory, or accounting clarification and guidance. Also, on December 22, 2017, the staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB No. 118”). SAB No. 118 provides guidance on accounting for the tax effects of the 2017 Tax Act and allows registrants to record provisional amounts for a period of up to one year from the date of enactment of the 2017 Tax Act. We considered amounts related to the 2017 Tax Act to be reasonably estimated as of January 31, 2018 and, as of October 31, 2018, we did not have any significant adjustments to provisional amounts recorded as of January 31, 2018. We expect to refine and complete the accounting for the 2017 Tax Act during the year ending January 31, 2019 as we obtain, prepare, and analyze additional information and as additional legislative, regulatory, and accounting guidance and interpretations become available.
For the three months ended October 31, 2018, we recorded an income tax provision of $5.6 million on pre-tax income of $25.8 million, which represented an effective income tax rate of 21.7%. We maintain valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances. Our pre-tax lossesincome in domestic and foreign jurisdictions where we maintainmaintained valuation allowances and dodid not record tax benefits wereprovisions was significantly lesslower than the pre-tax income in jurisdictions where we recordrecorded tax provisions.
For the threenine months ended October 31, 2017,2019, we recorded an income tax provision of $5.9$6.1 million on pre-tax income of $9.0$35.1 million, which represented an effective income tax rate of 66.0%17.4%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to a net tax benefit of $6.7 million recorded in our second quarter in relation to changes in unrecognized income tax benefits and other items as a result of an audit settlement in a foreign jurisdiction and the impact of U.S. taxation of certain foreign activities and limitations on certain tax deductions, offset by lower statutory rates in several foreign jurisdictions. Excluding the income tax benefit attributable to the audit settlement, the result was an income tax provision does not include income tax benefitsof $12.8 million on losses incurred by certain domestic and foreign operations where we maintain valuation allowances. Our pre-tax income of $35.1 million, resulting in profitable jurisdictions, where we record incomean effective tax provisions, was higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record tax benefits.rate of 36.5%.
For the nine months ended October 31, 2018, we recorded an income tax provision of $2.2 million on pre-tax income of $44.1 million, which represented an effective income tax rate of 4.9%. In connection with an acquisition in our Customer Engagement segment completed in our second quarter, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we reduced the valuation allowance recorded on our U.S. federal and certain state deferred income tax assets to the extent of the deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected asresulting in a discrete income tax benefit of
$7.3 million and not as a component of the acquisition accounting. $7.3 million. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintainmaintained valuation allowances. Our pre-tax losses in domestic and foreign jurisdictions where we maintainmaintained valuation allowances and dodid not record tax benefits were significantly less than the pre-tax income in jurisdictions where we recordrecorded tax provisions.
For Excluding the nine months ended October 31, 2017, we recordedincome tax benefit attributable to the valuation allowance release, the result was an income tax provision of $9.5 million on a pre-tax lossincome of $12.2$44.1 million, which represented a negativeresulting in an effective income tax rate of 77.7%21.5%. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances. Our pre-tax income in profitable jurisdictions, where we record income tax provisions, was lower than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record income tax benefits.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting guidance for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-
than-notmore-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against our federal and certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in certain state and foreign jurisdictions. As of January 31, 2019, we had a net federal deferred tax liability position in the U.S. and therefore no valuation allowance was recorded in certain foreign jurisdictions.relation to U.S. federal deferred tax items. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized income tax benefits of $114.9$99.5 million and $115.7$109.1 million (excluding interest and penalties) as of October 31, 20182019 and January 31, 2018,2019, respectively. The accrued liability for interest and penalties was $5.6$3.4 million and $4.6 million at October 31, 20182019 and January 31, 2018,2019, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. As of October 31, 20182019 and January 31, 2018,2019, the total amount of unrecognized income tax benefits that, if recognized, would impact our effective income tax rate were approximately $108.3$91.6 million and $105.4$100.9 million, respectively. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at October 31, 20182019 could decrease by approximately $4.2$5.3 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made.
| |
11. | FAIR VALUE MEASUREMENTS |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of October 31, 20182019 and January 31, 2018:2019:
| | | | October 31, 2018 | | October 31, 2019 |
| | Fair Value Hierarchy Category | | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Money market funds | | $ | 52,640 |
| | $ | — |
| | $ | — |
| | $ | 41,169 |
| | $ | — |
| | $ | — |
|
Commercial paper | | 3,242 |
| | — |
| | — |
| |
Foreign currency forward contracts | | — |
| | 1,401 |
| | — |
| | — |
| | 545 |
| | — |
|
Interest rate swap agreements | | — |
| | 4,747 |
| | — |
| |
Total assets | | $ | 55,882 |
| | $ | 6,148 |
| | $ | — |
| | $ | 41,169 |
| | $ | 545 |
| | $ | — |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Foreign currency forward contracts | | $ | — |
| | $ | 4,518 |
| | $ | — |
| | $ | — |
| | $ | 416 |
| | $ | — |
|
Interest rate swap agreement | | | — |
| | 13,084 |
| | — |
|
Contingent consideration - business combinations | | — |
| | — |
| | 53,674 |
| | — |
| | — |
| | 36,856 |
|
Option to acquire noncontrolling interests of consolidated subsidiaries | | — |
| | — |
| | 3,000 |
| | — |
| | — |
| | 3,050 |
|
Total liabilities | | $ | — |
| | $ | 4,518 |
| | $ | 56,674 |
| | $ | — |
| | $ | 13,500 |
| | $ | 39,906 |
|
|
| | | | | | | | | | | | |
| | January 31, 2019 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
|
Money market funds | | $ | 10,709 |
| | $ | — |
| | $ | — |
|
Foreign currency forward contracts | | — |
| | 1,401 |
| | — |
|
Interest rate swap agreements | | — |
| | 2,072 |
| | — |
|
Total assets | | $ | 10,709 |
| | $ | 3,473 |
| | $ | — |
|
Liabilities: | | |
| | |
| | |
|
Foreign currency forward contracts | | $ | — |
| | $ | 2,086 |
| | $ | — |
|
Interest rate swap agreements | | — |
| | 4,028 |
| | — |
|
Contingent consideration - business combinations | | — |
| | — |
| | 61,340 |
|
Option to acquire noncontrolling interests of consolidated subsidiaries | | — |
| | — |
| | 3,000 |
|
Total liabilities | | $ | — |
| | $ | 6,114 |
| | $ | 64,340 |
|
|
| | | | | | | | | | | | |
| | January 31, 2018 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
|
Money market funds | | $ | 186 |
| | $ | — |
| | $ | — |
|
Short-term investments, classified as available-for-sale | | — |
| | 2,002 |
| | — |
|
Foreign currency forward contracts | | — |
| | 3,682 |
| | — |
|
Interest rate swap agreement | | — |
| | 2,580 |
| | — |
|
Total assets | | $ | 186 |
| | $ | 8,264 |
| | $ | — |
|
Liabilities: | | |
| | |
| | |
|
Foreign currency forward contracts | | $ | — |
| | $ | 1,308 |
| | $ | — |
|
Contingent consideration - business combinations | | — |
| | — |
| | 62,829 |
|
Option to acquire noncontrolling interests of consolidated subsidiaries | | — |
| | — |
| | 2,950 |
|
Total liabilities | | $ | — |
| | $ | 1,308 |
| | $ | 65,779 |
|
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended October 31, 20182019 and 20172018:
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 |
Fair value measurement at beginning of period | | $ | 61,340 |
| | $ | 62,829 |
|
Contingent consideration liabilities recorded for business combinations, including measurement period adjustments | | 5,200 |
| | 8,969 |
|
Changes in fair values, recorded in operating expenses | | 62 |
| | (4,184 | ) |
Payments of contingent consideration | | (29,712 | ) | | (13,600 | ) |
Foreign currency translation and other | | (34 | ) | | (340 | ) |
Fair value measurement at end of period | | $ | 36,856 |
| | $ | 53,674 |
|
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 |
Fair value measurement at beginning of period | | $ | 62,829 |
| | $ | 52,733 |
|
Contingent consideration liabilities recorded for business combinations, including measurement period adjustments | | 8,969 |
| | 9,100 |
|
Changes in fair values, recorded in operating expenses | | (4,184 | ) | | (3,769 | ) |
Payments of contingent consideration | | (13,600 | ) | | (9,412 | ) |
Foreign currency translation and other | | (340 | ) | | — |
|
Fair value measurement at end of period | | $ | 53,674 |
| | $ | 48,652 |
|
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
During the year ended January 31, 2017, we acquired two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interests. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling
interests in these subsidiaries. The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the nine months ended October 31, 20182019 and 2017: 2018:
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 |
Fair value measurement at beginning of period | | $ | 3,000 |
| | $ | 2,950 |
|
Change in fair value, recorded in operating expenses | | 50 |
| | 50 |
|
Fair value measurement at end of period | | $ | 3,050 |
| | $ | 3,000 |
|
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 |
Fair value measurement at beginning of period | | $ | 2,950 |
| | $ | 3,550 |
|
Change in fair value, recorded in operating expenses | | 50 |
| | (450 | ) |
Fair value measurement at end of period | | $ | 3,000 |
| | $ | 3,100 |
|
There were no transfers between levels of the fair value measurement hierarchy during the nine months ended October 31, 20182019 and 2017.2018.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments, Corporate Debt Securities, and Commercial Paper - The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities
are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Interest Rate Swap Agreements - The fair value of our interest rate swap agreements are based in part on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration - Business Combinations - The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 3.0%2.9% to 6.0%5.6% in our calculations of the estimated fair values of our contingent consideration liabilities as of October 31, 2018.2019. We utilized discount rates ranging from 3.0%3.8% to 5.0%5.8% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2018.2019.
Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries - The fair value of the option is determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasure the fair value of the option at each reporting period, and any changes in fair value are recorded within selling, general, and administrative expenses. We utilized discount rates of 13.0%9.0% and 13.5%12.5% in our calculation of the estimated fair value of the option as of October 31, 20182019 and January 31, 2018,2019, respectively.
Other Financial Instruments
The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair values of our term loan borrowings were $421$418 million and $425$412 million at October 31, 20182019 and January 31, 2018.2019. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy because we cannot reasonably observe activity in the limited market in which participations in our term loans are traded. The indicative prices provided to us as at each of October 31, 20182019 and January 31, 20182019 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders. We had no revolving credit borrowings at October 31, 20182019 and January 31, 2018.2019.
The estimated fair values of our Notes were approximately $398$412 million and $389$400 million at October 31, 20182019 and January 31, 2018,2019, respectively. The estimated fair values of the Notes are determined based on quoted bid and ask prices in the over-the-counter market in which the Notes trade. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
As of October 31, 2019, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $3.8 million. There were no observable price changes in our investments in privately-held companies and we did not recognize any impairments or other adjustments during the nine months ended October 31, 2019.
| |
12. | DERIVATIVE FINANCIAL INSTRUMENTS |
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $113.1$96.1 million and $153.5$123.0 million as of October 31, 20182019 and January 31, 2018,2019, respectively.
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the term loan borrowings under the Prior Credit Agreement,a prior credit agreement, in February 2016 we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we paypaid interest at a fixed rate of 4.143% and receivereceived variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”). Although the Prior Credit Agreementprior credit agreement was terminated on June 29, 2017, the 2016 Swap agreement remainsremained in effect until September 6, 2019, and servesserved as an economic hedge to partially mitigate the risk of higher borrowing costs under our 2017 Credit Agreement resulting from increases in market interest rates. Settlements with the counterparty under the 2016 Swap occuroccurred quarterly, and the 2016 Swap will terminatematured on September 6, 2019.
Prior to June 29, 2017, the 2016 Swap was designated as a cash flow hedge for accounting purposes. On June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the Prior Credit Agreement,prior credit agreement, the 2016 Swap was no longer designated as a cash flow hedge for accounting purposes and, because occurrence of the specific forecasted variable cash flows which had been hedged by the 2016 Swap agreement was no longer probable, the $0.9 million fair value of the 2016 Swap at that date was reclassified from accumulated other comprehensive income (loss) into the condensed consolidated statement of operations as income within other income (expense), net. Ongoing changes in the fair value of the 2016 Swap agreement are nowwere recognized within other income (expense), net in the condensed consolidated statement of operations.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap in September 2019, under which we will pay interest at a fixed rate of 2.949% and receive variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap iswas September 6, 2019, and settlements with the counterparty will occur on a quarterly basis, beginning on November 1, 2019. The 2018 Swap will terminate on June 29, 2024.
During the operating term of the 2018 Swap, if we elect three-month LIBOR at the periodic interest rate reset dates for at least $200.0 million of our 2017 Term Loan, the annual interest rate on that amount of the 2017 Term Loan will be fixed at 4.949% (including the impact of our current 2.00% interest rate margin on Eurodollar loans) for the applicable interest rate period.
The 2018 Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and are reclassified into the condensed statement of operations within interest expense in the periods in which the hedged transactions affect earnings.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of October 31, 20182019 and January 31, 20182019 were as follows:
|
| | | | | | | | | |
| | | Fair Value at |
| | | October 31, | | January 31, |
(in thousands) | Balance Sheet Classification | | 2019 | | 2019 |
Derivative assets: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | 531 |
| | $ | 738 |
|
Not designated as hedging instruments | Prepaid expenses and other current assets | | 14 |
| | 663 |
|
Interest rate swap agreements: | | | | | |
Not designated as hedging instrument | Prepaid expenses and other current assets | | — |
| | 2,072 |
|
Total derivative assets | | | $ | 545 |
| | $ | 3,473 |
|
| | | | | |
Derivative liabilities: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | 208 |
| | $ | 1,830 |
|
Not designated as hedging instruments | Accrued expenses and other current liabilities | | 208 |
| | 256 |
|
Interest rate swap agreements: | | | | | |
Designated as a cash flow hedge | Accrued expenses and other current liabilities | | 1,840 |
| | 122 |
|
Designated as a cash flow hedge | Other liabilities | | 11,244 |
| | 3,906 |
|
Total derivative liabilities | | | $ | 13,500 |
| | $ | 6,114 |
|
|
| | | | | | | | | |
| | | Fair Value at |
| | | October 31, | | January 31, |
(in thousands) | Balance Sheet Classification | | 2018 | | 2018 |
Derivative assets: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | — |
| | $ | 3,682 |
|
Not designated as hedging instruments | Prepaid expenses and other current assets | | 1,401 |
| | — |
|
Interest rate swap agreements: | | | | | |
Designated as cash flow hedge | Other assets | | 1,878 |
| | — |
|
Not designated as hedging instrument | Prepaid expenses and other current assets | | 2,869 |
| | 1,330 |
|
| Other assets | | — |
| | 1,250 |
|
Total derivative assets | | | $ | 6,148 |
| | $ | 6,262 |
|
| | | | | |
Derivative liabilities: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | 4,518 |
| | $ | — |
|
Not designated as hedging instruments | Accrued expenses and other current liabilities | | — |
| | 1,061 |
|
| Other liabilities | | — |
| | 247 |
|
Total derivative liabilities | | | $ | 4,518 |
| | $ | 1,308 |
|
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the condensed consolidated statements of operations for the three and nine months ended October 31, 20182019 and 20172018 were as follows:
| | | | Three Months Ended October 31, | | Nine Months Ended October 31, | | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net (losses) gains recognized in AOCL: | | | | | | | | | | | | | | | | |
Foreign currency forward contracts | | $ | (1,591 | ) | | $ | 743 |
| | $ | (10,507 | ) | | $ | 6,329 |
| | $ | (960 | ) | | $ | (1,591 | ) | | $ | 1,019 |
| | $ | (10,507 | ) |
Interest rate swap agreement | | 1,266 |
| | — |
| | 1,878 |
| | (341 | ) | | (2,759 | ) | | 1,266 |
| | (9,317 | ) | | 1,878 |
|
| | $ | (325 | ) | | $ | 743 |
| | $ | (8,629 | ) | | $ | 5,988 |
| | $ | (3,719 | ) | | $ | (325 | ) | | $ | (8,298 | ) | | $ | (8,629 | ) |
| | | | | | | | | | | | | | | | |
Net (losses) gains reclassified from AOCL to the condensed consolidated statements of operations: | | | | | | | | | |
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations: | | | | | | | | | |
Foreign currency forward contracts | | $ | (1,328 | ) | | $ | 1,572 |
| | $ | (2,308 | ) | | $ | 4,446 |
| | $ | 542 |
| | $ | (1,328 | ) | | $ | (397 | ) | | $ | (2,308 | ) |
Interest rate swap agreement | | — |
| | — |
| | — |
| | (254 | ) | | (261 | ) | | — |
| | (261 | ) | | — |
|
| | $ | (1,328 | ) | | $ | 1,572 |
| | $ | (2,308 | ) | | $ | 4,192 |
| | $ | 281 |
| | $ | (1,328 | ) | | $ | (658 | ) | | $ | (2,308 | ) |
For information regarding the line item locations of the net gains reclassified out of AOCL into the condensed consolidated condensed statements of operations, see Note 9, “Stockholders’ Equity”.
There were no gains or losses from ineffectiveness of these cash flow hedges recorded for the nine months ended October 31, 2017. Effective with our February 1, 2018 adoption of ASU No. 2017-12, ineffectiveness of cash flow hedges is no longer recognized. All of the foreign currency forward contracts underlying the $4.1$0.3 million of net unrealized lossesgains recorded in our accumulated other comprehensive loss at October 31, 20182019 mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months. Approximately $1.5 million of the $10.2 million of net unrealized losses related to our interest rate swap agreement recorded in our accumulated other comprehensive loss at October 31, 2019 settle within twelve months, and therefore we expect those losses to be reclassified into earnings within the next twelve months.
DerivativeFinancial InstrumentsNot Designated as Hedging Instruments
Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three and nine months ended October 31, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Classification in Condensed Consolidated Statements of Operations | | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | | 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency forward contracts | | Other income (expense), net | | $ | (268 | ) | | $ | 930 |
| | $ | 508 |
| | $ | 2,828 |
|
Interest rate swap agreement | | Other income (expense), net | | — |
| | 121 |
| | (48 | ) | | 932 |
|
| | | | $ | (268 | ) | | $ | 1,051 |
| | $ | 460 |
| | $ | 3,760 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Classification in Condensed Consolidated Statements of Operations | | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | | 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency forward contracts | | Other income (expense), net | | $ | 930 |
| | $ | 257 |
| | $ | 2,828 |
| | $ | (1,025 | ) |
Interest rate swap agreements | | Other income (expense), net | | 121 |
| | 577 |
| | 932 |
| | 1,317 |
|
| | | | $ | 1,051 |
| | $ | 834 |
| | $ | 3,760 |
| | $ | 292 |
|
| |
13. | STOCK-BASED COMPENSATION |
Amended and RestatedNew Stock-Based Compensation Plan
On June 22, 2017,20, 2019, our stockholders approved the Verint Systems Inc. Amended and Restated 20152019 Long-Term Stock Incentive Plan (the “2019 Plan”). Upon approval of the 2019 Plan, additional awards are no longer permitted under our prior stock-based compensation plan (the “2017 Amended Plan”), which amended and restated the Verint Systems Inc. 2015 Long-Term Stock Incentive Plan (the “2015 Plan”). As with the 2015 Plan,Awards outstanding at June 20, 2019 under the 2017 Amended Plan or other previous stock-based compensation plans were not impacted by the approval of the 2019 Plan. Collectively, our stock-based compensation plans are referred to herein as the “Plans”.
The 2019 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, other stock-based awards, and performance compensation awards.
The 2017 Amended Plan amended and restated the 2015 Plan to, among other things, increase the number of shares available for issuance thereunder. Subject to adjustment as provided in the 2017 Amended2019 Plan, up to an aggregate of (i) 7,975,0009,475,000 shares of our common stock (on an option-equivalent basis), plus (ii) the number of shares of our common stock available for issuance under the 20152017 Amended Plan as of June 22, 2017,20, 2019, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 20152017 Amended Plan or the 2017 Amended2019 Plan that are forfeited, cancelled, exchanged, withheld or surrendered orthat terminate or expire, may be issued or transferred in connection with awards under the 2017 Amended2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2017 Amended2019 Plan will reduce the available plan capacity by one share and each other award denominated in shares that is granted under the 2019 Plan will reduce the available plan capacity by 2.472.38 shares.
The 2017 Amended Plan expires on June 22, 2027.
Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three and nine months ended October 31, 20182019 and 20172018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Cost of revenue - product | | $ | 424 |
| | $ | 410 |
| | $ | 1,246 |
| | $ | 915 |
|
Cost of revenue - service and support | | 1,342 |
| | 957 |
| | 3,958 |
| | 3,243 |
|
Research and development, net | | 2,988 |
| | 2,746 |
| | 8,925 |
| | 7,294 |
|
Selling, general and administrative | | 13,805 |
| | 12,482 |
| | 42,084 |
| | 39,057 |
|
Total stock-based compensation expense | | $ | 18,559 |
| | $ | 16,595 |
| | $ | 56,213 |
| | $ | 50,509 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Cost of revenue - product | | $ | 410 |
| | $ | 384 |
| | $ | 915 |
| | $ | 1,090 |
|
Cost of revenue - service and support | | 957 |
| | 1,813 |
| | 3,243 |
| | 4,778 |
|
Research and development, net | | 2,746 |
| | 3,181 |
| | 7,294 |
| | 9,322 |
|
Selling, general and administrative | | 12,482 |
| | 10,588 |
| | 39,057 |
| | 35,263 |
|
Total stock-based compensation expense | | $ | 16,595 |
| | $ | 15,966 |
| | $ | 50,509 |
| | $ | 50,453 |
|
The following table summarizes stock-based compensation expense by type of award for the three and nine months ended October 31, 2018,2019 and 2017:2018: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock units and restricted stock awards | | $ | 16,615 |
| | $ | 14,187 |
| | $ | 49,471 |
| | $ | 44,179 |
|
Stock bonus program and bonus share program | | 1,944 |
| | 2,394 |
| | 6,693 |
| | 6,273 |
|
Total equity-settled awards | | 18,559 |
| | 16,581 |
| | 56,164 |
| | 50,452 |
|
Phantom stock units (cash-settled awards) | | — |
| | 14 |
| | 49 |
| | 57 |
|
Total stock-based compensation expense | | $ | 18,559 |
| | $ | 16,595 |
| | $ | 56,213 |
| | $ | 50,509 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Restricted stock units and restricted stock awards | | $ | 14,187 |
| | $ | 14,201 |
| | $ | 44,179 |
| | $ | 42,951 |
|
Stock bonus program and bonus share program | | 2,394 |
| | 1,840 |
| | 6,273 |
| | 7,446 |
|
Total equity-settled awards | | 16,581 |
| | 16,041 |
| | 50,452 |
| | 50,397 |
|
Phantom stock units (cash-settled awards) | | 14 |
| | (75 | ) | | 57 |
| | 56 |
|
Total stock-based compensation expense | | $ | 16,595 |
| | $ | 15,966 |
| | $ | 50,509 |
| | $ | 50,453 |
|
Awards under our stock bonus and bonus share programs are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of our common stock, which for awards under our stock bonus program is determined using a discounted average price of our common stock.
Restricted Stock Units
We periodically award restricted stock units (“RSUs”)RSUs to our directors, officers, and other employees. These awards contain various vesting conditions and are subject to certain restrictions and forfeiture provisions prior to vesting. Some of these awards to executive officers and certain employees vest upon the achievement of specified performance goals or market conditions (performance stock units or “PSUs”).
The following table (“Award Activity Table”) summarizes activity for RSUs, PSUs, and other stock awards that reduce available Plan capacity under the Plans for the nine months ended October 31, 2019 and 2018:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended October 31, |
| | 2019 | | 2018 |
(in thousands, except per share data) | | Shares or Units | | Weighted-Average Grant Date Fair Value | | Shares or Units | | Weighted-Average Grant Date Fair Value |
Beginning balance | | 2,777 |
| | $ | 41.05 |
| | 2,808 |
| | $ | 41.18 |
|
Granted | | 1,600 |
| | $ | 60.54 |
| | 1,710 |
| | $ | 43.11 |
|
Released | | (1,402 | ) | | $ | 40.52 |
| | (1,440 | ) | | $ | 43.88 |
|
Forfeited | | (184 | ) | | $ | 44.52 |
| | (222 | ) | | $ | 40.98 |
|
Ending balance | | 2,791 |
| | $ | 52.41 |
| | 2,856 |
| | $ | 41.03 |
|
|
| | | | | | | |
(in thousands, except per share data) | | Shares or Units | | Weighted-Average Grant Date Fair Value |
Outstanding, January 31, 2018 | | 2,808 |
| | $ | 41.18 |
|
Granted | | 1,710 |
| | $ | 43.11 |
|
Released | | (1,440 | ) | | $ | 43.88 |
|
Forfeited | | (222 | ) | | $ | 40.98 |
|
Outstanding, October 31, 2018 | | 2,856 |
| | $ | 41.03 |
|
With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned
cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under “Stock Bonus Program” and “Bonus Share Program”.
Our RSU awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of October 31, 2018,2019, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards and are included in the table above.
The following table summarizes PSU activity in isolation under the Plans for the nine months ended October 31, 20182019 and 20172018 (these amounts are already included in the Award Activity Table above for 2019 and 2018):
|
| | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 |
Beginning balance | | 512 |
| | 506 |
|
Granted | | 286 |
| | 228 |
|
Released | | (245 | ) | | (139 | ) |
Forfeited | | (31 | ) | | (83 | ) |
Ending balance | | 522 |
| | 512 |
|
|
| | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 |
Beginning balance | | 506 |
| | 438 |
|
Granted | | 228 |
| | 204 |
|
Released | | (139 | ) | | (50 | ) |
Forfeited | | (83 | ) | | (86 | ) |
Ending balance | | 512 |
| | 506 |
|
Excluding PSUs, we granted 1,482,0001,314,000 RSUs during the nine months ended October 31, 2018.2019.
As of October 31, 2018,2019, there was approximately $78.5$99.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 1.8 years.
Stock Bonus Program
Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent
that shares remain available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a one-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is determined using a five-day5-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the “discount”). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash. Obligations
Awards under thisthe stock bonus program are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable numberperformance period ended January 31, 2019 consisted of shares earned in respect of common stock determinedemployee and officer incentive plans, using a discounted average price of our common stock.15% discount, and were issued during the three months ended July 31, 2019.
The following table summarizes activity under the stock bonus program during the nine months ended October 31, 20182019 and 20172018 in isolation. As noted above, shares issued in respect of the discount feature under the program reduce available plan capacity and are included in the Award Activity Table above. Other shares issued under the program do not reduce available plan capacity and are therefore excluded from the Award Activity Table above.
|
| | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 |
Shares in lieu of cash bonus - granted and released (not included in Award Activity Table above) | | 97 |
| | 19 |
|
Shares in respect of discount (included in Award Activity Table above): | | | | |
Granted | | 16 |
| | — |
|
Released | | 13 |
| | — |
|
|
| | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 |
Shares in lieu of cash bonus - granted and released | | 19 |
| | 21 |
|
Shares in respect of discount: | | | | |
Granted | | — |
| | — |
|
Released | | — |
| | — |
|
Awards under the stock bonus program for the performance period ended January 31, 2018 consisted of shares earned in respect of executive officer incentive plans without a discount, and were issued during the three months ended October 31, 2018.
In March 2018,2019, our board of directors approved up to 125,000150,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the yearperformance period ending January 31, 2019.2020. In August 2019, our board of directors changed this maximum number of shares to 200,000 based on strong enrollment and made a corresponding reduction of 50,000 shares in the number of shares available for issuance under our bonus share program for the performance period ending January 31, 2020.
Bonus Share Program
Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature. Similar to the accounting for the stock bonus program, obligations for these bonuses are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known, to be settled with a variable number ofAs noted above, shares of common stock.
For bonuses in respect of the year ended January 31, 2018, the board of directors approved the use of up to 300,000 shares of common stockissued under this program reduced by anyare included in the Award Activity Table above.
During the three months ended July 31, 2019, approximately 59,000 shares used under the stock bonus program in respect of the performance period ended January 31, 2018. Some of the shareswere awarded in respect of the bonus share program for the yearperformance period ended January 31, 2018 were issued during the three months ended July 31, 2018. The remaining shares awarded were issued during the three months ended October 31, 2018.2019.
For bonuses in respect of the year ending January 31, 2019, the2020, our board of directors has approved the use of up to 300,000 shares of common stock under thisthe bonus share program, reduced by any shares usedissued under the stock bonus program in respect of the same performance period. Assuming all 200,000 shares currently authorized for issuance under the stock bonus program for the performance period ending January 31, 2019.2020 are issued, no more than 100,000 shares will be issued under the bonus share program for such performance period.
The combined accrued liabilities for the stock bonus program and the bonus share program were $6.6$6.4 million and $9.2$9.3 million at October 31, 20182019 and January 31, 2018,2019, respectively.
14. LEASES
We have entered into operating leases primarily for corporate offices, research and development facilities, datacenters, and automobiles. Our finance leases primarily relate to infrastructure equipment. Our leases have remaining lease terms of 1 year to 12 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year. As of October 31, 2019, assets recorded under finance leases were $7.1 million and accumulated depreciation associated with finance leases was $0.5 million.
The components of lease expenses for the three and nine months ended October 31, 2019 were as follows:
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(in thousands) | | October 31, 2019 |
Operating lease expenses | | $ | 7,469 |
| | $ | 22,377 |
|
Finance lease expenses: | | | | |
Amortization of right-of-use assets | | 129 |
| | 382 |
|
Interest on lease liabilities | | 75 |
| | 150 |
|
Total finance lease expenses | | 204 |
| | 532 |
|
Variable lease expenses | | 2,047 |
| | 5,965 |
|
Short-term lease expenses | | 257 |
| | 695 |
|
Sublease income | | (232 | ) | | (678 | ) |
Total lease expenses | | $ | 9,745 |
| | $ | 28,891 |
|
Other information related to leases was as follows:
|
| | | | |
(dollars in thousands) | | Nine Months Ended October 31, 2019 |
Supplemental cash flow information | | |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 20,654 |
|
Operating cash flows from finance leases | | 150 |
|
Financing cash flows from finance leases | | 1,664 |
|
Right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases | | $ | 21,467 |
|
Finance leases | | 378 |
|
Weighted average remaining lease terms | | |
Operating leases | | 6 years |
|
Finance leases | | 3 years |
|
Weighted average discount rates | | |
Operating leases | | 5.6 | % |
Finance leases | | 5.5 | % |
Maturities of lease liabilities as of October 31, 2019 were as follows: |
| | | | | | | | |
| | October 31, 2019 |
(in thousands) | | Operating Leases | | Finance Leases |
Year Ending January 31, | | | | |
2020 (remainder of year) | | $ | 7,291 |
| | $ | 366 |
|
2021 | | 27,619 |
| | 1,811 |
|
2022 | | 22,481 |
| | 1,616 |
|
2023 | | 19,569 |
| | 1,075 |
|
2024 | | 18,068 |
| | 115 |
|
Thereafter | | 43,853 |
| | — |
|
Total future minimum lease payments | | 138,881 |
| | 4,983 |
|
Less imputed interest | | (22,454 | ) | | (363 | ) |
Total | | $ | 116,427 |
| | $ | 4,620 |
|
| | | | |
Reported as of October 31, 2019: | | | | |
Accrued expenses and other current liabilities | | $ | 22,264 |
| | $ | 1,560 |
|
Operating lease liabilities | | 94,163 |
| | — |
|
Other liabilities | | — |
| | 3,060 |
|
Total | | $ | 116,427 |
| | $ | 4,620 |
|
As of October 31, 2019, we had no material leases that have not yet commenced.
As previously disclosed in our January 31, 2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable operating leases as of January 31, 2019 were as follows (in thousands):
|
| | | | | | | | |
(in thousands) | | Operating | | Capital |
Years Ending January 31, | | Leases | | Leases |
2020 | | $ | 22,769 |
| | $ | 1,343 |
|
2021 | | 21,942 |
| | 1,252 |
|
2022 | | 19,157 |
| | 1,130 |
|
2023 | | 16,882 |
| | 765 |
|
2024 | | 15,152 |
| | 107 |
|
Thereafter | | 33,477 |
| | — |
|
Total | | $ | 129,379 |
| | 4,597 |
|
Less: amount representing interest and other charges | | | | (315 | ) |
Present value of minimum lease payments | | | | $ | 4,282 |
|
| |
14.15. | COMMITMENTS AND CONTINGENCIES |
Warranty Liability
The following table summarizes the activity in our warranty liability, which is included in accrued expenses and other liabilities in the condensed consolidated balance sheets, for the nine months ended October 31, 2018 and 2017:
|
| | | | | | | | |
| | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 |
Warranty liability at beginning of period | | $ | 551 |
| | $ | 962 |
|
Provision charged (credited) to expenses | | 103 |
| | (84 | ) |
Warranty charges | | (202 | ) | | (219 | ) |
Foreign currency translation and other | | (11 | ) | | — |
|
Warranty liability at end of period | | $ | 441 |
| | $ | 659 |
|
Legal Proceedings
OnIn March 26, 2009, legal actions were commenced byone of our former employees, Ms. Orit Deutsch, a former employee ofcommenced legal actions in Israel against our primary Israeli subsidiary, Verint Systems Limited (“VSL”), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the “Deutsch Labor Action”) and against our affiliate CTI in the Tel Aviv District Court (Case Number 1335/09) (the “Deutsch District Action”). Also in March 2009, a former employee of Comverse Limited (CTI’s primary Israeli subsidiary at the time), Ms Roni Katriel, commenced similar legal actions in Israel against Comverse Limited (Case Number 3444/09). In these actions, the Deutsch Labor Action, Ms. Deutsch filed a motionplaintiffs generally sought to approve acertify class action lawsuitsuits against the defendants on the grounds that she purported to represent a classbehalf of our employeescurrent and former employees of VSL and Comverse Limited who werehad been granted Verint and CTI stock options in Verint and/or CTI and who were allegedly damaged as a result of thea suspension of option exercises during the period from March 2006 through March 2010, during which we did not make periodic filings with the SEC as a result of certain internal and external investigations and reviews of accounting matters discussed in our prior public filings. In the Deutsch District Action, in addition to a small amount of individual damages, Ms. Deutsch was seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class certification motions did not specify an amount of damages. On February 8, 2010, the Deutsch Labor Action was dismissed for lack of material jurisdiction and was transferred to the Tel Aviv District Court and consolidated with the Deutsch District Action.
On March 16, 2009 and March 26, 2009, respectively, legal actions were commenced by Ms. Roni Katriel, a former employee of CTI’s former subsidiary, Comverse Limited, against Comverse Limited in the Tel Aviv Regional Labor Court (Case Number 3444/09) (the “Katriel Labor Action”) and against CTI in the Tel Aviv District Court (Case Number 1334/09) (the “Katriel District Action”). In the Katriel Labor Action, Ms. Katriel was seeking to certify a class of plaintiffs who were granted CTI stock options and were allegedly damaged as a result of the suspension ofon option exercises during an extended filing delay period affecting CTI’s periodic reportingthat is discussed in our and CTI’s historical SECpublic filings. In the Katriel District Action, in addition to a small amount of individual damages, Ms. Katriel was seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class certification motions did not specify an amount of damages. On March 2, 2010, the Katriel Labor Action was transferred toJune 7, 2012, the Tel Aviv District Court, based on an agreed motionwhere the cases had been filed byor transferred, allowed the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motionplaintiffs to consolidate and amend their claims and on June 7, 2012,complaints against the District Court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an amended consolidated complaint againstthree defendants: VSL, CTI, and Comverse Limited. Following CTI’s announcement of its intention to effect the distribution
On October 31, 2012, CTI distributed of all of the issued and outstanding shares of capitalcommon stock of its former subsidiary, Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI’s shareholders (the “Comverse Share Distribution”), on July 12, 2012,. In the plaintiffs filed a motion requesting that the District Court order CTI to set asideperiod leading up to $150.0 million in assets to secure any future judgment. The District Court ruled at such time that it would not decide this motion until the Deutsch and Katriel class certification motion was heard. Plaintiffs initially filed a motion to appeal this ruling in August 2012, but subsequently withdrew it in July 2014.
Prior to the consummation of the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in usVerint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. On October 31, 2012, CTI completedAs the Comverse Share Distribution, in which it distributed all of the outstanding shares of common stock of Comverse, Inc. to CTI’s shareholders. As a result of the Comverse Share Distribution,these transactions, Comverse, Inc. became an independent company and ceased to be a wholly owned subsidiary ofaffiliated with CTI, and CTI ceased to have any material assets other than its equity interestinterests in us. AsVerint. Prior to the completion of the Comverse Share Distribution, the plaintiffs sought to compel CTI to set aside up to $150.0 million in assets to secure any future judgment, but the District Court did not rule on this motion. In February 28, 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.
On February 4, 2013, we merged with CTI.Verint acquired the remaining CTI shell company in a merger transaction (the “CTI Merger”). As a result of the merger, we haveCTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action.foregoing legal actions. However, under the terms of thea Distribution Agreement between CTI and Comverse, Inc. relating toentered into in connection with the Comverse share distribution,Share Distribution, we, as
successor to CTI, are entitled to indemnification from Comverse, Inc. (now Mavenir) for any losses we may suffer in our capacity as successor-in-interestsuccessor to CTI in connection withrelated to the Deutsch District Action and the Katriel District Action.foregoing legal actions.
Following an unsuccessful mediation process, the proceeding before the District Court resumed. Onon August 28, 2016, the District Court (i) denied the plaintiffs’ motion to certify the suit as a class action with respect to all claims relating to Verint stock options and (ii) approved the plaintiffs’ motion to certify the suit as a class action with respect to claims of current or former employees of Comverse Limited (now part of Mavenir) or of VSL who held unexercised CTI stock options at the time CTI suspended option exercises. The court also ruled that the merits of the case and any calculation of damages would be evaluated under New York law.
On December 15, 2016, CTI filed withAs a result of this ruling (which excluded claims related to Verint stock options from the Supreme Court a motion for leave to appeal the District Court’s August 28, 2016 ruling. The plaintiffs did not file an appealcase), one of the District Court’s August 28, 2016 ruling. On February 5, 2017,original plaintiffs in the District Court approved the plaintiffs’ motion to appointcase, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin, forVaaknin. CTI appealed portions of the current or former employees of VSL who held unexercised CTI stock options atDistrict Court’s ruling to the time CTI suspended option exercises in replacement of Ms. Deutsch.
Israeli Supreme Court. On August 8, 2017, the Israeli Supreme Court partially allowed CTI’s appeal and ordered the case to be returned to the District Court to determine whether a cause of action exists in this case under New York law based on CTI’s previously submittedthe parties’ expert opinion and the opinion of any expert the plaintiffs elect to introduce.opinions.
On November 28, 2017,Following a second unsuccessful round of mediation in mid to late 2018, the proceedings resumed. The plaintiffs submitted an expert opinion regarding New York law. On January 3, 2018, CTIhave filed a motion to dismissamend the motion to certify the class action on the basis that the New York law opinion submitted by the plaintiffs did not directly address the causes of action in question, or alternatively, to dismiss the portions of the opinion that did not specifically relate to CTI’s expert opinion. On January 22, 2018, the court ruled that the plaintiffs should submit a motion to amend their class certification motion and that CTI’sCTI has filed a corresponding motion to dismiss would remain pending. Based on input fromand a response. These motions are now before the court the parties have agreed to enter intofollowing a furtherthird unsuccessful round of mediation in an effort to settle the matter, which remains ongoing.earlier this year.
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any current claims will have a material effect on our consolidated financial position, results of operations, or cash flows.
| |
15.16. | SEGMENT INFORMATION |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the enterprise’s chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is our CODM.
We report our results in two2 operating segments—Customer Engagement Solutions (“Customer Engagement”) and Cyber Intelligence Solutions (“Cyber Intelligence”). Our Customer Engagement solutions help customer-centric organizations optimize customer engagement, increase customer loyalty, and maximize revenue opportunities, while generating operational efficiencies, reducing cost, and mitigating risk. Our Cyber Intelligence solutions are used for a wide range of applications, including predictive intelligence, advanced and complex investigations, security threat analysis, and electronic data and physical assets protection, as well as for generating legal evidence and preventing criminal activity and terrorism.
We measure the performance of our operating segments primarily based on segment revenue and segment contribution.
Segment revenue includes adjustments associated with revenue of acquired companies which are not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the obligations’ acquisition-date fair values. Segment revenue adjustments can also result from aligning an acquired company’s historical revenue recognition policies to our policies.
Segment contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs, research and development, selling, marketing, and certain administrative expenses. When determining segment contribution, we do not allocate certain operating expenses which are provided by shared resources or are otherwise generally
not controlled by segment management. These expenses are reported as “Shared support expenses” in our table of segment operating results, the majority of which are expenses for administrative support functions, such as information technology, human resources, finance, legal, and other general corporate support, and for occupancy expenses. These unallocated expenses also include procurement, manufacturing support, and logistics expenses. We share resources across our segments for efficiency and to avoid duplicative costs.
In addition, segment contribution does not include amortization of acquired intangible assets, stock-based compensation, and other expenses that either can vary significantly in amount and frequency, are based upon subjective assumptions, or in certain cases are unplanned for or difficult to forecast, such as restructuring expenses and business combination transaction and integration expenses, all of which are not considered when evaluating segment performance.
Revenue from transactions between our operating segments is not material.
Operating results by segment for the three and nine months ended October 31, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | |
| | |
| | | | |
Customer Engagement | | |
| | |
| | | | |
Segment revenue | | $ | 224,149 |
| | $ | 201,448 |
| | $ | 658,440 |
| | $ | 593,556 |
|
Revenue adjustments | | (6,213 | ) | | (3,981 | ) | | (21,973 | ) | | $ | (8,826 | ) |
| | 217,936 |
| | 197,467 |
|
| 636,467 |
| | 584,730 |
|
Cyber Intelligence | | |
| | |
| | | | |
Segment revenue | | 106,931 |
| | 106,540 |
| | 328,115 |
| | 314,880 |
|
Revenue adjustments | | — |
| | (24 | ) | | (151 | ) | | (93 | ) |
| | 106,931 |
| | 106,516 |
|
| 327,964 |
| | 314,787 |
|
Total revenue | | $ | 324,867 |
| | $ | 303,983 |
|
| $ | 964,431 |
| | $ | 899,517 |
|
| | | | | | | | |
Segment contribution: | | |
| | |
| | | | |
Customer Engagement | | $ | 91,788 |
| | $ | 79,593 |
| | $ | 249,394 |
| | $ | 225,154 |
|
Cyber Intelligence | | 28,000 |
| | 29,193 |
| | 86,861 |
| | 74,964 |
|
Total segment contribution | | 119,788 |
| | 108,786 |
|
| 336,255 |
| | 300,118 |
|
| | | | | | | | |
Reconciliation of segment contribution to operating income: | | |
| | |
| | | | |
Revenue adjustments | | 6,213 |
| | 4,005 |
| | 22,124 |
| | 8,919 |
|
Shared support expenses | | 45,350 |
| | 39,585 |
| | 133,620 |
| | 121,390 |
|
Amortization of acquired intangible assets | | 13,746 |
| | 13,518 |
| | 41,392 |
| | 41,600 |
|
Stock-based compensation | | 18,559 |
| | 16,595 |
| | 56,213 |
| | 50,509 |
|
Acquisition, integration, restructuring, and other unallocated expenses | | 6,103 |
| | 1,413 |
| | 23,346 |
| | 7,017 |
|
Total reconciling items, net | | 89,971 |
| | 75,116 |
|
| 276,695 |
| | 229,435 |
|
Operating income | | $ | 29,817 |
| | $ | 33,670 |
|
| $ | 59,560 |
| | $ | 70,683 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Revenue: | | |
| | |
| | | | |
Customer Engagement | | |
| | |
| | | | |
Segment revenue | | $ | 201,448 |
| | $ | 184,506 |
| | $ | 593,556 |
| | $ | 542,708 |
|
Revenue adjustments | | (3,981 | ) | | (2,916 | ) | | (8,826 | ) | | (11,065 | ) |
| | 197,467 |
| | 181,590 |
| | 584,730 |
| | 531,643 |
|
Cyber Intelligence | | |
| | |
| | | | |
Segment revenue | | 106,540 |
| | 99,254 |
| | 314,880 |
| | 285,024 |
|
Revenue adjustments | | (24 | ) | | (118 | ) | | (93 | ) | | (169 | ) |
| | 106,516 |
| | 99,136 |
| | 314,787 |
| | 284,855 |
|
Total revenue | | $ | 303,983 |
| | $ | 280,726 |
| | $ | 899,517 |
| | $ | 816,498 |
|
| | | | | | | | |
Segment contribution: | | |
| | |
| | | | |
Customer Engagement | | $ | 79,593 |
| | $ | 70,768 |
| | $ | 225,154 |
| | $ | 195,756 |
|
Cyber Intelligence | | 29,193 |
| | 23,160 |
| | 74,964 |
| | 62,402 |
|
Total segment contribution | | 108,786 |
| | 93,928 |
| | 300,118 |
| | 258,158 |
|
| | | | | | | | |
Reconciliation of segment contribution to operating income (loss): | | |
| | |
| | | | |
Revenue adjustments | | 4,005 |
| | 3,034 |
| | 8,919 |
| | 11,234 |
|
Shared support expenses | | 39,585 |
| | 38,150 |
| | 121,390 |
| | 114,022 |
|
Amortization of acquired intangible assets | | 13,518 |
| | 16,230 |
| | 41,600 |
| | 54,973 |
|
Stock-based compensation | | 16,595 |
| | 15,966 |
| | 50,509 |
| | 50,453 |
|
Acquisition, integration, restructuring, and other unallocated expenses | | 1,413 |
| | 2,736 |
| | 7,017 |
| | 15,103 |
|
Total reconciling items, net | | 75,116 |
| | 76,116 |
| | 229,435 |
| | 245,785 |
|
Operating income (loss) | | $ | 33,670 |
| | $ | 17,812 |
| | $ | 70,683 |
| | $ | 12,373 |
|
Our acquisition, integration, restructuring, and other unallocated expenses increased approximately $16.3 million from $7.0 million in the nine months ended October 31, 2018 to $23.3 million in the nine months ended October 31, 2019. The increase was primarily attributable to $7.8 million of professional fees related to a shareholder proxy contest that was settled during the three months ended July 31, 2019, and a $4.3 million change in the fair value of our obligations under contingent consideration arrangements, from a net benefit of $4.2 million in the nine months ended October 31, 2018 to a net expense of $0.1 million during the nine months ended October 31, 2019. This change in the fair value of our obligations under contingent consideration arrangements resulted from revised outlooks for achieving the performance targets set forth in several unrelated contingent consideration arrangements.
With the exception of goodwill and acquired intangible assets, we do not identify or allocate our assets by operating segment. Consequently, it is not practical to present assets by operating segment. The allocations of goodwill and acquired intangible assets by operating segment appear in Note 6, “Intangible Assets and Goodwill”.
17. SUBSEQUENT EVENTS
Separation of Businesses
On December 4, 2019, we announced our intention to separate into two independent publicly traded companies: one which will consist of our Customer Engagement Solutions business, and one which will consist of our Cyber Intelligence Solutions business. We expect to implement the separation through a pro-rata distribution of common stock of a new entity that will hold the Cyber Intelligence Solutions business to our shareholders (the “Spin-Off”) that is intended to be tax-free to our shareholders for U.S. federal income tax purposes. We expect to complete the Spin-Off shortly after the end of our next fiscal year ending January 31, 2021. The completion of the Spin-Off is subject to certain customary conditions, including final approval of our board of directors, receipt of tax opinions from counsel as well as rulings from the Internal Revenue Service and the Israeli Tax Authority with respect to the tax treatment to the Company and our shareholders, and effectiveness of a registration statement to be filed with the U.S. Securities and Exchange Commission. The Spin-Off is not expected to require a shareholder vote. There can be no assurance that any separation transaction will ultimately occur or, if one does occur, of its terms or timing. The separation structure is subject to change based upon various tax and regulatory factors.
Apax Convertible Preferred Stock Investment
On December 4, 2019, we entered into an investment agreement with Valor Parent LP (the “Investor”), an affiliate of Apax Partners (“Apax”), a global leader in software investing. Under the terms of the agreement, the Investor will initially purchase $200 million of our Series A convertible preferred stock, which is expected to occur during the first quarter of our fiscal year ending January 31, 2021, subject to the satisfaction of certain customary closing conditions including the receipt of required regulatory and government approvals, with an initial conversion price of $53.50. The initial conversion price represents a conversion premium of 17.1% over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to the signing date. Assuming completion of the Spin-Off described above, the Series A convertible preferred stock will not participate in the Spin-Off distribution of the shares of the company holding the Company’s Cyber Intelligence Solutions business, and instead, the conversion price will be adjusted based on the ratio of the trading prices of the two companies over a short period following the Spin-Off, subject to a collar. Shortly following the Spin-Off, the Investor will purchase, subject to certain conditions, up to $200 million of Series B convertible preferred stock in the Company, as the entity holding the Customer Engagement Solutions business. The Series B convertible preferred stock will be convertible at a conversion price that is 100% of the average of the volume-weighted average price per share of our common stock for the 20 consecutive trading days immediately following the consummation of the Spin-Off, subject to a collar on the minimum and maximum enterprise value of the Company post consummation of the Spin-Off. Each series is mandatorily convertible into common stock beginning three years after issuance under certain conditions, and redeemable for cash at our option six years after issuance and at the option of the holder 8.5 years after issuance. Following the closing of the Series A investment, Apax’s ownership in us on an as-converted basis will be approximately 5%. Following completion of the Spin-Off, and assuming completion of the Series B investment, Apax’s ownership in us on an as-converted basis will be between 11.5% and 15%.
The Series A and Series B convertible preferred stock (together, the “Preferred Stock”) will have a liquidation preference of $1,000 per share. Dividends on the Preferred Stock will accrue at the rate of 5.2% per annum until the 48-month anniversary of the closing of the Series A preferred stock investment, and thereafter at a rate of 4.0%, subject to adjustment under certain circumstances. Dividends will be cumulative and payable semiannually in arrears in cash, and holders of the Preferred Stock will be entitled to vote with the holders of common stock on an as-converted basis. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. The applicable dividend rate is subject to increase (i) to 6.0% per annum in the event the number of shares of common stock into which the Preferred Stock could be converted exceeds 19.9% of the voting power of outstanding common stock on the closing of the Series A investment (unless the Company obtains shareholder approval of the issuance of common stock upon conversion of the Preferred Stock) and (ii) by 1.0% each year, up to a maximum dividend rate of 10.0% per annum, in the event we fail to satisfy our obligations to redeem the Preferred Stock in specified circumstances. Holders of the Preferred Stock will have customary demand and piggyback registration rights in respect of the shares of common stock issuable upon conversion of the Preferred Stock.
The Investor has agreed to restrictions on its ability to dispose of shares of the Preferred Stock until the earlier to occur of (1) the 36-month anniversary of the closing of the Series A investment or (2) the 24-month anniversary of the consummation of the Spin-Off. The Investor has also agreed to restrictions on its ability to dispose of the common stock issued upon conversion of the Preferred Stock until the earlier to occur of (1) the 12-month anniversary of the consummation of the Spin-Off or (2) the 24-month anniversary of the closing of the Series A investment.
We intend to use the proceeds from the initial Series A investment in connection with the share repurchase plan described below, and for general corporate purposes. We are currently evaluating the accounting and tax treatment and consolidated financial statement disclosures related to these Preferred Stock investments.
Share Repurchase Program
On December 4, 2019, we announced that our board of directors had authorized a new share repurchase program whereby we may repurchase up to $300 million of common stock over the period ending on February 1, 2021 (on or shortly before the closing of the planned Spin-Off described above). Repurchases are expected to be financed with the proceeds of the Series A investment described above and available cash, including possible borrowings under our revolving credit facility. We may utilize a number of different methods to effect the repurchases, including but not limited to, open market purchases and accelerated share repurchases, and some of the repurchases may be made through Rule 10b5-1 plans. The specific timing, price, and size of purchases will depend on prevailing stock prices, general market and economic conditions, and other considerations, including the amount of cash available in the U.S. and other potential uses of cash. The program may be extended, suspended or discontinued at any time without prior notice and does not obligate us to acquire any particular amount of common stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis is provided to assist readers in understanding our financial condition, results of operations, and cash flows. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended January 31, 20182019 and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by
uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under “Cautionary Note on Forward-Looking Statements”.
Overview
Recent Development - Separation of Businesses
On December 4, 2019, we announced our intention to separate into two independent publicly traded companies: one which will consist of our Customer Engagement Solutions business, and one which will consist of our Cyber Intelligence Solutions business. We expect to implement the separation through a pro-rata distribution of common stock of a new entity that will hold the Cyber Intelligence Solutions business to our shareholders (the “Spin-Off”) that is intended to be tax-free to our shareholders for U.S. federal income tax purposes. We expect to complete the Spin-Off shortly after the end of our next fiscal year ending January 31, 2021. We believe the two independent, publicly traded companies will both benefit from the separation and be well positioned to pursue their own strategies, drive opportunities to accelerate growth and extend their market leadership. The separation will make it easier for investors to evaluate and make independent investment decisions in each business. We believe that both our businesses are leaders in their respective markets and the separation will enable them to achieve even better performance over the long term as a result of having separate boards of directors with further differentiated skillsets to support tailored strategic plans; specific incentive programs more closely aligned with standalone business performance; capital structures tailored to the unique characteristics of each business; and enhanced appeal to a broader set of investors suited to the strategic and financial characteristics of each company.
Our Business
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence isIn a necessity in a dynamic world of massive information growth, because it empowersour solutions empower organizations with crucial, actionable insights and enablesenable decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more informed, timely, and effective decisions. Today, over 10,000 organizations in more than 180 countries, including over 85 percent of the Fortune 100, use Verint solutions to optimize customer engagement and make the world a safer place.
We have established leadership positions inVerint’s Actionable Intelligence solutions, deployed in the cloud and on premises, to make more informed, timely, and effective decisions.
Our Actionable Intelligence leadership is powered by developing highly-scalable,innovative, enterprise-class software built with artificial intelligence, analytics, automation, and servicesdeep domain expertise established by working closely with advanced, integrated analytics for both structuredsome of the most sophisticated and unstructured information.forward-thinking organizations in the world. We believe we have one of the industry’s strongest R&D teams focused on actionable intelligence consisting of approximately 1,900 professionals. Our innovative solutions are developedbacked-up by a large research and development (“R&D”) team comprised of approximately 1,800 professionals and backed by close tostrong IP portfolio with over 1,000 patents and patent applications worldwide.worldwide across areas including data capture, artificial intelligence, unstructured data analytics, predictive analytics, and automation.
To help our customers maximizeVerint’s Actionable Intelligence strategy is focused on two use cases and the benefits of our technology over the solution lifecycle and provide a high degree of flexibility, we offer a broad range of services, such as strategic consulting, managed services, implementation services, training, maintenance, and 24x7 support. Additionally, we offer a broad range of deployment options, including cloud, on-premises, and hybrid, and software licensing and delivery models that include perpetual licenses and software as a service (“SaaS”).
We conduct our business inCompany has two operating segments—segments: Customer Engagement Solutions (“Customer Engagement”) and Cyber Intelligence Solutions (“Cyber Intelligence”). Our Customer Engagement solutions help customer-centric organizations optimize customer engagement, increase customer loyalty, and maximize revenue opportunities, while generating operational efficiencies, reducing cost, and mitigating risk. Our Cyber Intelligence solutions are used for a wide range of applications, including predictive intelligence, advanced and complex investigations, security threat analysis, and electronic data and physical assets protection, as well as for generating legal evidence and preventing criminal activity and terrorism.
Solutions. Generally, we make business decisions by evaluating the risks and rewards of the opportunities available to us in the markets served by each of our segments. We view each operating segment differently and allocate capital, personnel, resources, and management attention accordingly. In reviewing each operating segment, we also review the performance of that segment by geography. Our marketing and sales strategies, expansion opportunities, and product offerings may differ materially within a particular segment geographically, as may our allocation of resources between segments. When making decisions regarding investments in our business, capital expenditures, or other decisions that may affect our profitability, we also consider the leverage ratio in our revolving credit facility. See “— Liquidity and Capital Resources” for more information.
Key Trends and Factors That May Impact our Performance
We see the following trends and factors which may impact our performance:
Customer Engagement
| |
• | Reducing Complexity and Enhancing Agility. Many organizations have complex environments that were assembled over many years, with multiple legacy systems from many different vendors deployed in silos across the enterprise. To reduce complexity and simplify operations, these organizations are looking for new solutions that are open and flexible and make it easier to address evolving requirements, while protecting their legacy investments. Organizations are also seeking open platforms that address their customer engagement needs across many enterprise functions, including the contact center, back-office and branch operations, self-service, e-commerce, customer experience, marketing, IT, and compliance. |
Many organizations have significant investments in existing legacy systems that they wish to protect. Our open portfolio is designed to easily integrate into customers’ current and evolving technology environments, and easily share data across the organization. Our open portfolio is also compatible with leading providers of contact center communications products, which provides organizations flexibility to select the most suitable solutions for their contact centers, while leveraging Verint’s portfolio for both the contact center and enterprise. We believe this compatibility is particularly important now as the contact center communications market is evolving with new entrants offering disruptive approaches to communications.
| |
• | Modernizing Customer Engagement IT Platforms. Many organizations are looking to modernize their legacy customer engagement operations by transitioning to the cloud, adopting modern architectures that facilitate the orchestration of disparate systems and the sharing of data across enterprise functions. We see a general market shift from on premises to cloud solutions, including both in new software deployments as well as in conversion of existing deployments. The shift is preceding at different paces in different areas of our portfolio and market, however, it is now evident in legacy product areas and with large customers. Organizations which are at different stages of migrating to the cloud and other modernization initiatives are also looking for vendors that can help them evolve customer engagement at their own pace with minimal disruption to their operations. |
| |
• | Automating Customer Engagement Operations. Many organizations are seeking solutions that incorporate machine learning and analytics to reduce manual work and increase workforce efficiency through automation. They also seek to empower their customers with self-service backed by AI-powered bots and human/bot collaboration, to elevate the customer experience in a fast, personalized way. |
Many organizations are looking to modernize their legacy customer engagement operations by transitioning to the cloud, adopting modern architectures that facilitate the orchestration of disparate systems and the sharing of data across enterprise functions. We offer organizations a smooth transition to the cloud, and through our hybrid cloud model, organizations can deploy solutions from our portfolio in cloud and perpetual license models, or combinations
of these models. Organizations are looking for solutions that incorporate machine learning and analytics to automate work and reduce manual labor. Our solutions enable organizations to draw on the power of automation to reduce repetitive, manual tasks, increase employee efficiency, and lower cost. Our growth will be impacted by the rate of adoption of our new solutions and the rate of market saturation for our more mature legacy solutions.
Cyber Intelligence
| |
• | Security Threats Becoming Increasingly Pervasive, Rapid and Complex. Governments, critical infrastructure providers, and enterprises face many types of security threats from criminal and terrorist organizations and foreign governments. Some of these security threats come from well-organized and well-funded organizations that utilize new and increasingly sophisticated methods. As a result, security and intelligence organizations find it more difficult and complicated to detect, investigate and neutralize threats. Many of these organizations are seeking to deploy more advanced data mining solutions that can help them capture and analyze data from multiple sources to effectively and efficiently address the challenge of increased sophistication and complexity. Organizations are also seeking faster solution deployments and more frequent technology refreshes to keep pace with evolving threats, driving demand for more productized software solutions. |
Security and intelligence organizations are finding it more difficult to detect, investigate and neutralize threats. Many of these organizations are seeking to deploy more advanced data mining solutions that can help them capture and analyze data from multiple sources to effectively and efficiently address the challenge of the increased complexity and sophistication of today’s security threats and encrypted communications. Verint has a long history of working closely with leading security organizations around the world and has designed its data mining software portfolio based on a deep understanding of our customers’ needs, proven intelligence methodologies and deep domain expertise in an effort to help them address these constantly evolving challenges. Our growth will be impacted by our ability to innovate and work with customers to address the more complex security and intelligence challenges.
| |
• | Shortage of Security Analysts Increasing the Need for Automation. Security organizations are using data mining solutions to help conduct investigations and generate actionable insights. Typically, data mining solutions require security organizations to employ intelligence analysts and data scientists to operate them. However, there is a shortage of such qualified personnel globally leading to elongated investigations and increased risk that security threats go undetected or are not addressed. To overcome this challenge, many security organizations are seeking advanced data mining solutions that automate functions historically performed manually to improve the quality and speed of investigations and intelligence production. These organizations are also increasingly seeking artificial intelligence and other advanced data analysis tools to gain intelligence faster with fewer analysts and data scientists. |
| |
• | Need for Predictive Intelligence as a Force Multiplier. Predictive intelligence is generated by correlating massive amounts of data from a wide range of disparate sources to uncover previously unknown connections, identify suspicious behaviors using advanced analytics, and predict future events. Predictive intelligence is a force multiplier, enabling security organizations to allocate resources more effectively to prioritize various operational tasks based on actionable intelligence. Security organizations are seeking advanced data mining solutions that can generate accurate and actionable predictive intelligence to shorten investigation times and empower their teams with greater insights. |
Many security organizations are seeking advanced data mining solutions that automate functions historically performed manually to improve the quality and speed of investigations and intelligence production. These organizations are also increasingly seeking artificial intelligence and other advanced data analysis tools such as predictive intelligence to gain intelligence faster with fewer analysts and data scientists, especially given the shortage of qualified personnel in today’s market. Our growth will be impacted by our ability to leverage automation and predictive intelligence technologies to improve the quality and speed of investigations and intelligence production.
Critical Accounting Policies and Estimates
Note 1, “Summary of Significant Accounting Policies” to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 20182019 describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements appearing in this report. The accounting policies that reflect our more significant estimates, judgments and assumptions in the preparation of our condensed consolidated financial statements are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2018,2019, and include the following:
Revenue recognition;
Allowance for doubtful accounts;
Accounting for business combinations;
Impairment of goodwill and other intangible assets;
Income taxes;
Contingencies; and
Accounting for stock-based compensation; andcompensation.
Cost of revenue.
On February 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts thatThere were not completed as of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under ASU No. 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under prior guidance. For additional information regarding the adoption of this accounting standard, please refer to Note 2, “Revenue Recognition” to our condensed consolidated financial statements in Part I, Item 1 of this report.
Please refer to Note 1, “Basis of Presentation and Significant Accounting Policies” in the notes to condensed consolidated financial statements in Part I, Item 1 of this report under the headings “Goodwill, Other Acquired Intangible Assets, and Long-Lived Assets” and “Other Recently Adopted Accounting Standards” for additionalno significant changes to our critical accounting policies and estimates during the nine months ended October 31, 2018.2019.
Results of Operations
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. In most years, our revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter (prior to the impact of unusual or nonrecurring items). Moreover, revenue and operating income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, in some years, by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of incentive compensation plans for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, may also have an impact on our business and financial results.
Overview of Operating Results
The following table sets forth a summary of certain key financial information for the three and nine months ended October 31, 20182019 and 2017:2018: | | | | Three Months Ended October 31, | | Nine Months Ended October 31, | | Three Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands, except per share data) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | | $ | 303,983 |
| | $ | 280,726 |
| | $ | 899,517 |
| | $ | 816,498 |
| | $ | 324,867 |
| | $ | 303,983 |
| | $ | 964,431 |
| | $ | 899,517 |
|
Operating income | | $ | 33,670 |
| | $ | 17,812 |
| | $ | 70,683 |
| | $ | 12,373 |
| | $ | 29,817 |
| | $ | 33,670 |
| | $ | 59,560 |
| | $ | 70,683 |
|
Net income (loss) attributable to Verint Systems Inc. | | $ | 18,920 |
| | $ | 2,489 |
| | $ | 38,685 |
| | $ | (23,724 | ) | |
Net income (loss) per common share attributable to Verint Systems Inc.: | | |
| | | | | | | |
Net income attributable to Verint Systems Inc. | | | $ | 11,681 |
| | $ | 18,920 |
| | $ | 23,815 |
| | $ | 38,685 |
|
Net income per common share attributable to Verint Systems Inc.: | | | |
| | | | | | |
Basic | | $ | 0.29 |
| | $ | 0.04 |
| | $ | 0.60 |
| | $ | (0.38 | ) | | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.36 |
| | $ | 0.60 |
|
Diluted | | $ | 0.29 |
| | $ | 0.04 |
| | $ | 0.59 |
| | $ | (0.38 | ) | | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.35 |
| | $ | 0.59 |
|
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Our revenue increased approximately $23.3$20.9 million, or 8%7%, to $304.0$324.9 million in the three months ended October 31, 20182019 from $280.7 million in the three months ended October 31, 2017. The increase consisted of a $16.9 million increase in product revenue and a $6.4 million increase in service and support revenue. In our Customer Engagement segment, revenue increased $15.9 million, or approximately 9%, from $181.6 million in the three months ended October 31, 2017 to $197.5 million in the three months ended October 31, 2018. The increase consisted of an $11.0 million increase in product revenue and a $4.9 million increase in service and support revenue. In our Cyber Intelligence segment, revenue increased approximately $7.4 million, or 7%, from $99.1 million in the three months ended October 31, 2017 to $106.5$304.0 million in the three months ended October 31, 2018. The increase consisted of a $5.9 million increase in product revenue and a $1.5$16.2 million increase in service and support revenue and a $4.7 million increase in product revenue. In our Customer Engagement segment, revenue increased $20.5 million, or approximately 10%, from $197.4 million in the three months ended October 31, 2018 to $217.9 million in the three months ended October 31, 2019. The increase consisted of an $12.0 million increase in service and support revenue and a $8.5 million increase in product revenue. In our Cyber Intelligence segment, revenue increased approximately $0.4 million, from $106.5 million in the three months ended October 31, 2018 to $106.9 million in the three months ended October 31, 2019. The increase consisted of a $4.2 million increase in service and support revenue and a $3.8 million decrease in product revenue. For additional details on our revenue by segment, see “—Revenue by Operating Segment”. Revenue in the Americas, in Europe, the Middle East and Africa (“EMEA”), and in the Asia-Pacific (“APAC”) regions represented approximately 55%54%, 26%27%, and 19% of our total revenue, respectively, in the three months ended October 31, 2018,2019, compared to approximately 52%55%, 32%26%, and 16%19%, respectively, in the three months ended October 31, 2017.2018. Further details of changes in revenue are provided below.
We reported operating income of $33.729.8 million in the three months ended October 31, 20182019 compared to operating income of $17.833.7 million in the three months ended October 31, 2017.2018. The increasedecrease in operating income was primarily due to a $23.4$22.8 million increase in operating expenses, from $159.1 million to $181.9 million, partially offset by an $18.9 million increase in gross profit, from $169.3$192.7 million to $192.7 million, partially offset by a $7.6 million increase in operating expenses, from $151.5 million to $159.1$211.6 million. The increase in operating expenses consisted of a $4.4$16.4 million increase in selling, general and administrative expenses, a $6.1 million increase in net research and development expenses, a $2.6 million increase in selling, general and administrative expenses, and a $0.6$0.2 million increase in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. was $18.9$11.7 million, and diluted net income per common share was $0.29,$0.17, in the three months ended October 31, 20182019 compared to net income attributable to Verint Systems Inc. of $2.5$18.9 million, and diluted net income per common share of $0.040.29, in the three months ended October 31, 2017. These improved operating results2018. The decrease in net income and diluted net income per common share in the three months ended October 31, 2018 were2019 was primarily due to a $15.9$3.9 million increasedecrease in operating income described above and a $0.9$3.6 million increase in provision from income taxes, partially offset by a $0.3 million decrease in total other expense, net, and a $0.3 million decrease in provision for income taxes, partially offset by a $0.7 million increase in net income attributable to our noncontrolling interests.net. Further details of these changes are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates
for the three months ended October 31, 20182019 to average exchange rates for the three months ended October 31, 2017,2018, the U.S. dollar strengthened relative to the euro, British pound sterling, Brazilian real,euro, Australian dollar, and Singapore dollar,our hedged Israeli shekel rate, resulting in an overall decrease in our revenue, cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the three months ended October 31, 2018,2019, had foreign currency exchange rates remained unchanged from rates in effect for the three months ended October 31, 2017,2018, our revenue would have been approximately $2.9 million higher and our cost of revenue and operating expenses on a combined basis would have been approximately $0.3$2.1 million higher, which would have resulted in a $2.6$0.8 million increase in our operating income.
Nine Months Ended October 31, 20182019 compared to Nine Months Ended October 31, 20172018. Our revenue increased approximately $83.0$64.9 million, or 10%7%, to $899.5$964.4 million in the nine months ended October 31, 20182019 from $816.5 million in the nine months ended October 31, 2017. The increase consisted of a $48.5 million increase in product revenue and a $34.5 million increase in service and support revenue. In our Customer Engagement segment, revenue increased $53.1 million, or approximately 10%, from $531.6 million in the nine months ended October 31, 2017 to $584.7$899.5 million in the nine months ended October 31, 2018. The increase consisted of a $33.7 million increase in product revenue and a $19.4$62.0 million increase in service and support revenue and a $2.9 million increase in product revenue. In our Customer Engagement segment, revenue increased $51.7 million, or approximately 9%, from $584.7 million in the nine months ended October 31, 2018 to $636.4 million in the nine months ended October 31, 2019. The increase consisted of a $38.7 million increase in service and support revenue and a $13.0 million increase in product revenue. In our Cyber Intelligence segment, revenue increased approximately $29.9$13.2 million, or 11%4%, from $284.9 million in the nine months ended October 31, 2017 to $314.8 million in the nine months ended October 31, 2018.2018 to $328.0 million in the nine months ended October 31, 2019. The increase consisted of a $15.1$23.3 million increase in service and support revenue, andpartially offset by a $14.8$10.1 million increasedecrease in product revenue. For additional details on our revenue by segment, see “—Revenue by Operating Segment”. Revenue in the Americas, EMEA, and in APAC regions represented approximately 53%, 26%28%, and 21%19% of our total revenue, respectively, in the nine months ended October 31, 2018,2019, compared to approximately 53%, 31%26%, and 16%21%, respectively, in the nine months ended October 31, 2017.2018. Further details of changes in revenue are provided below.
We reported operating income of $59.6 million in the nine months ended October 31, 2019, compared to operating income of $70.7 million in the nine months ended October 31, 2018 compared to2018. The decrease in operating income of $12.4 million in the nine months ended October 31, 2017. The increase was primarily due to a $77.3$70.8 million increase in operating expenses, from $490.2 million to $561.0 million, partially offset by $59.6 million increase in gross profit, from $483.6$560.9 million to $560.9 million, partially offset by a $19.0 million increase in operating expenses, from $471.2 million to $490.2$620.5 million. The increase in operating expenses consisted of a $14.1$52.8 million increase in selling, general and administrative expenses, a $17.5 million increase in net research and development expenses, and a $8.9 $0.4
million increase in selling, general and administrative expenses, partially offset by a $4.0 million decrease in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. was $38.7$23.8 million, and diluted net income per common share was $0.35, in the nine months ended October 31, 2019 compared to net income attributable to Verint Systems Inc. of $38.7 million, and a net income per common share of $0.59, in the nine months ended October 31, 2018 compared to a2018. The decrease in net loss attributable to Verint Systems Inc. of $23.7 million,income and adiluted net lossincome per common share of $0.38, in the nine months ended October 31, 2017. These improved operating results in the nine months ended October 31, 2018 were2019 was primarily due to a $58.3an $11.1 million increasedecrease in operating income described above, a $2.0 million increase in net income attributable to our noncontrolling interests, and a $7.3$4.0 million decreaseincrease in provision for income taxes, partially offset by a $2.0$2.2 million increasedecrease in total other expense, net, and a $1.2 million increase in net income attributable to our noncontrolling interests.net. Further details of these changes are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates for the nine months ended October 31, 20182019 to average exchange rates for the nine months ended October 31, 2017,2018, the U.S. dollar weakenedstrengthened relative to the euro, British pound sterling, Australian dollar, Brazilian real, Singapore dollar, and our hedged Israeli shekel rate (hedged and unhedged), resulting in an overall increasedecrease in our revenue, cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the nine months ended October 31, 2018,2019, had foreign currency exchange rates remained unchanged from rates in effect for the nine months ended October 31, 2017,2018, our revenue would have been approximately $4.1$11.9 million lowerhigher and our cost of revenue and operating expenses on a combined basis would have been approximately $11.4$11.1 million lower,higher, which would have resulted in a $7.3$0.8 million increase in our operating income.
As of October 31, 2018,2019, we employed approximately 5,7006,400 professionals, including part-time employees and certain contractors, as compared to approximately 5,0005,700 at October 31, 2017.2018.
Revenue by Operating Segment
As described in Note 2, “Revenue Recognition” to our condensed consolidated financial statements in Part I, Item 1 of this report, calculated revenue for the three and nine months ended October 31, 2018 without the adoption of ASU No. 2014-09 would have been lower than the revenue we are reporting under the new accounting guidance. However, the lower calculated revenue results not only from the impact of the new accounting guidance, but also from changes we made to our business practices in anticipation, and as a result, of the new accounting guidance. These business practice changes adversely impact the calculation of revenue under the prior accounting guidance and include, among other things, the way we manage our professional services projects, offer and deploy our solutions, structure certain customer contracts, and make pricing
decisions. While the many variables, required assumptions, and other complexities associated with these business practice changes make it impractical to precisely quantify the impact of these changes, we believe that calculated revenue under the prior accounting guidance, but absent these business practice changes, would have been closer to the revenue we are reporting under the new accounting guidance.
The following table sets forth revenue for each of our two operating segments for the three and nine months endedOctober 31, 20182019 and 2017:2018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 | | 2018 | | 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Customer Engagement | | $ | 197,467 |
| | $ | 181,590 |
| | 9% | | $ | 584,730 |
| | $ | 531,643 |
| | 10% | | $ | 217,936 |
| | $ | 197,467 |
| | 10% | | $ | 636,467 |
| | $ | 584,730 |
| | 9 | % |
Cyber Intelligence | | 106,516 |
| | 99,136 |
| | 7% | | 314,787 |
| | 284,855 |
| | 11% | | 106,931 |
| | 106,516 |
| | —% | | 327,964 |
| | 314,787 |
| | 4 | % |
Total revenue | | $ | 303,983 |
| | $ | 280,726 |
| | 8% | | $ | 899,517 |
| | $ | 816,498 |
| | 10% | | $ | 324,867 |
| | $ | 303,983 |
| | 7% | | $ | 964,431 |
| | $ | 899,517 |
| | 7 | % |
Customer Engagement Segment
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Customer Engagement revenue increased approximately $15.9$20.5 million, or 9%10%, from $181.6 million in the three months ended October 31, 2017 to $197.5 million in the three months ended October 31, 2018. The increase consisted of an $11.0 million increase in product revenue and a $4.9 million increase in service and support revenue. The application of ASU No. 2014-09 primarily resulted in differences in the timing and amount of revenue recognition for term-based licenses, minimum guaranteed amounts related to usage-based licenses, and professional services for which payment is contingent upon the achievement of milestones. Excluding the impact of ASU No. 2014-09, Customer Engagement revenue increased approximately $16.2 million, or 9%, from $181.6 million in the three months ended October 31, 2017 to $197.8$197.4 million in the three months ended October 31, 2018 consistingto $217.9 million in the three months ended October 31, 2019. The increase consisted of a $11.2 million increase in product revenue and a $5.0$12.0 million increase in service and support revenue and an $8.5 million increase in product revenue. Under either accounting standard, theThe increase in service and support revenue was primarily driven by growth in recurring revenue as we continued to see positive demand from customers across our portfolio of cloud-based solutions and a slight increase in support revenue. Over time, we expect support revenue will continue to decrease as a percentage of total recurring revenue as we continue to focus on increasing cloud revenue as a key strategic priority. The increase in product revenue was primarily reflectsdue to an increase in recurring revenue, as we recognized revenue on several large, multi-year unbundled SaaS contracts during the current period. We expect our revenue mix to continue to shift to recurring sources, which is consistent with our cloud-first strategy and a higher aggregate valuegeneral market shift from on premises to cloud solutions.
Nine Months Ended October 31, 2019 compared to Nine Months Ended October 31, 2018. Customer Engagement revenue increased approximately $51.7 million, or 9%, from $584.7 million in the nine months ended October 31, 2018 to $636.4 million in the nine months ended October 31, 2019. The increase consisted of executed perpetuala $38.7 million increase in service and term-based license arrangements, which comprises the majoritysupport revenue and a $13.0 million increase in product revenue. The increase in service and support revenue was primarily driven by growth in recurring revenue as we continued to see positive demand from customers across our portfolio of ourcloud-based solutions and, to a lesser extent, an increase in support revenue. Over time, we expect support revenue will continue to decrease as a percentage of total recurring revenue as we continue to focus on increasing cloud revenue as a key strategic priority. The increase in product revenue was primarily due to an increase in recurring revenue, as we recognized revenue on several large, multi-year unbundled SaaS contracts during the current period, and whichthe recognition of a large nonrecurring license arrangement
executed during the nine months ended October 31, 2019 with no comparable transaction in the prior period. Our product revenue can fluctuate from period to period, as some large contracts can represent a significant share of our product revenue for a given period. We expect our revenue mix to continue to shift to recurring sources, which is consistent with our cloud-first strategy and a general market shift from on premises to cloud solutions.
Cyber Intelligence Segment
Three Months Ended October 31, 2019 compared to Three Months Ended October 31, 2018. Cyber Intelligence revenue increased approximately $0.4 million, from $106.5 million in the three months ended October 31, 2018 to $106.9 million in the three months ended October 31, 2019. The increase consisted of a $4.2 million increase in service and support revenue, partially offset by a $3.8 million decrease in product revenue. The increase in service and support revenue was primarily attributable to an increase in our customer installed base,support and the related support revenue generated from this customer base and an increase in professional services revenue related to customer implementations.
Nine Months Ended October 31, 2018 compared to Nine Months Ended October 31, 2017. Customer Engagement revenue increased approximately $53.1 million, or 10%, from $531.6 million in the nine months ended October 31, 2017 to $584.7 million in the nine months ended October 31, 2018. The increase consisted of a $33.7 million increase in product revenue and a $19.4 million increase in service and support revenue. The application of ASU No. 2014-09 primarily resulted in differences in the timing and amount of revenue recognition for term-based licenses, minimum guaranteed amounts related to usage-based licenses, and professional services for which payment is contingent upon the achievement of milestones. Excluding the impact of ASU No. 2014-09, Customer Engagement revenue increased approximately $30.9 million, or 6%, from $531.6 million in the nine months ended October 31, 2017 to $562.5 million in the nine months ended October 31, 2018, consisting of a $20.2 million increase in product revenue and a $10.7 million increase in service and support revenue. As noted at the top of this section, as a result of the adoption of ASU No. 2014-09, we made certain changes to our Customer Engagement contracting and business processes that would have otherwise not occurred under the prior revenue recognition guidance and we believe that absent these changes, revenue under the prior accounting guidance would have been closer to the revenue we are reporting under the new accounting guidance. Under either accounting standard, the increase in product revenue primarily reflects a higher aggregate value of executed perpetual and term-based license arrangements, which comprises the majority of our product revenue and which can fluctuate from period to period. The increase in service and support revenue was primarily attributable to an increase in our customer installed base, and the related support revenue generated from this customer base and an increase in professional services revenue related to customer implementations.
Cyber Intelligence Segment
Three Months Ended October 31, 2018 compared to Three Months Ended October 31, 2017. Cyber Intelligence revenue increased approximately $7.4 million, or 7%, from $99.1 million in the three months ended October 31, 2017 to $106.5 million in the three months ended October 31, 2018. The increase consisted of a $5.9 million increase in product revenue and a $1.5 million increase in service and support revenue. The increase in product revenue was due to an increase in product deliveries and growth in our subscription offerings, partially offset by a decrease in progress realized during the current period on long-term projects with revenue recognized over time using the percentage of completion (“POC”) method. The increase in service
and support revenue was primarily attributable to an increase in support revenue from existing customers, and an increase in revenue from our SaaS offerings, partially offset by a decrease in progress realized during the current year on long-term projects for which revenue is recognized over time using the POCpercentage of completion (“POC”) method. The application of ASU No. 2014-09decrease in product revenue was primarily resulteddue to a decrease in differencesproduct deliveries, including a reduction in pass-through hardware revenue, partially offset by an increase in progress realized during the timing and amount ofcurrent period on long-term projects for which revenue recognition for software licenses inis recognized over time using the three months ended October 31, 2018. Excluding the impact of ASU No. 2014-09, Cyber Intelligence revenue increased approximately $5.2 million, or 5%, from $99.1 million in the three months ended October 31, 2017 to $104.3 million in the three months ended October 31, 2018. As a result of the adoption of the new revenue recognition accounting standard, we made certain changes to our Cyber Intelligence software licensing offerings that would have otherwise not occurred under prior revenue recognition guidance. Please refer to the note at the top of this section regarding the adoption of ASU No. 2014-09. POC method.
Nine Months Ended October 31, 20182019 compared to Nine Months Ended October 31, 2017.2018. Cyber Intelligence revenue increased approximately $29.9$13.2 million, or 11%4%, from $284.9 million in the nine months ended October 31, 2017 to $314.8 million in the nine months ended October 31, 2018.2018 to $328.0 million in the nine months ended October 31, 2019. The increase consisted of a $15.1$23.3 million increase in service and support revenue, andpartially offset by a $14.8$10.1 million increasedecrease in product revenue. The increase in service and support revenue was primarily attributable to an increase in support and professional services revenue from existing customerscustomers. The decrease in product revenue was primarily due to a decrease in product deliveries, including a reduction in pass-through hardware revenue, and an increasethe recognition of a long-term customization project that was recognized upon customer acceptance in revenue from our SaaS offerings,the nine months ended October 31, 2018, partially offset by a decreasean increase in progress realized during the current yearperiod on long-term projects for which revenue is recognized over time using the POC method. The increase in product revenue was primarily due to the adoption of ASU No. 2014-09 which resulted in differences in the timing and amount of revenue recognition for software licenses and a long-term customization project that was accepted by the customer during the nine months ended October 31, 2018, which had been previously recognized under prior revenue recognition accounting standards and an increase in product deliveries, partially offset by a decrease in progress realized during the current period on long-term projects with revenue recognized over time using the POC method. Excluding the impact of ASU No. 2014-09, Cyber Intelligence revenue increased approximately $15.4 million, or 5%, from $284.9 million in the nine months ended October 31, 2017 to $300.3 million in the nine months ended October 31, 2018. The increase consisted of a $14.6 million increase in service and support revenue and a $.8 million increase in product revenue. As noted at the top of this section, as a result of the adoption of ASU No. 2014-09, we made certain changes to our Cyber Intelligence software licensing offerings that would have otherwise not occurred under the prior revenue recognition and we believe that absent these changes, revenue under the prior accounting guidance would have been closer to the revenue we are reporting under the new accounting guidance.
Volume and Price
We sell products in multiple configurations, and the price of any particular product varies depending on the configuration of the product sold. Due to the variety of customized configurations for each product we sell, we are unable to quantify the amount of any revenue changes attributable to a change in the price of any particular product and/or a change in the number of products sold.
Product Revenue and Service and Support Revenue
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products and sale of hardware products (which include software that works together with the hardware to deliver the product’s essential functionality), and (b) service and support revenue, including revenue from installation services, post-contract customerinitial and renewal support, project management, hosting services, cloud deployments, SaaS, managed services, product warranties, and business advisory consulting services, and training services.
The following table sets forth product revenue and service and support revenue for the three and nine months endedOctober 31, 20182019 and 20172018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 |
| 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 | | 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Product revenue | | $ | 111,670 |
| | $ | 94,827 |
| | 18% | | $ | 327,576 |
| | $ | 279,056 |
| | 17% | | $ | 116,331 |
| | $ | 111,670 |
| | 4% | | $ | 330,538 |
| | $ | 327,576 |
| | 1% |
Service and support revenue | | 192,313 |
| | 185,899 |
| | 3% | | 571,941 |
| | 537,442 |
| | 6% | | 208,536 |
| | 192,313 |
| | 8% | | 633,893 |
| | 571,941 |
| | 11% |
Total revenue | | $ | 303,983 |
| | $ | 280,726 |
| | 8% | | $ | 899,517 |
| | $ | 816,498 |
| | 10% | | $ | 324,867 |
| | $ | 303,983 |
| | 7% | | $ | 964,431 |
| | $ | 899,517 |
| | 7% |
Product Revenue
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Product revenue increased approximately $16.9$4.6 million, or 18%4%, from $94.8$111.7 million for the three months ended October 31, 20172018 to $111.7$116.3 million for the
three months ended October 31, 2018,2019, resulting from an $11.0$8.4 million increase in our Customer Engagement segment, andpartially offset by a $5.9$3.8 million increasedecrease in our Cyber Intelligence segment.
Nine Months EndedOctober 31, 20182019 compared to Nine Months Ended October 31, 2017.2018. Product revenue increased approximately $48.5$2.9 million, or 17%1%, from $279.1 million for the nine months ended October 31, 2017 to $327.6 million for the nine months ended October 31, 2018 to $330.5 million for the nine months ended October 31, 2019, resulting from a $33.7$13.0 million increase in our Customer Engagement segment, andpartially offset by a $14.8$10.1 million increasedecrease in our Cyber Intelligence segment.
For additional information see “—Revenue by Operating Segment”.
Service and Support Revenue
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Service and support revenue increased approximately $6.4$16.2 million, or 3%8%, from $185.9 million for the three months ended October 31, 2017 to $192.3 million for the three months ended October 31, 2018.2018 to $208.5 million for the three months ended October 31, 2019. This increase was the result of a $4.9$12.0 million increase in our Customer Engagement segment and a $1.5$4.2 million increase in our Cyber Intelligence segment.
Nine Months EndedOctober 31, 20182019 compared to Nine Months Ended October 31, 2017.2018. Service and support revenue increased approximately $34.5$62.0 million, or 6%11%, from $537.4 million for the nine months ended October 31, 2017 to $571.9 million for the nine months ended October 31, 2018.2018 to $633.9 million for the nine months ended October 31, 2019. This increase was the result of a $19.4$38.7 million increase in our Customer Engagement segment and a $15.1$23.3 million increase in our Cyber Intelligence segment.
For additional information see “— Revenue by Operating Segment”.
Cost of Revenue
The following table sets forth cost of revenue by product and service and support, as well as amortization of acquired technology for the three and nine months endedOctober 31, 20182019 and 20172018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Cost of product revenue | | $ | 33,124 |
| | $ | 32,840 |
| | 1% | | $ | 100,917 |
| | $ | 98,708 |
| | 2% | | $ | 30,533 |
| | $ | 33,124 |
| | (8)% | | $ | 88,077 |
| | $ | 100,917 |
| | (13)% |
Cost of service and support revenue | | 72,182 |
| | 69,383 |
| | 4% | | 218,842 |
| | 205,928 |
| | 6% | | 76,771 |
| | 72,182 |
| | 6% | | 237,562 |
| | 218,842 |
| | 9% |
Amortization of acquired technology | | 5,933 |
| | 9,182 |
| | (35)% | | 18,879 |
| | 28,246 |
| | (33)% | | 5,968 |
| | 5,933 |
| | 1% | | 18,262 |
| | 18,879 |
| | (3)% |
Total cost of revenue | | $ | 111,239 |
| | $ | 111,405 |
| | —% | | $ | 338,638 |
| | $ | 332,882 |
| | 2% | | $ | 113,272 |
| | $ | 111,239 |
| | 2% | | $ | 343,901 |
| | $ | 338,638 |
| | 2% |
We exclude certain costs of both product revenue and service and support revenue, including shared support costs, stock-based compensation, and asset impairment charges, (if any), among others, as well as amortization of acquired technology, when calculating our operating segment gross margins.
Cost of Product Revenue
Cost of product revenue primarily consists of hardware material costs and royalties due to third parties for software components that are embedded in our software solutions. Cost of product revenue also includes amortization of capitalized software development costs, employee compensation and related expenses associated with our global operations, facility costs, and other allocated overhead expenses. In our Cyber Intelligence segment, cost of product revenue also includes employee compensation and related expenses, contractor and consulting expenses, and travel expenses, in each case for resources dedicated to project management and associated product delivery.
As with many other technology companies, our software products tend to have higher gross margins than our hardware products, so the mix of products we sell in a particular period can have a significant impact on our gross margins in that period.
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Cost of product revenue increaseddecreased approximately $0.3$2.6 million, or 1%8%, from $32.8 million in the three months ended October 31, 2017 to $33.1 million in the three months ended October 31, 2018 to $30.5 million in the three months ended October 31, 2019, primarily due to increaseda decreased cost of product revenue in our Customer EngagementCyber Intelligence segment, due
todriven primarily by a corresponding increasedecrease in Cyber Intelligence product revenue as discussed above.above and a reduction in the amount of pass-through hardware reselling activity. Our overall product gross margins increased to 74% in the three months
ended October 31, 2019 from 70% in the three months ended October 31, 2018 from 65% in the three months ended October 31, 2017.2018. Product gross margins in our Cyber Intelligence segment increased from 55% in the three months ended October 31, 2017 to 61% in the three months ended October 31, 2018 to 64% in the three months ended October 31, 2019, primarily due to a change in product mix.mix, a reduction in the amount of pass-through hardware reselling activity, and the timing of hardware deliveries related to certain long-term projects, for which fulfillment costs are recognized upon delivery but the associated revenue is recognized over time using the POC method. Cyber Intelligence product margins are subject to considerable fluctuation from period to period, based on the product mix sold and the timing of hardware deliveries related to POC revenue. Product gross margins in our Customer Engagement segment increased from 80% in the three months ended October 31, 2017 to 83% in the three months ended October 31, 2018 primarily due to a change in product mix. The adoption of ASU No. 2014-09 impacted product gross margins primarily due to a change in the timing of cost of product revenue recognition for certain customer contracts requiring significant customization, because unlike prior guidance, the new guidance precludes the deferral of costs simply to obtain an even profit margin over the contract term. Excluding the impact of the adoption of ASU No. 2014-09, our overall product gross margins increased to 72%86% in the three months ended October 31, 2018 from 65% in the three months ended October 31, 2017,2019, primarily due to a change in product mix.
Nine Months Ended October 31, 20182019 compared to Nine Months Ended October 31, 2017.2018. Cost of product revenue increaseddecreased approximately $2.2$12.8 million, or 2%13%, from $98.7 million in the nine months ended October 31, 2017 to $100.9 million in the nine months ended October 31, 2018 to $88.1 million in the nine months ended October 31, 2019 primarily due to corresponding increases in product revenues in both our Customer Engagement and Cyber Intelligence segments as discussed above. We expect ourdecreased cost of product revenue to continue to increase asin our Cyber Intelligence segment, driven primarily by a corresponding decrease in Cyber Intelligence product revenue increases.as discussed above and a reduction in the amount of pass-through hardware reselling activity. Our overall product gross margins increased to 73% in the nine months ended October 31, 2019 from 69% in the nine months ended October 31, 2018 from 65% in the nine months ended October 31, 2017.2018. Product gross margins in our Cyber Intelligence segment increased from 55% in the nine months ended October 31, 2017 to 58% in the nine months ended October 31, 2018 to 65% in the nine months ended October 31, 2019, primarily due to a change in product mix.mix, a reduction in the amount of pass-through hardware reselling activity, and the timing of hardware deliveries related to certain long-term projects, for which fulfillment costs are recognized upon delivery but the associated revenue is recognized over time using the POC method. Cyber Intelligence product margins are subject to considerable fluctuation from period to period, based on the product mix sold and the timing of hardware deliveries related to POC revenue. Product gross margins in our Customer Engagement segment increased from 80% in the nine months ended October 31, 2017 to 83% in the nine months ended October 31, 2018 to 85% in the nine months ended October 31, 2019, primarily due to a change in product mix. Our overall product gross margins were unchanged by the adoption of ASU No. 2014-09 in the nine months ended October 31, 2018.
For additional information regarding the impact of the adoption of ASU No. 2014-09 see “— Revenue by Operating Segment”.
Cost of Service and Support Revenue
Cost of service and support revenue primarily consists of employee compensation and related expenses, contractor costs, hosting infrastructure costs, and travel expenses relating to installation, training, consulting, and maintenance services. Cost of service and support revenue also includes stock-based compensation expenses, facility costs, and other overhead expenses. In accordance with GAAP and our accounting policy, the cost of service and support revenue is generally expensed as incurred in the period in which the services are performed.
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Cost of service and support revenue increased approximately $2.8$4.6 million, or 4%6%, from $69.472.2 million in the three months ended October 31, 20172018 to $72.2$76.8 million in the three months ended October 31, 2018.2019. The increase was primarily due to increased employee compensation and related expenses in our Customer Engagement segment as a result of additional services employee headcount to support the delivery of our services and support revenue and an increase in data center and cloud costs associated with the increase in cloud revenue. Our overall service and support gross margins decreasedincreased from 62% in the three months ended October 31, 2018 to 63% in the three months ended October 31, 2017 to 62% in the three months ended October 31, 2018. Cost of service and support revenue under the prior revenue recognition guidance did not differ materially from cost of service and support revenue under ASU No. 2014-09 in the three months ended October 31, 2018.2019.
Nine Months Ended October 31, 20182019 compared to Nine Months Ended October 31, 2017.2018. Cost of service and support revenue increased approximately $12.9$18.8 million, or 6%9%, from $205.9 million in the nine months ended October 31, 2017 to $218.8 million in the nine months ended October 31, 2018.2018 to $237.6 million in the nine months ended October 31, 2019. The increase was primarily due to increased employee compensation and related expenses in our Customer Engagement segment as a result of additional services employee headcount to support the delivery of our services and support revenue and an increase in data center and cloud costs associated with the increase in cloud revenue. Our overall service and support gross margins wereincreased from 62% in each of the nine months ended October 31, 2018 and 2017. Cost of service and support revenue under the prior revenue recognition guidance did not differ materially from cost of service and support revenue under ASU No. 2014-09to 63% in the nine months ended October 31, 2018.2019.
Amortization of Acquired Technology
Amortization of acquired technology consists of amortization of technology assets acquired in connection with business combinations.
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Amortization of acquired technology decreasedincreased approximately $3.3$0.1 million, or 36%1%, from $9.2$5.9 million in the three months ended October 31, 20172018 to
$5.9 $6.0 million in the three months ended October 31, 2019. The increase was attributable to amortization expense associated with recent business combinations, partially offset by acquired technology intangible assets from historical business combinations becoming fully amortized.
Nine Months Ended October 31, 2019 compared to Nine Months Ended October 31, 2018. Amortization of acquired technology decreased approximately $0.6 million, or 3%, from $18.9 million in the nine months ended October 31, 2018 to $18.3 million in the nine months ended October 31, 2019. The decrease was attributable to acquired technology intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense of acquired technology-based intangible assets associated with recent business combinations.
Nine Months Ended October 31, 2018 compared to Nine Months Ended October 31, 2017. Amortization of acquired technology decreased approximately $9.3 million, or 33%, from $28.2 million in the nine months ended October 31, 2017 to $18.9 million in the nine months ended October 31, 2018. The decrease was attributable to acquired technology intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense of acquired technology-based intangible assets associated with recent business combinations.
Further discussion regarding our business combinations appears in Note 5, “Business Combinations” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Research and Development, Net
Research and development expenses consist primarily of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized, as well as reimbursements under government programs. Software development costs are capitalized upon the establishment of technological feasibility and continue to be capitalized through the general release of the related software product.
The following table sets forth research and development, net for the three and nine months endedOctober 31, 20182019 and 20172018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Research and development, net | | $ | 51,587 |
| | $ | 47,157 |
| | 9% | | $ | 155,993 |
| | $ | 141,911 |
| | 10% | | $ | 57,694 |
| | $ | 51,587 |
| | 12% | | $ | 173,548 |
| | $ | 155,993 |
| | 11% |
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017. 2018. Research and development, net increased approximately $4.4$6.1 million, or 9%12%, from $47.2 million in the three months ended October 31, 2017 to $51.6 million in the three months ended October 31, 2018.2018 to $57.7 million in the three months ended October 31, 2019. The increase was primarily due to a $4.6$5.9 million increase in employee compensation and related expenses and a $1.2 million increase in allocated overhead costs as a result of increased investment in R&D headcount, a $2.9 million increase in R&D contractor expenses primarily related to our Cyber Intelligence segment, and a $0.2 million increase in stock-based compensation expenses, partially offset by a $0.8$3.2 million decreaseincrease in capitalized software development costs and a $0.6 million decrease in depreciation expense on fixed assets used for R&D activities in the three months ended October 31, 20182019 compared to the three months ended October 31, 2017.2018.
Nine Months EndedOctober 31, 20182019 compared to Nine Months Ended October 31, 2017. 2018. Research and development, net increased approximately $14.1$17.5 million, or 10%11%, from $141.9 million in the nine months ended October 31, 2017 to $156.0 million in the nine months ended October 31, 2018.2018 to $173.5 million in the nine months ended October 31, 2019. The increase was primarily due to a $9.4$16.9 million increase in employee compensation and related expenses and a $3.4 million increase in allocated overhead costs as a result of increased investment in R&D headcount, and a $5.1$3.7 million increase in R&D contractor expenses primarily inrelated to our Cyber Intelligence segment, a $1.6 million increase in stock-based compensation expenses as a result of a change in R&D employee bonus payment structure, and a $1.3 million increase in software subscription expenses related to internal-use software, partially offset by a $2.0$6.4 million decrease in stock-based compensation expenses for R&D employees, and a $1.8 million decreaseincrease in capitalized software development costs in the nine months ended October 31, 20182019 compared to the nine months ended October 31, 2017.2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, changes in the fair values of our obligations under contingent consideration arrangements, sales and marketing expenses, including travel costs, sales commissions and sales referral fees, facility costs, communication expenses, and other administrative expenses.
The following table sets forth selling, general and administrative expenses for the three and nine months endedOctober 31, 20182019 and 20172018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Selling, general and administrative | | $ | 99,902 |
| | $ | 97,304 |
| | 3% | | $ | 311,482 |
| | $ | 302,605 |
| | 3% | | $ | 116,306 |
| | $ | 99,902 |
| | 16% | | $ | 364,292 |
| | $ | 311,482 |
| | 17% |
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Selling, general and administrative expenses increased approximately $2.6$16.4 million, or 3%16%, from $97.399.9 million in the three months ended October 31, 20172018 to
$99.9116.3 million in the three months ended October 31, 2019. This increase was primarily attributable to an $8.2 million increase in employee compensation expense due to increased headcount, including due to recent acquisitions, a $1.8 million increase in legal fees, a $1.6 million increase in software subscription expenses related to internal-use software, a $1.5 million increase in professional fees related to the planned separation of our businesses (as discussed in “Overview” above), a $1.3 million increase in stock-based compensation expenses due to a year-over-year increase in our stock price and an increase in number of participants due to recent acquisitions, a $1.1 million increase in depreciation expense on fixed assets used for general administration purposes, and a $0.5 million increase in facility expenses as a result of recent acquisitions. These increases were partially offset by a $0.8 million decrease due to the change in fair value of our obligations under contingent consideration arrangements, from a net expense of $0.5 million in the three months ended October 31, 2018 to a net benefit of $0.3 million during the three months ended October 31, 2019, as a result of revised outlooks for achieving the performance targets set forth in several unrelated contingent consideration arrangements.
Nine Months Ended October 31, 2019 compared to Nine Months Ended October 31, 2018. Selling, general and administrative expenses increased approximately $52.8 million, or 17%, from $311.5 million in the nine months ended October 31, 2018 to $364.3 million in the nine months ended October 31, 2019. This increase was primarily attributable to a $7.2$25.2 million increase in employee compensation expenses due to increased headcount as a result of recent acquisitions, a $7.8 million increase in professional fees related to a shareholder proxy contest that was settled during the three months ended July 31, 2019, a $4.0 million increase in software subscription expenses related to internal-use software, a $3.0 million increase in stock-based compensation expenses due to a year-over-year increase in our stock price and an increase in number of participants due to recent acquisitions, a $2.9 million increase in marketing expenses, a $2.3 million increase in facility expenses as a result of recent acquisitions, a $2.1 million increase in depreciation expense on fixed assets used for general administration purposes, a $1.7 million increase in professional fees related to the planned separation of our businesses (as discussed in “Overview” above), and a $1.5 million increase as a result of an increase in the use of contractors for corporate support activities. Selling, general, and administrative expense was also impacted by a $4.3 million increase due to the change in the fair value of our obligations under contingent consideration arrangements, from a net benefit of $6.7$4.2 million in the threenine months ended October 31, 20172018 to a net expense of $0.5$0.1 million during the threenine months ended October 31, 2018.2019, as a result of revised outlooks for achieving the performance targets set forth in several unrelated contingent consideration arrangements.These increases were partially offset by a $4.0 million decrease in legal fees primarily associated with acquisition activity.
The impact of contingent consideration arrangements on our operating results can vary over time as we revise our outlook for achieving the performance targets underlying the arrangements. This impact on our operating results may be more significant in some periods than in others, depending on a number of factors, including the magnitude of the change in the outlook for each arrangement separately as well as the number of contingent consideration arrangements in place, the liabilities requiring adjustment in that period, and the net effect of those adjustments. The net expense recorded during the three months ended October 31, 2018 resulted from revised outlooks to several unrelated arrangements. Additionally, selling, general, and administrative expenses increased as the result of a $1.9 million increase in stock-based compensation expense and a $1.3 million increase in employee compensation expenses due to increased headcount as a result of recent acquisitions. These increases were partially offset by a $3.1 million decrease in legal fees primarily associated with acquisition activity, a $2.9 million decrease in facility expenses primarily due to the early termination of a facility lease in the EMEA region in the three months ended October 31, 2017, and a $2.2 million decrease in allocated overhead costs in the three months ended October 31, 2018 compared to 2017.
Nine Months Ended October 31, 2018 compared to Nine Months Ended October 31, 2017. Selling, general and administrative expenses increased approximately $8.9 million, or 3%, from $302.6 million in the nine months ended October 31, 2017 to $311.5 million in the nine months ended October 31, 2018. This increase was primarily attributable to a $8.2 million increase in employee compensation expenses due to increased headcount as a result of recent acquisitions, a $3.8 million increase in stock-based compensation expense, a $2.7 million increase in travel related expenses due primarily to increased travel expenses in our Customer Engagement segment, a $1.7 million increase in depreciation expense on fixed assets used for general administration purposes, and $1.3 million increase in legal fees. These increases were partially offset by a $5.5 million decrease in allocated overhead costs and a $3.7 million decrease in facility expenses primarily due to the early termination of a facility lease in the EMEA region during the nine months ended October 31, 2017 with no comparable expense during the nine months ended October 31, 2018.The change in the fair value of our obligations under contingent consideration arrangements, during the nine months ended October 31, 2018 compared to the nine months ended October 31, 2017 was not material.
Amortization of Other Acquired Intangible Assets
Amortization of other acquired intangible assets consists of amortization of certain intangible assets acquired in connection with business combinations, including customer relationships, distribution networks, trade names, and non-compete agreements.
The following table sets forth amortization of other acquired intangible assets for the three and nine months ended October 31, 20182019 and 2017:2018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Amortization of other acquired intangible assets | | $ | 7,585 |
| | $ | 7,048 |
| | 8% | | $ | 22,721 |
| | $ | 26,727 |
| | (15)% | | $ | 7,778 |
| | $ | 7,585 |
| | 3% | | $ | 23,130 |
| | $ | 22,721 |
| | 2% |
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Amortization of other acquired intangible assets increased approximately $0.6$0.2 million, or 8%3%, from $7.0 million in the three months ended October 31, 2017 to $7.6 million in the three months ended October 31, 2018 primarily due to an$7.8 million in the three months ended October 31, 2019. The increase inwas attributable to amortization fromexpense associated with acquired intangible assets from recent business combinations, partially offset by acquired customer-related intangible assets from historical business combinations becoming fully amortized.
Nine Months Ended October 31, 20182019 compared toNine Months Ended October 31, 2017.2018. Amortization of other acquired intangible assets decreasedincreased approximately $4.0$0.4 million, or 15%2%, from $26.7 million in the nine months ended October 31, 2017 to $22.7 million in the nine months ended October 31, 2018 as a result ofto $23.1 million in the nine months ended October 31, 2019. The increase was attributable to amortization expense associated
with acquired intangible assets from recent business combinations, partially offset by acquired customer-related intangible assets from historical business combinations becoming fully amortized, partially offset by an increase in amortization expense from acquired intangible assets from recent business combinations.amortized.
Further discussion regarding our business combinations appears in Note 5, “Business Combinations” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Other Expense, Net
The following table sets forth total other expense, net for the three and nine months endedOctober 31, 20182019 and 20172018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Interest income | | $ | 1,319 |
| | $ | 654 |
| | 102% | | $ | 3,246 |
| | $ | 1,793 |
| | 81% | | $ | 1,404 |
| | $ | 1,319 |
| | 6% | | $ | 4,517 |
| | $ | 3,246 |
| | 39% |
Interest expense | | (8,686 | ) | | (8,891 | ) | | (2)% | | (27,670 | ) | | (26,997 | ) | | 2% | | (10,102 | ) | | (8,686 | ) | | 16% | | (30,143 | ) | | (27,670 | ) | | 9% |
Loss on early retirement of debt | | — |
| | — |
| | * | | — |
| | (1,934 | ) | | * | |
Other income (expense): | | |
| | |
| |
| | | | | |
| | |
| | |
| |
| | | | | |
Foreign currency (losses) gains, net | | (1,458 | ) | | (1,474 | ) | | (1)% | | (5,372 | ) | | 2,384 |
| | * | |
Gains on derivatives | | 1,051 |
| | 834 |
| | 26% | | 3,760 |
| | 292 |
| | * | |
Foreign currency gains (losses), net | | | 1,531 |
| | (1,458 | ) | | (205)% | | 1,119 |
| | (5,372 | ) | | (121)% |
(Losses) gains on derivatives | | | (268 | ) | | 1,051 |
| | (125)% | | 460 |
| | 3,760 |
| | (88)% |
Other, net | | (82 | ) | | 75 |
| | * | | (582 | ) | | (147 | ) | | * | | (181 | ) | | (82 | ) | | 121% | | (378 | ) | | (582 | ) | | (35)% |
Total other (expense) income, net | | (489 | ) | | (565 | ) | | (13)% | | (2,194 | ) | | 2,529 |
| | (187)% | |
Total other income (expense), net | | | 1,082 |
| | (489 | ) | | (321)% | | 1,201 |
| | (2,194 | ) | | (155)% |
Total other expense, net | | $ | (7,856 | ) | | $ | (8,802 | ) | | (11)% | | $ | (26,618 | ) | | $ | (24,609 | ) | | 8% | | $ | (7,616 | ) | | $ | (7,856 | ) | | (3)% | | $ | (24,425 | ) | | $ | (26,618 | ) | | (8)% |
* Percentage is not meaningful.
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Total other expense, net, decreased by $0.9$0.3 million from $8.8 million in the three months ended October 31, 2017 to $7.9 million in the three months ended October 31, 2018.
Interest expense decreased from $8.92018 to $7.6 million in the three months ended October 31, 2017 to2019.
Interest expense increased from $8.7 million in the three months ended October 31, 2018 to $10.1 million in the three months ended October 31, 2019 primarily due to a $1.0 million reversal of accrued interest related to a legal matter whichthat was settled in the three months ended October 31, 2018 partially offset byand higher interest rates on outstanding borrowings.
We recorded $1.5 million of net foreign currency gains in the three months ended October 31, 2019 compared to $1.5 million of net foreign currency losses in the three months ended October 31, 2018 and 2017.2018. Foreign currency lossesgains in the three months ended October 31, 20182019 resulted primarily from the strengtheningweakening of the U.S. dollar against the euroBritish pound sterling from July 31, 20182019 to October 31, 2018,2019, resulting in foreign currency lossesgains on euro denominatedU.S. dollar-denominated net assetsliabilities in certain entities, which use a U.S. dollar functional currency and foreign currency losses on U.S. dollar-denominated net payables in certain entities which use a euro functional currency, the strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-denominated net assets in certain entities which use a U.S. dollar functional currency, and the strengthening of the U.S. dollar against the Australian dollar, resulting in foreign currency losses on U.S. dollar-denominated net payables in certain entities which use an Australian dollarBritish pound sterling functional currency.
In the three months ended October 31, 2018,2019, there were net gainslosses on derivative financial instruments of $1.1$0.3 million, compared to net gains of $0.8$1.1 million on such instruments for the three months ended October 31, 2017.2018. The net losses in the current period primarily reflected losses on contracts executed to hedge movements in the exchange rate between the U.S. dollar and the Singapore dollar.
Nine Months Ended October 31, 2019 compared to Nine Months EndedOctober 31, 2018. Total other expense, net, decreased by $2.2 million from $26.6 million in the nine months ended October 31, 2018 to $24.4 million in the nine months ended October 31, 2019.
Interest expense increased from $27.7 million in the nine months ended October 31, 2018 to $30.1 million in the nine months ended October 31, 2019 primarily due to higher interest rates on outstanding borrowings and a $1.0 million reversal of accrued interest related to a legal matter that was settled in the three months ended October 31, 2018.
We recorded $1.1 million of net foreign currency gains in the nine months ended October 31, 2019 compared to $5.4 million of net foreign currency losses in the nine months ended October 31, 2018. Foreign currency gains in the nine months ended October 31, 2019 resulted primarily from the weakening of the U.S. dollar against the British pound sterling, and in particular during the three months ended October 31, 2019, resulting in foreign currency gains on U.S. dollar-denominated net liabilities in certain entities, which use the British pound sterling functional currency.
In the nine months ended October 31, 2019, there were net gains on derivative financial instruments of $0.5 million, compared to net gains of $3.8 million on such instruments for the nine months ended October 31, 2018. The net gains in the current
period primarily reflected gains on contracts executed to hedge movements in the exchange rate between the U.S. dollar and the Singapore dollar.
Nine Months Ended October 31, 2018 compared to Nine Months Ended October 31, 2017. Total other expense, net, increased by $2.0 million from $24.6 million in the nine months ended October 31, 2017 to $26.6 million in the nine months ended October 31, 2018.
Interest expense increased from $27.0 million in the nine months ended October 31, 2017 to $27.7 million in the nine months ended October 31, 2018 primarily due to higher interest rates on outstanding borrowings, partially offset by the reversal of accrued interest related to a legal matter which was settled during the nine months ended October 31, 2018.
During the nine months ended October 31, 2017 we entered into a new credit agreement with certain lenders and terminated our prior credit agreement. In connection with these transactions, we recorded a $1.9 million loss on early retirement of debt. There were no comparable charges in the nine months ended October 31, 2018.
We recorded $5.4 million of net foreign currency losses in the nine months ended October 31, 2018 compared to $2.4 million of net foreign currency gains in the nine months ended October 31, 2017. Foreign currency losses in the nine months ended
October 31, 2018 resulted primarily from the strengthening of the U.S. dollar against the euro from January 31, 2018 to October 31, 2018 , resulting in foreign currency losses on euro denominated net assets in certain entities which use a U.S. dollar functional currency and foreign currency losses on U.S. dollar-denominated net payables in certain entities which use a euro functional currency, the strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-denominated net assets in certain entities which use a U.S. dollar functional currency, the strengthening of the U.S. dollar against the British pound sterling, resulting in foreign currency losses on U.S. dollar-denominated net payables in certain entities which use a British pound sterling functional currency, and the strengthening of the U.S. dollar against the Australian dollar, resulting in foreign currency losses on U.S. dollar-denominated net payables in certain entities which use an Australian dollar functional currency.
In the nine months ended October 31, 2018, there were net gains on derivative financial instruments of $3.8 million, compared to a net gain of $0.3 million on such instruments for the nine months ended October 31, 2017. The net gains in the current period primarily reflected gains on an interest rate swap and contracts executed to hedge movements in the exchange rate between the U.S. dollar and the Singapore dollar.
Provision for Income Taxes
The following table sets forth our provision forbenefit from income taxes for the three and nine months ended October 31, 20182019 and 2017:2018:
| | | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change | | Three Months Ended October 31, | | % Change | | Nine Months Ended October 31, | | % Change |
(in thousands) | | 2018 | | 2017 | | 2018 - 2017 | | 2018 | | 2017 | | 2018 - 2017 | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Provision for income taxes | | $ | 5,601 |
| | $ | 5,944 |
| | (6)% | | $ | 2,153 |
| | $ | 9,504 |
| | (77)% | | $ | 9,218 |
| | $ | 5,601 |
| | 65% | | $ | 6,120 |
| | $ | 2,153 |
| | 184% |
Three Months Ended October 31, 20182019 compared to Three Months Ended October 31, 2017.2018. Our effective income tax rate was 41.5% for the three months ended October 31, 2019, compared to an effective income tax rate of 21.7% for the three months ended October 31, 2018, compared2018.
For the three months ended October 31, 2019, the income tax rate no longer reflects the impact of a valuation allowance related to U.S. federal tax. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities and limitations on certain tax deductions, offset by lower statutory rates in several foreign jurisdictions. The result was an income tax provision of $9.2 million on pre-tax income of $22.2 million, which represented an effective income tax rate of 66.0% for the three months ended October 31, 2017. On December 22, 2017, the Tax Cuts and Jobs Acts (“2017 Tax Act”) was enacted in the United States. The 2017 Tax Act significantly revises the Internal Revenue Code of 1986, as amended, and it includes fundamental changes to taxation of U.S. multinational corporations. New international provisions add a new category of deemed income from our foreign operations, eliminate U.S. tax on foreign dividends (subject to certain restrictions), and add a minimum tax on certain payments made to foreign related parties. Our estimated annual effective tax rate for the three months ended October 31, 2018 includes provisional amounts for certain 2017 Tax Act provisions related to our foreign operations. We maintain valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions.41.5%.
For the three months ended October 31, 2018, the pre-tax income in domestic and foreign jurisdictions where we maintainmaintained valuation allowances and dodid not record tax benefits wereprovisions was significantly lower than the pre-tax income in jurisdictions where we recordrecorded tax provisions. The result was an income tax provision of $5.6 million on a pre-tax income of $25.8 million, which represented an effective income tax rate of 21.7%.
ForNine Months Ended October 31, 2019 compared to Nine Months Ended October 31, 2018. Our effective income tax rate was 17.4% for the threenine months ended October 31, 2017,2019, compared to an effective income tax rate of 4.9% for the pre-taxnine months ended October 31, 2018. For the nine months ended October 31, 2019, the income tax rate no longer reflects the impact of a valuation allowance related to U.S. federal tax. The effective tax rate differs from the U.S. federal statutory rate of 21.0% primarily due to a net tax benefit of $6.7 million recorded in our profitable jurisdictions, where we recordedsecond quarter in relation to changes in unrecognized income tax provisions, was higher thanbenefits and other items as a result of an audit settlement in a foreign jurisdiction and the pre-tax lossesimpact of U.S. taxation of certain foreign activities and limitations on certain tax deductions, offset by lower statutory rates in our domestic andseveral foreign jurisdictions where we maintain valuation allowances and did not record the related income tax benefits.jurisdictions. The result was an income tax provision of $5.9$6.1 million on pre-tax income of $9.0$35.1 million, which represented an effective income tax rate of 66.0%17.4%.
Nine Months Ended October 31, 2018 compared to Nine Months Ended October 31, 2017. Our effective Excluding the income tax benefit attributable to the audit settlement, the result was an income tax provision of $12.8 million and an effective tax rate was 4.9% forof 36.5%.
For the nine months ended October 31, 2018, compared to a negative effectivethe pre-tax losses in domestic and foreign jurisdictions where we maintained valuation allowances and did not record tax benefits were significantly less than the pre-tax income in jurisdictions where we recorded tax rate of 77.7% for the nine months ended October 31, 2017. Our estimated annual effective tax rate for the nine months ended October 31, 2018 includes provisional amounts for certain 2017 Tax Act provisions related to our foreign operations.provisions. In addition, in connection with an acquisition in our Customer Engagement segment completed in our second quarter, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we reduced the valuation allowance recorded on our U.S. federal and certain state deferred income tax assets to the extent of the deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected asresulting in a discrete income tax benefit of $7.3 million and not as a component of the acquisition accounting.million. The result was an income tax provision of $2.2 million on pre-tax income of $44.1 million, which represented an effective income tax rate of 4.9%.
For Excluding the nine months ended October 31, 2017, pre-tax income in our profitable jurisdictions, where we recorded income tax provisions, was lower thanbenefit attributable to the pre-tax losses in our domestic and foreign jurisdictions where we maintain valuation allowances
and did not recordallowance release, the related income tax benefits. The result was an income tax provision of $9.5 million on a pre-tax loss of $12.2 million, which represented a negativeand an effective income tax rate of 77.7%21.5%.
Liquidity and Capital Resources
Overview
Our primary recurring source of cash is the collection of proceeds from the sale of products and services to our customers, including cash periodically collected in advance of delivery or performance.
On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we announced that Valor Parent LP (the “Investor”), an affiliate of Apax Partners (“Apax”) will make an investment in us in an amount of up to $400 million, subject to customary closing conditions including the receipt of required regulatory and government approvals. Under the terms of the agreement, the Investor will initially purchase $200 million of our Series A convertible preferred stock, which is expected to occur during the first quarter of our fiscal year ending January 31, 2021, with
an initial conversion price of $53.50. The initial conversion price represents a conversion premium of 17.1% over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to the signing date. Assuming completion of the Spin-Off described above, the Series A convertible preferred stock will not participate in the Spin-Off distribution of the shares of the company holding the Company’s Cyber Intelligence Solutions business, and instead, the conversion price will be adjusted based on the ratio of the trading prices of the two companies over a short period following the Spin-Off, subject to a collar. Shortly following the Spin-Off, the Investor will purchase, subject to certain conditions, up to $200 million of Series B convertible preferred stock in the Company, as the entity holding the Customer Engagement Solutions business.The Series B convertible preferred stock will be convertible at a conversion price that is 100% of the average of the volume-weighted average price per share of the common stock for the 20 consecutive trading days immediately following the consummation of the Spin-off, subject to a collar on the minimum and maximum enterprise value of the Company post consummation of the Spin-Off. Following the closing of the Series A investment, Apax’s ownership in us on an as-converted basis will be approximately 5%. Following completion of the Spin-Off and assuming the issuance of the Series B preferred stock, Apax’s ownership in us on an as-converted basis will be between 11.5% and 15%. The convertible preferred stock will pay dividends at an annual rate of 5.2% until the 48-month anniversary of the closing of the Series A preferred stock investment, and thereafter at a rate of 4.0%, subject to adjustment under certain circumstances. Dividends will be cumulative and payable semiannually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. We intend to use the proceeds from the initial Apax investment in connection with the stock repurchase program (as described below under“Liquidity and Capital Resources Requirements”) that we announced on December 4, 2019, and for general corporate purposes. Please refer to Note 17, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding the Apax convertible preferred stock investment.
Our primary recurring use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs, and capital expenditures. We also utilize cash for debt service and periodically for business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term investments, are our primary sources of operating liquidity, and we believe that our operating liquidity is sufficient to support our current business operations, including debt service, and capital expenditure requirements.requirements, and in connection with the Apax investment described above, dividends on the convertible preferred stock.
On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders, and terminated our Prior Credit Agreement.a prior credit agreement. The 2017 Credit Agreement was amended on January 31, 2018 (the “2018 Amendment”). Further discussion of our 2017 Credit Agreement and 2018 Amendment appears below, under “Financing Arrangements”.
We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of products, technologies, and businesses. We may finance such acquisitions using cash, debt, stock, or a combination of the foregoing, however, we have used cash as consideration for substantially all of our historical business acquisitions, including approximately $27$51 million and $103$90 million of net cash expended for business acquisitions during the nine months ended October 31, 20182019 and year ended January 31, 2018,2019, respectively.
We continually examine our options with respect to terms and sources of existing and future short-term and long-term capital resources to enhance our operating results and to ensure that we retain financial flexibility, and may from time to time elect to raise capital through the issuance of additional equity or incurthe incurrence of additional debt.
A considerable portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term investments, and restricted cash, cash equivalents, and bank time deposits (excluding any long-term portions) held by our subsidiaries outside of the United States were $368.5$393.2 million and $346.2$399.4 million as of October 31, 20182019 and January 31, 2018,2019, respectively, and are generally used to fund the subsidiaries’ operating requirements and to invest in growth initiatives, including business acquisitions. These subsidiaries also held long-term restricted cash and cash equivalents, and restricted bank time deposits of $26.6$28.4 million and $28.4$23.1 million, at October 31, 20182019 and January 31, 2018,2019, respectively.
While weWe currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries’ earnings, we currently no longer intend to indefinitely reinvest all such earnings,subsidiaries, which, as a result of the 2017 Tax Act, may now be repatriated without incurring additional U.S. federal income taxes. Accordingly, we recognized provisional deferred income tax expense of $15.0 million for the year ended January 31, 2018 for withholding taxes on certain unremitted foreign earnings, for which we are evaluating our plans for repatriation.
Should other circumstances arise whereby we require more capital in the United States than is generated by our domestic operations, or should we otherwise consider it in our best interests, we could repatriate future earnings from foreign jurisdictions, which could result in higher effective tax rates. WeAs noted above, we currently intend to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent of the U.S. federal tax provided under the 2017 Tax Acton earnings of our foreign subsidiaries as of October 31, 2019 and withholding taxes onof $15.0 million accrued as of October 31,
2019, with respect to certain identified cash that may be repatriated to the U.S., we have not provided for taxestax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries. ItDue to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicalpracticable to estimate this potential liability.the total amount of income and withholding taxes that would have to be provided on such earnings.
The following table summarizes our total cash, cash equivalents, restricted cash, cash equivalents, and bank time deposits, and short-term investments, as well as our total debt, as of October 31, 20182019 and January 31, 2018:
2019:
| | | | October 31, | | January 31, | | October 31, | | January 31, |
(in thousands) | | 2018 | | 2018 | | 2019 | | 2019 |
Cash and cash equivalents | | $ | 353,422 |
| | $ | 337,942 |
| | $ | 412,838 |
| | $ | 369,975 |
|
Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | | 32,457 |
| | 33,303 |
| | 24,185 |
| | 42,262 |
|
Short-term investments | | 49,434 |
| | 6,566 |
| | 13,973 |
| | 32,329 |
|
Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | | $ | 435,313 |
| | $ | 377,811 |
| | $ | 450,996 |
| | $ | 444,566 |
|
Total debt, including current portions | | $ | 779,724 |
| | $ | 772,984 |
| | $ | 789,420 |
| | $ | 782,128 |
|
Capital Allocation Framework
As noted above, after cash utilization required for working capital, capital expenditures, required debt service, and in connection with the Apax investment described above, dividends on the convertible preferred stock, we expect that our primary usage of cash will be for business combinations. However, if we do not identify desirable business combinations, we will consider using our excess cash to repurchase shares (subject to the terms of our 2017 Credit Agreement and convertible preferred stock to be issued in connection with the Apax investment) or to repay outstanding indebtedness.
Condensed Consolidated Cash Flow Activity
The following table summarizes selected items from our condensed consolidated statements of cash flows for the nine months ended October 31, 20182019 and 20172018: | | | | Nine Months Ended October 31, | | Nine Months Ended October 31, |
(in thousands) | | 2018 | | 2017 | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 131,650 |
| | $ | 96,174 |
| | $ | 136,470 |
| | $ | 131,650 |
|
Net cash used in investing activities | | (119,446 | ) | | (58,597 | ) | | (69,311 | ) | | (119,446 | ) |
Net cash used in financing activities | | (16,566 | ) | | (1,420 | ) | | (34,281 | ) | | (16,566 | ) |
Effect of foreign currency exchange rate changes on cash and cash equivalents | | (3,864 | ) | | 447 |
| | (1,251 | ) | | (3,864 | ) |
Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | (8,226 | ) | | $ | 36,604 |
| |
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | | $ | 31,627 |
| | $ | (8,226 | ) |
Our operating activities generated $131.7$136.5 million of cash during the nine months ended October 31, 2018,2019, which was partially offset by $136.0$103.6 million of net cash used in combined investing and financing activities during this period. Further discussion of these items appears below.
Net Cash Provided by Operating Activities
Net cash provided by operating activities is driven primarily by our net income or loss, as adjusted for non-cash items and working capital changes. Operating activities generated $131.7$136.5 million of net cash during the nine months ended October 31, 2018,2019, compared to $96.2$131.7 million generated during the nine months ended October 31, 2017.2018. The increase in operating cash flow in the current period was primarily due to a $4.1 million increase in net income adjusted for non-cash items to reconcile net income to net cash provided by operations and a slight favorable impact on operating cash flow from changes in operating assets and liabilities, primarily driven by the timing of receipts of payments from customers.
Our cash flow from operating activities can fluctuate from period to period due to several factors, including the timing of our billings and collections, the timing and amounts of interest, income tax and other payments, and our operating results.
Net Cash Used in Investing Activities
During the nine months ended October 31, 2019, our investing activities used $69.3 million of net cash, including $51.5 million of net cash utilized for business acquisitions and $40.8 million of payments for property, equipment and capitalized software development costs, partially offset by $18.2 million of net sales and maturities of short-term investments and $4.8 million of net cash provided by other investing activities, consisting primarily of settlements of derivative instruments and a net decrease in restricted bank time deposits during the period. Restricted bank time deposits are typically deposits, which do not qualify as cash equivalents, used to secure bank guarantees in connection with sales contracts, the amounts of which will fluctuate from period to period.
During the nine months ended October 31, 2018, our investing activities used $119.4 million of net cash, including $27.4 million of net cash utilized for a business acquisition, $27.7 million of payments for property, equipment, and capitalized software development costs, $43.2 million of net purchases of short-term investments, and $21.1 million of net cash used in other investing activities, consisting primarily of a net increase in restricted bank time deposits during the period, and $43.2 million of net purchases of short-term investments. Restricted bank time deposits are typically deposits, which do not qualify as cash equivalents, used to secure bank guarantees in connection with sales contracts, the amounts of which will fluctuate from period to period.
During the nine months ended October 31, 2017, our investing activities used $58.6 million of net cash, including $28.1 million of net cash utilized for business acquisitions, $27.4 million of payments for property, equipment, and capitalized software development costs, and $3.1 million of net purchases of short-term investments.
We had no significant commitments for capital expenditures at October 31, 2018.2019.
Net Cash Used in Financing Activities
For the nine months ended October 31, 2019, our financing activities used $34.3 million of net cash, the most significant portions of which were payments of $6.0 million related to deferred purchase price of a prior period business combination, $22.0 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $4.7 million repayments of borrowings and other financing obligations, $0.9 million of distributions and dividends to a noncontrolling shareholder of one of our subsidiaries, and $0.5 million of payments to repurchase treasury stock.
For the nine months ended October 31, 2018, our financing activities used $16.6 million of net cash, the most significant portions of which were payments of $10.7 million for the financing portion of payments under contingent consideration
arrangements related to prior business combinations, $4.3 million repayments of borrowingborrowings and other financing obligations, and a $0.8 million dividend payment to a noncontrolling shareholder of one of our subsidiaries.
For the nine months ended October 31, 2017, our financing activities used $1.4 million of net cash. On June 29, 2017 we entered into the 2017 Credit Agreement with certain lenders, under which we received net proceeds of $424.5 million from the 2017 Term Loan, the majority of which were used to repay all $406.9 million owed under the 2014 Term Loans at June 29, 2017 upon termination of the Prior Credit Agreement. Other financing activities during the nine months ended October 31, 2017 included $7.1 million paid for debt issuance costs, $7.2 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and a $0.7 million dividend payment to a noncontrolling shareholder of one of our subsidiaries.
Liquidity and Capital Resources Requirements
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet anticipated operating costs, required payments of principal and interest, working capital needs, ordinary course capital expenditures, research and development spending, and other commitments for at least the next 12 months. Currently, we have no plans to pay any cash dividends on our common stock, which are not permitted under our 2017 Credit Agreement.
Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the impact of changes in customer buying behavior due to circumstances over which we have no control. If we determine to make additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could involve the issuance of additional equity or debt securities or increase our borrowings under our credit facility.
On March 29, 2016, we announced that our board of directors had authorized a common stock repurchase program of up to $150 million over two years following the date of announcement. This program expired on March 29, 20182018. We made a total of $46.9 million in repurchases and we did not acquire any shares of treasury stock during the nine monthsyear ended OctoberJanuary 31, 20182019 under the program.
On December 4, 2019, we announced that our board of directors had authorized a new share repurchase program whereby we may repurchase up to $300 million of common stock over the period ending on February 1, 2021 (on or shortly before the closing of the planned Spin-Off described above). Please refer to Note 17, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding this share repurchase program.
Financing Arrangements
1.50% Convertible Senior Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021, unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under the Prior Credit Agreement.a prior credit agreement.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount of the Notes. We currently expect to refinance the Notes at or prior to maturity with new convertible notes or other debt.
The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;
during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or
upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied. Holders of the Notes may require us to purchase for cash all or any portion of their Notes upon the occurrence of a “fundamental change” at a price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest.
As of October 31, 2018,2019, the Notes were not convertible.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our
option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of October 31, 2018,2019, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of October 31, 2018,2019, no Warrants had been exercised and all Warrants remained outstanding.
Credit Agreements
On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders, and terminated the Prior Credit Agreement.a prior credit agreement.
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”) and a $300.0 million revolving credit facility maturing on June 29, 2022 (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement. The majority of the proceeds from the 2017 Term Loan were used to repay all $406.9 million that remained outstanding under the 2014 Term Loans at June 29, 2017 upon termination of the Prior Credit Agreement. There were no borrowingsterms loans under our Prior Revolving Credit Facility (as defined in Note 7, “Long-Term Debt” to our condensed consolidated financial statements included under Item 1 of this report) at June 29, 2017.prior credit agreement.
The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility will be accelerated to March 1, 2021, if on such date any Notes remain outstanding.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million. This discount is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
We are required to pay a commitment fee with respect to unused availability under the 2017 Revolving Credit Facility at a rate per annum determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the “Leverage Ratio”).
The 2017 Term Loan requires quarterly principal payments of approximately $1.1 million, which commenced on August 1, 2017, with the remaining balance due on June 29, 2024. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
On January 31, 2018, we entered into the 2018 Amendment to our 2017 Credit Agreement, providing for, among other things, a reduction of the interest rate margins on the 2017 Term Loan from 2.25% to 2.00% for Eurodollar loans, and from 1.25% to 1.00% for ABR loans. The vast majority of the impact of the 2018 Amendment was accounted for as a debt modification. For the portion of the 2017 Term Loan which was considered extinguished and replaced by new loans, we wrote off $0.2 million of unamortized deferred debt issuance costs as a loss on early retirement of debt during the three months ended January 31, 2018. The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining term of the 2017 Term Loan.
For loans under the 2017 Revolving Credit Facility, the margin is determined by reference to our Leverage Ratio.
As of October 31, 2018,2019, the interest rate on the 2017 Term Loan was 4.27%4.15%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 4.45%4.32% at October 31, 2018.2019. As of January 31, 2018,2019, the interest rate on the 2017 Term Loan was 3.58%4.52%.
OnIn February 11, 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on the term loans under our Prior Credit Agreement,prior credit agreement, under which we paypaid interest at a fixed rate of 4.143% and receivereceived variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”).
Although the Prior Credit Agreementprior credit agreement was terminated on June 29, 2017, the interest rate swap agreement remains2016 Swap remained in effect until September 6, 2019, and servesserved as an economic hedge to partially mitigate the risk of higher borrowing costs under the 2017 Credit Agreement resulting from increases in market interest rates. The interest rate swapEffective June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the prior credit agreement, isthe 2016 Swap was no longer formally designated as a cash flow hedge for accounting purposes, and therefore subsequent settlements arewere reported within other income (expense), net on the condensed consolidated statement of operations, not within interest expense. The 2016 Swap matured on September 6, 2019.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap, under which we will pay interest at a fixed rate of 2.949% and receive variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap iswas September 6, 2019, and settlements with the counterparty will occur on a quarterly basis, beginning on November 1, 2019. The 2018 Swap will terminate on June 29, 2024.
During the operating term of the 2018 Swap, if we elect three-month LIBOR at the periodic interest rate reset dates for at least $200.0 million of our 2017 Term Loan, the annual interest rate on that amount of the 2017 Term Loan will be fixed at 4.949% (including the impact of our current 2.00% interest rate margin on Eurodollar loans) for the applicable interest rate period.
The 2018 Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and are reclassified into the condensed consolidated statement of operations within interest expense in the period in which the hedged transaction affects earnings.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2017 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. At October 31, 2018,2019, our Leverage Ratio was approximately 2.42.1 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
Contractual Obligations
Our Annual Report on Form 10-K for the year ended January 31, 20182019 includes a table summarizing our contractual obligations of approximately $1.2 billion as of January 31, 2018,2019, including approximately $950$940 million for long-term debt obligations, including projected future interest. That table appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the report.
We believe that our contractual obligations and commercial commitments did not materially change during the nine months ended October 31, 2018.2019.
Please refer to Note 17, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item 1 of this report for information regarding dividends on expected issuances of convertible preferred stock.
Contingent Payments Associated with Business Combinations
In connection with certain of our business combinations, we have agreed to make contingent cash payments to the former owners of the acquired companies based upon achievement of performance targets following the acquisition dates.
For the nine months ended October 31, 2018,2019, we made $13.6$29.7 million of payments under contingent consideration arrangements. As of October 31, 2018,2019, potential future cash payments and earned consideration expected to be paid subsequent
to October 31, 20182019 under contingent consideration arrangements total $131.6$128.2 million, the estimated fair value of which was $53.7$36.9 million, including $25.2$20.9 million reported in accrued expenses and other current liabilities, and $28.5$16.0 million reported in other liabilities. The performance periods associated with these potential payments extend through January 2022.
Off-Balance Sheet Arrangements
As of October 31, 2018,2019, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, and the potential impact of these pronouncements on our condensed consolidated financial statements, see Note 1, “Basis of Presentation and Significant Accounting Policies” to the condensed consolidated financial statements in Part I, Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. We are exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations. To manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to enter intouse derivative transactionsinstruments only to the extent considered necessary to meet our risk management objectives. We use derivative instruments solely to reduce the financial impact of these risks and do not use derivative instruments for speculative purposes.
Interest Rate Risk on Our Debt
On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders and terminated our Prior Credit Agreement.
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturingbears interest at variable rates based on June 29, 2024 (the “2017 Term Loan”) and a $300.0 million revolving credit facility maturing on June 29, 2022 (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement),LIBOR plus in each case a margin. The margin for the 2017 Term Loan is fixed at 2.00% for Eurodollar loans, and at 1.00% for ABR loans. For loans under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio. Because the interest rates applicable to borrowings under the 2017 Credit Agreement are variable, we are exposed to market risk from changes in the underlying index rates, which affect our cost of borrowing.
As of October 31, 2018, the interest rate on the 2017 Term Loan was 4.27%. There were no borrowings outstanding under the 2017 Revolving Credit Facility at that date.
To partially mitigate risks associated with the variable interest rates on the term loan borrowings under the Prior Credit Agreement, in February 2016 we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we pay interest at a fixed rate of 4.143% and receive variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”). Although the Prior Credit Agreement was terminated on June 29, 2017, the 2016 Swap agreement remains in effect, and serves as an economic hedge to partially mitigate the risk of higher borrowing costs under our 2017 Credit Agreement resulting from increases in market interest rates. Settlements with the counterparty under the 2016 Swap occur quarterly, and the 2016 Swap will terminate on September 6, 2019.
Prior to June 29, 2017, the 2016 Swap was designated as a cash flow hedge for accounting purposes. On June 29, 2017, concurrent with the executionThe Financial Conduct Authority of the 2017 Credit Agreement and termination of the Prior Credit Agreement, the 2016 Swap was no longer designated as a cash flow hedge for accounting purposes and, because occurrence of the specific forecasted variable cash flows which had been hedgedUnited Kingdom plans to phase out LIBOR by the 2016 Swap agreement was no longer probable,end of 2021, and we have approached the $0.9 million fair value of the 2016 Swap at that date was reclassified from accumulated other comprehensive income (loss) into the condensed consolidated statement of operations as income within other income (expense), net. Ongoing changes in the fair value of the 2016 Swap agreement are now recognized within other income (expense), net in the condensed consolidated statement of operations.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institutionadministrative agent under this facility to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap in September 2019, under which we will pay interest at a fixed rate of 2.949% and receive variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap is September 6, 2019, and settlements with the counterparty will occur on a quarterly basis, beginning on November 1, 2019. The 2018 Swap will terminate on June 29, 2024.
During the operating term of the 2018 Swap, if we elect three-month LIBOR at the periodic interest rate reset dates for at least $200.0 million of our 2017 Term Loan, the annual interest rate on that amount of the 2017 Term Loan will be fixed at 4.949% (includingdiscuss the impact of our current 2.00%the planned phase out. However, it is currently
uncertain what, if any, alternative reference interest rate margin onrates or other reforms will be enacted in response to the planned phase out,
and we cannot assure you that an alternative to LIBOR (on which the Eurodollar loans) for the applicable interest rate period.Rate is based) that we find acceptable will be
available to us.
The section entitled “Quantitative and Qualitative Disclosures About Market Risk” under Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 31, 20182019 provides detailed quantitative and qualitative discussions of the market risks affecting our operations. Other than as described above under “Interest Rate Risk on Our Debt”, we believe that our market risk profile did not materially change during the nine months ended October 31, 2018.2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of October 31, 2018.2019. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2018.2019.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended October 31, 2018,2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be achieved. Further, the design of a control system must reflect the impact of resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all possible conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II
Item 1. Legal Proceedings
See Note 14,15, “Commitments and Contingencies” of the Notes to the condensed consolidated financial statements under Part I, Item 1 for information regarding our legal proceedings.
Item 1A.Risk Factors
ThereOther than as disclosed below, there have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2018.2019 and the Risk Factor described in Part II “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2019 (the “First Quarter Form 10-Q”). In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our Annual Report on Form 10-K and the First Quarter Form 10-Q, which could materially affect our business, financial condition, or operating results. The risks described in our Annual Report on Form 10-K and the First Quarter Form 10-Q are not the only risks facing us, however. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition, or operating results in the future.
Our plan to separate into two independent publicly traded companies by means of a spin-off of our Cyber Intelligence Solutions business is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time, expense, and distraction, which could disrupt or adversely affect our business.
On December 4, 2019, we announced plans to separate into two independent publicly traded companies by means of a proposed spin-off of our Cyber Intelligence Solutions business (the “Spin-Off’). In the Spin-Off, we will distribute shares of a company holding our Cyber Intelligence Solutions business to our stockholders.
The Spin-Off, which is currently expected to be completed shortly after the end of our next fiscal year ending January 31, 2021, is subject to certain conditions, including final approval by our Board of Directors, as well as other conditions such as completion of all necessary filings under the U.S. securities laws; receipt by our Board of Directors of one or more opinions from an independent valuation firm confirming the solvency and financial viability of each of our Cyber Intelligence Solutions business and Customer Engagement Solutions business immediately after the completion of the distribution in a form acceptable to us; receipt of an opinion regarding the qualification of the distribution as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code (the “Code”) to our stockholders; the absence of any legal impediments prohibiting the distribution; and the satisfaction or waiver of certain conditions. The failure to satisfy all of the required conditions could delay the completion of the Spin-Off for a significant period of time or prevent it from occurring at all.
Unanticipated developments, including changes in the competitive conditions of our markets, possible delays in obtaining various tax opinions or rulings, negotiating challenges, the uncertainty of the financial markets, changes in the law, and challenges in executing the separation of the two businesses, could delay or prevent the completion of the Spin-Off, or cause the Spin-Off to occur on terms or conditions that are different or less favorable than expected. Any changes to the Spin-Off or delay in completing the Spin-Off could cause us not to realize some or all of the expected benefits, or realize them on a different timeline than expected. Further, our Board of Directors could decide, either because of a failure of conditions or because of market or other factors, to abandon the Spin-Off. No assurance can be given as to whether and when the Spin-Off will occur.
We have incurred expenses in connection with the Spin-Off, and expect that the process of completing the Spin-Off will be time-consuming and involve significant additional costs and expenses, which may not yield a discernible benefit if the Spin-Off is not completed. Executing the Spin-Off will require significant time and attention from our senior management and employees, which could adversely affect our business, financial results, and results of operations. We may also experience increased difficulties in attracting, retaining, and motivating employees during the pendency of the Spin-Off and following its completion, which could harm our businesses. In addition, if the Spin-Off is not completed, we will still be required to pay certain costs and expenses incurred in connection therewith, such as legal, accounting, and other professional fees.
Any of the above factors could cause the Spin-Off (or the failure to execute the Spin-Off) to have a material adverse effect on our business, financial condition and results of operations and the price of our common stock.
The Spin-Off may not achieve the anticipated benefits and will expose us to new risks.
We may not realize the anticipated strategic, financial, operational, or other benefits from the Spin-Off. We cannot predict with certainty when the benefits expected from the Spin-Off will occur or the extent to which they will be achieved. If the Spin-Off is completed, our operational and financial profile will change and we will face new risks. As independent, publicly traded companies, our Cyber Intelligence Solutions business and Customer Engagement Solutions business will each be smaller, less-diversified companies and may be more vulnerable to changing market conditions. There is no assurance that following the Spin-Off each separate company will be successful. The announcement and/or completion of the Spin-Off may cause uncertainty for or disruptions with our customers, partners, suppliers, and employees, which may negatively impact these relationships or our operations.
The announcement and/or completion of the Spin-Off may cause some investors to sell shares of the Company or of one or both of the resulting companies creating greater volatility in the trading of the shares of such companies and potentially causing their market prices to decline. We expect the trading price of our common stock immediately following the ex-dividend date for the Spin-Off to be significantly lower than immediately preceding the ex-dividend date, as the trading price of our common stock will no longer reflect the value of our Cyber Intelligence Solutions business. Further, there can be no assurance that the combined value of the shares of the two resulting companies will be equal to or greater than what the value of our common stock would have been had the proposed Spin-Off not occurred.
Assuming the completion of the investment by an affiliate of Apax Partners in our preferred stock, Apax will own a substantial portion of our equity and its interests may not be aligned with yours.
Apax will own approximately 5% of our common stock assuming completion of the Series A convertible preferred stock investment and between 11.5% and 15% of our common stock assuming the completion of the Series B convertible preferred stock investment, in each case on an as-converted basis. Additionally, we have agreed to increase the size of our board of directors, giving Apax the right to designate one director at the closing of the Series A convertible preferred stock investment and the right to mutually select with us a second independent director following the closing of the Series B convertible preferred stock investment. Circumstances may occur in which the interests of Apax could conflict with the interests of our other stockholders. For example, the existence of Apax as a significant stockholder and Apax’s board appointment rights may have the effect of limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we have purchased treasury stock from directors, officers, and other employees to facilitate income tax withholding and payment requirements upon vesting of equity awards during a Company-imposed trading blackout or lockup periods. There was no such activity during the three months ended October 31, 2018.2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
New Form of Indemnification Agreement for Directors and OfficersNot applicable.
On November 28, 2018, our board of directors approved a new form of indemnification agreement to be entered into by us and each of our directors and certain of our corporate officers. The new indemnification agreement will replace our currently existing indemnification agreements with each of our directors and certain of our corporate officers.
In general, the indemnification agreement provides that, subject to the procedures, limitations, and exceptions set forth therein, we will indemnify and hold harmless the applicable director or corporate officer indemnitee against all expenses, damages, losses, liabilities, judgments, fines, penalties and other charges relating to, arising out of, or resulting from (1) any actual, alleged or suspected act or failure to act by the indemnitee in his or her capacity as a director, officer, employee, or agent of ours or as a director, officer, employee, member, manager, trustee, or agent of any other entity as to which the indemnitee is or was serving at our request, (2) any actual, alleged, or suspected act or failure to act by the indemnitee in respect of any business, transaction, communication, filing, disclosure, or other activity of ours or any other entity referred to in clause (1) of this sentence, or (3) the indemnitee’s status as a current or former director, officer, employee, member, manager, trustee, or agent of ours or any other entity referred to in clause (1) of this sentence or any actual, alleged, or suspected act or failure to act by the indemnitee in connection with any obligation or restriction imposed upon the indemnitee by reason of such status.
Each indemnitee will also have the right to advancement by us of any and all reasonable expenses relating to, arising out of or resulting from any claim covered by the indemnification agreement paid or incurred by the indemnitee or which the indemnitee determines are reasonably likely to to be paid or incurred.
The above description of the indemnification agreement does not purport to be complete and is qualified in its entirety by reference to the form indemnification agreement, which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
Item 6. Exhibits
The following exhibit list includes agreements that we entered into or that became effective during the three months ended October 31, 2018:2019:
|
| | | | |
Number | | Description | | Filed Herewith / Incorporated by Reference from |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
101.INS | | XBRL Instance Document | | Filed herewith |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
(1)These exhibits are being “furnished” with this periodic report and are not deemed “filed” with the SEC and are not incorporated by reference in any filing of the company under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
| Verint Systems Inc. |
| |
| |
December 6, 20184, 2019 | /s/ Douglas E. Robinson |
| Douglas E. Robinson |
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |