UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 20202021
OR
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| ☐ | 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
(Exact Name of Registrant as Specified in its Charter)
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| Delaware | | | 11-3200514 |
(State or Other Jurisdiction of Incorporation or
Organization) | | | (I.R.S. Employer Identification No.) |
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| 175 Broadhollow Road | | | |
| Melville, | New York | | 11747 |
| (Address of Principal Executive Offices) | | | (Zip Code) |
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| (631) | 962-9600 | |
| (Registrant’s Telephone Number, Including Area Code) | | | |
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| Securities registered pursuant to Section 12(b) of the Act: | | | | |
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| 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 ☑
No ☐
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 ☑
No ☐
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.
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| Large accelerated filer | ☑ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
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 ☐ No ☑
There were 64,525,66064,999,036 shares of the registrant’s common stock outstanding on May 15, 2020.
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| Verint Systems Inc. and Subsidiaries | | |
| Index to Form 10-Q | | |
As of and For the Period Ended April 30, 20202021 | | |
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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, but are not limited to, 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 changes in macroeconomic and/or global conditions, including as a result of slowdowns, recessions, economic instability, political unrest, armed conflicts, natural disasters, or outbreaks of disease, such as the COVID-19 pandemic, as well as the resulting impact on information technology spending by enterprises and government budgets,customers, on our business;
•risks that our customers delay, cancel, or refrain from placing orders, refrain from renewing subscriptions or service contracts, or are unable to honor contractual commitments or payment obligations due to liquidity issues or other challenges in their budgets and business, due to the COVID-19 pandemic or otherwise;
•risks that continuing restrictions resulting from the COVID-19 pandemic or actions taken in response to the pandemic adversely impact our operations or our ability to fulfill orders, complete implementations, or recognize revenue;
•risks associated with our ability to keep pace with technological advances and challenges and evolving industry standards; to adapt to changing market potential from area to area within our markets; and to successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer challenges and 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 revenue, margins, and sufficient levels of investment in our business and operations;
•risks created by the continued consolidation of ouroperations, and competitors or the introduction of large competitors in our markets with greater resources than we have;
•risks relating to our ability to properly manage investments in our business and operations, execute on growth or strategic initiatives, and enhance our existing operations and infrastructure, including the proper prioritization and allocation of limited financial and other resources;
•risks associated with our ability to identify suitable targets for acquisition or investment or 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 relatingchallenges associated with selling sophisticated solutions, including with respect to longer sales cycles, more complex sales processes, and assisting customers in understanding and realizing the benefits of our ability to properly manage investmentssolutions, as well as with developing, offering, implementing, and maintaining a broad solution portfolio;
•challenges associated with our cloud transition, including increased importance of subscription renewal rates, and risk of increased variability in our businessperiod to period results based on the mix, terms, and operations, executetiming of our transactions;
•risks that we may be unable to maintain, expand, and enable our relationships with partners as part of our growth strategy;
•risks associated with our reliance on growth initiatives, and enhancethird-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 existing operations and infrastructure, including the proper prioritization and allocation of limited financial and other resources;competitors, as well as cloud hosting providers;
•risks associated with our ability to retain, recruit, and train qualified personnel in regions in which we operate, including in new markets and growth areas we may enter;
•risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators and risks associated with our reliance on third-party suppliers, partners,significant international operations, exposure to regions subject to political or original equipment manufacturers (“OEMs”) for certain components,economic instability, fluctuations in foreign exchange rates, and challenges associated with a significant portion of our cash being held overseas;
•risks associated with a significant part of our business coming from government contracts and associated procurement processes;
•risks associated with complex and changing domestic and foreign regulatory environments relating to our own operations, the products and services we offer, and/or services,the use of our solutions by our customers, including, companies that may competeamong others, with us or work with our competitors;respect to data privacy and protection, government contracts, anti-corruption, trade compliance, tax, and labor matters;
•risks associated with the mishandling or perceived mishandling of sensitive or confidential information and data, including personally identifiable information or other information that may belong to our customers or other third parties, andincluding in connection with security vulnerabilitiesour SaaS or lapses, including cyber-attacks, information technology system breaches, failures,other hosted or disruptions;managed service offerings or when we are asked to perform service or support;
•risks that our productssolutions 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 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;
•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, relating to our own operations as well as to the use of our solutions by our customers;
•challenges associated with selling sophisticated solutions, including with respect to assisting customers in understanding and realizing the benefits of our solutions, 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; risk of customer concentration; challenges associated with our ability to accurately forecast when a sales opportunity will convert to an order,security vulnerabilities or to accurately forecast revenue and expenses;
•challenges associated with our Customer Engagement segment cloud transition and our Cyber Intelligence segment software model transition, and risk of increased volatility of our operating results from period to period;lapses, including cyber-attacks, information technology system breaches, failures, or disruptions;
•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, claim infringement on their intellectual property rights, or claim a violation of their license rights, including relative to free or open source components we may use;
•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 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 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 associated with changing accounting principles or standards, tax laws and regulations, tax rates, and the continuing availability of expected tax benefits;
•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, for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays;
•risks associated with changing accounting principles or standards, tax laws and regulations, tax rates, and the continuing availability of expected tax 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 issuance of preferred stock to an affiliate of Apax Partners, including with respect to completion of the second tranche of the investment and Apax'sPartners’ 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 Solutions 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, includingdoes not qualify as a result of management distraction from our business.tax-free transaction, or exposes us to unexpected claims or liabilities.
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, 2020.2021. 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
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| VERINT SYSTEMS INC. AND SUBSIDIARIES | |
| Index to Condensed Consolidated Financial Statements (Unaudited) | |
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited) | | | | | | | | | | | | | | |
| | April 30, | | January 31, |
| (in thousands, except share and per share data) | | 2021 | | 2021 |
| Assets | | | | |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 359,418 | | | $ | 585,273 | |
| Restricted cash and cash equivalents, and restricted bank time deposits | | 389,795 | | | 15 | |
| Short-term investments | | 668 | | | 46,300 | |
| Accounts receivable, net of allowance for doubtful accounts of $1.5 million and $1.6 million, respectively | | 147,932 | | | 206,157 | |
| Contract assets, net | | 38,907 | | | 36,716 | |
| Inventories | | 5,593 | | | 5,541 | |
| Prepaid expenses and other current assets | | 56,223 | | | 42,814 | |
| Current assets of discontinued operations | | 0 | | | 354,926 | |
| Total current assets | | 998,536 | | | 1,277,742 | |
| Property and equipment, net | | 69,071 | | | 69,090 | |
| Operating lease right-of-use assets | | 53,396 | | | 57,849 | |
| Goodwill | | 1,329,798 | | | 1,327,407 | |
| Intangible assets, net | | 132,316 | | | 143,744 | |
| Other assets | | 118,194 | | | 104,511 | |
| Long-term assets of discontinued operations | | 0 | | | 280,952 | |
| Total assets | | $ | 2,701,311 | | | $ | 3,261,295 | |
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| Liabilities, Temporary Equity, and Stockholders' Equity | | | | |
| Current Liabilities: | | | | |
| Accounts payable | | $ | 35,797 | | | $ | 35,463 | |
| Accrued expenses and other current liabilities | | 154,606 | | | 211,517 | |
| Current maturities of long-term debt | | 386,887 | | | 386,713 | |
| Contract liabilities | | 244,892 | | | 261,033 | |
| Current liabilities of discontinued operations | | 0 | | | 268,713 | |
| Total current liabilities | | 822,182 | | | 1,163,439 | |
| Long-term debt | | 405,614 | | | 402,781 | |
| Long-term contract liabilities | | 17,391 | | | 16,502 | |
| Operating lease liabilities | | 51,412 | | | 56,712 | |
| Other liabilities | | 38,743 | | | 75,710 | |
| Long-term liabilities of discontinued operations | | 0 | | | 58,118 | |
| Total liabilities | | 1,335,342 | | | 1,773,262 | |
| Commitments and Contingencies | | 0 | | 0 |
| Temporary Equity: | | | | |
Preferred Stock - $0.001 par value; authorized 2,207,000 shares | | | | |
| Series A Preferred Stock; 200,000 shares issued and outstanding at April 30, 2021 and January 31, 2021, respectively; aggregate liquidation preference and redemption value of $203,467 and $206,067 at April 30, 2021 and January 31, 2021, respectively. | | 200,628 | | | 200,628 | |
| Series B Preferred Stock; 200,000 shares issued and outstanding at April 30, 2021; 0 shares issued and outstanding at January 31, 2021; aggregate liquidation preference and redemption value of $200,722 at April 30, 2021. | | 235,693 | | | 0 | |
| Equity component of currently redeemable convertible notes | | 0 | | | 4,841 | |
| Total temporary equity | | 436,321 | | | 205,469 | |
| Stockholders' Equity: | | | | |
| Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 69,946,000 and 70,177,000 shares; outstanding 64,999,000 and 65,773,000 shares at April 30, 2021 and January 31, 2021, respectively. | | 70 | | | 70 | |
| Additional paid-in capital | | 1,333,312 | | | 1,726,166 | |
| Treasury stock, at cost - 4,947,000 and 4,404,000 shares at April 30, 2021 and January 31, 2021, respectively. | | (233,992) | | | (208,124) | |
| Accumulated deficit | | (68,123) | | | (113,797) | |
| Accumulated other comprehensive loss | | (104,171) | | | (136,878) | |
| Total Verint Systems Inc. stockholders' equity | | 927,096 | | | 1,267,437 | |
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| | April 30, | | January 31, |
| (in thousands, except share and per share data) | | 2020 | | 2020 |
| Assets | | | | |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 556,671 | | | $ | 379,146 | |
| Restricted cash and cash equivalents, and restricted bank time deposits | | 46,451 | | | 43,860 | |
| Short-term investments | | 19,741 | | | 20,215 | |
| Accounts receivable, net of allowance for doubtful accounts of $6.3 million and $5.3 million, respectively | | 308,304 | | | 382,435 | |
| Contract assets, net | | 62,249 | | | 64,961 | |
| Inventories | | 25,030 | | | 20,495 | |
| Prepaid expenses and other current assets | | 92,168 | | | 87,946 | |
| Total current assets | | 1,110,614 | | | 999,058 | |
| Property and equipment, net | | 115,481 | | | 116,111 | |
| Operating lease right-of-use assets | | 97,878 | | | 102,149 | |
| Goodwill | | 1,452,434 | | | 1,469,211 | |
| Intangible assets, net | | 182,503 | | | 197,764 | |
| Other assets | | 135,798 | | | 131,765 | |
| Total assets | | $ | 3,094,708 | | | $ | 3,016,058 | |
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| Liabilities and Stockholders' Equity | | | | |
| Current Liabilities: | | | | |
| Accounts payable | | $ | 70,987 | | | $ | 71,604 | |
| Accrued expenses and other current liabilities | | 228,256 | | | 233,948 | |
| Contract liabilities | | 378,548 | | | 397,350 | |
| Total current liabilities | | 677,791 | | | 702,902 | |
| Long-term debt | | 990,390 | | | 832,798 | |
| Long-term contract liabilities | | 40,566 | | | 40,565 | |
| Operating lease liabilities | | 87,340 | | | 90,372 | |
| Other liabilities | | 105,715 | | | 106,984 | |
| Total liabilities | | 1,901,802 | | | 1,773,621 | |
| Commitments and Contingencies | | | | |
| Stockholders' Equity: | | | | |
| Preferred stock - $0.001 par value; authorized 2,207,000 shares at April 30, 2020 and January 31, 2020, respectively; none issued. | | — | | | — | |
| Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 68,930,000 and 68,529,000 shares; outstanding 64,526,000 and 64,738,000 shares at April 30, 2020 and January 31, 2020, respectively. | | 69 | | | 68 | |
| Additional paid-in capital | | 1,677,775 | | | 1,660,889 | |
| Treasury stock, at cost - 4,404,000 and 3,791,000 shares at April 30, 2020 and January 31, 2020, respectively. | | (208,124) | | | (174,134) | |
| Accumulated deficit | | (112,544) | | | (105,590) | |
| Accumulated other comprehensive loss | | (178,774) | | | (151,865) | |
| Total Verint Systems Inc. stockholders' equity | | 1,178,402 | | | 1,229,368 | |
| Noncontrolling interests | | 14,504 | | | 13,069 | |
| Total stockholders' equity | | 1,192,906 | | | 1,242,437 | |
| Total liabilities and stockholders' equity | | $ | 3,094,708 | | | $ | 3,016,058 | |
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| | April 30, | | January 31, |
| (in thousands, except share and per share data) | | 2021 | | 2021 |
| Noncontrolling interests | | 2,552 | | | 15,127 | |
| Total stockholders' equity | | 929,648 | | | 1,282,564 | |
| Total liabilities, temporary equity, and stockholders' equity | | $ | 2,701,311 | | | $ | 3,261,295 | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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| | | Three Months Ended
April 30, | | |
| (in thousands, except per share data) | | 2020 | | 2019 |
| Revenue: | | | | |
| Product | | $ | 77,284 | | | $ | 104,224 | |
| Service and support | | 210,011 | | | 211,035 | |
| Total revenue | | 287,295 | | | 315,259 | |
| Cost of revenue: | | | | |
| Product | | 21,318 | | | 28,120 | |
| Service and support | | 76,399 | | | 79,361 | |
| Amortization of acquired technology | | 4,609 | | | 6,707 | |
| Total cost of revenue | | 102,326 | | | 114,188 | |
| Gross profit | | 184,969 | | | 201,071 | |
| Operating expenses: | | | | |
| Research and development, net | | 59,079 | | | 57,169 | |
| Selling, general and administrative | | 111,651 | | | 121,721 | |
| Amortization of other acquired intangible assets | | 8,065 | | | 7,713 | |
| Total operating expenses | | 178,795 | | | 186,603 | |
| Operating income | | 6,174 | | | 14,468 | |
| Other income (expense), net: | | | | |
| Interest income | | 1,017 | | | 1,426 | |
| Interest expense | | (10,698) | | | (9,934) | |
| Other expense, net | | (2,230) | | | (790) | |
| Total other expense, net | | (11,911) | | | (9,298) | |
| (Loss) income before (benefit) provision for income taxes | | (5,737) | | | 5,170 | |
| (Benefit) provision for income taxes | | (1,762) | | | 1,409 | |
| Net (loss) income | | (3,975) | | | 3,761 | |
| Net income attributable to noncontrolling interests | | 2,039 | | | 2,185 | |
| Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 1,576 | |
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| Net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Basic | | $ | (0.09) | | | $ | 0.02 | |
| Diluted | | $ | (0.09) | | | $ | 0.02 | |
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| Weighted-average common shares outstanding: | | | | |
| Basic | | 64,376 | | | 65,438 | |
| Diluted | | 64,376 | | | 67,088 | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive LossOperations
(Unaudited)
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| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Net (loss) income | | $ | (3,975) | | | $ | 3,761 | |
| Other comprehensive loss, net of reclassification adjustments: | | | | |
| Foreign currency translation adjustments | | (20,999) | | | (3,962) | |
| Net (decrease) increase from foreign exchange contracts designated as hedges | | (873) | | | 1,281 | |
| Net decrease from interest rate swap designated as a hedge | | (6,944) | | | (2,017) | |
| Benefit from income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges | | 1,548 | | | 294 | |
| Other comprehensive loss | | (27,268) | | | (4,404) | |
| Comprehensive loss | | (31,243) | | | (643) | |
| Comprehensive income attributable to noncontrolling interests | | 1,680 | | | 2,079 | |
| Comprehensive loss attributable to Verint Systems Inc. | | $ | (32,923) | | | $ | (2,722) | |
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| | | Three Months Ended
April 30, |
| (in thousands, except per share data) | | 2021 | | 2020 |
| Revenue: | | | | |
| Recurring | | $ | 144,453 | | | $ | 129,070 | |
| Nonrecurring | | 56,451 | | | 56,795 | |
| Total revenue | | 200,904 | | | 185,865 | |
| Cost of revenue: | | | | |
| Recurring | | 38,076 | | | 34,928 | |
| Nonrecurring | | 29,880 | | | 31,619 | |
| Amortization of acquired technology | | 4,384 | | | 4,356 | |
| Total cost of revenue | | 72,340 | | | 70,903 | |
| Gross profit | | 128,564 | | | 114,962 | |
| Operating expenses: | | | | |
| Research and development, net | | 29,148 | | | 32,412 | |
| Selling, general and administrative | | 87,646 | | | 76,827 | |
| Amortization of other acquired intangible assets | | 7,328 | | | 7,764 | |
| Total operating expenses | | 124,122 | | | 117,003 | |
| Operating income (loss) | | 4,442 | | | (2,041) | |
| Other income (expense), net: | | | | |
| Interest income | | 23 | | | 481 | |
| Interest expense | | (5,019) | | | (10,689) | |
| Losses on early retirements of debt | | (2,474) | | | 0 | |
| Other income (expense), net | | 4,050 | | | (1,822) | |
| Total other expense, net | | (3,420) | | | (12,030) | |
| Income (loss) from continuing operations before provision for income taxes | | 1,022 | | | (14,071) | |
| (Benefit from) provision for income taxes | | (72) | | | 347 | |
| Net income (loss) from continuing operations | | 1,094 | | | (14,418) | |
| Net income from discontinued operations | | 0 | | | 10,443 | |
| Net income (loss) | | 1,094 | | | (3,975) | |
| Net income attributable to noncontrolling interests from continuing operations | | 295 | | | 240 | |
| Net income attributable to noncontrolling interests from discontinued operations | | 0 | | | 1,799 | |
| Net income (loss) attributable to Verint Systems Inc. | | 799 | | | (6,014) | |
| Dividends on preferred stock | | (3,322) | | | 0 | |
| Net loss attributable to Verint Systems Inc. common shares | | $ | (2,523) | | | $ | (6,014) | |
| | | | |
| Net (loss) income attributable to Verint Systems Inc. common shares | | | | |
| Net loss from continuing operations attributable to Verint Systems Inc. common shares | | $ | (2,523) | | | $ | (14,658) | |
| Net income from discontinued operations attributable to Verint Systems Inc. common shares | | $ | 0 | | | $ | 8,644 | |
| | | | |
| Basic net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Continuing operations | | $ | (0.04) | | | $ | (0.23) | |
| Discontinued operations | | 0 | | | 0.14 | |
| Total basic net loss per common share attributable to Verint Systems Inc. | | $ | (0.04) | | | $ | (0.09) | |
| | | | |
| Diluted net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Continuing operations | | $ | (0.04) | | | $ | (0.23) | |
| Discontinued operations | | 0 | | | 0.14 | |
| Total diluted net loss per common share attributable to Verint Systems Inc. | | $ | (0.04) | | | $ | (0.09) | |
| | | | |
| Weighted-average common shares outstanding: | | | | |
| Basic | | 65,661 | | | 64,376 | |
| Diluted | | 65,661 | | | 64,376 | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Net income (loss) | | $ | 1,094 | | | $ | (3,975) | |
| Other comprehensive income (loss), net of reclassification adjustments: | | | | |
| Foreign currency translation adjustments | | 2,608 | | | (20,999) | |
| Distribution of Cognyte Software Ltd. | | 17,123 | | | 0 | |
| Net decrease from foreign exchange contracts designated as hedges | | (66) | | | (873) | |
| Net increase (decrease) from interest rate swap prior to dedesignation as a hedge | | 1,014 | | | (6,944) | |
| Net increase from settlement of interest rate swap due to partial early retirement of 2017 Term Loan | | 12,017 | | | 0 | |
| Benefit from income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges | | 11 | | | 1,548 | |
| Other comprehensive income (loss) | | 32,707 | | | (27,268) | |
| Comprehensive income (loss) | | 33,801 | | | (31,243) | |
| Comprehensive income attributable to noncontrolling interests | | 295 | | | 1,680 | |
| Comprehensive income (loss) attributable to Verint Systems Inc. | | $ | 33,506 | | | $ | (32,923) | |
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 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 | |
| | | | | | | | | | | | | | | | | | |
| Balances as of January 31, 2020 | | 64,738 | | | $ | 68 | | | $ | 1,660,889 | | | $ | (174,134) | | | $ | (105,590) | | | $ | (151,865) | | | $ | 1,229,368 | | | $ | 13,069 | | | $ | 1,242,437 | |
| Net (loss) income | | | — | | | — | | | — | | | — | | | (6,014) | | | — | | | (6,014) | | | 2,039 | | | (3,975) | |
| Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (26,909) | | | (26,909) | | | (359) | | | (27,268) | |
| Stock-based compensation - equity-classified awards | | | — | | | — | | | 15,029 | | | — | | | — | | | — | | | 15,029 | | | — | | | 15,029 | |
| Common stock issued, or to be issued, for stock awards and stock bonuses | | | 399 | | | 1 | | | 1,845 | | | — | | | — | | | — | | | 1,846 | | | — | | | 1,846 | |
| Exercises of stock options | | | 2 | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | — | | | 12 | |
| Treasury stock acquired | | | (613) | | | — | | | — | | | (33,990) | | | — | | | — | | | (33,990) | | | — | | | (33,990) | |
| Distribution to noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (245) | | | (245) | |
| Cumulative effect of adoption of ASU No. 2016-13 | | | — | | | — | | | — | | | — | | | (940) | | | — | | | (940) | | | — | | | (940) | |
| Balances as of April 30, 2020 | | 64,526 | | | $ | 69 | | | $ | 1,677,775 | | | $ | (208,124) | | | $ | (112,544) | | | $ | (178,774) | | | $ | 1,178,402 | | | $ | 14,504 | | | $ | 1,192,906 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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, 2021 | | 65,773 | | | $ | 70 | | | $ | 1,726,166 | | | $ | (208,124) | | | $ | (113,797) | | | $ | (136,878) | | | $ | 1,267,437 | | | $ | 15,127 | | | $ | 1,282,564 | |
| Net income | | — | | | — | | | — | | | — | | | 799 | | | — | | | 799 | | | 295 | | | 1,094 | |
| Other comprehensive income, excluding the distribution of Cognyte Software Ltd. | | — | | | — | | | — | | | — | | | — | | | 15,584 | | | 15,584 | | | — | | | 15,584 | |
| Distribution of Cognyte Software Ltd. | | — | | | — | | | (281,665) | | | — | | | — | | | 17,123 | | | (264,542) | | | (12,870) | | | (277,412) | |
| Stock-based compensation - equity-classified awards | | — | | | — | | | 14,253 | | | — | | | — | | | — | | | 14,253 | | | — | | | 14,253 | |
| Common stock issued for stock awards and stock bonuses | | 827 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| Common stock repurchased and retired | | (1,058) | | | (1) | | | (49,580) | | | — | | | — | | | — | | | (49,581) | | | — | | | (49,581) | |
| Treasury stock acquired | | (543) | | | — | | | — | | | (25,868) | | | — | | | — | | | (25,868) | | | — | | | (25,868) | |
| Purchases of capped calls, net of taxes | | — | | | — | | | (32,416) | | | — | | | — | | | — | | | (32,416) | | | — | | | (32,416) | |
| Cumulative effect of adoption of ASU No. 2020-06, net of taxes | | — | | | — | | | (43,445) | | | — | | | 44,875 | | | — | | | 1,430 | | | | | 1,430 | |
| Balances as of April 30, 2021 | | 64,999 | | | $ | 70 | | | $ | 1,333,312 | | | $ | (233,992) | | | $ | (68,123) | | | $ | (104,171) | | | $ | 927,096 | | | $ | 2,552 | | | $ | 929,648 | |
| | | | | | | | | | | | | | | | | | |
| Balances as of January 31, 2020 | | 64,738 | | | $ | 68 | | | $ | 1,660,889 | | | $ | (174,134) | | | $ | (105,590) | | | $ | (151,865) | | | $ | 1,229,368 | | | $ | 13,069 | | | $ | 1,242,437 | |
| Net (loss) income | | — | | | — | | | — | | | — | | | (6,014) | | | — | | | (6,014) | | | 2,039 | | | (3,975) | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (26,909) | | | (26,909) | | | (359) | | | (27,268) | |
| Stock-based compensation - equity-classified awards | | — | | | — | | | 15,029 | | | — | | | — | | | — | | | 15,029 | | | — | | | 15,029 | |
| Common stock issued, or to be issued, for stock awards and stock bonuses | | 399 | | | 1 | | | 1,845 | | | — | | | — | | | — | | | 1,846 | | | — | | | 1,846 | |
| Exercises of stock options | | 2 | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | — | | | 12 | |
| Treasury stock acquired | | (613) | | | — | | | — | | | (33,990) | | | — | | | — | | | (33,990) | | | — | | | (33,990) | |
| Distribution to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (245) | | | (245) | |
| Cumulative effect of adoption of ASU No. 2016-13 | | — | | | — | | | — | | | — | | | (940) | | | — | | | (940) | | | — | | | (940) | |
| Balances as of April 30, 2020 | | 64,526 | | | $ | 69 | | | $ | 1,677,775 | | | $ | (208,124) | | | $ | (112,544) | | | $ | (178,774) | | | $ | 1,178,402 | | | $ | 14,504 | | | $ | 1,192,906 | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited) | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | |
| Net income (loss) | | $ | 1,094 | | | $ | (3,975) | |
| (Income) from discontinued operations, net of income taxes | | 0 | | | (10,443) | |
| Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 19,049 | | | 20,989 | |
| Stock-based compensation, excluding cash-settled awards | | 16,405 | | | 10,683 | |
| Change in fair value of future tranche right | | (15,810) | | | 0 | |
| Amortization of discount on convertible notes | | 0 | | | 3,226 | |
| Non-cash losses on derivative financial instruments, net | | 14,374 | | | 1 | |
| Losses on early retirements of debt | | 2,474 | | | 0 | |
| Other, net | | (2,317) | | | (3,703) | |
| Changes in operating assets and liabilities: | | | | |
| Accounts receivable | | 58,026 | | | 36,159 | |
| Contract assets | | (2,184) | | | 6,064 | |
| Inventories | | (350) | | | (2,855) | |
| Prepaid expenses and other assets | | (18,781) | | | (10,657) | |
| Accounts payable and accrued expenses | | (1,510) | | | 3,679 | |
| Contract liabilities | | (15,524) | | | (7,158) | |
| Deferred income taxes | | (16,977) | | | 752 | |
| Other, net | | (260) | | | 2,557 | |
| Net cash provided by operating activities - continuing operations | | 37,709 | | | 45,319 | |
| Net cash (used in) provided by operating activities - discontinued operations | | (8,007) | | | 30,659 | |
| Net cash provided by operating activities | | 29,702 | | | 75,978 | |
| | | | |
| Cash flows from investing activities: | | | | |
| Purchases of property and equipment | | (4,369) | | | (4,201) | |
| Maturities and sales of investments | | 45,640 | | | 9,000 | |
| Cash paid for capitalized software development costs | | (1,966) | | | (2,287) | |
| Change in restricted bank time deposits, and other investing activities, net | | (32) | | | 11 | |
| Net cash provided by investing activities - continuing operations | | 39,273 | | | 2,523 | |
| Net cash provided by investing activities - discontinued operations | | 0 | | | 6,770 | |
| Net cash provided by investing activities | | 39,273 | | | 9,293 | |
| | | | |
| Cash flows from financing activities: | | | | |
| Proceeds from issuance of preferred stock | | 200,000 | | | 0 | |
| Proceeds from borrowings | | 315,000 | | | 155,000 | |
| Repayments of borrowings and other financing obligations | | (310,633) | | | (1,898) | |
| Purchases of capped calls | | (40,950) | | | 0 | |
| Payments of debt-related costs | | (9,422) | | | 0 | |
| Purchases of treasury stock and common stock for retirement | | (75,014) | | | (36,836) | |
| Preferred stock dividend payments | | (5,200) | | | 0 | |
| Distributions paid to noncontrolling interest | | 0 | | | (245) | |
| Payment for termination of interest rate swap | | (16,502) | | | 0 | |
| Net cash transferred to Cognyte Software Ltd. | | (114,657) | | | 0 | |
| Dividend and other settlements received from Cognyte Software Ltd. | | 40,164 | | | 0 | |
| Payments of contingent consideration for business combinations (financing portion) and other financing activities | | (2,842) | | | (1,282) | |
| Net cash (used in) provided by financing activities | | (20,056) | | | 114,739 | |
| Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | | 218 | | | (3,106) | |
| Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 49,137 | | | 196,904 | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 700,133 | | | 411,657 | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 749,270 | | | $ | 608,561 | |
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | |
| Net (loss) income | | $ | (3,975) | | | $ | 3,761 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 23,931 | | | 22,954 | |
| Stock-based compensation, excluding cash-settled awards | | 14,192 | | | 17,065 | |
| Amortization of discount on convertible notes | | 3,226 | | | 3,061 | |
| Non-cash gains on derivative financial instruments, net | | (1,014) | | | (549) | |
| Other non-cash items, net | | (3,537) | | | 2,646 | |
| Changes in operating assets and liabilities, net of effects of business combinations: | | | | |
| Accounts receivable | | 70,087 | | | 58,900 | |
| Contract assets | | 2,094 | | | (39) | |
| Inventories | | (5,118) | | | (3,118) | |
| Prepaid expenses and other assets | | (11,630) | | | 5,268 | |
| Accounts payable and accrued expenses | | 564 | | | 8,487 | |
| Contract liabilities | | (14,776) | | | (24,648) | |
| Other, net | | 1,934 | | | (725) | |
| Net cash provided by operating activities | | 75,978 | | | 93,063 | |
| | | | |
| Cash flows from investing activities: | | | | |
| Cash paid for business combinations, including adjustments, net of cash acquired | | — | | | (20,210) | |
| Purchases of property and equipment | | (8,835) | | | (8,331) | |
| Purchases of investments | | (15,198) | | | (9,995) | |
| Maturities and sales of investments | | 15,648 | | | 2,965 | |
| Cash paid for capitalized software development costs | | (3,146) | | | (2,819) | |
| Change in restricted bank time deposits, and other investing activities, net | | 20,824 | | | 2,941 | |
| Net cash provided by (used in) investing activities | | 9,293 | | | (35,449) | |
| | | | |
| Cash flows from financing activities: | | | | |
| Proceeds from borrowings, net of original issuance discount | | 155,000 | | | — | |
| Repayments of borrowings and other financing obligations | | (1,898) | | | (1,584) | |
| Purchases of treasury stock | | (36,836) | | | (474) | |
| Distribution paid to noncontrolling interest | | (245) | | | — | |
| Payments of deferred purchase price and contingent consideration for business combinations (financing portion) and other financing activities | | (1,282) | | | (11,674) | |
| Net cash provided by (used in) financing activities | | 114,739 | | | (13,732) | |
| Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (3,106) | | | (853) | |
| Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 196,904 | | | 43,029 | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 411,657 | | | 412,699 | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 608,561 | | | $ | 455,728 | |
| | | | |
| 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 | | $ | 556,671 | | | $ | 412,024 | |
| Restricted cash and cash equivalents included in restricted cash and cash equivalents, and restricted bank time deposits | | 38,004 | | | 39,373 | |
| Restricted cash and cash equivalents included in other assets | | 13,886 | | | 4,331 | |
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 608,561 | | | $ | 455,728 | |
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| | | | |
| 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 | | $ | 359,418 | | | $ | 556,671 | |
| Restricted cash and cash equivalents included in restricted cash and cash equivalents, and restricted bank time deposits | | 389,795 | | | 38,004 | |
| Restricted cash and cash equivalents included in other assets | | 57 | | | 13,886 | |
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 749,270 | | | $ | 608,561 | |
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. In a world of massive information growth, our solutions empower organizations with crucial, actionable insights and enable decision makers to anticipate, respond, and take action. Today, over 10,000 organizations inhelps brands provide Boundless Customer Engagement™. For more than 180 countries,two decades, the world’s most iconic brands – including overmore than 85 percent of the Fortune 100 use Verint’s Actionable Intelligencecompanies – have trusted Verint to provide the technology and domain expertise they require to effectively build enduring customer relationships. Through the Verint Cloud Platform, we offer our customers and partners solutions deployedthat are based on artificial intelligence (AI) and analytics to automate workflows across enterprise silos to optimize workforce expense and drive an elevated consumer experience. These solutions are used by approximately 10,000 organizations in the cloud175 countries across a diverse set of verticals, including financial services, healthcare, utilities, technology, and on-premises,government. Our customers include large enterprises with thousands of employees, as well as small to make more informed, timely, and effective decisions.medium sized business (SMB) organizations.
Our Actionable Intelligence leadershipVerint is poweredheadquartered in Melville, New York, and has more than 40 offices worldwide. We have approximately 4,300 professionals around the globe exclusively focused on helping brands provide Boundless Customer Engagement™.
Recent Developments
Spin-Off of Cognyte Software Ltd.
On February 1, 2021, we completed the previously announced spin-off (the “Spin-Off”) of Cognyte Software Ltd. (“Cognyte”), a company limited by innovative, enterprise-class software built with artificial intelligence, analytics, automation, and deep domain expertise established by working closely with someshares incorporated under the laws of the most sophisticatedState of Israel whose business and forward-thinking organizationsoperations consist of our former Cyber Intelligence Solutions business (the “Cognyte Business”). The Spin-Off of Cognyte was completed by way of a pro rata distribution in which holders of Verint’s common stock, par value $0.001 per share, received 1 ordinary share of Cognyte, no par value, for every share of common stock of Verint held of record as of the close of business on January 25, 2021 (the “Record Date”). After the distribution, we do not beneficially own any ordinary shares of Cognyte and no longer consolidate Cognyte into our financial results for periods ending after January 31, 2021. The Spin-Off was intended to be generally tax-free to our stockholders for U.S. federal income tax purposes.
The financial results of Cognyte for the three months ended April 30, 2020 are presented as income from discontinued operations, net of taxes on the condensed consolidated statements of operations and its assets and liabilities as of January 31, 2021 are presented as assets and liabilities of discontinued operations on the condensed consolidated balance sheets. The historical condensed consolidated statement of cash flows has also been revised to reflect the effect of the Spin-Off. The historical statements of comprehensive income (loss) and the balances related to stockholders' equity have not been revised to reflect the effect of the Spin-Off. For further information on discontinued operations, see Note 2, “Discontinued Operations”. Unless noted otherwise, discussion in the world. We believe we have one ofnotes to the industry's strongest research and development (“R&D”) teams focused on actionable intelligence consisting of approximately one-third of our approximately 6,300 professionals. Our innovative solutions are backed-up by a strong IP portfolio with over 1,000 patents and patent applications worldwide across areas including data capture, artificial intelligence, machine learning, unstructured data analytics, predictive analytics and automation.condensed consolidated financial statements pertain to continuing operations.
Apax Convertible Preferred Stock Investment
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 stockholders (the “Spin-Off”) that is intended to be tax-free to our stockholders for U.S. federal income tax purposes. We currently expect to complete the Spin-Off shortly after the end of this fiscal year ending January 31, 2021, though this timeline may be impacted by the current business environment brought on by the COVID-19 pandemic. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments” under Item 2 of this report for a more detailed discussion of the planned Spin-Off.
On December 4, 2019, we also announced that Valor Parent LPan affiliate (the “Apax Investor”), an affiliate of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400$400.0 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the “Investment Agreement”), the Apax Investor initially purchased $200$200.0 million of our Series A convertible preferred stock which(“Series A Preferred Stock”) in an issuance that closed on May 7, 2020. Please refer to Note 16, “Subsequent Events” for additional information regardingIn connection with the closingcompletion of the initial tranche. Shortly following the Spin-Off, the Apax Investor will purchase, subject to certain conditions, up to $200purchased $200.0 million of our Series B convertible preferred stock in the Company, as the entity holding the Customer Engagement Solutions business. Following the closing of(the “Series B Preferred Stock” and together with the Series A investment,Preferred Stock, the “Preferred Stock”) in an issuance that closed on April 6, 2021. As of April 30, 2021, Apax’s ownership in us on an as-converted basis is approximately 5.5%12.9%. 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%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 2 of this reportPlease refer to Note 9, “Convertible Preferred Stock” for a more detailed discussion of the planned Apax investment.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.
Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption despite progress made in recent months in the development and distribution of vaccines and the economic recovery since the first half of 2020. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Companies around the world, including us, our customers, partners, and vendors, have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. The global spread of COVID-19 and actions taken in response have negatively affected us, our customers, partners, and vendors and caused significant economic and business disruption the extent and duration of which is not currently known. In response to these challenges, we quickly adjustedestablished remote working arrangements for our operationsemployees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to work from homea virtual-only format and we believe our business continuity plan is working well.
We are monitoring and assessing the impact of the COVID-19 pandemic daily, including recommendations and orders issued by government and public health authorities. We continue to work to help our customers meet their business continuity needs and help keep the world safe during this difficult time and are managing our operations with a view to resuming normal business activity as soon as possible.
See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments” of this report for a more detailed discussion of the impact of COVID-19 on our business.
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, 20202021 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 April 30, 20202021 and 2019,2020, and the condensed consolidated balance sheet as of April 30, 2020,2021, 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, 20202021 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2020.2021. 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, 20202021 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., and 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.subsidiaries. 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 two2 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 accrued expenses and other current liabilities and do not recognize noncontrolling interests in these subsidiaries.
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.eliminated in consolidation.
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.
In light of the currently unknown extent and duration of the COVID-19 pandemic, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply to certain of our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts COVID-19 as of April 30, 20202021 and through the date of this report. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Significant Accounting Policies
Reclassifications
Following the Spin-Off, we began to operate as a pure-play customer engagement company and determined that presenting our revenue and cost of revenue as recurring and nonrecurring would be a more meaningful representation of the nature of our offerings, provide greater transparency and clarity to users of the financial statements, and is more consistent with industry practice and internal reporting. Accordingly, prior period amounts have been reclassified to conform to the current period presentation in our condensed consolidated financial statements and the accompanying notes. For a description of the types of revenue included in each category, see Note 3, “Revenue Recognition”.
Business Segment Information
Prior to the Spin-Off, we had 2 reportable segments—Customer Engagement and Cyber Intelligence. Upon completion of the Spin-Off, we are a pure-play customer engagement company that operates as a single reporting segment as our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Significant Accounting Policies
There have been no material changes in our significant accounting policies during the three months ended April 30, 2020,2021, as compared to the significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2020.2021, other than the recently adopted accounting pronouncements described below.
Recently Adopted Accounting Pronouncements
In June 2016,December 2019, the Financial Accounting Standards Board ("FASB"(the “FASB”) issued Accounting Standard Update ("ASU"Standards Updated (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. This new standard requires entities to measure expected credit losses for certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company's financial instruments within the scope of this guidance primarily includes accounts receivable and contract assets. On February 1, 2020, we adopted the new standard under the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. The adoption of ASU No. 2016-13 resulted in a $1.1 million increase in our allowance for expected credit losses related to accounts receivable and contract assets, a $0.2 million increase to deferred tax assets, and an impact of $0.9 million to our accumulated deficit. The new accounting standard did not have a material impact on our condensed consolidated financial statements, including accounting policies, given our limited historical write-off activity.
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 requires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize and which costs to expense. Under the new standard, implementation costs are deferred and presented in the same financial statement caption on the condensed consolidated balance sheet as a prepayment of related arrangement fees. The deferred costs are recognized over the term of the arrangement in the same financial statement caption in the condensed consolidated income statement as the related fees of the arrangement. We adopted ASU No. 2018-15 prospectively to eligible costs incurred on or after February 1, 2020 and the implementation did not have a material impact on our condensed consolidated financial statements.
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. Since the standard affects only disclosure requirements, the adoption of the standard did not have an impact on our condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Effective
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes and is meant to simplify and reduceTaxes. The new guidance simplifies the cost of accounting for income taxes. This standard is effectivetaxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the tax basis of goodwill after a business combination, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also changes the calculation of the income tax impact of hybrid taxes and the methodology for calculating income taxes in an interim and annual reporting periods beginning after December 15, 2020.period. We are currently reviewingadopted this standard but doas of February 1, 2021 on either a prospective basis, or through a modified retrospective approach, as required by the standard. There was no cumulative effect adjustment recorded to accumulated deficit as the amount was not expectmaterial. The effects of this standard on our financial position, results of operations and cash flows were not material.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU No. 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. ASU No. 2020-06 also eliminates the treasury stock method to calculate diluted earnings per share and requires the if-converted method for convertible instruments. We early adopted ASU No. 2020-06 as of February 1, 2021 using the modified retrospective transition method. Prior period financial statements have not been restated upon adoption.
Upon adoption of ASU No. 2020-06, we no longer record the conversion feature of our 2014 convertible senior notes in equity. Instead, we combined the previously separated equity component with the liability component, which together is classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, we recorded a decrease to accumulated deficit of approximately $44.9 million, a decrease to additional paid-in capital of $43.4 million, a decrease to temporary equity of $4.8 million, an increase to current maturities of long-term debt of $4.4 million, a decrease to deferred tax liabilities of $0.9 million, and an increase in debt issuance costs of $0.1 million. There was no impact to earnings per share as a result of the adoption.
New Accounting Pronouncements Not Yet Effective
There are no new accounting pronouncements not yet effective that it willare expected to have a materialan impact on our condensed consolidated financial statements.
2. DISCONTINUED OPERATIONS
On February 1, 2021 (the “Spin-Off Date”), we completed the previously announced Spin-Off of Cognyte by way of a pro rata and generally tax-free distribution of all of the then-issued and outstanding ordinary shares of Cognyte to holders of record of our common stock as of the close of business on January 25, 2021.
To effect the Spin-Off and provide a framework for our relationship with Cognyte post Spin-Off we entered into several agreements with Cognyte, including the following:
•a Separation and Distribution Agreement;
•a Tax Matters Agreement;
•an Employee Matters Agreement;
•a Transition Services Agreement;
•an Intellectual Property Cross License Agreement; and
•a Trademark Cross License Agreement.
These agreements provide for the allocation of assets, employees, liabilities, and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between us and Cognyte attributable to periods prior to, at and after the Spin-Off.
Under the Transition Services Agreement (“TSA”) with Cognyte, we and Cognyte will provide and/or make available various administrative services and assets to each other for a given period based on each individual service, with an option to extend certain services after the first year. In no case will services be provided for more than 24 months after the Spin-Off. In consideration for such services, we and Cognyte will each pay fees to the other for the services provided, and those fees will generally be in amounts intended to allow the party providing services to recover all of its direct and indirect costs incurred in providing those services, plus a standard markup, and subject to a mutually agreed upon increase following an extension of the initial service term. The fees charged for the first year of services are fixed. Fees for services provided by third-party suppliers will be on a straight pass-through basis. During the three months ended April 30, 2021, we invoiced Cognyte $1.5 million and Cognyte invoiced us $0.3 million for transition services provided under the TSA.
Under the Tax Matters Agreement with Cognyte, we and Cognyte each agreed to share the obligation to pay any taxes as shown on tax returns filed by Cognyte (or any member of its group), on one hand, and us (or any member of our group), on the other hand, such that we will be primarily responsible for any taxes related to, or arising in connection with our business and Cognyte will be responsible for any taxes related to, or arising in connection with, the Cognyte Business, regardless of which party prepares and files any such tax return and whether such taxes arise prior to or after the Spin-Off. We and Cognyte also agreed to share responsibility for preparing relevant tax returns, which responsibility will depend on the type of a tax return and the period for which such tax return is being filed. We and Cognyte agreed to indemnify each other under the Tax Matters Agreement for certain actions or inactions.
The Spin-Off met the criteria for classification as “discontinued operations” in accordance with the accounting guidance upon completion of the separation, and as such, the results of our former Cognyte Business have been classified as discontinued operations in our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of cash flows for all periods presented. As of April 30, 2021, there were no assets from discontinued operations associated with Cognyte and remaining accrued liabilities related to unpaid transaction costs were immaterial. There were no revenues earned or costs and expenses incurred by discontinued operations during the three months ended April 30, 2021.
The following table summarizes the major classes of line items included within discontinued operations in our condensed consolidated statement of operations for the three months ended April 30, 2020:
| | | | | | | | |
| (in thousands) | | Three Months Ended
April 30, 2020 |
| Revenue | | $ | 101,430 | |
| Cost of revenue | | 31,423 | |
| Operating expenses | | 61,792 | |
| Other income, net | | 119 | |
| Income from discontinued operations before benefit from income taxes | | 8,334 | |
| Benefit from income taxes | | (2,109) | |
| Net income from discontinued operations | | 10,443 | |
| Net income attributable to noncontrolling interests from discontinued operations | | 1,799 | |
| Net income from discontinued operations attributable to Verint Systems Inc. common shares | | $ | 8,644 | |
The following table summarizes the assets and liabilities that were transferred to Cognyte on February 1, 2021 and presented as discontinued operations in our condensed consolidated balance sheet as of January 31, 2021:
| | | | | | | | |
| (in thousands) | | January 31, 2021 |
| Assets | | |
| Current Assets: | | |
| Cash and cash equivalents | | $ | 78,570 | |
| Restricted cash and cash equivalents, and restricted bank time deposits | | 27,042 | |
| Short-term investments | | 4,713 | |
| Accounts receivable, net | | 175,001 | |
| Contract assets, net | | 20,317 | |
| Inventories | | 14,542 | |
| Prepaid expenses and other current assets | | 34,741 | |
| Total current assets of discontinued operations | | 354,926 | |
| Property and equipment, net | | 37,152 | |
| Operating lease right-of-use assets | | 31,040 | |
| Goodwill | | 158,183 | |
| Intangible assets, net | | 5,299 | |
| Other assets | | 49,278 | |
| Total long-term assets of discontinued operations | | 280,952 | |
| Total assets of discontinued operations | | $ | 635,878 | |
| | |
| Liabilities | | |
| Current Liabilities: | | |
| Accounts payable | | $ | 41,512 | |
| Accrued expenses and other current liabilities | | 100,189 | |
| Contract liabilities | | 127,012 | |
| Total current liabilities of discontinued operations | | 268,713 | |
| Long-term contract liabilities | | 22,037 | |
| Operating lease liabilities | | 23,174 | |
| Other liabilities | | 12,907 | |
| Total long-term liabilities of discontinued operations | | 58,118 | |
| Total liabilities of discontinued operations | | $ | 326,831 | |
In connection with the Spin-Off, $17.1 million of accumulated other comprehensive income, net of income taxes, related to foreign currency translation adjustments and foreign exchange contracts designated as cash flow hedges were transferred to Cognyte on the Spin-Off Date. Additionally, Verint transferred its interests in Cognyte Technologies Israel Ltd. (formerly Verint Systems Limited) (“CTIL”) on the Spin-Off Date. Prior to the transfer, CTIL was a wholly owned subsidiary of Verint and the CTIL board of directors declared a cash dividend in the aggregate amount of $35.0 million payable to Verint, as its sole holder of record of ordinary shares, on January 29, 2021. In April 2021, we received the dividend from Cognyte less applicable
withholding taxes. The $78.6 million of cash and cash equivalents shown in the table above does not reflect the payment of the dividend, which occurred after the completion of the Spin-Off.
2.3. REVENUE RECOGNITION
We derive our revenue primarily from providing customers the licensing ofright to access our cloud-based solutions, the right to use our software productsfor an indefinite or specified period of time, and related services and support based on when access or control of the software passes to our customers or the services are provided, in an amount that reflects the consideration we expect to be entitled to in exchange for such goods or services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction,transactions, including mandatory government charges that are passed through to our customers.
We determine revenue recognition through the following five steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition 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 has commercial substance, and collectability of consideration is probable.
Disaggregation of Revenue
The following table provides information about disaggregated revenue fora disaggregation of our Customer Engagementrecurring 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.revenue. Recurring revenue is the portion of our revenue that we believe is likely to be renewed in the 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 withand some optional managed services revenue.
◦SaaS revenue consists predominately of bundled SaaS (software with standard managed services) with someand unbundled SaaS (software(comprised of software licensing rights sold separately from managed services and accounted for as term-based licenses)licenses whereby customers use our software with related support for a specified period of time). 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, except for the related support which is recognized over time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one-one- and three-year time frame.
•Nonrecurring revenue primarily consists of our perpetual licenses, consulting, implementation andhardware, installation services, and training.business advisory consulting and training services.
For our Cyber Intelligence segment:
•Recurring revenue primarily consists of initial and renewal support, subscription software licenses, andIn order to conform with the presentation described above, unbundled SaaS in certain limited transactions.
•Nonrecurring revenue primarily consists of our perpetual licenses, long-term 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
April 30, 2020 | | | | | | Three Months Ended
April 30, 2019 | | | | |
| (in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
| Revenue: | | | | | | | | | | | | |
| Product | | $ | 33,997 | | | $ | 43,287 | | | $ | 77,284 | | | $ | 54,002 | | | $ | 50,222 | | | $ | 104,224 | |
| Service and support | | 151,868 | | | 58,143 | | | 210,011 | | | 153,093 | | | 57,942 | | | 211,035 | |
| Total revenue | | $ | 185,865 | | | $ | 101,430 | | | $ | 287,295 | | | $ | 207,095 | | | $ | 108,164 | | | $ | 315,259 | |
| | | | | | | | | | | | |
| Revenue by recurrence: | | | | | | | | | | | | |
| Recurring revenue | | $ | 129,070 | | | $ | 56,038 | | | $ | 185,108 | | | $ | 123,358 | | | $ | 46,817 | | | $ | 170,175 | |
| Nonrecurring revenue | | 56,795 | | | 45,392 | | | 102,187 | | | 83,737 | | | 61,347 | | | 145,084 | |
| Total revenue | | $ | 185,865 | | | $ | 101,430 | | | $ | 287,295 | | | $ | 207,095 | | | $ | 108,164 | | | $ | 315,259 | |
The following table provides a further disaggregation of revenue for our Customer Engagement segment.the three months ended April 30, 2020 has been revised to reflect $2.0 million of unbundled SaaS support revenue which had previously been presented within support revenue.
| | | Three Months Ended
April 30, | | | Three Months Ended
April 30, |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| Customer Engagement revenue | | | | | |
| Recurring revenue | | |
| Recurring revenue: | | Recurring revenue: | | | | |
| Bundled SaaS revenue | Bundled SaaS revenue | | $ | 33,393 | | | $ | 27,204 | | Bundled SaaS revenue | | $ | 39,309 | | | $ | 33,393 | |
| Unbundled SaaS revenue | Unbundled SaaS revenue | | 5,472 | | | 6,252 | | Unbundled SaaS revenue | | 24,283 | | | 7,495 | |
| Optional managed services revenue | Optional managed services revenue | | 14,132 | | | 13,629 | | Optional managed services revenue | | 16,458 | | | 14,132 | |
| Total cloud revenue | Total cloud revenue | | 52,997 | | | 47,085 | | Total cloud revenue | | 80,050 | | | 55,020 | |
| Support revenue | Support revenue | | 76,073 | | | 76,273 | | Support revenue | | 64,403 | | | 74,050 | |
| Total recurring revenue | Total recurring revenue | | 129,070 | | | 123,358 | | Total recurring revenue | | 144,453 | | | 129,070 | |
| Nonrecurring revenue | | | | | | | |
| Nonrecurring revenue: | | Nonrecurring revenue: | | | | |
| Perpetual revenue | Perpetual revenue | | 28,525 | | | 47,602 | | Perpetual revenue | | 29,323 | | | 28,525 | |
| Professional services revenue | Professional services revenue | | 28,270 | | | 36,135 | | Professional services revenue | | 27,128 | | | 28,270 | |
| Total nonrecurring revenue | Total nonrecurring revenue | | 56,795 | | | 83,737 | | Total nonrecurring revenue | | 56,451 | | | 56,795 | |
| Total Customer Engagement revenue | | $ | 185,865 | | | $ | 207,095 | | |
| Total revenue | | Total revenue | | $ | 200,904 | | | $ | 185,865 | |
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
| | | | | | | | | | | | | | |
| (in thousands) | | April 30, 2020 | | January 31, 2020 |
| Accounts receivable, net | | $ | 308,304 | | | $ | 382,435 | |
| Contract assets, net | | $ | 62,249 | | | $ | 64,961 | |
| Long-term contract assets (included in Other assets) | | $ | 9,260 | | | $ | 1,358 | |
| Contract liabilities | | $ | 378,548 | | | $ | 397,350 | |
| Long-term contract liabilities | | $ | 40,566 | | | $ | 40,565 | |
| | | | | | | | | | | | | | |
| (in thousands) | | April 30, 2021 | | January 31, 2021 |
| Accounts receivable, net | | $ | 147,932 | | | $ | 206,157 | |
| Contract assets, net | | $ | 38,907 | | | $ | 36,716 | |
| Long-term contract assets, net (included in other assets) | | $ | 20,570 | | | $ | 17,210 | |
| Contract liabilities | | $ | 244,892 | | | $ | 261,033 | |
| Long-term contract liabilities | | $ | 17,391 | | | $ | 16,502 | |
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 multi-year unbundled SaaS contracts and arrangements where our 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 asset impairment charges related to contract assets were immaterial in the three months ended April 30, 20202021 and 2019. There are two customers in our Cyber Intelligence segment that accounted for a combined $47.3 million and $51.7 million of our aggregated accounts receivable and contract assets at April 30, 2020 and January 31, 2020, respectively. These amounts result from both direct and indirect contracts with governmental agencies outside of the U.S. which we believe present insignificant credit risk.2020.
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 months ended April 30, 20202021 and 20192020 from amounts included in contract liabilities at the beginning of each period was $139.1$97.6 million and $134.6$92.5 million, respectively.
Remaining Performance Obligations
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 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. The timing and amount of revenue recognition for our remaining performance obligations is influenced by several factors, including seasonality, the timing of support renewals, the timing of delivery of software licenses, the average length of the contract terms, 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.foreign currency exchange rates.
The following table provides information about when we expect to recognize our remaining performance obligations for each of our operating segments:obligations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2020 | | | | | | January 31, 2020 | | | | |
| (in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
| RPO: | | | | | | | | | | | | |
| Expected to be recognized within 1 year | | $ | 363,496 | | | $ | 363,710 | | | $ | 727,206 | | | $ | 374,982 | | | $ | 356,677 | | | $ | 731,659 | |
| Expected to be recognized in more than 1 year | | 113,340 | | | 197,729 | | | 311,069 | | | 117,497 | | | 225,056 | | | 342,553 | |
| Total RPO | | $ | 476,836 | | | $ | 561,439 | | | $ | 1,038,275 | | | $ | 492,479 | | | $ | 581,733 | | | $ | 1,074,212 | |
| | | | | | | | | | | | | | |
| (in thousands) | | April 30, 2021 | | January 31, 2021 |
| RPO: | | | | |
| Expected to be recognized within 1 year | | $ | 388,193 | | | $ | 405,714 | |
| Expected to be recognized in more than 1 year | | 230,839 | | | 229,951 | |
| Total RPO | | $ | 619,032 | | | $ | 635,665 | |
3.4. NET (LOSS) INCOMELOSS PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net (loss) incomeloss per common share attributable to Verint Systems Inc. for the three months ended April 30, 20202021 and 2019:
| | | | | | | | | | | | | | |
| | Three Months Ended
April 30, | | |
| (in thousands, except per share amounts) | | 2020 | | 2019 |
| Net (loss) income | | $ | (3,975) | | | $ | 3,761 | |
| Net income attributable to noncontrolling interests | | 2,039 | | | 2,185 | |
| Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 1,576 | |
| Weighted-average shares outstanding: | | | | |
| Basic | | 64,376 | | | 65,438 | |
| Dilutive effect of employee equity award plans | | — | | | 1,650 | |
| Dilutive effect of 1.50% convertible senior notes | | — | | | — | |
| Dilutive effect of warrants | | — | | | — | |
| Diluted | | 64,376 | | | 67,088 | |
| Net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Basic | | $ | (0.09) | | | $ | 0.02 | |
| Diluted | | $ | (0.09) | | | $ | 0.02 | |
| | | | | | | | | | | | | | |
| | Three Months Ended
April 30, |
| (in thousands, except per share amounts) | | 2021 | | 2020 |
| Net income (loss) from continuing operations | | $ | 1,094 | | | $ | (14,418) | |
| Net income from discontinued operations, net of tax | | 0 | | | 10,443 | |
| Net income (loss) | | 1,094 | | | (3,975) | |
| Net income attributable to noncontrolling interests from continuing operations | | 295 | | | 240 | |
| Net income attributable to noncontrolling interests from discontinued operations | | 0 | | | 1,799 | |
| Net income (loss) attributable to Verint Systems Inc. | | 799 | | | (6,014) | |
| Dividends on preferred stock | | (3,322) | | | 0 | |
| Net loss attributable to Verint Systems Inc. for basic net loss per common share | | (2,523) | | | (6,014) | |
| Dilutive effect of dividends on preferred stock | | 0 | | | 0 | |
| Net loss attributable to Verint Systems Inc. for diluted net loss per common share | | $ | (2,523) | | | $ | (6,014) | |
| | | | |
| Net loss (income) attributable to Verint Systems Inc. common shares | | | | |
| Net loss from continuing operations attributable to Verint Systems Inc. common shares | | (2,523) | | | (14,658) | |
| Net income from discontinued operations attributable to Verint Systems Inc. common shares | | 0 | | | 8,644 | |
| | | | |
| Weighted-average shares outstanding: | | | | |
| Basic | | 65,661 | | | 64,376 | |
| Dilutive effect of employee equity award plans | | 0 | | | 0 | |
| Dilutive effect of 0.25% convertible senior notes | | 0 | | | 0 | |
| Dilutive effect of 1.50% convertible senior notes | | 0 | | | 0 | |
| Dilutive effect of warrants | | 0 | | | 0 | |
| Dilutive effect of assumed conversion of preferred stock | | 0 | | | 0 | |
| Diluted | | 65,661 | | | 64,376 | |
| | | | |
| Basic net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Continuing operations | | $ | (0.04) | | | $ | (0.23) | |
| Discontinued operations | | 0 | | | 0.14 | |
| Total basic net loss per common share attributable to Verint Systems Inc. | | $ | (0.04) | | | $ | (0.09) | |
| | | | |
| Diluted net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Continuing operations | | $ | (0.04) | | | $ | (0.23) | |
| Discontinued operations | | 0 | | | 0.14 | |
| Total diluted net loss per common share attributable to Verint Systems Inc. | | $ | (0.04) | | | $ | (0.09) | |
We excluded the following weighted-average potential common shares from theour diluted per share calculations of diluted net income per common share during the applicable periods because their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | |
| | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Common shares excluded from calculation: | | | | |
| Stock options and restricted stock-based awards | | 1,491 | | | 606 | |
| 1.50% convertible senior notes | | 6,205 | | | 6,205 | |
| Warrants | | 6,205 | | | 6,205 | |
| | | | | | | | | | | | | | |
| | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Common shares excluded from calculation: | | | | |
| Stock options and restricted stock-based awards | | 1,859 | | | 1,491 | |
| 0.25% convertible senior notes | | 1,254 | | | 0 | |
| 1.50% convertible senior notes | | 9,541 | | | 6,205 | |
| Warrants | | 9,865 | | | 6,205 | |
| Series A Preferred Stock | | 5,498 | | | 0 | |
| Series B Preferred Stock | | 1,118 | | | 0 | |
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%Upon our adoption of ASU No. 2020-06 on February 1, 2021, use of the if-converted method is required for calculating any potential dilutive effect of convertible senior notes (“Notes”) will not impactinstruments. For the calculation of diluted net income per share unlessthree months ended April 30, 2021, the average price of our common stock, as calculateddid not exceed the $62.08 per share conversion price of our 0.25% convertible senior notes, and other requirements for the 2021 Notes (as defined in accordance withNote 7, “Long-Term Debt”) to be convertible were not met. The 2021 Notes will have a dilutive impact on net income per common share at any time when the termsaverage market price of the indenture governing the Notes,our common stock for a reporting period exceeds the conversion price.
The Capped Calls (as defined in Note 7, “Long-Term Debt”) do not impact our diluted earnings per common share calculations as their effect would be anti-dilutive. The Capped Calls are intended generally to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the $62.08 conversion price, with such reduction and/or offset subject to a cap of $64.46 per share. Likewise, diluted net income per share will not include any$100.00.
There is no impact on our calculation of the dilutive effect fromof our 1.50% convertible senior notes upon adoption of ASU No. 2020-06 as we were obligated to settle the principal amount of our 2014 Notes (as defined in Note 7, “Long-Term Debt”) in cash and settled the conversion spread with shares of our common stock in connection with the maturity of the 2014 Notes. Following the completion of the Spin-Off on February 1, 2021, the strike prices of the conversion features of our 2014 Notes and Warrants (as defined in Note 7, “Long-Term Debt”) unlesswere reduced to $40.55 per share and $47.18 per share, respectively, which increased the average priceequivalent number of ourunderlying common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share.shares to 9,541,000 and 9,865,000, respectively.
Our Note Hedges (as defined in Note 7, “Long-Term Debt”) dodid not impact the calculation ofour diluted net incomeearnings per common share under the treasury stock method,calculations because their effect would be anti-dilutive. However, in connection with the event of an actual conversion of any or allmaturity of the 2014 Notes, the common shares that would be delivered to us under the Note Hedges would neutralizeneutralized the dilutive effect of the common shares that we would issueissued under the Notes.2014 Notes to settle the conversion premium. As a result, actual conversion of any or allthe settlement of the outstanding 2014 Notes woulddid not increase our outstanding common stock. Up
Our Warrants (as defined in Note 7, “Long-Term Debt”) would have a dilutive effect on our diluted per common share calculations to 6,205,000the extent that we earned income for the applicable period and the average market value of our common stock exceeds the strike price of the Warrants. As of April 30, 2021, up to 9,865,000 common shares could be issued upon exercise of the Warrants.
Further details regarding the 2021 Notes, Capped Calls, 2014 Notes, Note Hedges, and the Warrants appear in Note 7, “Long-Term Debt”. See Note 16, “Subsequent Event,” for more details regarding the maturity of the 2014 Notes and Notes Hedges.
On December 4, 2019, we announced that Valor Parent LP, an affiliate ofthe Apax Partners,Investor would invest up to $400$400.0 million in us, in the form of convertible preferred stock. On May 7, 2020, the initial purchase of $200$200.0 million of our Series A convertible preferred stockPreferred Stock closed. As a result,On April 6, 2021, in connection with the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock. The weighted-average common shares underlying the assumed conversion of the Series A Preferred Stock and Series B Preferred Stock, on an as-converted basis, were excluded from the calculation of basic and diluted net income (loss)loss per common share will be impacted beginning infor the second quarter of this current fiscal year ending January 31, 2021.three months ended April 30, 2021 as their effect would have been anti-dilutive. Further details regarding the convertible preferred stockPreferred Stock investment appear in Note 1, “Basis of Presentation and Significant Accounting Policies” under “Description of Business” and Note 16, “Subsequent Events”9, “Convertible Preferred Stock”.
4.5. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of April 30, 20202021 and January 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2020 | | | | | | |
| (in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Cash and cash equivalents: | | | | | | | | |
| Cash and bank time deposits | | $ | 411,926 | | | $ | — | | | $ | — | | | $ | 411,926 | |
| Money market funds | | 144,745 | | | — | | | — | | | 144,745 | |
| Total cash and cash equivalents | | $ | 556,671 | | | $ | — | | | $ | — | | | $ | 556,671 | |
| | | | | | | | |
| Short-term investments: | | | | | | | | |
| Bank time deposits | | $ | 19,741 | | | $ | — | | | $ | — | | | $ | 19,741 | |
| Total short-term investments | | $ | 19,741 | | | $ | — | | | $ | — | | | $ | 19,741 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2021 |
| (in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Cash and cash equivalents: | | | | | | | | |
| Cash and bank time deposits | | $ | 187,394 | | | $ | — | | | $ | — | | | $ | 187,394 | |
| Money market funds | | 172,024 | | | — | | | — | | | 172,024 | |
| Total cash and cash equivalents | | $ | 359,418 | | | $ | — | | | $ | — | | | $ | 359,418 | |
| | | | | | | | |
| Short-term investments: | | | | | | | | |
| Bank time deposits | | $ | 668 | | | $ | 0 | | | $ | 0 | | | $ | 668 | |
| Total short-term investments | | $ | 668 | | | $ | 0 | | | $ | 0 | | | $ | 668 | |
| | | January 31, 2020 | | | January 31, 2021 |
| (in thousands) | (in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | (in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Cash and cash equivalents: | Cash and cash equivalents: | | | | | | | | | Cash and cash equivalents: | | | | | | | | |
| Cash and bank time deposits | Cash and bank time deposits | | $ | 379,057 | | | $ | — | | | $ | — | | | $ | 379,057 | | Cash and bank time deposits | | $ | 243,183 | | | $ | — | | | $ | — | | | $ | 243,183 | |
| Money market funds | Money market funds | | 89 | | | — | | | — | | | 89 | | Money market funds | | 342,090 | | | — | | | — | | | 342,090 | |
| Total cash and cash equivalents | Total cash and cash equivalents | | $ | 379,146 | | | $ | — | | | $ | — | | | $ | 379,146 | | Total cash and cash equivalents | | $ | 585,273 | | | $ | — | | | $ | — | | | $ | 585,273 | |
| | Short-term investments: | Short-term investments: | | Short-term investments: | |
| Bank time deposits | Bank time deposits | | $ | 20,215 | | | $ | — | | | $ | — | | | $ | 20,215 | | Bank time deposits | | $ | 46,300 | | | $ | 0 | | | $ | 0 | | | $ | 46,300 | |
| Total short-term investments | Total short-term investments | | $ | 20,215 | | | $ | — | | | $ | — | | | $ | 20,215 | | Total short-term investments | | $ | 46,300 | | | $ | 0 | | | $ | 0 | | | $ | 46,300 | |
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 three months ended April 30, 20202021 and 2019,2020, proceeds from maturities and sales of short-term investments were $15.6$45.6 million and $3.0$9.0 million, respectively.
5. BUSINESS COMBINATIONS
Three Months Ended April 30, 2020
We did not complete any business combinations during the three months ended April 30, 2020.
Year Ended January 31, 2020
During the year ended January 31, 2020, we completed four business combinations:
•On February 1, 2019, we completed the acquisition of a SaaS workforce optimization company focused on the small and medium-sized business (“SMB”) market as part of our strategy 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 has been integrated into our Customer Engagement segment.
•On December 18, 2019, we completed the acquisition of two software companies under common control focused on multi source intelligence and fusion analytics domains. These companies are being integrated into our Cyber Intelligence segment.
•On January 13, 2020, we completed the acquisition of a SaaS based company providing web and mobile session replay solutions. 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 $89.3 million consisted of (i) $76.2 million of combined cash paid at closings or shortly thereafter, partially offset by $2.4 million of cash acquired, resulting in net cash consideration at closing of $73.8 million; and (ii) the fair value of the contingent consideration arrangements described below of $15.3 million; offset by (iii) $2.1 million of other purchase price adjustments. For three of the business combinations, we agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $23.5 million, contingent upon the achievement of certain performance targets over periods extending through January 2022, the fair value of which was estimated to be $15.3 million at the acquisition 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. Of the $50.4 million of goodwill associated with these business combinations, $39.1 million and $11.3 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively, and $15.7 million of which is deductible for income tax purposes.
Revenue and net income (loss) attributable to these acquisitions for the year ended January 31, 2020 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $1.1 million and $1.0 million for the three months ended months ended April 30, 2020 and April 30, 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 subsequent to April 30, 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.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the year ended January 31, 2020 including adjustments identified subsequent to the valuation date, none of which were material:
| | | | | | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | | |
Cash | | $ | 76,198 | |
Fair value of contingent consideration | | 15,253 | |
Other purchase price adjustments | | (2,137) | |
Total purchase prices | | $ | 89,314 | |
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 3,950 | |
Other current assets, including cash acquired | | 14,394 | |
Other assets | | 6,556 | |
Current and other liabilities | | (8,531) | |
Contract liabilities - current and long-term | | (3,794) | |
Deferred income taxes | | (4,061) | |
Net tangible assets | | 8,514 | |
Identifiable intangible assets: | | |
Customer relationships | | 13,299 | |
Developed technology | | 14,443 | |
Trademarks and trade names | | 1,367 | |
Non-compete agreements | | 1,307 | |
Total identifiable intangible assets | | 30,416 | |
Goodwill | | 50,384 | |
Total purchase prices allocation | | $ | 89,314 | |
For these acquisitions, customer relationships, developed technology, trademarks and trade names, and non-compete agreements were assigned estimated useful lives of from five years to nine years, four years to five years, and three years to five years, and three years, respectively, the weighted average of which is approximately 6.1 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 April 30, 2020 and 2019, we recorded a benefit of $4.8 million and a charge of $1.2 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 $35.0 million at April 30, 2020, of which $20.4 million was recorded within accrued expenses and other current liabilities, and $14.6 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $3.0 million and $6.4 million for the three months ended April 30, 2020 and 2019, respectively.
6. INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets consisted of the following as of April 30, 20202021 and January 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | |
| | | April 30, 2021 |
| (in thousands) | | Cost | | Accumulated
Amortization | | Net |
| Intangible assets with finite lives: | | | | | | |
| Customer relationships | | $ | 465,535 | | | $ | (363,719) | | | $ | 101,816 | |
| Acquired technology | | 222,429 | | | (194,396) | | | 28,033 | |
| Trade names | | 9,430 | | | (6,963) | | | 2,467 | |
| Distribution network | | 2,440 | | | (2,440) | | | 0 | |
| Total intangible assets | | $ | 699,834 | | | $ | (567,518) | | | $ | 132,316 | |
| | | | | | | | | | | | | | | | | | | | |
| | | April 30, 2020 | | | | |
| (in thousands) | | Cost | | Accumulated
Amortization | | Net |
| Intangible assets with finite lives: | | | | | | |
| Customer relationships | | $ | 458,725 | | | $ | (330,492) | | | $ | 128,233 | |
| Acquired technology | | 291,603 | | | (243,894) | | | 47,709 | |
| Trade names | | 12,823 | | | (7,411) | | | 5,412 | |
| Distribution network | | 4,440 | | | (4,440) | | | — | |
| Non-competition agreements | | 1,307 | | | (158) | | | 1,149 | |
| Total intangible assets | | $ | 768,898 | | | $ | (586,395) | | | $ | 182,503 | |
| | | | | | | | | | | | | | | | | | | | |
| | | January 31, 2020 | | | | |
| (in thousands) | | Cost | | Accumulated
Amortization | | Net |
| Intangible assets with finite lives: | | | | | | |
| Customer relationships | | $ | 465,130 | | | $ | (328,069) | | | $ | 137,061 | |
| Acquired technology | | 294,841 | | | (241,585) | | | 53,256 | |
| Trade names | | 12,957 | | | (6,783) | | | 6,174 | |
| Distribution network | | 4,440 | | | (4,440) | | | — | |
| Non-competition agreements | | 1,307 | | | (34) | | | 1,273 | |
| Total intangible assets | | $ | 778,675 | | | $ | (580,911) | | | $ | 197,764 | |
| | | | | | | | | | | | | | | | | | | | |
| | | January 31, 2021 |
| (in thousands) | | Cost | | Accumulated
Amortization | | Net |
| Intangible assets with finite lives: | | | | | | |
| Customer relationships | | $ | 464,586 | | | $ | (356,064) | | | $ | 108,522 | |
| Acquired technology | | 222,040 | | | (189,687) | | | 32,353 | |
| Trade names | | 9,424 | | | (6,555) | | | 2,869 | |
| Distribution network | | 2,440 | | | (2,440) | | | 0 | |
| Total intangible assets | | $ | 698,490 | | | $ | (554,746) | | | $ | 143,744 | |
We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic to assess whether a triggering event had occurred that would result in a potential impairment of our indefinite-lived intangible assets. Based on this assessment, we concluded that a triggering event has not occurred which would require further impairment testing to be performed.
The following table presents net acquisition-related intangible assets by reportable segment as of April 30, 2020 and January 31, 2020:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
| (in thousands) | | 2020 | | 2020 |
| Customer Engagement | | $ | 175,241 | | | $ | 189,896 | |
| Cyber Intelligence | | 7,262 | | | 7,868 | |
| Total | | $ | 182,503 | | | $ | 197,764 | |
Total amortization expense recorded for acquisition-related intangible assets was $12.7$11.7 million and $14.4$12.1 million for the three months ended April 30, 20202021 and 2019,2020, 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 |
| 2021 (remainder of year) | | $ | 36,856 | |
| 2022 | | 45,885 | |
| 2023 | | 37,978 | |
| 2024 | | 27,805 | |
| 2025 | | 11,754 | |
| 2026 and thereafter | | 22,225 | |
| Total | | $ | 182,503 | |
| | | | | | | | |
| (in thousands) | | |
| Years Ending January 31, | | Amount |
| 2022 (remainder of year) | | $ | 33,346 | |
| 2023 | | 37,166 | |
| 2024 | | 28,072 | |
| 2025 | | 11,273 | |
| 2026 | | 9,945 | |
| 2027 and thereafter | | 12,514 | |
| Total | | $ | 132,316 | |
Goodwill activity for the three months ended April 30, 2020, in total and by reportable segment,2021 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Reportable Segment | | |
| (in thousands) | | Total | | Customer Engagement | | Cyber Intelligence |
| Three Months Ended April 30, 2020: | | | | | | |
| Goodwill, gross, at January 31, 2020 | | $ | 1,536,076 | | | $ | 1,367,111 | | | $ | 168,965 | |
| Accumulated impairment losses through January 31, 2020 | | (66,865) | | | (56,043) | | | (10,822) | |
| Goodwill, net, at January 31, 2020 | | 1,469,211 | | | 1,311,068 | | | 158,143 | |
| Foreign currency translation and other | | (16,420) | | | (15,764) | | | (656) | |
| Business combinations, including adjustments to prior period acquisitions | | (357) | | | — | | | (357) | |
| Goodwill, net, at April 30, 2020 | | $ | 1,452,434 | | | $ | 1,295,304 | | | $ | 157,130 | |
| | | | | | |
| Balance at April 30, 2020: | | | | | | |
| Goodwill, gross, at April 30, 2020 | | $ | 1,519,299 | | | $ | 1,351,347 | | | $ | 167,952 | |
| Accumulated impairment losses through April 30, 2020 | | (66,865) | | | (56,043) | | | (10,822) | |
| Goodwill, net, at April 30, 2020 | | $ | 1,452,434 | | | $ | 1,295,304 | | | $ | 157,130 | |
| | | | | | | | |
| (in thousands) | | Amount |
| Three Months Ended April 30, 2021: | | |
| Goodwill, gross, at January 31, 2021 | | $ | 1,383,450 | |
| Accumulated impairment losses through January 31, 2021 | | (56,043) | |
| Goodwill, net, at January 31, 2021 | | 1,327,407 | |
| Foreign currency translation and other | | 2,391 | |
| Goodwill, net, at April 30, 2021 | | $ | 1,329,798 | |
| | |
| Balance at April 30, 2021 | | |
| Goodwill, gross, at April 30, 2021 | | $ | 1,385,841 | |
| Accumulated impairment losses through April 30. 2021 | | (56,043) | |
| Goodwill, net, at April 30, 2021 | | $ | 1,329,798 | |
We evaluated whether there has been a change in circumstances as of April 30, 20202021 and as of the date of this filing in response to the economic impacts seen globally from COVID-19. The valuation methodology to determine the fair value of theour reporting unitsunit is sensitive to management's forecasts of future revenue, profitability and market conditions. At this time, the impact of COVID-19 on our forecasts is uncertain and increases the subjectivity that will beis involved in evaluating goodwill for potential impairment. We do expect declines in ourOur reporting unit fair valuesvalue may decline as a result of delayed or reduced demand for our products and services, driving lower revenue and operating income across our businesses.business. However, given the significant difference between the reporting unit fair valuesvalue and theirits carrying valuesvalue in the most recent quantitative analyses completed as of November 1, 2019,2020, as well as expected long-term recovery, within all reporting units, management does not believe that these events were severe enough to result in an
impairment trigger. We will continue to monitor the environment to determine whether the impacts to our reporting unitsunit represent an eventevents or changechanges in circumstances that may trigger a need to assess for impairment.
7. LONG-TERM DEBT
The following table summarizes our long-term debt at April 30, 20202021 and January 31, 2020:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
| (in thousands) | | 2020 | | 2020 |
| 1.50% Convertible Senior Notes | | $ | 400,000 | | | $ | 400,000 | |
| June 2017 Term Loan | | 413,313 | | | 414,375 | |
| Borrowings under 2017 Revolving Credit Facility | | 200,000 | | | 45,000 | |
| Less: Unamortized debt discounts and issuance costs | | (18,673) | | | (22,327) | |
| Total debt | | 994,640 | | | 837,048 | |
| Less: current maturities | | 4,250 | | | 4,250 | |
| Long-term debt | | $ | 990,390 | | | $ | 832,798 | |
Current maturities | | | | | | | | | | | | | | |
| | April 30, | | January 31, |
| (in thousands) | | 2021 | | 2021 |
| 0.25% Convertible Senior Notes | | $ | 315,000 | | | $ | 0 | |
| 1.50% Convertible Senior Notes | | 386,887 | | | 386,887 | |
| June 2017 Term Loan | | 100,000 | | | 410,125 | |
| Less: unamortized debt discounts and issuance costs | | (9,386) | | | (7,518) | |
| Total debt | | 792,501 | | | 789,494 | |
| Less: current maturities | | 386,887 | | | 386,713 | |
| Long-term debt | | $ | 405,614 | | | $ | 402,781 | |
0.25% Convertible Senior Notes
On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25% convertible senior notes due April 15, 2026 (the “2021 Notes”), unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.
We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our 2017 Credit Agreement described below, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.
The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to settled with cash or common stock, or a combination thereof, at our election. As of April 30, 2021, the 2021 Notes were not convertible.
We incurred approximately $8.7 million of issuance costs in connection with the 2021 Notes, which have been deferred and are presented as a reduction of long-term debt, and which are reported within accrued expenses and other current liabilitiesbeing amortized as interest expense over the term of the 2021 Notes. Including the impact of the deferred debt issuance costs, the effective interest rate on the 2021 Notes was approximately 0.81% at April 30, 2021.
Based on the closing market price of our condensed consolidated balance sheet.common stock on April 30, 2021, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
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 (“(the “2014 Notes”), unless earlier converted by the holders pursuant to their terms.. Net proceeds from the 2014 Notes after underwriting discounts were $391.9 million. The 2014 Notes paywere unsecured and paid 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 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 afterEffective December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the June 1, 2021 maturity date, holders may surrendercould have surrendered their 2014 Notes for conversion regardless of whether any of the other specified conditions for conversion havehad been satisfied. AsOn February 26, 2021, we deposited approximately $390.0 million of cash, representing the full principal amount of the 2014 Notes then outstanding as well as the final interest payment on the 2014
Notes due at maturity, into an escrow account to cash collateralize the 2014 Notes. The amount in escrow is included within restricted cash and cash equivalents, and restricted bank time deposits on our April 30, 2020, the Notes were not convertible.2021 condensed consolidated balance sheet.
In connection with the maturity of the 2014 Notes, we used the escrowed cash to settle the principal amount of the 2014 Notes, including the final interest payment, and the incremental conversion value of $57.7 million was settled with approximately 1,250,000 shares of common stock.
As of January 31, 2021, the 2014 Notes had a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of approximately $64.46 per share of common stock and would have resulted in the issuance of approximately 6,002,000 shares if all of the 2014 Notes were converted. As a result of the Spin-Off, the conversion rate was adjusted to 24.6622 shares of common stock per $1,000 principal amount of 2014 Notes, which represents an effective conversion price of $40.55 per share of common stock and would have resulted in the issuance of approximately 9,541,000 shares if all of the 2014 Notes had been converted prior to maturity. Based on the closing market price of our common stock on April 30, 2021, the if-converted value of the 2014 Notes was approximately $76.5 million greater than the aggregate principal amount of the 2014 Notes.
At issuance, in accordance with then-applicable accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the 2014 Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the 2014 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. TheThrough January 31, 2021, the excess of the principal amount of the debt component over its carrying amount (the “debt discount”) iswas being amortized as interest expense over the term of the 2014 Notes using the effective interest method. The equity component iswas not remeasured as long as it continuescontinued to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the 2014 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 2014 Notes are presented as a reduction of long-term debt and are beingwere amortized as interest expense over the term of the 2014 Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The
During the three months ended July 31, 2020, we repurchased $13.1 million principal amount of the 2014 Notes (the “Repurchased 2014 Notes”) in open market transactions for an aggregate of $13.0 million in cash, resulting in a debt extinguishment loss of $0.1 million, and a $0.2 million charge to additional paid-in-capital.
At January 31, 2021, because the 2014 notes were convertible, $4.8 million of the 2014 Notes’ equity component was classified as temporary equity on our consolidated balance sheet, representing the difference between the principal amount and the net carrying amount of the equity component, net of issuance costs, was $78.2 million at April 30, 2020.2014 Notes that could be requested for conversion.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU No. 2020-06 eliminates the liability and equity separation model for convertible instruments with a cash conversion feature, such as the 2014 Notes.
As permitted, on February 1, 2021, we early adopted ASU No. 2020-06, which otherwise would have been effective for us on February 1, 2022. As a result, effective February 1, 2021, we no longer present separate liability and equity components for the 2014 Notes on our condensed consolidated balance sheet. We implemented the provisions of ASU No. 2020-06 using the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods.
The adoption of ASU No. 2020-06 resulted in the $78.0 million carrying value of the 2014 Notes’ equity component at January 31, 2021, which included applicable issuance costs and the portion classified within temporary equity, being reclassified and combined with the liability component of the 2014 Notes. This resulted in a $43.4 million decrease to additional paid-in capital, a $4.8 million decrease to temporary equity, a $4.4 million increase to current maturities of long-term debt, a $0.9 million decrease to deferred tax liabilities, a $0.1 million increase in unamortized debt issuance costs (a component of long-term debt), and a $44.9 million decrease to our accumulated deficit.
As of April 30, 2020,2021, the carrying value of the debt component2014 Notes was $384.1$386.8 million, which iswas net of unamortized debt discount and issuance costs of $14.5 million and $1.4 million, respectively.$0.1 million. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the 2014 Notes was approximately 5.29%1.91% at April 30, 2020.2021.
BasedAs the 2014 Notes were due June 1, 2021, they are classified within current maturities of long-term debt on our condensed consolidated balance sheets as of April 30, 2021 and January 31, 2021, respectively.
Capped Calls, Note Hedges and Warrants
Capped Calls
In connection with the closing market priceissuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the “Capped Calls”) with certain counterparties. The Capped Calls are intended generally to reduce the potential dilution to our common stock on April 30, 2020, the if-converted valueupon any conversion of the 2021 Notes was less thanand/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted 2021 Notes, in the Notes.event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.
The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00, each subject to certain adjustments under the terms of the Capped Calls. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of April 30, 2021, no Capped Calls have been exercised.
Pursuant to their terms, the Capped Calls qualify for classification within stockholders’ equity, and their fair value is not remeasured and adjusted as long as they continue to qualify for stockholders’ equity classification. We paid approximately $41.0 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.
Note Hedges and Warrants
Concurrently with the issuance of the 2014 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 servesserved to increase the effective initial conversion price for the 2014 Notes to $75.00 per share. Subsequent to the Spin-Off, as a result of conversion rate adjustments, the Note Hedges and the Warrants served to increase the effective conversion price for the 2014 Notes to $47.18 per share. The Note Hedges and Warrants are each separate instruments from the 2014 Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we havehad 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 equalsequaled the initial conversion price of the 2014 Notes. Our exercise rights under the Note Hedges generally trigger upon conversionAs a result of the Notes andSpin-Off, on February 1, 2021, the Note Hedges terminate upon maturitycall options on our stock were adjusted to allow us to purchase up to 9,865,000 shares of our common stock at a price of $40.55, which is equal to the adjusted conversion price of the Notes, or the first day the Notes are no longer outstanding.2014 Notes. The Note Hedges may becould have been settled in cash, shares of our common stock, or a combination thereof, at our option, and arewere intended to reduce our exposure to potential dilution upon conversion of the 2014 Notes. Our exercise rights under the Note Hedges were automatically triggered upon conversion of the 2014 Notes and the Note Hedges terminated upon maturity of the 2014 Notes on June 1, 2021. In connection with the maturity of the 2014 Notes, we received approximately 1,250,000 shares of our common stock from the counterparties under the Note Hedges, which we used to offset the dilution resulting from the settlement of the conversion premium on the 2014 Notes as the market value per share of our common stock, as measured under the terms of the Note Hedges, was greater than the strike price of the Note Hedges. We paid $60.8 million for the Note Hedges, which was recorded as a reductioncharge to additional paid-in capital. As of April 30, 2020,2021, we had not purchased any shares of our common stock under the Note Hedges.
The Repurchased 2014 Notes acquired during the three months ended July 31, 2020 as described above did not change the number of common shares subject to the Note Hedges as the counterparties agreed the options under the Note Hedges remained outstanding notwithstanding such repurchase. Upon maturity of the 2014 Notes, we received approximately 42,000 shares of our common stock from the counterparties related to the reimbursement for the in-the-money portion of the Repurchased 2014 Notes under the Note Hedge agreement.
Warrants
We sold the Warrants to several counterparties. The Warrants provideinitially provided 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. As a result of the Spin-Off, the Warrants now provide the counterparties rights to acquire from us up to approximately 9,865,000 shares of our common stock at a price of $47.18 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 average 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 April 30, 2020,2021, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirementsqualified 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
2017 Credit Agreement
On June 29, 2017, we entered into a credit agreement (the “2017 Credit Agreement”) with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, and 2021, as further described below (as amended, the “2017 Credit Agreement”).
The 2017 Credit Agreement currently 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”), of which $100.0 million and $410.1 million was outstanding at April 30, 2021 and January 31, 2021, respectively, and a $300.0 million revolving credit facility maturing on June 29, 2022April 9, 2026 (the “2017“2021 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 outstanding terms loans under our prior credit agreement.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million. This discountmillion, which 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.
During the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million. As a result, $1.8 million of deferred debt issuance costs and $0.2 million of unamortized discount associated with the 2017 Term Loan were written off, and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the three months ended April 30, 2021.
On January 31, 2018,April 9, 2021, we entered into an amendment toamended the 2017 Credit Agreement (the “2018“2021 Amendment”) providing, pursuant to which we refinanced our $300.0 million 2017 Revolving Credit Facility, which would have matured on June 29, 2022, with the $300.0 million 2021 Revolving Credit Facility. The 2021 Amendment also provides that for among other things, a reductionpurposes 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 majorityacceleration of the impact of the 2018 Amendment was accounted for as a debt modification. For the portionmaturity of the 2017 Term Loan which was considered extinguished and replaced by new loans,2021 Revolving Credit Facility, neither the 2014 Notes nor the 2021 Notes will be deemed to be outstanding if such notes are cash collateralized prior to their respective maturity dates in accordance with the 2017 Credit Agreement. As noted above, we wrote off $0.2 million of unamortized deferred debt issuance costs as a losscash collateralized the 2014 Notes prior to settlement on early retirement of debt duringJune 1, 2021, and we currently intend to cash collateralize, or otherwise refinance or repurchase, the three months ended January 31, 2018. 2021 Notes prior to their maturity in 2026.
The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining termmaturity dates of the 2017 Term Loan.
On June 8, 2020, we entered intoLoan and 2017 Revolving Credit Facility would have been accelerated to March 1, 2021 if on such date any 2014 Notes remained outstanding, unless such outstanding 2014 Notes are cash collateralized pursuant to a second amendment to the 2017 Credit Agreement (the “Second“2020 Amendment”)., entered into on June 8, 2020. Pursuant to the Second2020 Amendment, we were permitted to effect the Spin-Off of our Cyber Intelligence business within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes willwould not be deemed to be outstanding if such 2014 Notes arewere cash collateralized in accordance with the 2017 Credit Agreement as amended, for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above. We currently intend toOn February 26, 2021, as noted above, we cash collateralize, or otherwise refinance or repurchase,collateralized the 2014 Notes prior to their maturity. Refer to Note 16, “Subsequent Events” for further details regardingin satisfaction of the Second Amendment tocash collateralization provisions of the 2020 Amendment. Accordingly, the maturity dates of the 2017 Term Loan and 2017 Revolving Credit Agreement.Facility were not accelerated to March 1, 2021.
As of April 30, 2020,2021, the interest rate on the 2017 Term Loan was 3.37%2.12%. 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 3.55%2.32% at April 30, 2020.2021. As of January 31, 20202021, the interest rate on the 2017 Term Loan was 3.85%2.14%.
BorrowingsFor borrowings under the 20172021 Revolving Credit Facility, were $200.0 million at April 30, 2020, which is included in long-term debt on our condensed consolidated balance sheet. For borrowingsand previously 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 April 30, 2020, the weighted average interest rate on our revolving credit facility borrowings was 2.33%. In addition, we are required to pay a commitment fee with respect to unused availability under the 2017 Revolving Credit Facility at rates per annum determined by reference to our Leverage Ratio. The proceeds of borrowings under the 2017 Revolving Credit Facility were used to fund a portion of our stock repurchase program or will be used for general corporate purposes. Please refer to Note 9, “Stockholders’ Equity”, for more information regarding the stock repurchase program.
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 20172021 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 and Amendment 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 underfacilities. During the 2017 Credit Agreement. As noted previously, during the three monthsyear 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. We incurred $2.1 million of debt modification costs related to the 2020 Amendment, $1.2 million of which were expensed, and $0.9 million of which were deferred (comprised of $0.5 million associated with the 2017 Term Loan, and $0.4 million associated with the 2017 Revolving Credit Facility), and which are being amortized along with the previously deferred debt issuance costs.
At the time of the 2021 Amendment, there were $1.3 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility, of which $0.8 million were associated with commitments under the 2017 Revolving Credit Facility provided by lenders that are continuing to provide commitments under the 2021 Revolving Credit Facility and therefore continued to be deferred, and which are now being amortized over the term of the 2021 Revolving Credit Facility. The remaining $0.5 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility were written off and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the three months ended April 30, 2021. We incurred $1.5 million of debt modification costs related to the 2021 Amendment, all of which are associated with the 2021 Revolving Credit Facility, which have been deferred and are being amortized along with the previously deferred debt issuance costs over the term of the 2021 Revolving Credit Facility.
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 20172021 Revolving Credit Facility are being amortized on a straight-line basis.
Future Principal Payments on the Term Loan
As a result of the significant 2017 Term Loan principal payments made during the three months ended April 30, 2020, future scheduled2021, no further principal payments onare required prior to the maturity of the 2017 Term Loan were as follows:
| | | | | | | | |
| (in thousands) | | |
| Years Ending January 31, | | Amount |
| 2021 (remainder of year) | | $ | 3,188 | |
| 2022 | | 4,250 | |
| 2023 | | 4,250 | |
| 2024 | | 4,250 | |
| 2025 | | 397,375 | |
| Total | | $ | 413,313 | |
Interest Expense
The following table presents the components of interest expense incurred on the 2021 Notes, the 2014 Notes, and on borrowings under our credit agreements2017 Credit Agreement, for the three months ended April 30, 20202021 and 2019:2020:
| | | | | Three Months Ended
April 30, | | | | Three Months Ended
April 30, |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| 1.50% Convertible Senior Notes: | | | | | |
| 2021 Notes: | | 2021 Notes: | | | | |
| Interest expense at 0.25% coupon rate | | Interest expense at 0.25% coupon rate | | $ | 48 | | | $ | 0 | |
| Amortization of deferred debt issuance costs | | Amortization of deferred debt issuance costs | | 105 | | | 0 | |
| Total Interest Expense - 2021 Notes | | Total Interest Expense - 2021 Notes | | $ | 153 | | | $ | 0 | |
| | 2014 Notes: | | 2014 Notes: | |
| Interest expense at 1.50% coupon rate | Interest expense at 1.50% coupon rate | | $ | 1,500 | | | $ | 1,500 | | Interest expense at 1.50% coupon rate | | $ | 1,451 | | | $ | 1,500 | |
| Amortization of debt discount | Amortization of debt discount | | 3,226 | | | 3,061 | | Amortization of debt discount | | 0 | | | 3,226 | |
| Amortization of deferred debt issuance costs | Amortization of deferred debt issuance costs | | 304 | | | 289 | | Amortization of deferred debt issuance costs | | 391 | | | 304 | |
| Total Interest Expense - 1.50% Convertible Senior Notes | | $ | 5,030 | | | $ | 4,850 | | |
| Total Interest Expense - 2014 Notes | | Total Interest Expense - 2014 Notes | | $ | 1,842 | | | $ | 5,030 | |
| | Borrowings under Credit Agreements: | | |
| Borrowings under 2017 Credit Agreement: | | Borrowings under 2017 Credit Agreement: | |
| Interest expense at contractual rates | Interest expense at contractual rates | | $ | 4,513 | | | $ | 4,645 | | Interest expense at contractual rates | | $ | 1,760 | | | $ | 4,513 | |
| Impact of interest rate swap | | 591 | | | — | | |
| Impact of interest rate swap reclassified from accumulated other comprehensive loss | | Impact of interest rate swap reclassified from accumulated other comprehensive loss | | 1,014 | | | 591 | |
| Amortization of debt discounts | Amortization of debt discounts | | 18 | | | 16 | | Amortization of debt discounts | | 3 | | | 18 | |
| Amortization of deferred debt issuance costs | Amortization of deferred debt issuance costs | | 391 | | | 374 | | Amortization of deferred debt issuance costs | | 272 | | | 391 | |
| Total Interest Expense - Borrowings under Credit Agreements | Total Interest Expense - Borrowings under Credit Agreements | | $ | 5,513 | | | $ | 5,035 | | Total Interest Expense - Borrowings under Credit Agreements | | $ | 3,049 | | | $ | 5,513 | |
On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense) on our condensed consolidated statement of operations for the three months ended April 20, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and included within other liabilities on our condensed consolidated balance sheet as of April 30, 2021.
Please refer to Note 13, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
8. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of April 30, 20202021 and January 31, 2020: 2021:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
| (in thousands) | | 2020 | | 2020 |
| Raw materials | | $ | 12,422 | | | $ | 9,628 | |
| Work-in-process | | 4,943 | | | 4,749 | |
| Finished goods | | 7,665 | | | 6,118 | |
| Total inventories | | $ | 25,030 | | | $ | 20,495 | |
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
| (in thousands) | | 2021 | | 2021 |
| Raw materials | | $ | 1,927 | | | $ | 2,768 | |
| Work-in-process | | 92 | | | 26 | |
| Finished goods | | 3,574 | | | 2,747 | |
| Total inventories | | $ | 5,593 | | | $ | 5,541 | |
Condensed Consolidated Statements of Operations
Other expense,income (expense), net consisted of the following for the three months ended April 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Foreign currency losses, net | | $ | (3,254) | | | $ | (1,187) | |
| Gains on derivative financial instruments, net | | 1,014 | | | 549 | |
| Other, net | | 10 | | | (152) | |
| Total other expense, net | | $ | (2,230) | | | $ | (790) | |
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Foreign currency losses, net | | $ | (541) | | | $ | (1,798) | |
| Losses on derivative financial instruments, net | | (14,374) | | | 0 | |
| Change in fair value of future tranche right | | 15,810 | | | 0 | |
| Other, net | | 3,155 | | | (24) | |
| Total other income (expense), net | | $ | 4,050 | | | $ | (1,822) | |
Please refer to Note 9, “Convertible Preferred Stock” and Note 12, “Fair Value Measurements” for additional information regarding the future tranche right.
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the three months ended April 30, 2021 and 2020:
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Cash paid for interest | | $ | 4,583 | | | $ | 5,295 | |
| Cash payments of income taxes, net | | $ | 23,035 | | | $ | 9,564 | |
| Cash payments for operating leases | | $ | 4,878 | | | $ | 5,025 | |
| Non-cash investing and financing transactions: | | | | |
| Finance leases of property and equipment | | $ | 1,678 | | | $ | 760 | |
| Accrued but unpaid purchases of property and equipment | | $ | 2,406 | | | $ | 799 | |
| Settlement of Future Tranche Right upon issuance of Series B Preferred Stock | | $ | 36,962 | | | $ | 0 | |
| Accrued but unpaid purchases of treasury stock | | $ | 434 | | | $ | 0 | |
9. CONVERTIBLE PREFERRED STOCK
On December 4, 2019, we entered into an Investment Agreement with the Apax Investor, whereby, subject to certain closing conditions, the Apax Investor agreed to make an investment in us in an amount up to $400.0 million as follows:
•On May 7, 2020 (the “Series A Closing Date”), we issued a total of 200,000 shares of our Series A Preferred Stock, for an aggregate purchase price of $200.0 million, or $1,000 per share to the Apax Investor. In connection therewith, we incurred direct and 2019:incremental costs of $2.7 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series A Preferred Stock.
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Cash paid for interest | | $ | 5,302 | | | $ | 4,673 | |
| Cash payments (refunds) of income taxes, net | | $ | 9,557 | | | $ | (1,513) | |
| Cash payments for operating leases | | $ | 6,277 | | | $ | 6,841 | |
| Non-cash investing and financing transactions: | | | | |
| Liabilities for contingent consideration in business combinations | | $ | — | | | $ | 5,200 | |
| Finance leases of property and equipment | | $ | 760 | | | $ | — | |
| Accrued but unpaid purchases of property and equipment | | $ | 3,295 | | | $ | 3,301 | |
| Inventory transfers to property and equipment | | $ | 153 | | | $ | 73 | |
•In connection with the Spin-Off, on April 6, 2021, (the “Series B Closing Date” and together with the Series A Closing Date, as applicable, the “Applicable Closing Date”) we issued a total of 200,000 shares of our Series B Preferred Stock, for an aggregate purchase price of $200.0 million, or $1,000 per share to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $1.3 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series B Preferred Stock.
Each of the rights, preferences and privileges of the Series A Preferred Stock and Series B Preferred Stock are set forth in separate certificates of designation filed with the Secretary of State of the State of Delaware on the Applicable Closing Date.
Voting Rights
Holders of the Preferred Stock have the right to vote on matters submitted to a vote of the holders of our common stock, on an as-converted basis; however, in no event will the holders of Preferred Stock have the right to vote shares of the Preferred Stock on an as-converted basis in excess of 19.9% of the voting power of the common stock outstanding immediately prior to December 4, 2019.
Dividends and Liquidation Rights
The Preferred Stock ranks senior to the shares of our common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of our affairs. Shares of Preferred Stock have a liquidation preference of the greater of $1,000 per share or the amount that would be received if the shares are converted at the then applicable conversion price at the time of such liquidation.
Holders of the Preferred Stock are entitled to a cumulative dividend at a rate of 5.2% per annum until the 48-month anniversary of the Series A Closing Date and thereafter at a rate of 4.0% per annum. Dividends on the Preferred Stock are cumulative and payable semi-annually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. The 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 Series A Closing Date (unless we obtain 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.
For the three months ended April 30, 2021, we paid $5.2 million of preferred stock dividends, which were accrued as of January 31, 2021, and there were $4.2 million of cumulative undeclared and unpaid preferred stock dividends at April 30, 2021. We had 0 accrued dividends as of April 30, 2021. We reflected $3.3 million of preferred stock dividends in our condensed consolidated results of operations, for purposes of computing net loss attributable to Verint Systems Inc. commons shares, for the three months ended April 30, 2021. There were 0 preferred stock dividends recorded in our condensed consolidated results of operations for the three months ended April 30, 2020.
Conversion
The Series A Preferred Stock was convertible into common stock at the election of the holder, subject to certain conditions including conditions associated with the Spin-Off, at an initial conversion price of $53.50 per share. The initial conversion price represented 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. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares, which occurred on February 1, 2021, and the Series A conversion price was instead adjusted to $36.38 per share based on the ratio of the relative trading prices of Verint and Cognyte following the Spin-Off. The Series B Preferred Stock is convertible at a conversion price of $50.25, based in part on our trading price over the 20 day trading period following the Spin-Off. As of April 30, 2021, the maximum number of shares of common stock that could be required to be issued upon conversion of the outstanding shares of Preferred Stock was approximately 9.6 million shares and Apax’s ownership in us on an as-converted basis was approximately 12.9%.
At any time after 36 months following the Applicable Closing Date, we will have the option to require that all (but not less than all) of the then-outstanding shares of Preferred Stock of the series convert into common stock if the volume-weighted average price per share of the common stock for at least 30 trading days in any 45 consecutive trading day period exceeds 175% of the then-applicable conversion price of such series (a “Mandatory Conversion”).
We may redeem any or all of the Preferred Stock of a series for cash at any time after the 72-month anniversary of the Applicable Closing Date at a redemption price equal to 100% of the liquidation preference of the shares of the Preferred Stock, plus any accrued and unpaid dividends to, but excluding, the redemption date, plus a make-whole amount designed to allow the Apax Investor to earn a total 8.0% internal rate of return on such shares.
The Apax Investor has agreed to restrictions on its ability to dispose of shares of the Series A Preferred Stock until the earlier of (1) the 36-month anniversary of the Series A Closing Date or (2) the 24-month anniversary of the consummation of the Spin-Off (the “Preferred Stock Restricted Period”). Following the Preferred Stock Restricted Period, the Preferred Stock may not be sold or transferred without the prior written consent of the Company. The Apax Investor has also agreed to restrictions on its ability to dispose of the common stock issued upon conversion of the Preferred Stock. The common stock may not be disposed of until the earlier of (1) the 12-month anniversary of consummation of the Spin-Off or (2) the 24-month anniversary of the Series A Closing Date. These restrictions do not apply to certain transfers to one or more permitted co-investors or transfers or pledges of the Preferred Stock or common stock pursuant to the terms of specified margin loans to be entered into by the Apax Investor as well as transfers effected pursuant to a merger, consolidation, or similar transaction consummated by us and transfers that are approved by our board of directors.
At any time after the 102-month anniversary of the Applicable Closing Date or upon the occurrence of a change of control triggering event (as defined in the Certificates of Designation), the holders of the applicable series of Preferred Stock will have
the right to cause us to redeem all of the outstanding shares of Preferred Stock for cash at a redemption price equal to 100% of the liquidation preference of the shares of such series, plus any accrued and unpaid dividends to, but excluding, the redemption date. Therefore, the Preferred Stock has been classified as temporary equity on our condensed consolidated balance sheet as of April 30, 2021, separate from permanent equity, as the potential required repurchase of the Preferred Stock, however remote in likelihood, is not solely under our control.
As of April 30, 2021, the Preferred Stock was not redeemable, and we have concluded that it is currently not probable of becoming redeemable, including from the occurrence of a change in control triggering event. The holders’ redemption rights which occur at the 102-month anniversary of the Applicable Closing Date are not considered probable because there is a more than remote likelihood that the Mandatory Conversion may occur prior to such redemption rights. We therefore did not adjust the carrying amount of the Preferred Stock to its current redemption amount, which was its liquidation preference, at April 30, 2021 plus accrued and unpaid dividends. As of April 30, 2021, the stated value of the liquidation preference for each series of Preferred Stock was $200.0 million and cumulative, unpaid dividends on the Series A Preferred Stock and the Series B Preferred Stock were $3.5 million and $0.7 million, respectively.
Future Tranche Right
We determined that our obligation to issue and the Apax Investor’s obligation to purchase 200,000 shares of the Series B Preferred Stock in connection with the completion of the Spin-Off and the satisfaction of other customary closing conditions (the “Future Tranche Right”) met the definition of a freestanding financial instrument as the Future Tranche Right is legally detachable and separately exercisable from the Series A Preferred Stock. At issuance, we allocated a portion of the proceeds from the issuance of the Series A Preferred Stock to the Future Tranche Right based upon its fair value at such time, with the remaining proceeds being allocated to the Series A Preferred Stock. The Future Tranche Right was remeasured at fair value each reporting period until the settlement of the right (at the time of the issuance of the Series B Preferred Stock), and changes in its fair value have been recognized as a non-cash charge or benefit within other income (expense), net on the condensed consolidated statement of operations.
At the Series A Closing Date, the Future Tranche Right was recorded as an asset of $3.4 million, as the purchase price of the Series B Preferred Stock was greater than its estimated fair value at the expected settlement date. This resulted in a $203.4 million carrying value, before direct and incremental issuance costs, for the Series A Preferred Stock.
Immediately prior to the issuance of the Series B Preferred Stock the Future Tranche Right was remeasured to fair value and as a result we recorded a non-cash benefit of $15.8 million related to the change in fair value of the Future Tranche Right for the three months ended April 30, 2021, within other income (expense), net. Upon the issuance of the Series B Preferred Stock in April 2021, the Future Tranche Right was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. This resulted in a $237.0 million carrying value, before direct and incremental issuance costs, for the Series B Preferred Stock. As a result of the issuance of the Series B Preferred Stock, we will no longer recognize changes in the fair value of the Future Tranche Right in our condensed consolidated statements of operations. Please refer to Note 12, “Fair Value Measurements” for additional information regarding valuations of the Future Tranche Right.
9.10. STOCKHOLDERS’ EQUITY
Dividends on Common Stock Dividends
We did not0t declare or pay any cash dividends on our common stock during the three months ended April 30, 20202021 and 2019.2020. Under the terms of our 2017 Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.
In connection with the Spin-Off, each holder of Verint’s common stock, par value $0.001 per share, received 1 ordinary share of Cognyte, no par value, for every share of common stock of Verint held of record as of the close of business on the Record Date.
Stock Repurchase ProgramPrograms
On December 4, 2019, we announced that our board of directors had authorized a stock repurchase program whereby we maywere authorized to repurchase up to $300.0 million$300 million of common stock over the period ending on February 1, 2021. We made $34.0
million and $116.1 million in repurchases under the program during the years ended January 31, 2021 and January 31, 2020, respectively. This program expired on February 1, 2021.
On March 31, 2021, we announced that our board of directors had authorized a new stock repurchase program whereby we were authorized to repurchase up to a number of shares of common stock approximately equal to the number of shares to be issued as equity compensation during the fiscal year ending January 31, 2022. During the three months ended April 30, 2020 and $116.12021, we acquired 1,600,000 shares of our common stock at a cost of $75.4 million under this program, of which $0.4 million was settled in cash in May 2021. No further repurchases duringare expected under this program for the year endedending January 31, 2020. Due to the uncertainty surrounding the impact of the COVID-19 pandemic, we will consider further repurchases under the stock repurchase program based on economic and market conditions as they evolve.2022.
Treasury Stock
Repurchased shares of common stock are typically 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 three months ended April 30, 2021, we repurchased approximately 1,601,000 shares of our common stock for a cost of $75.5 million, which includes $75.4 million of share repurchases under the 2021 share repurchase program described above, and other repurchases to facilitate income tax withholding upon vesting of equity awards. On March 30, 2021, our board of directors approved the retirement of such repurchased shares of common stock and any other shares held as treasury stock, at management’s discretion. During the three months ended April 30, 2021, we retired 1,058,300 shares with a cost of $49.6 million that had been repurchased under the 2021 share repurchase program described above, which was recorded as a reduction of common stock and additional paid-in capital. These shares were returned to the status of authorized and unissued shares.
During the three months ended April 30, 2020, we repurchased approximately 613,000 shares of treasuryour common stock for a cost of $34.0 million under the 2019 share repurchase program described above. During the three months ended April 30, 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.
At April 30, 2020,2021, we held approximately 4,947,000 shares of treasury stock with a cost of $234.0 million. At January 31, 2021, we held approximately 4,404,000 shares of treasury stock with a cost of $208.1 million. At January 31, 2020, we held approximately 3,791,000 shares of treasury stock with a cost of $174.1 million.
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 announced that an affiliate of Apax Partners would invest up to $400$400.0 million in us, in the form of convertible preferred stock. Under the terms of the Investment Agreement, the Apax Investor initially purchased $200$200.0 million of our Series A convertible preferred stock,Preferred Stock, which closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock, which closed on April 6, 2021. As of April 30, 2021, Apax’s ownership in us on an as-converted basis is approximately 12.9%. Please refer to Note 16, “Subsequent Events”9, “Convertible Preferred Stock” for additional information regarding the closinga more detailed discussion of the initial tranche.Apax investment.
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 ofto our accumulated other comprehensive income (loss) by component for the three months ended April 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 income (loss) at January 31, 2020 | | $ | 626 | | | $ | (10,528) | | | $ | (141,963) | | | $ | (151,865) | |
| Other comprehensive loss before reclassifications | | (829) | | | (5,949) | | | (20,640) | | | (27,418) | |
| Amounts reclassified out of accumulated other comprehensive income (loss) | | (46) | | | (463) | | | — | | | (509) | |
| Net other comprehensive loss | | (783) | | | (5,486) | | | (20,640) | | | (26,909) | |
| Accumulated other comprehensive loss at April 30, 2020 | | $ | (157) | | | $ | (16,014) | | | $ | (162,603) | | | $ | (178,774) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 income (loss) at January 31, 2021 | | $ | 634 | | | $ | (13,031) | | | $ | (124,481) | | | $ | (136,878) | |
| Distribution of Cognyte Software Ltd. | | (559) | | | 0 | | | 17,682 | | | 17,123 | |
| Other comprehensive income before reclassifications | | 32 | | | 0 | | | 2,608 | | | 2,640 | |
| Amounts reclassified out of accumulated other comprehensive income (loss) | | 87 | | | (1,014) | | | 0 | | | (927) | |
| Amounts reclassified upon partial early retirement of the 2017 Term Loan | | 0 | | | (12,017) | | | 0 | | | (12,017) | |
| Net other comprehensive income (loss) | | (614) | | | 13,031 | | | 20,290 | | | 32,707 | |
Accumulated other comprehensive income (loss) at
April 30, 2021 | | $ | 20 | | | $ | 0 | | | $ | (104,191) | | | $ | (104,171) | |
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.
On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense) on our consolidated statement of operations for the three months ended April 20, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and included within other liabilities on our condensed consolidated balance sheet as of April 30, 2021. Please refer to Note 13, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statementstatements of operations, with presentation location, for the three months ended April 30, 20202021 and 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
April 30, | | | | |
| (in thousands) | | 2020 | | 2019 | | Location |
| Unrealized losses on derivative financial instruments: | | | | | | |
| Foreign currency forward contracts | | $ | (3) | | | | $ | (72) | | | Cost of product revenue |
| | (5) | | | | (84) | | | Cost of service and support revenue |
| | (27) | | | | (472) | | | Research and development, net |
| | (17) | | | | (311) | | | Selling, general and administrative |
| | (52) | | | (939) | | | Total, before income taxes |
| | 6 | | | 94 | | | Benefit from income taxes |
| | $ | (46) | | | $ | (845) | | | Total, net of income taxes |
| | | | | | |
| Interest rate swap agreement | | $ | (591) | | | $ | — | | | Interest expense |
| | (591) | | | — | | | Total, before income taxes |
| | 128 | | | — | | | Benefit from income taxes |
| | $ | (463) | | | $ | — | | | Total, net of income taxes |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
April 30, | | |
| (in thousands) | | 2021 | | 2020 | | Location |
| Unrealized gains (losses) on derivative financial instruments: | | | | | | |
| Foreign currency forward contracts | | $ | 1 | | | $ | 0 | | | Cost of recurring revenue |
| | 12 | | | 0 | | | Cost of nonrecurring revenue |
| | 65 | | | 0 | | | Research and development, net |
| | 28 | | | 0 | | | Selling, general and administrative |
| | 106 | | | 0 | | | Total, before income taxes |
| | (19) | | | 0 | | | Provision for income taxes |
| | $ | 87 | | | $ | 0 | | | Total, net of income taxes |
| | | | | | |
| Interest rate swap agreement | | $ | (1,014) | | | $ | (591) | | | Interest expense |
| | (15,655) | | | 0 | | | Other income (expense), net |
| | (16,669) | | | (591) | | | Total, before income taxes |
| | 3,638 | | | 128 | | | Benefit from income taxes |
| | $ | (13,031) | | | $ | (463) | | | Total, net of income taxes |
10.
11. INCOME TAXES
Our interim (benefit)(benefit from) provision for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
For the three months ended April 30, 2021, we recorded an income tax benefit of $0.1 million on pretax income of $1.0 million, which represented a negative effective income tax rate of 7.0%. 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 the adjustment of certain unrecognized tax benefits, offset by a change in the fair value of the Future Tranche Right associated with the Preferred Stock issuance and by lower statutory rates in several foreign jurisdictions.
For the three months ended April 30, 2020, we recorded an income tax benefitprovision of $1.8$0.3 million on a pre-taxpretax loss of $5.7$14.1 million, which represented ana negative effective income tax rate of 30.7%2.5%. 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, offset by lower statutory rates in several foreign jurisdictions and a deferred tax benefit due to a tax rate change in a foreign jurisdiction.
For the three months ended April 30, 2019, we recorded an income tax provision of $1.4 million on pre-tax income of $5.2 million, which represented an effective income tax rate of 27.3%. 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, offset by lower statutory rates in several foreign jurisdictions.
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-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against 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. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized income tax benefits of $92.3$85.3 million and $91.3$84.8 million (excluding interest and penalties) as of April 30, 20202021 and January 31, 2020, respectively.2021, respectively, that if recognized, would impact our effective income tax rate. The accrued liability for interest and penalties was $3.0$3.1 million and $2.9$3.0 million at April 30, 20202021 and January 31, 2020,2021, respectively. Interest and penalties are recorded as a component of the (benefit from) provision for income taxes in our condensed consolidated statements of operations. As of April 30, 2020 and January 31, 2020, the total amount of unrecognized income tax benefits that, if recognized, would impact our effective income tax rate were approximately $92.3 million and $91.3 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 April 30, 20202021 could decrease by approximately $1.3$1.6 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. See Note 2, “Discontinued Operations” for discussion related to the Tax Matters agreement entered into between and us and Cognyte as result of the Spin-Off.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. However, we plan to deferhave deferred the timing of employer payroll taxes and accelerateaccelerated the refund of AMT credits as permitted by the CARES Act.
11.12. 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 April 30, 20202021 and January 31, 2020:2021: | | | | | | | | | | | | | | | | | | | | |
| | | April 30, 2021 |
| | | Fair Value Hierarchy Category |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | |
| Money market funds | | $ | 172,024 | | | $ | 0 | | | $ | 0 | |
| Foreign currency forward contracts | | 0 | | | 38 | | | 0 | |
| Contingent consideration receivable | | 0 | | | 0 | | | 453 | |
| Total assets | | $ | 172,024 | | | $ | 38 | | | $ | 453 | |
| Liabilities: | | | | | | |
| Foreign currency forward contracts | | $ | 0 | | | $ | 17 | | | $ | 0 | |
| Contingent consideration - business combinations | | 0 | | | 0 | | | 8,311 | |
| Option to acquire noncontrolling interests of consolidated subsidiaries | | 0 | | | 0 | | | 3,400 | |
| Total liabilities | | $ | 0 | | | $ | 17 | | | $ | 11,711 | |
| | | | | | | | | | | | | | | | | | | | |
| | | April 30, 2020 | | | | |
| | | Fair Value Hierarchy Category | | | | |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | |
| Money market funds | | $ | 144,745 | | | $ | — | | | $ | — | |
| Foreign currency forward contracts | | — | | | 1,270 | | | — | |
| Contingent consideration receivable | | — | | | — | | | 668 | |
| Total assets | | $ | 144,745 | | | $ | 1,270 | | | $ | 668 | |
| Liabilities: | | | | | | |
| Foreign currency forward contracts | | $ | — | | | $ | 724 | | | $ | — | |
| Interest rate swap agreement | | — | | | 20,445 | | | — | |
| Contingent consideration - business combinations | | — | | | — | | | 35,002 | |
| Option to acquire noncontrolling interests of consolidated subsidiaries | | — | | | — | | | 2,650 | |
| Total liabilities | | $ | — | | | $ | 21,169 | | | $ | 37,652 | |
| | | | | | | | | | | | | | | | | | | | |
| | | January 31, 2021 |
| | | Fair Value Hierarchy Category |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | |
| Money market funds | | $ | 342,090 | | | $ | 0 | | | $ | 0 | |
| Foreign currency forward contracts | | 0 | | | 136 | | | 0 | |
| Contingent consideration receivable | | 0 | | | 0 | | | 565 | |
| Total assets | | $ | 342,090 | | | $ | 136 | | | $ | 565 | |
| Liabilities: | | | | | | |
| Foreign currency forward contracts | | $ | 0 | | | $ | 48 | | | $ | 0 | |
| Interest rate swap agreements | | 0 | | | 17,881 | | | 0 | |
| Future tranche right | | 0 | | | 0 | | | 52,772 | |
| Contingent consideration - business combinations | | 0 | | | 0 | | | 15,704 | |
| Option to acquire noncontrolling interests of consolidated subsidiaries | | 0 | | | 0 | | | 3,250 | |
| Total liabilities | | $ | 0 | | | $ | 17,929 | | | $ | 71,726 | |
24We evaluated the Future Tranche Right associated with the Series A Preferred Stock issued on May 7, 2020 and determined that the Future Tranche Right was a freestanding financial instrument. The Future Tranche Right was initially recorded as an asset and was re-measured at each reporting period until the redemption feature was exercised in connection with the sale and issuance of the Series B Preferred Stock on April 6, 2021. Immediately prior to the issuance of the Series B Preferred Stock the Future Tranche Right was remeasured to fair value with the change in fair value recognized as a component of other income (expense). Upon the issuance of the Series B Preferred Stock, the Future Tranche Right liability was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. Please refer to Note 9, “Convertible Preferred Stock” for additional information regarding the Future Tranche Right and preferred stock investment.
The following table presents the changes in the estimated fair value of Contents
the Future Tranche Right measured using significant unobservable inputs (Level 3) for the three months ended April 30, 2021. | | | | | | | | | | | | | | | | | | | | |
| | | January 31, 2020 | | | | |
| | | Fair Value Hierarchy Category | | | | |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | |
| Money market funds | | $ | 89 | | | $ | — | | | $ | — | |
| Foreign currency forward contracts | | — | | | 812 | | | — | |
| Contingent consideration receivable | | — | | | — | | | 738 | |
| Total assets | | $ | 89 | | | $ | 812 | | | $ | 738 | |
| Liabilities: | | | | | | |
| Foreign currency forward contracts | | $ | — | | | $ | 132 | | | $ | — | |
| Interest rate swap agreements | | — | | | 13,501 | | | — | |
| Contingent consideration - business combinations | | — | | | — | | | 42,875 | |
| Option to acquire noncontrolling interests of consolidated subsidiaries | | — | | | — | | | 2,900 | |
| Total liabilities | | $ | — | | | $ | 13,633 | | | $ | 45,775 | |
| | | | | | | | |
| | |
| (in thousands) | | Three Months Ended
April 30, 2021 |
| Fair value measurement at beginning of period | | $ | (52,772) | |
| Change in fair value, recorded in other income (expense), net | | 15,810 | |
| Reclassification of future tranche right liability upon settlement | | 36,962 | |
| Fair value measurement at end of period | | $ | 0 | |
In January 2020, we completed the sale of an insignificant subsidiary in our Customer Engagement segment.subsidiary. In accordance with the terms of the sale agreement, 100% of the aggregate purchase price is contingent in nature based on a percentage of net sales of the former subsidiary’s
products during the thirty-six month period following the transaction closing. We include the fair value of the contingent consideration receivable within prepaid expenses and other current assets and other assets on our condensed consolidated balance sheet. The estimated fair value of this asset as of April 30, 2020,2021, which is measured using Level 3 inputs, was $0.5 million. We received payments of $0.1 million, and the change in the estimated fair value of this contingent receivable was not material, during the three months ended April 30, 2021. The estimated fair value of this asset as of April 30, 2020 was $0.7 million. We did not receive any payments, and the change in the estimated fair value of this contingent receivable was not material, during the three months ended April 30, 2020.
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 three months ended April 30, 20202021 and 2019: 2020:
| | | | | | | | | | | | | | |
| | | | |
| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Fair value measurement at beginning of period | | $ | 42,875 | | | $ | 61,340 | |
| Contingent consideration liabilities recorded for business combinations, including measurement period adjustments | | — | | | 5,200 | |
| Changes in fair values, recorded in operating expenses | | (4,803) | | | 1,213 | |
| Payments of contingent consideration | | (3,031) | | | (6,361) | |
| Foreign currency translation and other | | (39) | | | (13) | |
| Fair value measurement at end of period | | $ | 35,002 | | | $ | 61,379 | |
| | | | | | | | | | | | | | |
| | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Fair value measurement at beginning of period | | $ | 15,704 | | | $ | 31,367 | |
| Changes in fair values, recorded in operating expenses | | 241 | | | (4,399) | |
| Payments of contingent consideration | | (7,609) | | | (3,031) | |
| Foreign currency translation and other | | (25) | | | (40) | |
| Fair value measurement at end of period | | $ | 8,311 | | | $ | 23,897 | |
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 two2 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 accrued expenses and other current 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 three months ended April 30, 20202021 and 2019: 2020:
| | | | | | | | | | | | | | |
| | | | |
| | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Fair value measurement at beginning of period | | $ | 2,900 | | | $ | 3,000 | |
| Change in fair value, recorded in operating expenses | | (250) | | | (150) | |
| Fair value measurement at end of period | | $ | 2,650 | | | $ | 2,850 | |
| | | | | | | | | | | | | | |
| | | | |
| | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Fair value measurement at beginning of period | | $ | 3,250 | | | $ | 2,900 | |
| Change in fair value, recorded in operating expenses | | 150 | | | (250) | |
| Fair value measurement at end of period | | $ | 3,400 | | | $ | 2,650 | |
On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our consolidated statement of operations for the three months ended April 20, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and included within other liabilities on our condensed consolidated balance sheet as of April 30, 2021. Please refer to Note 13, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
There were no transfers between levels of the fair value measurement hierarchy during the three months ended April 30, 20202021 and 2019.2020.
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.
Future Tranche Right - The fair value of the Future Tranche Right was classified within Level 3 of the fair value hierarchy because it was valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The fair value of the Future Tranche Right was estimated using a binomial tree model to estimate the value of the Series B Preferred Stock and a Monte Carlo simulation to estimate our stock price post-Spin-Off, which we believe was reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Future Tranche Right. The fair value of the Future Tranche Right also reflected the likelihood of the Series B Preferred Stock being issued, which management considered to be highly probable for all periods.
Significant inputs and assumptions used in the valuation model as of the issuance date, May 7, 2020, and immediately prior to the settlement date, April 6, 2021, are as follows:
| | | | | | | | | | | | | | |
| | April 6, | | May 7, |
| | 2021 | | 2020 |
| Risk-free interest rate for preferred stock | | 2.35 | % | | 1.31 | % |
| Implied credit spread | | 6.78 | % | | 10.78 | % |
| Expected volatility | | 30.00 | % | | 30.00 | % |
| Verint common stock price | | $ | 45.91 | | $ | 45.44 |
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 Asset or Liability - Business Combinations and Divestitures - The fair value of the contingent consideration related to business combinations and divestitures 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 3.2%2.8% to 6.7%3.3%, with a weighted average discount rate of 4.8%2.6%, in our calculations of the estimated fair values of our contingent consideration liabilities as of April 30, 2020.2021. We utilized discount rates ranging from 2.1%3.3% to 4.9%3.8%, with a weighted average discount rate of 3.5% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2020.2021. We utilized discount rates ranging from 6.4%2.9% to 6.8%3.6%, with a weighted average discount rate of 6.6%3.2%, in our calculation of the estimated fair value of our contingent consideration asset as of April 30, 2020.2021. We utilized discount rates ranging from 4.3%3.3% to 4.9%4.0%, with a weighted average discount rate of 3.7% in our calculation of the estimated fair value of our contingent consideration asset as of January 31, 2020.2021.
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 a discount ratesrate of 11.0% and 9.0% in our calculation of the estimated fair value of the option as of April 30, 20202021 and January 31, 2020, respectively.2021.
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 $100 million and our revolving credit borrowings$409 million at April 30, 2020 were $406 million2021 and $190 million, respectively. The estimated fair values of our term loan and our revolving credit borrowings at January 31, 2020 were $417 million and $45 million,2021, respectively. 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 participation in our term loans are traded. The indicative prices provided to us as at each of April 30, 20202021 and January 31, 20202021 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.
The estimated fair values of our 2014 Notes were approximately $386$454 million and $438$440 million at April 30, 20202021 and January 31, 2020,2021, respectively. The estimated fair value of our 2021 Notes was approximately $319 million at April 30, 2021. The estimated fair values of the 2014 Notes and 2021 Notes are determined based on quoted bid and ask prices in the over-the-counter market in which the 2014 Notes and 2021 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 April 30, 2020,2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $3.8$5.1 million, of which $4.4 million was remeasured to fair value based on an observable transaction during the three months ended April 30, 2021. These investments are included within other assets on the condensed consolidated balance sheets. An unrealized gain of $3.1 million, which adjusted the carrying value of a noncontrolling equity investment based on an observable transaction was recorded in other income (expense), net on the condensed consolidated statement of operations for the three months ended April 30, 2021. As of January 31, 2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $2.0 million. There were no observable price changes in our investments in privately-held companies and weduring the year ended January 31, 2021. We did not recognize any impairments or other adjustments during the three months ended April 30, 2021 and 2020.
12.13. 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 $106.2$4.2 million and $89.0$6.6 million as of April 30, 20202021 and January 31, 2020,2021, 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, in February 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we paid interest at a fixed rate of 4.143% and received 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 remained in effect until September 6, 2019, and served 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 occurred quarterly, and the 2016 Swap matured on September 6, 2019.
Prior to June 29, 2017, the 2016 Swap was designated as a cash flow hedge for accounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and were reclassified into the statement of operations within interest expense in the period in which the hedged transaction affected earnings. Hedge ineffectiveness, if any, was recognized currently in the condensed consolidated statement of operations.
On June 29, 2017, concurrent with the execution 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 hedged by the 2016 Swap 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 were 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 Swapour prior interest rate swap in September 2019, under which we paypaid interest at a fixed rate of 2.949% and receivereceived 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 was September 6, 2019, and settlements with the counterparty will occurbegan on November 1, 2019, and occurred on a quarterly basis, beginning on November 1, 2019.basis. The 2018 Swap will terminate onhad a termination date of June 29, 2024.
During the operating term ofPrior to May 1, 2020, 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 iswas designated as a cash flow hedge for accounting purposes and as such, changes in its fair value arewere recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and arewere reclassified into the condensed consolidated statement of operations within interest expense in the periods in which the hedged transactions affectaffected earnings.
On May 1, 2020, which was an interest rate reset date on our 2017 Term Loan, we selected an interest rate other than three-month LIBOR. As a result, the 2018 Swap, which was designated specifically to hedge three-month LIBOR interest payments, no longer qualified as a cash flow hedge. Subsequent to May 1, 2020, changes in fair value of the 2018 Swap were accounted for as a component of other income (expense), net. Accumulated deferred losses on the 2018 Swap of $20.4 million, or $16.0 million after taxes, at May 1, 2020 that were previously recorded as a component of accumulated other comprehensive loss, were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the 2018 Swap, as the previously hedged interest payments occurred.
On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity. Upon settlement, we recorded an unrealized gain of $1.3 million in other income (expense) to adjust the interest rate swap to its fair value at settlement date and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our condensed consolidated statement of operations for the three months ended April 30, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and included within other liabilities on our condensed consolidated balance sheet as of April 30, 2021.
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 April 30, 20202021 and January 31, 20202021 were as follows:
| | | | | | | | | | | | | | | | | |
| | | Fair Value at | | |
| | | April 30, | | January 31, |
| (in thousands) | Balance Sheet Classification | | 2020 | | 2020 |
| Derivative assets: | | | | | |
| Foreign currency forward contracts: | | | | | |
| Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | 544 | | | $ | 710 | |
| Not designated as hedging instruments | Prepaid expenses and other current assets | | 726 | | | 102 | |
| Total derivative assets | | | $ | 1,270 | | | $ | 812 | |
| | | | | |
| Derivative liabilities: | | | | | |
| Foreign currency forward contracts: | | | | | |
| Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | 724 | | | $ | 16 | |
| Not designated as hedging instruments | Accrued expenses and other current liabilities | | — | | | 116 | |
| Interest rate swap agreements: | | | | | |
| Designated as a cash flow hedge | Accrued expenses and other current liabilities | | 3,897 | | | 2,060 | |
| Designated as a cash flow hedge | Other liabilities | | 16,548 | | | 11,441 | |
| Total derivative liabilities | | | $ | 21,169 | | | $ | 13,633 | |
| | | | | | | | | | | | | | | | | |
| | | Fair Value at |
| | | April 30, | | January 31, |
| (in thousands) | Balance Sheet Classification | | 2021 | | 2021 |
| Derivative assets: | | | | | |
| Foreign currency forward contracts: | | | | | |
| Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | 38 | | | $ | 136 | |
| Total derivative assets | | | $ | 38 | | | $ | 136 | |
| | | | | |
| Derivative liabilities: | | | | | |
| Foreign currency forward contracts: | | | | | |
| Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | 17 | | | $ | 47 | |
| Not designated as hedging instruments | Accrued expenses and other current liabilities | | 0 | | | 1 | |
| Interest rate swap agreement: | | | | | |
| Not designated as a hedging instrument | Accrued expenses and other current liabilities | | 0 | | | 4,316 | |
| Not designated as a hedging instrument | Other liabilities | | 0 | | | 13,565 | |
| Total derivative liabilities | | | $ | 17 | | | $ | 17,929 | |
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 months ended April 30, 20202021 and 20192020 were as follows:
| | | Three Months Ended
April 30, | | | Three Months Ended
April 30, |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| Net (losses) gains recognized in AOCL: | | | | | |
| Net gains (losses) recognized in AOCL: | | Net gains (losses) recognized in AOCL: | | | | |
| Foreign currency forward contracts | Foreign currency forward contracts | | $ | (925) | | | $ | 342 | | Foreign currency forward contracts | | $ | 40 | | | $ | (8) | |
| Interest rate swap agreement | Interest rate swap agreement | | (7,535) | | | (2,017) | | Interest rate swap agreement | | 0 | | | (7,535) | |
| | $ | (8,460) | | | | $ | (1,675) | | | $ | 40 | | | $ | (7,543) | |
| | Net losses reclassified from AOCL to the condensed consolidated statements of operations: | | |
| Net gains (losses) 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 | Foreign currency forward contracts | | $ | (52) | | | $ | (939) | | Foreign currency forward contracts | | $ | 106 | | | $ | 0 | |
| Interest rate swap agreement | Interest rate swap agreement | | (591) | | | — | | Interest rate swap agreement | | (16,669) | | | (591) | |
| | $ | (643) | | | $ | (939) | | | $ | (16,563) | | | $ | (591) | |
For information regarding the line item locations of the net gains (losses) gains on derivative financial instruments reclassified out of AOCL into the condensed consolidated statements of operations, seesee Note 9,10, “Stockholders’ Equity”.
All of the foreign currency forward contracts underlying the $0.2 million of net unrealized lossesgains recorded in our accumulated other comprehensive loss at April 30, 20202021 mature within twelve months, and therefore we expect all such losses to be reclassified into earnings within the next twelve months. Approximately $3.1 million of the $16.0 million of net unrealized losses related to our interest rate swap agreement recorded in our accumulated other comprehensive loss at April 30, 2020 settle within twelve months, and therefore we expect those lossesgains to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Gains (losses)Losses recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three months ended months ended April 30, 20202021 and 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Classification in Condensed Consolidated Statements of Operations | | Three Months Ended
April 30, | | |
| (in thousands) | | | | 2020 | | 2019 |
| Foreign currency forward contracts | | Other income (expense), net | | $ | 1,014 | | | $ | 564 | |
| Interest rate swap agreement | | Other income (expense), net | | — | | | (15) | |
| | | | $ | 1,014 | | | $ | 549 | |
| | | | | | | | | | | | | | | | | | | | |
| | Classification in Condensed Consolidated Statements of Operations | | Three Months Ended
April 30, |
| (in thousands) | | | 2021 | | 2020 |
| Interest rate swap agreement | | Other income (expense), net | | $ | (14,374) | | | $ | 0 | |
13.14. STOCK-BASED COMPENSATION
Stock-Based Compensation Plan
On June 20, 2019, our stockholders approved the Verint Systems Inc. 2019 Long-Term Stock Incentive Plan (the “2019 Plan”). Upon approval of the 2019 Plan, additionalnew awards are no longer permitted under our prior stock-based compensation plan (the “2017 Amended 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. Subject to adjustment as provided in the 2019 Plan, up to an aggregate of (i) 9,475,000 shares of our common stock plus (ii) the number of shares of our common stock available for issuance under the 2017 Amended Plan as of June 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 2017 Amended Plan or the 2019 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2019 Plan will reduce the available plan capacity by one1 share and each other award denominated in shares that is granted under the 2019 Plan will reduce the available plan capacity by 2.38 shares.
In March 2021, our board of directors approved an adjustment of the available plan capacity to the 2019 Plan to 14,239,656 shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off.
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 months ended April 30, 20202021 and 2019:2020:
| | | Three Months Ended
April 30, | | | Three Months Ended
April 30, |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| Cost of revenue - product | | $ | 310 | | | $ | 334 | | |
| Cost of revenue - service and support | | 657 | | | 1,070 | | |
| Cost of revenue - recurring | | Cost of revenue - recurring | | $ | 429 | | | $ | 265 | |
| Cost of revenue - nonrecurring | | Cost of revenue - nonrecurring | | 833 | | | 272 | |
| Research and development, net | Research and development, net | | 2,336 | | | 2,590 | | Research and development, net | | 1,773 | | | 1,173 | |
| Selling, general and administrative | Selling, general and administrative | | 10,881 | | | 13,109 | | Selling, general and administrative | | 13,366 | | | 8,968 | |
| Total stock-based compensation expense | Total stock-based compensation expense | | $ | 14,184 | | | $ | 17,103 | | Total stock-based compensation expense | | $ | 16,401 | | | $ | 10,678 | |
The following table summarizes stock-based compensation expense by type of award for the three months ended April 30, 20202021 and 2019:2020:
| | | Three Months Ended
April 30, | | | Three Months Ended
April 30, |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| Restricted stock units and restricted stock awards | Restricted stock units and restricted stock awards | | $ | 15,029 | | | $ | 14,890 | | Restricted stock units and restricted stock awards | | $ | 14,253 | | | $ | 11,256 | |
| Stock bonus program and bonus share program | Stock bonus program and bonus share program | | (837) | | | 2,175 | | Stock bonus program and bonus share program | | 2,152 | | | (573) | |
| Total equity-settled awards | Total equity-settled awards | | 14,192 | | | 17,065 | | Total equity-settled awards | | 16,405 | | | 10,683 | |
| Phantom stock units (cash-settled awards) | Phantom stock units (cash-settled awards) | | (8) | | | 38 | | Phantom stock units (cash-settled awards) | | (4) | | | (5) | |
| Total stock-based compensation expense | Total stock-based compensation expense | | $ | 14,184 | | | $ | 17,103 | | Total stock-based compensation expense | | $ | 16,401 | | | $ | 10,678 | |
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 and Performance Stock Units
We periodically award 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 three months ended April 30, 20202021 and 2019:2020:
| | | Three Months Ended April 30, | | | Three Months Ended April 30, |
| | 2020 | | | 2019 | | | 2021 | | 2020 |
| (in thousands, except per share data) | (in thousands, except per share data) | | Shares or Units | | Weighted-Average Grant Date Fair Value | | Shares or Units | | Weighted-Average Grant Date Fair Value | (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 | Beginning balance | | 2,736 | | | $ | 52.53 | | | 2,777 | | | $ | 41.05 | | Beginning balance | | 2,950 | | | $ | 35.97 | | | 1,879 | | | $ | 52.96 | |
| Granted | Granted | | 107 | | | $ | 51.26 | | | 1,444 | | | $ | 61.10 | | Granted | | 1,262 | | | $ | 48.62 | | | 90 | | | $ | 49.80 | |
| Released | Released | | (399) | | | $ | 46.96 | | | (448) | | | $ | 39.50 | | Released | | (827) | | | $ | 35.33 | | | (332) | | | $ | 46.38 | |
| Forfeited | Forfeited | | (81) | | | $ | 51.84 | | | (60) | | | $ | 35.44 | | Forfeited | | (41) | | | $ | 35.61 | | | (71) | | | $ | 52.15 | |
| Ending balance | Ending balance | | 2,363 | | | $ | 53.44 | | | 3,713 | | | $ | 49.23 | | Ending balance | | 3,344 | | | $ | 40.91 | | | 1,566 | | | $ | 54.21 | |
The beginning balance of the outstanding shares for the three months ended April 30, 2021 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The related weighted-average grant date fair value for the beginning outstanding shares reflects the adjusted fair value of the awards on the Spin-Off Date. The adjusted shares preserve the same terms and conditions and vesting schedules as the original awards.
The beginning balance of the shares and the respective weighted-average grant date fair values for the three months ended April 30, 2020 reflect the shares and fair values on the original date of grant without adjustment.
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 April 30, 2020,2021, 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.
In order to achieve an equitable modification of the existing awards following the Spin-Off, we converted unvested awards as of February 1, 2021 by a factor of approximately 1.45, resulting in additional awards being granted to remaining employees denominated solely in Verint common stock. As noted above, a corresponding adjustment was also made to the available capacity under the 2019 Plan.
The following table summarizes PSU activity in isolation under the Plans for the three months ended April 30, 20202021 and 20192020 (these amounts are already included in the Award Activity Table above for 20202021 and 2019)2020):
| | | | | | | | | | | | | | |
| | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Beginning balance | | 526 | | | 512 | |
| Granted | | 107 | | | 286 | |
| Released | | (231) | | | (234) | |
| Forfeited | | (20) | | | (26) | |
| Ending balance | | 382 | | | 538 | |
| | | | | | | | | | | | | | |
| | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Beginning balance | | 635 | | | 423 | |
| Granted | | 212 | | | 90 | |
| Released | | (270) | | | (180) | |
| Forfeited | | (5) | | | (20) | |
| Ending balance | | 572 | | | 313 | |
Consistent with the table above, the beginning balance of the outstanding shares for the three months ended April 30, 2021 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The beginning balance of the outstanding shares of the three months ended April 30, 2020 reflects the number of shares on the date of grant without adjustment.
Excluding PSUs, we did not grant anygranted 1,050,000 RSUs or other equity awards during the three months ended April 30, 2020.2021.
As of April 30, 2020,2021, there was approximately $70.2$101.6 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 1.41.8 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 generally determined using a 5-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.
There was no activity under the stock bonus program during the three months ended April 30, 2020 and 2019.
For bonuses in respect of the year endingended January 31, 2020,2021, our board of directors approved the use of up to 200,000 shares of common stock, and a discount of 15%, for awards under this program. However, the stock bonus program. We currently expect to issueprogram was not used and no more than 32,000 shares under the stock bonus program forwill be issued in respect of the performance period ended January 31, 2020, which are expected to be issued during the second half of the year ending January 31, 2021.
In March 2020,2021, our board of directors approved up to 200,000300,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period endedending January 31, 2021.2022.
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. As noted above, shares issued under this program are included in the Award Activity Table above.
For bonuses in respect of the year endingended January 31, 2020,2021, our board of directors has approved the use of up to 305,000300,000 shares of common stock under the bonus share program, reduced by any shares issued under the stock bonus program in respect of the same performance period. ForThe program was not used, however, and 0 shares will be issued in respect of the performance period ended January 31, 2020, we currently expect to issue no more than 32,000 shares under the stock bonus program, with the remaining 273,000 shares authorized by the board of directors available for use under the bonus share program for the same performance period. Awards under the bonus share program for the
performance period ended January 31, 2020 are expected to be issued during the second half of the year ending January 31, 2021.
For bonuses in respect of the year ending January 31, 2021,2022, our board of directors has approved the use of up to 300,000 shares of common stock under this program, reduced by any shares used under the stock bonus program in respect of the same performance period.period (the maximum number of shares issuable under the stock bonus program and the bonus share program collectively for the performance period ending January 31, 2022 will not exceed 300,000).
The combined accrued liabilities for the stock bonus program and the bonus share program were $14.6 million and $17.3was $2.1 million at April 30, 2020 and2021. As noted above, no awards were made under the stock bonus program or the bonus share program for the performance period ended January 31, 2020, respectively.2021 and bonuses for such period were paid in cash.
14.15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our primary Israeli subsidiary, Verint Systems Limited (“VSL”) (Case Number 4186/09) and against our affiliate CTI (Case Number 1335/09). 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 plaintiffs generally sought to certify class action suits against the defendants on behalf of current and former employees of VSL and Comverse Limited who had been granted stock options in Verint and/or CTI and who were allegedly damaged as a result of a suspension on option exercises during an extended filing delay period that is discussed in our and CTI’s historical public filings. On June 7, 2012, the Tel Aviv District Court, where the cases had been filed or transferred, allowed the plaintiffs to consolidate and amend their complaints against the three3 defendants: VSL, CTI, and Comverse Limited.
On October 31, 2012, CTI distributed of all of the outstanding shares of common stock of Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI’s shareholders (the “Comverse Share Distribution”). In the period leading up to the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in Verint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. As the result of these transactions, Comverse, Inc. became an independent company and ceased to be affiliated with CTI, and CTI ceased to have any material assets other than its equity interests in Verint. 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 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.
On February 4, 2013, Verint acquired the remaining CTI shell company in a merger transaction (the “CTI Merger”). As a result of the CTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the foregoing legal actions. However, under the terms of a Distribution Agreement entered into in connection with the Comverse 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 to CTI related to the foregoing legal actions.
Following an unsuccessful mediation process, on 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 would be evaluated under New York law.
As a result of this ruling (which excluded claims related to Verint stock options from the case), one of the original plaintiffs in the case, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin. CTI appealed portions of the District Court’s ruling to the 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 under New York law based on the parties’ expert opinions.
Following two unsuccessful rounds of mediation in mid to late 2018 and in mid-2019, the proceedings resumed. On April 16, 2020, the District Court accepted plaintiffs’ application to amend the motion to certify a class action and set deadlines for filing amended pleadings by the parties. CTI recently submitted a motion to appeal the District Court’s decision to the Supreme Court, as well as a motion to stay the proceedings in the District Court pending the resolution of the appeal. On July 6, 2020, the Supreme Court granted the motion for a stay. On July 27, 2020, the plaintiffs filed their response on the merits of the motion for leave to appeal, and the parties are waiting for further instructions or decisions from the Supreme Court.
32On February 1, 2021, we completed the Spin-Off. As a result of the Spin-Off, Cognyte is now an independent, publicly traded company. Under the terms of the Separation and Distribution Agreement entered into between Verint and Cognyte, Cognyte has agreed to indemnify Verint for Cognyte’s share of any losses that Verint may suffer related to the foregoing legal actions either in its capacity as successor to CTI, to the extent not indemnified by Mavenir, or due to its former ownership of Cognyte and VSL.
FromWe are a party to various litigation matters and claims that arise 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 ultimate outcome of any such current claimsmatters will not have a material adverse effect on us, their outcomes are not determinable and negative outcomes may adversely affect our consolidated financial position, liquidity, or results of operations, or cash flows.
15. 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 2 operating segments—Customer Engagement and 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 months ended April 30, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Revenue: | | | | |
| Customer Engagement | | | | |
| Segment revenue | | $ | 189,127 | | | $ | 215,867 | |
| Revenue adjustments | | (3,262) | | | (8,772) | |
| | 185,865 | | | 207,095 | |
| Cyber Intelligence | | | | |
| Segment revenue | | 102,522 | | | 108,291 | |
| Revenue adjustments | | (1,092) | | | (127) | |
| | | 101,430 | | | 108,164 | |
| Total revenue | | $ | 287,295 | | | $ | 315,259 | |
| | | | |
| Segment contribution: | | | | |
| Customer Engagement | | $ | 65,797 | | | $ | 78,818 | |
| Cyber Intelligence | | 24,964 | | | 27,290 | |
| Total segment contribution | | 90,761 | | | 106,108 | |
| | | | |
| Reconciliation of segment contribution to operating income: | | | | |
| Revenue adjustments | | 4,354 | | | 8,899 | |
| Shared support expenses | | 43,341 | | | 43,854 | |
| Amortization of acquired intangible assets | | 12,674 | | | 14,420 | |
| Stock-based compensation | | 14,184 | | | 17,103 | |
| Acquisition, integration, restructuring, and other unallocated expenses | | 10,034 | | | 7,364 | |
| Total reconciling items, net | | 84,587 | | | 91,640 | |
| Operating income | | $ | 6,174 | | | $ | 14,468 | |
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”.operations.
16. SUBSEQUENT EVENTS
Apax Convertible Preferred Stock InvestmentEVENT
On May 7, 2020, we closed28, 2021, prior to the initial tranchematurity of the previously announced strategic partnership (the “Closing”) with2014 Notes on June 1, 2021, we paid an aggregate of $389.8 million in cash for the Apax Investor. Pursuantsettlement of the 2014 Notes, which included $386.9 million in satisfaction of the outstanding principal of the 2014 Notes and $2.9 million related to the Investment Agreement, dated asfinal interest payment on the 2014 Notes. We funded the repayment of December 4, 2019, at the Closing,outstanding principal amount of the 2014 Notes and accrued interest thereon using cash we sold 200,000had placed in escrow on February 26, 2021. Additionally, in satisfaction of the conversion premium of $57.7 million we issued approximately 1,250,000 shares of our Series A Convertible Perpetual Preferred Stock, par value $0.001 per share,common stock to the holders of the 2014 Notes.
The Note Hedges we entered into in connection with the issuance of the 2014 Notes were automatically settled with the conversion of the 2014 Notes, resulting in our receipt of approximately 1,250,000 shares of our common stock from the counterparties, offsetting the shares we issued to the holders of the 2014 Notes. We also received approximately 42,000 shares of our common stock from the counterparties pertaining to the reimbursement for an aggregate purchase pricethe in-the-money portion of $200.0 million. the Repurchased 2014 Notes under the Note Hedge agreement.
See “Management’s discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 2 of this reportNote 7, “Long-Term Debt” for a more detailed discussion regarding the Apax investment.
In connection with the Closing, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which, among other things, we have agreed to use commercially reasonable efforts to prepare2014 Notes and file a shelf registration statement with the SEC no later than the first business day after the Common Stock Restricted Period (as defined in the agreement) and to use commercially reasonable efforts to cause such shelf registration statement to be declared effective as promptly as is reasonably practicable after its filing to permit the public resale of registrable securities covered by the Registration Rights Agreement. The registrable securities generally include any shares of our common stock, par value $0.001 per share (“Common Stock”), into which the Preferred Stock is convertible, and any other securities issued or issuable with respect to any such shares of Common Stock by way of share split, share dividend, distribution, recapitalization, merger, exchange, replacement or similar event or otherwise.
We generally will be required to effect registrations for up to three underwritten offerings of the registrable securities within any twelve-month period during the term of the Registration Rights Agreement, subject to certain limitations, including that the anticipated gross proceeds of any offering be at least $50.0 million. The Apax Investor is also entitled to customary “piggy-back” registration and shelf take-down rights. The rights of any particular holder to cause us to register securities under theNote Hedges.
Registration Rights Agreement will terminate with respect to that holder upon the date on which the holder no longer holds any Preferred Stock or any registrable securities covered thereby. The registration rights set forth in the Registration Rights Agreement will terminate on the date on which all shares of Common Stock issuable (or actually issued) upon conversion of the Preferred Stock cease to be registrable securities covered thereby.
Amendment to 2017 Credit Agreement
On June 8, 2020, we entered into the Second Amendment to the 2017 Credit Agreement, pursuant to which (i) we are permitted to effect the previously announced Spin-Off of our Cyber Intelligence business within the parameters set forth in the 2017 Credit Agreement, as amended, and (ii) for purposes of the acceleration of the maturity of the 2017 Term Loan and 2017 Revolving Credit Facility under the 2017 Credit Agreement, our Notes will not be deemed to be outstanding if such Notes are cash collateralized in accordance with the 2017 Credit Agreement, as amended.
Other than the changes described above, all other material provisions of the 2017 Credit Agreement as described in Note 7, “Long-Term Debt” remain unchanged.
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, 20202021 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 Developments
SeparationSpin-Off of BusinessesCognyte Software Ltd.
On December 4, 2019,February 1, 2021, we completed the previously announced our intention to separate into two independent publicly traded companies: one which willspin-off (the “Spin-Off”) of Cognyte Software Ltd. (“Cognyte”), a company limited by shares incorporated under the laws of the State of Israel whose business and operations 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 theformer Cyber Intelligence Solutions business (the “Cognyte Business”). The Spin-Off was completed by way of a pro rata distribution on February 1, 2021 of all of the then-issued and outstanding ordinary shares, no par value, of Cognyte to holders of record of our stockholders (the “Spin-Off”) that is intended to be tax-free tocommon stock as of the close of business on January 25, 2021. After the distribution, we do not beneficially own any ordinary shares of Cognyte and beginning February 1, 2021, we no longer consolidate Cognyte within our stockholders for U.S. federal income tax purposes. We currently expect to completefinancial results or reflect the Spin-Off shortly after the endfinancial results of this fiscal year ending January 31, 2021, though this timeline may be impacted by the current business environment brought on by the COVID-19 pandemic. 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 bothCognyte within our businesses are leaders in their respective markets and the separation will enable them to achieve better performance over the long term as a resultcontinuing results of several factors, including 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.operations.
We expectincurred cumulative transaction costs of $53.0 million prior to incur significantthe completion of the Spin-Off, of which $7.8 million is reflected in our condensed consolidated statement of operations within discontinued operations for the three months ended April 30, 2020. Transaction costs in connection withprimarily consisted of costs incurred for the planned separationestablishment of our Cyber Intelligence Solutions business. The costs include developing stand-alone Cyber Intelligence Solutionsseparate information systems andfor each company, along with related ITinformation technology costs, third-party advisory, consulting, legal and professional services, as well as other items that arewere incremental and one-time in nature that are related to the plannedSpin-Off.
In connection with the Spin-Off, we entered into several agreements with Cognyte that provide a framework for the relationship between the parties going forward, including a limited duration Transition Services Agreement under which we and Cognyte will provide and/or make available various administrative services and assets to each other for a given period based on each individual service. In no case will services be provided for more than 24 months after the Spin-Off. We capitalized $1.5 millionServices to be provided include certain services related to finance, accounting, business technology, human resources, information systems, facilities, document management and record retention and technical support. In consideration for such services, we and Cognyte will each pay fees to the other for the services provided, and those fees will generally be in amounts intended to allow the party providing services to recover all of theseits direct and indirect costs incurred in providing those services, plus a standard markup.
The historical results of operations and expensed $7.8 million duringfinancial positions of Cognyte are reported as discontinued operations in our condensed consolidated financial statements. For further information on discontinued operations, see Note 2, “Discontinued Operations”, to the three months ended April 30, 2020. We have capitalized $5.5 million and expensed $13.1 millioncondensed consolidated financial statements in Item 1, Part I of separation related costs since commencingthis report. Pursuant to the Spin-Off of the Cognyte Business, we now operate in a single reportable segment, which is described in the year ended January 31, 2020. The expense portion is reflected in selling, general and administrative expenses.“Our Business” section below.
Apax Investment
On December 4, 2019, we also announced that Valor Parent LP, an affiliate of Apax Partners would make an investment in us in an amount of up to $400$400.0 million. Under the terms of the Investment Agreement, on May 7, 2020 the Apax Investor initially purchased $200$200.0 million of our Series A convertible preferred stock which closed(“Series A Preferred Stock”). In connection with the completion of the Spin-Off, on May 7, 2020.April 6, 2021 the Apax Investor purchased $200.0 million of our Series B convertible preferred stock (“Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”). Further discussion regarding the Apax investmentinvestments and details of the initial closing of both tranches appears in Note 16, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item 1 of this report and the “Liquidity and Capital Resources-Overview” section below.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption despite progress made in recent months in
the development and distribution of vaccines and the economic recovery since the first half of 2020. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Companies around the world, including us, our customers, partners, and vendors, have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. The global spread of COVID-19 and actions taken in response have negatively affected us, our customers, partners, and vendors and caused significant economic and business disruption the extent and duration of which is not currently known. In response to these challenges, we quickly adjustedestablished remote working arrangements for our operationsemployees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to work from homea virtual-only format and we believe our business continuity plan is working well.
We are monitoring and assessing the impact of the COVID-19 pandemic daily, including recommendations and orders issued by government and public health authorities. We continue to work to help our customers meet their business continuity needs and help keep the world safe during this difficult time and are managing our operations with a view to resuming normal business activity as soon as possible.
During the first quarter, revenue in both of our operating segments was negatively impacted by delays and reduced spending attributed to the impacthalf of the COVID-19 pandemic on our customers’ operational priorities and as a result of cost containment measures they have implemented. Due to the pandemic,year ended January 31, 2021, we have seen a reduction or delay in large customer contracts, particularly on-premises arrangements, and we have been unable to conduct face-to-face meetings with existing or prospective customers and partners, present in-person demonstrations of our solutions, or host or attend in-person trade shows and conferences. Limitations on access to the facilities of our customers have also impacted our ability to deliver some of our products, completeimplemented certain implementations, and provide in-person consulting and training services, negatively impacting our ability to recognize revenue. We continued to experience high recurring revenue renewal rates during the first quarter. We have also begun to offer new versions of our solutions in both of our segments designed to help our customers address challenges created by the pandemic and to offer simpler packages of software and services for some of our Customer Engagement solutions to make it easier and faster for customers to make purchases. Notwithstanding our strong first quarter recurring renewal rates and these new offerings, we cannot predict how the pandemic will impact our results in future periods, including to the extent that customers delay or miss payments, customers defer, reduce, or refrain from placing orders or renewing subscriptions or support arrangements, or travel restrictions and site access restrictions remain necessary.
In light of the adverse impact of COVID-19 on global economic conditions and our revenue, along with the uncertainty associated with the extent and timing of a potential recovery, we have implemented several cost-reduction actions some of which did not take effect until the beginning of our second quarter.varying durations. Such actions have included, but arewere not limited to, reducing our discretionary spending, substantially decreasing capital expenditures, extending days payable outstanding, consideringreconsidering the optimal uses of our cash and other capital resources, including with respect to our stock repurchase program,repurchases, and reducing workforce-related costs. TheseDuring the first half of the year ended January 31, 2021, including the three months ended April 30, 2020, our revenue was adversely impacted by delays and reduced spending attributed to the impact of the pandemic on our customers’ operational priorities and as a result of cost containment measures they had implemented. We saw a reduction or delay in certain large customer contracts, particularly on-premises arrangements, and limitations on access to the facilities of our customers also impacted our ability to deliver some of our products and complete certain implementations, negatively impacting our ability to recognize revenue.
We saw an improvement in the business environment during the second half of the year ended January 31, 2021, which has continued to date into the year ending January 31, 2022. During the three months ended April 30, 2021, we continued to experience solid demand for our cloud solutions as our customers have accelerated the digitization of their customer interactions and internal operations due to the pandemic. Based on the improved business environment and our financial performance, we have in many cases resumed investments and other spending; however, these actions may need to be reassessed depending on how the facts and circumstances surrounding the pandemic evolve. Any such renewed cost controls may have an adverse impact on us, particularly if they remain in place for an extended period. We continueexpect to evaluateincur additional costs to the extent we further resume business-related travel and may decideour employees return to implement further cost control strategies to help us mitigateour office locations, the impacttiming and extent of which remains undetermined at this time. Notwithstanding the pandemic.
The ultimate impact of the COVID-19 pandemicstrong demand for our cloud solutions and the effects ofrecovery in the operational alterations we have made in response onbusiness environment, given the uncertainty associated with the pandemic, our ability to predict how it will impact our business, financial condition, liquidity, and financial results cannot be predicted at this time.in future periods is limited, particularly if the pandemic fails to abate for an extended period of time or worsens.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on our consolidated financial condition or results of operations as of and for the quarterthree months ended April 30, 2020.2021. However, we plan to deferhave deferred the timing of employer payroll taxes and accelerateaccelerated the refund of AMT credits as permitted by the CARES Act. Where taxes payable to government entities have been deferred to a later date, no reduction of expenses has been recorded.
Our Business
Verint is a global leader in Actionable Intelligence solutions. In a world of massive information growth, our solutions empower organizations with crucial, actionable insights and enable decision makers to anticipate, respond, and take action. Today, over 10,000 organizations inhelps brands provide Boundless Customer Engagement™. For more than 180 countries,two decades, the world’s most iconic brands – including overmore than 85 percent of the Fortune 100 use Verint’s Actionable Intelligence solutions, deployed incompanies – have trusted Verint to provide the cloudtechnology and on-premises,domain expertise they require to make more informed, timely, and effective decisions.effectively build enduring customer relationships.
Our Actionable Intelligence leadershipBrands today are challenged by new workforce dynamics, ever-expanding customer engagement channels and exponentially more consumer interactions – often while facing limited budgets and resources. As a result, brands are finding it more challenging to deliver the desired customer experience. This creates an Engagement Capacity Gap™, which is powered by innovative, enterprise-class software built with artificial intelligence,widening as the digital transformation continues. Organizations are increasingly seeking technology to close this gap, solutions that are based on AI and analytics automation,to automate workflows across enterprise silos to optimize the workforce expense and deep domain expertise established by working closely with some of the most sophisticated and 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 one-third of our approximately 6,300 professionals. Our innovative solutions are backed-up by a strong IP portfolio with over 1,000 patents and patent applications worldwide across areas including data capture, artificial intelligence, machine learning, unstructured data analytics, predictive analytics, and automation.to drive an elevated consumer experience.
Verint’s Actionable Intelligence strategyVerint is focused on two use cases anduniquely positioned to help organizations close the Company has two operating segments: Customer Engagement and Cyber Intelligence. Generally, we make business decisions by evaluating the risks and rewards of the opportunities available to us in the markets served by each ofcapacity gap with 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.differentiated Verint Cloud Platform.
Key Trends and Factors That May Impact our Performance
In addition to the impact of the COVID-19 pandemic discussed above, we see the following business trends and factors which may impact our performance:
•Digital Transformation. Transformation is AcceleratingMany organizations. Long gone are going through digital transformations by expanding theirthe days when customer service interactionsjourneys were limited to include digital channels, such as chat, virtual assistants, mobile apps and social media. Remote work arrangements and site restrictions due to the COVID-19 pandemic have increased this trend. While these new channels make it easier for consumers to connect, they caused organizations increased system complexity and new challenges. Inphone calls into a contact center. Today, customer journeys take place across many cases these new customer touch points residetouchpoints in different functional groups and are not connected, resulting in siloed information, a decentralized customer service workforce and difficulty gaining insight into customer experiences. To facilitate effective digital transformations, organizations are looking for vendors that help them to connect silos across the enterprise and across many communication and collaboration platforms, with digital leading the way. Customer touchpoints take proactive action to improveplace in contact centers, in back-office and branch operations, in ecommerce, in digital marketing, in self-service, and in customer experience departments. The breadth of customer touchpoints, the rapid growth in digital interactions, and facilitate openthe emergence of the new workforce – with humans and modular design to simplify integration across systems.bots working together – are creating demand for new solutions.
•Cloud Migration.The Engagement Capacity Gap is Widening. ManyBrands are seeking to differentiate themselves by providing consumers with a strong brand experience. But they cannot afford to do so by hiring more people. With the exponential growth in digital journeys and more demanding consumer expectations, organizations require more resources, but hiring more knowledge workers and further increasing workforce expenses is often not a sustainable solution. This creates an Engagement Capacity Gap, and as the digital transformation accelerates, the gap is widening. Brands are looking for new technology and solutions to modernize their legacy customer engagement operations by transitioninghelp close the Engagement Capacity Gap.
•The Market is Shifting Rapidly to Cloud-Based, AI-Driven Solutions. To effectively address the cloud, adopting modern architectures thatEngagement Capacity Gap, brands are seeking open, cloud-based solutions to break down silos and facilitate the orchestration of disparate systems and the sharing of data across enterprise functions. Organizations whichBrands are at different stages of migratingalso seeking to the cloudleverage AI and other modernization initiatives are also looking for vendors that can help them evolve customer engagement at their own pace while protecting their legacy investments with minimal disruptionadvanced data analytic tools to their operations. Remotereduce manual work, arrangementsincrease workforce efficiency, and site restrictions due tomanage the COVID-19 pandemic have increased this trend.new workforce of humans and bots.
•Automation Adoption. Many organizations are seeking solutionsAs discussed above, the current COVID-19 pandemic is also a material factor that incorporate artificial intelligencemay negatively impact us 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.
Cyber Intelligence
•Security Threats Becoming Increasingly Pervasive 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 generate predictive intelligence and accelerate investigations by correlating massive amounts of data from a wide range of disparate sources to uncover previously unknown connections to identify suspicious behaviors and current and future threats.
•Shortage of Security Analysts Increasing the Needdemand 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 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. These organizations are also increasingly seeking artificial intelligence and other advanced data analysis tools to gain actionable intelligence faster with fewer analysts and data scientists.
•Security Organizations Seeking Faster Innovation Through Open Software Solutions. As security threats have become more pervasive and complex, security organizations have been seeking faster innovation from security vendors. Historically, security organizations purchased customized solutions incorporating software, hardware and integration services. This project-based approach resulted in closed systems, limiting the pace of innovation as upgrades were complex, costly and time consuming. Today, we see a growing preference to purchase software
solutions that are open and can run on standard hardware, that are faster and easier to deploy, and that can be refreshed more quickly to keep up with the accelerating pace of evolving threats.our solutions.
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, 20202021 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, 2020,2021, and include the following:
•Revenue recognition;
•Accounting for business combinations;
•Goodwill and other intangible assets;
•Income taxes; and
•Accounting for stock-based compensation.
There were no significant changes to our critical accounting policies and estimates during the three months ended April 30, 2020.2021, except to the extent such policies or estimates related solely to the Cognyte Business or were no longer relevant as a result of the Spin-Off.
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, and more recently, the impact of the COVID-19 pandemic, 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 months ended April 30, 20202021 and 2019:2020:
| | | Three Months Ended
April 30, | | | Three Months Ended
April 30, |
| (in thousands, except per share data) | (in thousands, except per share data) | | 2020 | | 2019 | (in thousands, except per share data) | | 2021 | | 2020 |
| Revenue | Revenue | | $ | 287,295 | | | $ | 315,259 | | Revenue | | $ | 200,904 | | | $ | 185,865 | |
| Operating income | | $ | 6,174 | | | $ | 14,468 | | |
| Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 1,576 | | |
| Net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
| Operating income (loss) | | Operating income (loss) | | $ | 4,442 | | | $ | (2,041) | |
| Net loss from continuing operations attributable to Verint Systems Inc. common shares | | Net loss from continuing operations attributable to Verint Systems Inc. common shares | | $ | (2,523) | | | $ | (14,658) | |
| Net loss from continuing operations per common share attributable to Verint Systems Inc.: | | Net loss from continuing operations per common share attributable to Verint Systems Inc.: | | | |
| Basic | Basic | | $ | (0.09) | | | $ | 0.02 | | Basic | | $ | (0.04) | | | $ | (0.23) | |
| Diluted | Diluted | | $ | (0.09) | | | $ | 0.02 | | Diluted | | $ | (0.04) | | | $ | (0.23) | |
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Our revenue decreasedincreased approximately $28.0$15.0 million, or 9%8%, to $287.3$200.9 million in the three months ended April 30, 20202021 from $315.3 million in the three months ended April 30, 2019. The decrease consisted of a $27.0 million decrease in product revenue and a $1.0 million decrease in service and support revenue. In our Customer Engagement segment, revenue decreased $21.2 million, or approximately 10%, from $207.1 million in the three months ended April 30, 2019 to $185.9 million in the three months ended April 30, 2020. The decreaseincrease consisted of a $20.0$15.4 million decreaseincrease in product revenue and a $1.2 million decrease in service and support revenue. In our Cyber Intelligence segment, revenue decreased approximately $6.8 million, from $108.2 million in the three months ended
April 30, 2019 to $101.4 million in the three months ended April 30, 2020. The decrease consisted of a $7.0 million decrease in productrecurring revenue, partially offset by a $0.2$0.4 million increasedecrease in service and supportnonrecurring revenue. For additional details on our revenue by segment,category, see “—Revenue by Operating Segment”Revenue”. Revenue in the Americas, in Europe, the Middle East and Africa (“EMEA”), and in the Asia-Pacific (“APAC”) regions represented approximately 51%68%, 29%21%, and 20%11% of our total revenue, respectively, in the three months ended April 30, 2020,2021, compared to approximately 54%67%, 28%21%, and 18%12%, respectively, in the three months ended April 30, 2019.2020. Further details of changes in revenue are provided below.
We reported operating income of $6.2$4.4 million in the three months ended April 30, 20202021 compared to an operating incomeloss of $14.5$2.0 million in the three months ended April 30, 2019.2020. The decreaseincrease in operating income was primarily due to a $16.1$13.6 million decreaseincrease in gross profit, from $201.1$115.0 million to $185.0$128.6 million, partially offset by a $7.8$7.1 million decreaseincrease in operating expenses, from $186.6$117.0 million to $178.8$124.1 million. The decreaseincrease in operating expenses consisted of a $10.1$10.8 million decreaseincrease in selling, general and administrative expenses, partially offset by a $1.9$3.3 million increasedecrease in net research and development expenses and a $0.4 million increasedecrease in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.
Net loss from continuing operations attributable to Verint Systems Inc. common shares was $6.0$2.5 million, and diluted net loss per common share was $0.09,$0.04, in the three months ended April 30, 20202021 compared to a net incomeloss from continuing operations attributable to Verint Systems Inc. common shares of $1.6$14.7 million, and diluted net incomeloss per common share of $0.02,$0.23, in the three months ended April 30, 2019. These reduced operating results2020. The increase in income attributable to Verint Systems Inc. common shares in the three months ended April 30, 2020 were2021 was primarily due to an $8.3a $8.6 million decrease in operating income described above, a $2.6 million increase in total other expense, net, a $6.4 million increase in operating income as described above and a $0.4 million decrease in provision for income taxes, partially offset by a $3.2$3.3 million decreaseincrease in provision from income taxesdividends on preferred stock and a $0.1 million decreaseincrease in net income attributable to our noncontrolling interests. The decrease in total other expense, net was primarily due to the change in fair value of the Future Tranche Right issued in connection with our preferred stock and a decrease in debt discount amortization costs as a result of our adoption of ASU No. 2020-06, partially offset by losses on derivatives due to the partial early retirement of the 2017 Term Loan. 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 April 30, 20202021 to average exchange rates for the three months ended April 30, 2019,2020, the U.S. dollar strengthenedweakened relative to the Singapore dollar, Australian dollar, British pound sterling, Brazilian real,Australian dollar and the euro, resulting in an overall decreaseincrease in our revenue, cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the three months ended April 30, 2020,2021, had foreign currency exchange rates remained unchanged from rates in effect for the three months ended April 30, 2019,2020, our revenue would have been approximately $3.8$4.6 million higherlower and our cost of revenue and operating expenses on a combined basis would have been approximately $3.2$4.8 million higher,lower, which would have resulted in a $0.6$0.2 million increase in our operating income.
As of April 30, 2020,2021, we employed approximately 6,3004,300 professionals, including part-time employees and certain contractors, as compared to approximately 6,2004,200 at April 30, 2019.2020.
Revenue by Operating Segment
We derive and report our revenue in two categories: (a) recurring revenue, which includes bundled SaaS, unbundled SaaS, hosting services, optional managed services, initial and renewal support revenue, and product warranties, and (b) nonrecurring
revenue, which primarily consists of our perpetual licenses, hardware, installation services, and business advisory consulting and training services.
The following table sets forth revenue for each of our two operating segmentsby category for the three months ended April 30, 20202021 and 2019:2020:
| | | | | Three Months Ended
April 30, | | | % Change | | Three Months Ended
April 30, | | % Change |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020-2019 | (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| Customer Engagement | | $ | 185,865 | | | $ | 207,095 | | | (10)% | |
| Cyber Intelligence | | 101,430 | | | 108,164 | | | (6)% | |
| Recurring revenue | | Recurring revenue | | | | | | |
| Bundled SaaS revenue | | Bundled SaaS revenue | | $ | 39,309 | | | $ | 33,393 | | | 18% |
| Unbundled SaaS revenue | | Unbundled SaaS revenue | | 24,283 | | | 7,495 | | | 224% |
| Optional managed services revenue | | Optional managed services revenue | | 16,458 | | | 14,132 | | | 16% |
| Total cloud revenue | | Total cloud revenue | | 80,050 | | | 55,020 | | | 45% |
| Support revenue | | Support revenue | | 64,403 | | | 74,050 | | | (13)% |
| Total recurring revenue | | Total recurring revenue | | 144,453 | | | 129,070 | | | 12% |
| Nonrecurring revenue | | Nonrecurring revenue | | | | | |
| Perpetual revenue | | Perpetual revenue | | 29,323 | | | 28,525 | | | 3% |
| Professional services revenue | | Professional services revenue | | 27,128 | | | 28,270 | | | (4)% |
| Total nonrecurring revenue | | Total nonrecurring revenue | | 56,451 | | | 56,795 | | | (1)% |
| Total revenue | Total revenue | | $ | 287,295 | | | $ | 315,259 | | | (9)% | Total revenue | | $ | 200,904 | | | $ | 185,865 | | | 8% |
Customer Engagement SegmentRecurring Revenue
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Customer EngagementRecurring revenue decreasedincreased approximately $21.2$15.4 million, or 10%12%, from $207.1$129.1 million in the three months ended April 30, 20192020 to $185.9$144.5 million in the three months ended April 30, 2020.2021. The decreaseincrease consisted of a $20.0$25.0 million increase in cloud revenue, partially offset by a $9.6 million decrease in product revenue and a $1.2 million decrease in service and support revenue. The decreaseincrease in productcloud revenue was primarily due to delayed purchasing decisions on large contracts, particularly on-premises arrangements,an increase in unbundled SaaS revenue resulting from the accelerated pace of support conversion transactions and reduced spending by customers, both duenew cloud deployments, and to COVID-19. The impact of COVID-19 was most pronounceda lesser extent, an increase in the last month of the quarter when the vast majority of transactions typically close, as our customers’ priorities shifted to maintaining the stability of their operations and the preservation of cash. 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. The slight decrease in service and support revenue was primarily
driven by a decrease in implementation revenue due to COVID-19 and related containment measures, including customer facility closures and travel restrictions, partially offset by growth in recurring revenuebundled SaaS as we continue to see positive demand from customers across our portfolio offor cloud-based solutions. The decrease in support revenue was primarily due to the continuing shift in the market to cloud-based solutions. 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 April 30, 2020 compared to Three Months Ended April 30, 2019. Cyber Intelligence revenue decreased approximately $6.8 million, from $108.2 million in the three months ended April 30, 2019 to $101.4 million in the three months ended April 30, 2020. The decrease consisted of a $7.0 million decrease in product revenue, partially offset by a $0.2 million increase in service and support revenue. The decrease in product revenue was primarily due to a decrease in product deliveries due to delays attributed to the impact of COVID-19, as our customers shifted their attention to addressing operational challenges associated with the pandemic, and a decrease in progress realized during the current period on long-term projects for which revenue is 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 to a lesser extent an increase in SaaS revenue, partially offset by a decrease in deployment services due to COVID-19 restrictions and a decrease in progress realized during the current year on long-term projects for which revenue is recognized over time using the POC method.
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, unbundled SaaS, 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, initial and renewal support, project management, hosting services, cloud deployments, bundled SaaS, optional managed services, product warranties, and business advisory consulting and training services.
The following table sets forth product revenue and service and support revenue for the three months ended April 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | | | % Change |
| (in thousands) | | 2020 | | 2019 | | 2020-2019 |
| Product revenue | | $ | 77,284 | | | $ | 104,224 | | | (26)% |
| Service and support revenue | | 210,011 | | | 211,035 | | | —% |
| Total revenue | | $ | 287,295 | | | $ | 315,259 | | | (9)% |
Product Revenue
Three Months Ended April 30, 2020 compared to Three Months Ended April 30, 2019. Product revenue decreased approximately $26.9 million, or 26%, from $104.2 million for the three months ended April 30, 2019 to $77.3 million for the three months ended April 30, 2020, resulting from a $20.0 million decrease in our Customer Engagement segment and a $6.9 million decrease in our Cyber Intelligence segment.
For additional information see “—Revenue by Operating Segment”.
Service and SupportNonrecurring Revenue
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Service and supportNonrecurring revenue decreased approximately $1.0$0.3 million, or 1%, from $211.0$56.8 million forin the three months ended April 30, 20192020 to $210.0$56.5 million forin the three
months ended April 30, 2020. This2021. The decrease in nonrecurring revenue was the result ofprimarily due to a $1.2$1.1 million decrease in professional services revenue resulting from a decrease in implementation services as a result of the overall shift in our Customer Engagement segment,business to a cloud based model. The decrease in professional services revenue was partially offset by a $0.2$0.8 million increase in perpetual revenue as a result of increased customer spending as the overall business environment improved after the initial stages of COVID-19. Our nonrecurring revenue can fluctuate from period to period, as some large contracts can represent a significant share of our Cyber Intelligence segment.
For additional information see “— Revenue by Operating Segment”.
Cost of Revenue
The following table sets forth cost of revenue by productrecurring and service and support,nonrecurring, as well as amortization of acquired technology for the three months ended April 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | | | % Change |
| (in thousands) | | 2020 | | 2019 | | 2020-2019 |
| Cost of product revenue | | $ | 21,318 | | | $ | 28,120 | | | (24)% |
| Cost of service and support revenue | | 76,399 | | | 79,361 | | | (4)% |
| Amortization of acquired technology | | 4,609 | | | 6,707 | | | (31)% |
| Total cost of revenue | | $ | 102,326 | | | $ | 114,188 | | | (10)% |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | % Change |
| (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| Cost of recurring revenue | | $ | 38,076 | | | $ | 34,928 | | | 9% |
| Cost of nonrecurring revenue | | 29,880 | | | 31,619 | | | (5)% |
| Amortization of acquired technology | | 4,384 | | | 4,356 | | | 1% |
| Total cost of revenue | | $ | 72,340 | | | $ | 70,903 | | | 2% |
Cost of Recurring Revenue
Cost of recurring revenue primarily consists of employee compensation and related expenses for our cloud operations and support teams, contractor costs, cloud infrastructure and data center costs, travel expenses relating to optional managed services and support, and royalties due to third parties for software components that are embedded in our cloud solutions. Cost of both productrecurring revenue also includes stock-based compensation expenses, facility costs, and other allocated overhead expenses.
Three Months Ended April 30, 2021 compared to Three Months Ended April 30, 2020. Cost of recurring revenue increased approximately $3.2 million, or 9%, from $34.9 million in the three months ended April 30, 2020 to $38.1 million in the three months ended April 30, 2021, due to an increase in data center and cloud costs associated with the corresponding increase in cloud revenue and service and support revenue, including shared support costs, stock-basedan increase in employee compensation and asset impairment charges, among others, when calculatingrelated expenses. Our recurring gross margins increased from 73% in the three months ended April 30, 2020 to 74% in the three months ended April 30, 2021 primarily due to a reduction in overhead costs as a result of the Spin-Off.
We expect our operating segment gross margins.cost of recurring revenue to continue to increase as we continue to invest in our cloud operations to support our growing cloud customer base, to improve operational efficiencies, and to continue to improve the security of our solutions.
Cost of ProductNonrecurring Revenue
Cost of productnonrecurring revenue primarily consists of employee compensation and related expenses, contractor costs, travel expenses relating to installation, training and consulting services, hardware material costs, and royalties due to third parties for software components that are embedded in our on premises software solutions. Cost of productnonrecurring 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 April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Cost of productnonrecurring revenue decreased approximately $6.8$1.7 million, or 24%5%, from $28.1 million in the three months ended April 30, 2019 to $21.3$31.6 million in the three months ended April 30, 2020 to $29.9 million in the three months ended April 30, 2021. The decrease was primarily due to decreased cost of product revenue in both our Cyber Intelligence and Customer Engagement segments, driven primarily by a corresponding decrease in product revenue as discussed above, and by a decrease in Cyber Intelligence subcontractorindirect nonrecurring shared support services due to a reduction in our shared support services workforce as a result of the completion of the Spin-Off, a decrease in contractor costs resulting fromand employee compensation, and lower travel expenses due to COVID-19, partially offset by an increase in stock based compensation due to a shorter vesting schedule for prior investments to further productize our portfolio.year grants which resulted in a greater charge in the current period, additional performance based awards in connection with completion of the Spin-Off, and a change in the employee bonus payment structure. Our overall productnonrecurring gross margins decreased to 72%increased from 44% in the three months ended April 30, 2020 from 73%to 47% in the three months ended April 30, 2019. Product gross margins in our Cyber Intelligence segment increased from 64% in the three months ended April 30, 2019 to 69% in the three months ended April 30, 2020,2021, primarily due to a change in product mix and a decrease in product customization work that is not considered a separate performance obligation driven by recent and ongoing investments to productize our portfolio. Cyber Intelligence product margins are subject to considerable fluctuation from period to period, based on the product mix sold. Product gross margins in our Customer Engagement segment decreased from 84% in the three months ended April 30, 2019 to 79% in the three months ended April 30, 2020, primarily due to lower sales volume due to COVID-19, which resulted in revenuecosts, including software amortization costs, decreasing at a faster rate than product costs, including software amortization costs.nonrecurring revenue.
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 April 30, 2020 compared to Three Months Ended April 30, 2019. Cost of service and support revenue decreased approximately $3.0 million, or 4%, from $79.4 million in the three months ended April 30, 2019 to $76.4 million in the three months ended April 30, 2020. The decrease was primarily due to a decrease in travel costs and employee compensation expenses as a result of cost reduction initiatives related to COVID-19, offset by an increase in data center and
cloud costs associated with the increase in cloud revenue. Our overall service and support gross margins increased from 62% in the three months ended April 30, 2019 to 64% in the three months ended April 30, 2020.
Amortization of Acquired Technology
Amortization of acquired technology consists of amortization of technology assets acquired in connection with business combinations.
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Amortization of acquired technology decreased approximately $2.1was $4.4 million or 31%, from $6.7 million in each of the three months ended April 30, 20192021 and 2020 due to $4.6 million in the three months ended April 30, 2020. The decrease was attributable tono acquired technology intangible assets from historical business combinations becoming fully amortized partially offset byduring the current period and no amortization expense of acquired technology intangible assets associated with recentfrom new 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 months ended months ended April 30, 20202021 and 2019: 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | | | % Change |
| (in thousands) | | 2020 | | 2019 | | 2020-2019 |
| Research and development, net | | $ | 59,079 | | | $ | 57,169 | | | 3% |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | % Change |
| (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| Research and development, net | | $ | 29,148 | | | $ | 32,412 | | | (10)% |
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Research and development, net increased(“R&D”) decreased approximately $1.9$3.3 million, or 3%10%, from $57.2$32.4 million in the three months ended April 30, 20192020 to $59.1$29.1 million in the three months ended April 30, 2020. The increase2021. This decrease was primarily attributable to a $4.4 million decrease in indirect R&D shared support services and facility expenses due to a $2.9reduction in our shared support services workforce as a result of the completion of the Spin-Off and a $1.3 million increasedecrease in employee compensation and related expenses,general overhead costs, partially offset by a $1.0$0.9 million increase in contractor costs, a $0.6 million increase in stock based compensation due to a shorter vesting schedule for prior year grants which resulted in a greater charge in the current period, additional performance based awards in connection with completion of the Spin-Off, and a change in the employee bonus payment structure, a $0.5 million decrease in capitalized software development costs and a $0.4 million increase in the three months ended April 30, 2020 comparedsoftware subscription expenses related to the three months ended April 30, 2019.internal-use software.
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 months ended April 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | | | % Change |
| (in thousands) | | 2020 | | 2019 | | 2020-2019 |
| Selling, general and administrative | | $ | 111,651 | | | $ | 121,721 | | | (8)% |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | % Change |
| (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| Selling, general and administrative | | $ | 87,646 | | | $ | 76,827 | | | 14% |
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Selling, general and administrative expenses decreased(“SG&A”) increased approximately $10.0$10.8 million, or 8%14%, from $121.7$76.8 million in the three months ended April 30, 20192020 to $111.7$87.6 million in the three months ended April 30, 2020.2021. This decreaseincrease was primarily attributable to $6.3 million of one-time nonrecurring operational costs incurred during the current period related to the Spin-Off, in that they are only necessary because of the Spin-Off, but they are not transactional-type costs and a $5.0 million increase in stock-based compensation expense due to a shorter vesting schedule for prior year grants which resulted in a greater charge in the current period, additional performance based awards in connection with completion of the Spin-Off, and a change in the employee bonus payment structure. These increases in SG&A were partially offset by a $3.3 million decrease in indirect SG&A shared support services and facilities expenses due to a reduction in our shared support services workforce as a result of the completion of the Spin-Off and a $1.7 million decrease in travel related expenses due to cost reduction initiatives we implemented in response to the COVID-19 pandemic, which resulted in a $3.7 million decrease in travel related costs, a $1.6 million decrease in marketing related expenses due to the cancellation of certain sales and marketing events and trade shows, a $0.7 million decrease in employee compensation related expenses, a $0.7 million decrease in facility expenses as a result of the majority of our workforce working from home, and $0.5 million decrease in overhead expenses. Additionally,
stock-based compensation decreased by $2.2 million due to a year-over-year decrease in our stock price and professional fees decreased by $1.9 million. Selling, general, and administrativepandemic. SG&A expenses were also impacted by a $6.0$4.6 million decreaseincrease due to the change in the fair value of our obligations under contingent consideration arrangements, from a net expensebenefit of $1.2$4.4 million in the three months ended April 30, 20192020 to a net benefitcharge of $4.8$0.2 million during the three months ended April 30, 2020,2021, as a result of revised outlooks for achieving the performance targets under several unrelated contingent consideration arrangements. These decreases were partially offset by a $7.8 million increase in expenses related to the planned separation of our businesses (as discussed in “Overview” above).
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.
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 months ended April 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | | | % Change |
| (in thousands) | | 2020 | | 2019 | | 2020-2019 |
| Amortization of other acquired intangible assets | | $ | 8,065 | | | $ | 7,713 | | | 5% |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | % Change |
| (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| Amortization of other acquired intangible assets | | $ | 7,328 | | | $ | 7,764 | | | (6)% |
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Amortization of other acquired intangible assets increaseddecreased approximately $0.4$0.5 million, or 5%6%, from $7.7$7.8 million in the three months ended April 30, 20192020 to $8.1$7.3 million in the three months ended April 30, 2020.2021. The increasedecrease 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.
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 months ended April 30, 20202021 and 2019:2020:
| | | | | | Three Months Ended
April 30, | | | % Change | | | Three Months Ended
April 30, | | % Change |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020-2019 | (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| Interest income | Interest income | | $ | 1,017 | | | $ | 1,426 | | | (29)% | Interest income | | $ | 23 | | | $ | 481 | | | (95)% |
| Interest expense | Interest expense | | (10,698) | | | (9,934) | | | 8% | Interest expense | | (5,019) | | | (10,689) | | | (53)% |
| Losses on early retirements of debt | | Losses on early retirements of debt | | (2,474) | | | — | | | * |
| Other income (expense): | Other income (expense): | | | | | | Other income (expense): | | | | | |
| Foreign currency losses, net | Foreign currency losses, net | | (3,254) | | | (1,187) | | | * | Foreign currency losses, net | | (541) | | | (1,798) | | | (70)% |
| Gains on derivatives | | 1,014 | | | 549 | | | 85% | |
| Losses on derivatives | | Losses on derivatives | | (14,374) | | | — | | | * |
| Fair value change of future tranche right | | Fair value change of future tranche right | | 15,810 | | | — | | | * |
| Other, net | Other, net | | 10 | | | (152) | | | * | Other, net | | 3,155 | | | (24) | | | * |
| Total other income (expense) , net | | Total other income (expense) , net | | 4,050 | | | (1,822) | | | * |
| Total other expense, net | Total other expense, net | | (2,230) | | | (790) | | | * | Total other expense, net | | $ | (3,420) | | | $ | (12,030) | | | (72)% |
| Total other expense, net | | $ | (11,911) | | | $ | (9,298) | | | 28% | |
* Percentage is not meaningful.
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Total other expense, net, increaseddecreased by $2.6$8.6 million from $9.3$12.0 million in the three months ended April 30, 20192020 to $11.9$3.4 million in the three months ended April 30, 2020. 2021.
Interest expense increaseddecreased from $9.9 million in the three months ended April 30, 2019 to $10.7 million in the three months ended April 30, 2020 primarilyto $5.0 million in the three months ended April 30, 2021 due to an increase$3.2 million of amortization of debt discount costs related to the 2014 Notes in the three months ended April 30, 2020 with no comparable activity for the three months ended April 30, 2021 as a result of our adoption of ASU No. 2020-06, which eliminated the embedded conversion feature of the 2014 Notes. See Note 1, "Description of Business and Summary of Significant Accounting Policies" in our notes to our unaudited condensed consolidated financial statements for more information regarding the adoption of ASU No. 2020-06. Interest expense also decreased due to lower interest rates on outstanding borrowings as well as lower outstanding borrowings as a result of the partial prepayment of our 2017 Term Loan in conjunction with the issuance of the 2021 Notes and the repayment of all outstanding borrowings under our revolving credit facility, partially offset by lower interest rates.2017 Revolving Credit Facility during the three months ended October 31, 2020. Further discussion regarding our 2014 Notes, 2017 Term Loan, 2017 Revolving Credit Facility, and 2021 Notes appears in Note 7, “Long-term Debt” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
During the three months ended April 30, 2021, we recorded $2.5 million of losses on early retirements of debt, $2.0 million of which was a result of repaying $309.0 million of our outstanding borrowings2017 Term Loan. In April 2021, we also amended the 2017 Credit Agreement and refinanced our 2017 Revolving Credit Facility, which would have matured on June 29, 2022, resulting in the write off of $0.5 million of unamortized deferred debt issuance costs related to certain lenders who will no longer provide commitments under the 2021 Revolving Credit Facility. Further discussion regarding our 2017 Credit Agreement, 2017 Term Loan and 2021 Revolving Credit Facility appears in Note 7, “Long-term Debt” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
We recorded $3.3$0.5 million of net foreign currency losses in the three months ended April 30, 20202021 compared to $1.2$1.8 million of net foreign currency losses in the three months ended April 30, 2019.2020. Our foreign currency losses in the current period resulted primarily from the strengtheningweakening of the U.S dollar against certain foreign currenciesthe British pound sterling from January 31, 20202021 to April 30, 2020, mainly the Brazilian real, Israeli shekel and2021,
resulting in foreign currency losses on U.S. dollar-denominated net assets in certain entities which use a British pound sterling.sterling functional currency.
InDuring the three months ended April 30, 2020, there were2021, we and recorded a $14.4 million loss on our interest rate swap as a result of the partial early retirement of our 2017 Term Loan, with no comparable transaction in the prior period.
During the three months ended April 30, 2021, we recorded a non-cash Future Tranche Right revaluation gain of $15.8 million. This non-cash gain for the period relates to the final mark-to-market adjustment of the Future Tranche Right (right of the Apax Investor to purchase Series B Preferred Stock at a future date), issued in connection with the closing of the Series A Preferred Stock on May 7, 2020. The change in fair value was primarily due to a decrease in our stock price from January 31, 2021 to immediately prior to the issuance of the Series B Preferred Stock, which decreased the estimated fair value of the Future Tranche Right. Our diluted net gains on derivative financial instruments (not designated as hedging instruments) of $1.0 million, compared to net gains of $0.5 million on such instrumentsloss per common share for the three months ended April 30, 2019. The net gains in2021 would have been $0.24 larger without this non-cash gain. Upon the current period primarily reflected gainsissuance of the Series B Preferred Stock on contracts executedApril 6, 2021, the Future Tranche Right was settled and no further charges (or benefits) will be recorded. Please refer to hedge movements inNote 9, “Convertible Preferred Stock” and Note 12, “Fair Value Measurements” to our condensed consolidated financial statements included under Part I, Item 1 of this report for additional information regarding the exchange rate between the U.S. dollar and the Singapore dollar.Future Tranche Right.
(Benefit)We recorded $3.2 million of income within other, net in the three months ended April 30, 2021, primarily due to the recognition of a $3.1 million unrealized gain from a fair value adjustment to a noncontrolling equity investment related to an observable price change in the period.
(Benefit from) Provision for Income Taxes
The following table sets forth our (benefit)(benefit from) provision from income taxes for the three months ended April 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | | | % Change |
| (in thousands) | | 2020 | | 2019 | | 2020-2019 |
| (Benefit) provision for income taxes | | $ | (1,762) | | | $ | 1,409 | | | (225)% |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | % Change |
| (in thousands) | | 2021 | | 2020 | | 2021-2020 |
| (Benefit from) provision for income taxes | | $ | (72) | | | $ | 347 | | | * |
* Percentage is not meaningful.
Three Months Ended April 30, 20202021 compared to Three Months Ended April 30, 2019.2020. Our effective income tax rate was 30.7%negative 7.0% for the three months ended April 30, 2020,2021, compared to ana negative effective income tax rate of 27.3%2.5% for the three months ended April 30, 2019.2020.
For the three months ended April 30, 2021, 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 the adjustment of certain unrecognized tax benefits, offset by a change in the fair value of the Future Tranche Right associated with the Preferred Stock issuance and by lower statutory rates in several foreign jurisdictions. The result was an income tax benefit of $0.1 million on pretax income of $1.0 million, which represented a negative effective income tax rate of 7.0%.
For the three months ended April 30, 2020, the effectiveincome 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, offset by lower statutory rates in several foreign jurisdictions and a deferred tax benefit due to a tax rate change in a foreign jurisdiction. The result was an income tax benefitprovision of $1.8$0.3 million on a pre-taxpretax loss of $5.7$14.1 million, which represented ana negative effective income tax rate of 30.7%2.5%.
ForNet Income from Discontinued Operations
As more fully described in Note 2, "Discontinued Operations” to our condensed consolidated financial statements included under Part I, Item 1 of this report, on February 1, 2021, we completed the three months ended April 30, 2019,Spin-Off of our Cognyte Business into an independent public company, Cognyte. As a result, the effective tax rate differs from the U.S. federal statutory ratehistorical results of 21% primarily due to the impact of U.S. taxation of certain foreign activities, offset by lower statutory ratesoperations for Cognyte have been included within discontinued operations in several foreign jurisdictions. The result was an income tax provision of $1.4 million on a pre-tax income of $5.2 million, which represented an effective income tax rate of 27.3%.our condensed consolidated financial statements.
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, we announced that Valor Parent LP (the “Apax Investor”), an affiliate of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400$400.0 million. UnderUnder the terms of the Investor Agreement,Investment Agreement, dated as of December 4, 2019, the Apax Investor initially purchased $200$200.0 million of our Series A convertible preferred stock, whichPreferred Stock in an issuance that closed on May 7, 2020, with an initial conversion price of $53.50. The initial conversion price represents a conversion premium of 17.1% over$53.50 per share. In accordance with 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,Investment Agreement, the Series A convertible preferred stock willPreferred Stock did not participate in the Spin-Off distribution of the Cognyte shares ofdescribed above and the company holding the Company’s Cyber Intelligence Solutions business, and instead, theSeries A conversion price will bewas instead adjusted to $36.38 per share based on the ratio of the relative trading prices of the two companies over a short periodVerint and Cognyte following the Spin-Off, subject to a collar. Shortly followingSpin-Off. In connection with the completion of the Spin-Off, the Apax Investor will purchase, subject to certain conditions, up to $200purchased $200.0 million of our Series B convertible preferred stockPreferred Stock in the Company, as the entity holding the Customer Engagement Solutions business.an issuance that closed on April 6, 2021. The Series B convertible preferred stock will bePreferred Stock is convertible at a conversion price that is 100% of the average of the volume-weighted average$50.25, based in part on our trading price per share of the common stock forover the 20 consecutive trading days immediatelyday period following the consummationSpin-Off. As 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,April 30, 2021, Apax’s ownership in us on an as-converted basis is approximately 5.5%12.9%. Following completion
Each series 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 payPreferred Stock pays dividends at an annual rate of 5.2% until the 48-month anniversary of the closing of the Series A preferred stockPreferred Stock investment, and thereafter at a rate of 4.0%, subject to adjustment under certain circumstances.circumstances. Dividends will be cumulative and payable semiannually in arrears in cash.cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of preferred stock. We intend to useused the proceeds from the initial Apax investment to repay outstanding indebtedness, including borrowings under our revolving credit facility used to fund a portion of our stock repurchase programprograms (as described below under “Liquidity and Capital Resources Requirements”), and/or for general corporate purposes. Please refer to Note 1, “Basis of Presentation and Significant Accounting Policies”, under “Description of Business” and Note 16, "Subsequent Events"9, “Convertible Preferred Stock”, 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, stock repurchases, dividends on the convertible preferred stock, 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 currently sufficient to support our business operations, including debt service, capital expenditure requirements, and dividends on the convertible preferred stock.
On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders and terminated a prior credit agreement. The 2017 Credit Agreement was amended on January 31, 2018 (the “2018 Amendment”), again on June 8, 2020 (the “2020 Amendment”), and again on April 9, 2021 (the “2021 Amendment”). Pursuant to the 2020 Amendment, we were permitted to effect the Spin-Off within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes would not be deemed to be outstanding if such 2014 Notes were cash collateralized in accordance with the 2017 Credit Agreement, as amended, for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility. On February 26, 2021, we deposited approximately $390.0 million of cash, representing the full principal amount of the 2014 Notes then outstanding as well as the final interest payment on the 2014 Notes due at maturity, into an escrow account in satisfaction of the cash collateralization provisions of the 2020 Amendment. On June 1, 2021, the maturity date of the 2014 Notes, we used the escrowed cash to settle the principal amount, including the final interest payment, and the incremental conversion value of $57.7 million was settled with approximately 1,250,000 shares of common stock. Further discussion of our 2017 Credit Agreement and 2018 Amendmentas amended, 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 $74 million of net cash expended for business acquisitions during the year ended January 31, 2020.acquisitions. There were no business acquisitions during the three months ended April 30, 2020.2021 or the year ended January 31, 2021.
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 the incurrence of additional debt. During the three months ended April 30, 2020, we increased borrowings under our revolving credit facility by $155.0 million to a total2021, in connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million as of our Series B Preferred Stock in an issuance that closed on April 30, 2020. The proceeds6, 2021. Additionally, we issued $315.0 million in aggregate principal amount of these borrowings were0.25% convertible senior notes due April 15, 2026, unless earlier converted by the holders pursuant to their terms, on April 9, 2021 (the “2021 Notes”). We used to fund a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the
net proceeds from the April 6, 2021 issuance of the Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our stock2017 Credit Agreement, to terminate an interest rate swap agreement, and to repurchase program or will beshares of our common stock. The remainder is being used for working capital and other general corporate purposes.
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 $458.8ere $153.3 million and $426.6$241.1 million as of April 30, 20202021 and January 31, 2020,2021, 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 $22.5$0.4 million and $26.3$0.6 million, at April 30, 20202021 and January 31, 2020,2021, respectively.
We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries, which, as a result of the 2017 Tax Act, may now be repatriated without incurring additional U.S. federal income taxes.
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. As 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. tax provided on earnings of our foreign subsidiaries as of April 30, 2020 and withholding taxes of approximately $15.0 million accrued as of April 30, 2020, with respect to certain identified cash that may be repatriated to the U.S.,2021, we have not provided tax 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. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate 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 April 30, 20202021 and January 31, 2020:2021:
| | | April 30, | | January 31, | | April 30, | | January 31, |
| (in thousands) | (in thousands) | | 2020 | | 2020 | (in thousands) | | 2021 | | 2021 |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 556,671 | | | $ | 379,146 | | Cash and cash equivalents | | $ | 359,418 | | | $ | 585,273 | |
| Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | | 46,451 | | | 43,860 | | Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | | 389,795 | | | 15 | |
| Short-term investments | Short-term investments | | 19,741 | | | 20,215 | | Short-term investments | | 668 | | | 46,300 | |
| Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | | $ | 622,863 | | | $ | 443,221 | | Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | | $ | 749,881 | | | $ | 631,588 | |
| Total debt, including current portions | Total debt, including current portions | | $ | 994,640 | | | $ | 837,048 | | Total debt, including current portions | | $ | 792,501 | | | $ | 789,494 | |
Capital Allocation Framework
As noted above, after cash utilization required for working capital, capital expenditures, required debt service, and dividends on the convertible preferred stock, we expect that our primary usage of cash will be for business combinations, repayment of outstanding indebtedness, and our current and/or stock repurchase program (including the repayment of any borrowings under our revolving credit facility used to fund the stock repurchase program). Due to the uncertainty surrounding the impact of the COVID-19 pandemic, we will consider further repurchases under the stock repurchase program based on economic and market conditions as they evolve.repurchases.
Condensed Consolidated Cash Flow Activity
The following table summarizes selected items from our condensed consolidated statements of cash flows for the three months ended April 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, |
| (in thousands) | | 2021 | | 2020 |
| Net cash provided by operating activities from continuing operations | | $ | 37,709 | | | $ | 45,319 | |
| Net cash provided by investing activities from continuing operations | | 39,273 | | | 2,523 | |
| Net cash (used in) provided by financing activities from continuing operations | | (20,056) | | | 114,739 | |
| Effect of foreign currency exchange rate changes on cash and cash equivalents | | 218 | | | (3,106) | |
| Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents from discontinued operations | | (8,007) | | | 37,429 | |
| Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 49,137 | | | $ | 196,904 | |
| | | | | | | | | | | | | | |
| | | Three Months Ended
April 30, | | |
| (in thousands) | | 2020 | | 2019 |
| Net cash provided by operating activities | | $ | 75,978 | | | $ | 93,063 | |
| Net cash provided by (used in) investing activities | | 9,293 | | | (35,449) | |
| Net cash provided by (used in) financing activities | | 114,739 | | | (13,732) | |
| Effect of foreign currency exchange rate changes on cash and cash equivalents | | (3,106) | | | (853) | |
| Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 196,904 | | | $ | 43,029 | |
Our operating activities from continuing operations generated $76.0$37.7 million of cash during the three months ended April 30, 2020,2021, which was in addition to $124.0supplemented by $39.3 million of net cash provided by combined investing activities from continuing operations, and partially offset by $20.1 million of net cash used in financing activities from continuing operations during this period. Further discussion of these items appears below.
Net Cash Provided by Operating Activities from Continuing Operations
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 from continuing operations generated $76.0$37.7 million of net cash during the three months ended April 30, 2020,2021, compared to $93.1$45.3 million generated during the three months ended April 30, 2019.2020. Our reduceddecreased operating cash flow in the current period was primarily due to our net loss, the net effect of non-cash items, and $11.7$12.8 million of higher combined interest and net income tax payments, partially offset by a $3.0 million increase in the non-financing portion of payments under contingent consideration arrangements, and a less favorable impact on operating cash flow from changes in operating assets and liabilities as compared to the prior period, partially offset by higher net income and a more favorable impact from the net effect of non-cash items in the current period as compared to the prior period.
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 Provided by (Used in) Investing Activities from Continuing Operations
During the three months ended April 30, 2021, our investing activities from continuing operations provided $39.3 million of net cash, including $45.6 million of net sales and maturities of short-term investments, partially offset by $6.3 million of payments for property, equipment and capitalized software development costs.
During the three months ended April 30, 2020, our investing activities provided $9.3$2.5 million of net cash, including $20.8 million of net cash provided by other investing activities, consisting primarily of a net decrease in restricted bank time deposits and settlements of derivative instruments during the period and $0.5$9.0 million of net sales and maturities of short-term
investments, partially offset by $12.0$6.5 million of payments for property, equipment and capitalized software development costs. 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 three months ended April 30, 2019, our investing activities used $35.4 million of net cash, including $20.2 million of net cash utilized for a business acquisition, $11.2 million of payments for property, equipment, and capitalized software development costs, and $7.0 million of net purchases of short-term investments, partially offset by $2.9 million of net cash provided by other investing activities, consisting primarily of a net decrease in restricted bank time deposits and settlements of derivative instruments during the period.
We had no significant commitments for capital expenditures at April 30, 2020.2021.
Net Cash (Used in) Provided by (Used in) Financing Activities
For the three months ended April 30, 2021, our financing activities used $20.1 million of net cash, primarily due to $310.1 million of repayments of borrowings under our 2017 Term Loan, $114.7 million of net cash transferred to Cognyte upon the completion of the Spin-Off, $75.0 million of payments to repurchase common stock, $41.0 million of payments to purchase the capped calls in connection with the issuance of our 2021 Notes, $16.5 million paid to terminate our interest rate swap, $9.4 million paid for debt-related issuance fees, $5.2 million of payments of Series A Preferred Stock dividends, $2.9 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and $0.5 million of finance lease payments, partially offset by $315.0 million of net proceeds from the issuance of our 2021 Notes, $200.0 million of net proceeds from the issuance of preferred stock, and $40.2 million of a dividend and other settlements received from Cognyte in connection with the Spin-Off during the period.
For the three months ended April 30, 2020, our financing activities generated $114.7 million of net cash, primarily due to a $155.0 million increase in borrowings under our revolving credit facility, partially offset by $36.8 million of payments to repurchase treasurycommon stock, $1.9 million repayments of borrowings and other financing obligations, $1.3 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and $0.2 million of distributions and dividends to a noncontrolling shareholder of one of our subsidiaries.
For the three months ended April 30, 2019, our financing activities used $13.7 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, $5.7 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $1.6 million repayments of borrowings and other financing obligations, and $0.5 million of payments to repurchase treasury stock.
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, dividends on the convertible preferred stock, 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 subject to certain restrictions 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, including, but not limited to, the effects of the COVID-19 pandemic. 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 December 4, 2019, we announced that our board of directors had authorized a stock repurchase program whereby we maywere authorized to repurchase up to $300 $300.0 million of common stock over the period ending on February 1, 2021. During the three monthsyear ended April 30, 2020,January 31, 2021, we acquired approximately 613,000 shares of treasuryour common stock at a cost of $34.0 million under this program. Total repurchases under the program, which expired on February 1, 2021, were $150.1 million.
On March 31, 2021, we announced that our board of directors had authorized a new stock repurchase program whereby we were authorized to repurchase up to a number of shares of common stock approximately equal to the number of shares to be issued as equity compensation during the fiscal year ending January 31, 2022. During the yearthree months ended January 31, 2020,April 30, 2021, we acquired approximately 2,119,0001,600,000 shares of treasuryour common stock at a cost of $116.1$75.4 million under this program, of which $2.8$0.4 million was settled in cash in February 2020.May 2021. No further repurchases are expected under this program for the year ending January 31, 2022.
Financing Arrangements
0.25% Convertible Senior Notes
On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25% convertible senior notes due April 15, 2026 (the “2021 Notes”), unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.
We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our 2017 Credit Agreement, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.
The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of April 30, 2021, the 2021 Notes were not convertible.
Based on the closing market price of our common stock on April 30, 2021, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
Capped Calls
In connection with the issuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the “Capped Calls”) with certain counterparties. The Capped Calls are intended generally to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.
The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00, each subject to certain adjustments under the terms of the Capped Calls. The Capped Calls have the economic effect of increasing the conversion price of the 2021 Notes from $62.08 per share to $100.00 per share. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of April 30, 2021, no Capped Calls have been exercised.
Pursuant to their terms, the Capped Calls qualify for classification within stockholders’ equity, and their fair value is not remeasured and adjusted, as long as they continue to qualify for stockholders’ equity classification. We paid approximately $41.0 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.
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 ("(the "2014 Notes"), unless earlier converted by the holders pursuant to their terms.. Net proceeds from the 2014 Notes after underwriting discounts were $391.9 million. The 2014 Notes paypaid interest in cash semiannually in arrears at a rate of 1.50% per annum.
The 2014 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 a prior credit agreement.
The Notes are unsecured and rank senior in rightOn February 26, 2021, we deposited approximately $390.0 million of payment to our indebtedness that is expressly subordinated in right of payment tocash, representing 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 thefull principal amount of the 2014 Notes then outstanding as well as the final interest payment on the 2014 Notes due at maturity, into an escrow account to cash collateralize the 2014 Notes. We currently expectIn connection with the maturity of the 2014 Notes, we used the escrowed cash to refinancesettle the Notes at or prior to maturityprincipal amount, including the final interest payment, and the incremental conversion value of $57.7 million was settled with new convertible notes or other debt.approximately 1,250,000 shares of common stock.
TheAs of January 31, 2021, the 2014 Notes havehad a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of 2014 Notes, which representsrepresented an effective conversion price of approximately $64.46 per share of common stock and would resulthave resulted in the issuance of approximately 6,205,0006,002,000 shares of common stock if all of the 2014 Notes were converted. The conversion rate has not changed since issuanceAs a result of the Notes, although throughout the term of the Notes,Spin-Off, the conversion rate may bewas adjusted upon the occurrenceto 24.6622 shares 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 periodper $1,000 principal amount of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the2014 Notes, which represents an effective conversion price of $40.55 per share of common stock and would have resulted in 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%issuance of approximately 9,541,000 shares of common stock if all of the 2014 Notes had been converted. Based on the closing salemarket price of our common stock on such date multiplied byApril 30, 2021, 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 anyif-converted value of the foregoing conditions have been satisfied. Holders of2014 Notes was approximately $76.5 million greater than 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 theaggregate principal amount of the Notes being purchased, plus accrued and unpaid interest.2014 Notes.
During the year ended January 31, 2021, we repurchased $13.1 million principal amount of our 2014 Notes in open market transactions for an aggregate of $13.0 million in cash. As of April 30, 2020,2021, the outstanding principal of the Notes was $386.9 million, which is classified within current maturities of long-term debt on our consolidated balance sheet as the Notes were not convertible.due June 1, 2021.
Note Hedges and Warrants
Concurrently with the issuance of the 2014 Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). ThePrior to the Spin-Off, the combination of the Note Hedges and the Warrants servesserved to increase the effective initial conversion price for the 2014 Notes to $75.00 per share. Subsequent to the Spin-Off, as a result of the conversion rate adjustments, the Note Hedges and the Warrants served to increase the effective conversion price for the 2014 Notes to $47.18 per share. The Note Hedges and Warrants are each separate instruments from the 2014 Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we havehad 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 equalsequaled the initial conversion price of the 2014 Notes. Our exercise rights under the Note Hedges generally trigger upon conversionAs a result of the Notes andSpin-Off, on February 1, 2021, the Note Hedges terminate upon maturitycall options on our stock were adjusted to allow us to purchase up to 9,865,000 shares of our common stock at a price of $40.55, which was equal to the adjusted conversion price of the Notes, or the first day the Notes are no longer outstanding.2014 Notes. The Note Hedges may becould have been settled in cash, shares of our common stock, or a combination thereof, at our option, and arewere intended to reduce our exposure to potential dilution upon conversion of the 2014 Notes. Our exercise rights under the Note Hedges were automatically triggered upon conversion of the 2014 Notes and the Note Hedges terminated upon maturity of the 2014 Notes on June 1, 2021. In connection with the maturity of the 2014 Notes, we received approximately 1,250,000 shares of common stock from the counterparties under the Note Hedges, which we used to offset the potential dilution resulting from the settlement of the conversion premium on the 2014 Notes as the market value per share of our common stock, as measured under the terms of the Note Hedges, was greater than the strike price of the Note Hedges. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of April 30, 2020,2021, we had not purchased any shares of our common stock under the Note Hedges.
The 2014 Note repurchases executed during the year ended January 31, 2021 described above did not change the number of common shares subject to the Note Hedges as the counterparties agreed the options under the Note Hedges remained outstanding notwithstanding such repurchase. Upon maturity of the 2014 Notes, we received approximately 42,000 shares of our common stock from the counterparties related to the reimbursement for the in-the-money portion of the Repurchased 2014 Notes under the Note Hedge agreement.
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. As a result of the Spin-Off, the Warrants now provide the counterparties rights to acquire from us up to approximately 9,865,000 shares of our common stock at a price of $47.18 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. TheOur Warrants couldwould have a dilutive effect on net incomeour diluted per share calculations to the extent that we earned income for the applicable period and the average 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 April 30, 2020,2021, no Warrants had been exercised and all Warrants remained outstanding.
Credit Agreements
On June 29, 2017, we entered into the 2017 Credit Agreementa credit agreement with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, and 2021, as further described below (as amended, the “2017 Credit Agreement”).
The 2017 Credit Agreement currently 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”), of which $100.0 million and $410.1 million was outstanding at April 30, 2021 and January 31, 2021, respectively, and a $300.0 million revolving credit facility maturing on June 29, 2022April 9, 2026 (the “2017“2021 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 outstanding term loans under our 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.
WeDuring the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million. As a result, $1.8 million of deferred debt issuance costs and $0.2 million of unamortized discount associated with the 2017 Term Loan were written off, and are requiredincluded within losses on early retirements of debt on our condensed consolidated statement of operations for the three months ended April 30, 2021.
On April 9, 2021, we amended the 2017 Credit Agreement (the “2021 Amendment”), pursuant to pay a commitment fee with respect to unused availability under thewhich we refinanced our $300.0 million 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 duewould have matured on June 29, 2024. Optional prepayments of loans under2022, with the 2017$300.0 million 2021 Revolving Credit Agreement are generally permitted without premium or penalty.
On January 31, 2018, we entered into the 2018Facility. The 2021 Amendment to our 2017 Credit Agreement, providingalso provides that for among other things, a reductionpurposes 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 majorityacceleration of the impact of the 2018 Amendment was accounted for as a debt modification. For the portionmaturity of the 2017 Term Loan which was considered extinguished and replaced by new loans,2021 Revolving Credit Facility, neither the 2014 Notes nor the 2021 Notes will be deemed to be outstanding if such notes are cash collateralized in accordance with the 2017 Credit Agreement. As noted above, we wrote off $0.2 million of unamortized deferred debt issuance costs as a loss on early retirement of debt duringcash collateralized the three months ended January 31, 2018. 2014 Notes prior to settlement, and we currently intend to cash collateralize, or otherwise refinance or repurchase, the 2021 Notes prior to their maturity.
The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining termmaturity dates of the 2017 Term Loan.
On June 8, 2020, we entered intoLoan and 2017 Revolving Credit Facility would have been accelerated to March 1, 2021 if on such date any 2014 Notes remained outstanding, unless such outstanding 2014 Notes were cash collateralized pursuant to a second amendment to the 2017 Credit Agreement (the “Second“2020 Amendment”)., entered into on June 8, 2020. Pursuant to the Second2020 Amendment, we were permitted to effect the Spin-Off of our Cyber Intelligence Solutions business within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes willwould not be deemed to be outstanding if such 2014 Notes arewere cash collateralized in accordance with the 2017 Credit Agreement as amended, for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above. We currently intend toOn February 26, 2021, as noted above, we cash collateralize, or otherwise refinance or repurchase,collateralized the 2014 Notes prior to their maturity. Refer to Note 16, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item Iin satisfaction of this report for further details regarding the Second Amendment tocash collateralization provisions of the 2020 Amendment. Accordingly, the maturity dates of the 2017 Credit Agreement.
For loans under the 2017 Revolving Credit Facility, the margin is determined by reference to our Leverage Ratio. Borrowings under theTerm Loan and 2017 Revolving Credit Facility were $200.0not accelerated to March 1, 2021. In connection with, the maturity of the 2014 Notes, we used the escrowed cash to settle the principal amount, including the final interest payment, and the incremental conversion value of $57.7 million aswas settled with approximately 1,250,000 shares of April 30, 2020. As of April 30, 2020, the weighted average interest rate on our revolving credit facility borrowings was 2.33%.common stock.
As of April 30, 2020,2021, the interest rate on the 2017 Term Loan was 3.37%2.12%. 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 3.55%2.32% at April 30, 2020.2021. As of January 31, 2020,2021, the interest rate on the 2017 Term Loan was 3.85%2.14%.
For borrowings under the 2021 Revolving Credit Facility, and previously 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"). In February 2016,addition, we executedare required to pay a pay-fixed, receive-variable interest rate swap agreementcommitment fee with a multinational financial institutionrespect to partially mitigate risks associated withunused availability under the variable interest rate on the term loans under2017 Revolving Credit Facility at rates per annum determined by reference to our prior credit agreement, under which we paid interest at a fixed rate of 4.143% and received variable interest of three-month LIBOR (subject to aLeverage Ratio.
minimumOptional prepayments 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 remained in effect until September 6, 2019, and served as an economic hedge to partially mitigate the risk of higher borrowing costsloans under the 2017 Credit Agreement resulting from increases in market interest rates. Effective June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the prior credit agreement, the 2016 Swap was no longer formally designated as a cash flow hedge for accounting purposes, and therefore subsequent settlements were 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 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 was September 6, 2019, and settlements with the counterparty will be 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.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. At April 30, 2020,2021, our Leverage Ratio was approximately 2.81.1 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 ObligationsInterest Rate Swap
ExceptIn 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, under which we paid interest at a fixed rate of 2.949% and received 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 was September 6, 2019, and settlements with the counterparty began on November 1, 2019 and occurred on a quarterly basis. The 2018 Swap had a termination date of June 29, 2024.
Prior to May 1, 2020, the 2018 Swap was designated as a cash flow hedge for additional borrowings underaccounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and were reclassified into the condensed consolidated statement of operations within interest expense in the periods in which the hedged transactions affected earnings.
On May 1, 2020, which was an interest rate reset date on our revolving credit facility2017 Term Loan, we selected an interest rate other than three-month LIBOR. As a result, the 2018 Swap, which was designated specifically to hedge three-month LIBOR interest payments, no longer qualified as a cash flow hedge. Subsequent to May 1, 2020, changes in fair value of $155.0the 2018 Swap were accounted for as a component of other income (expense), net. Accumulated deferred losses on the 2018 Swap of $20.4 million, duringor $16.0 million after tax, at May 1, 2020 that were previously recorded as a component of accumulated other comprehensive loss, were being amortized to interest expense in the condensed consolidated statement of operations over the remaining term of the 2018 Swap, as the hedged interest payments occur.
On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity. Upon settlement, we recorded an unrealized gain of $1.3 million in other income (expense), net to adjust the interest rate swap to its fair value at settlement date and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our condensed consolidated statement of operations for the three months ended April 30, 2020,2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and included within other liabilities on our condensed consolidated balance sheet as of April 30, 2021.
Contractual Obligations
Our principal commitments primarily consist of long-term debt, dividends on convertible preferred stock, leases for office space and open non-cancellable purchase orders. As of April 30, 2021, our total operating lease liabilities were $66.0 million, of
which $14.6 million is included within accrued expenses and other current liabilities (current portions), and $51.4 million is included as operating lease liabilities (long-term portions), on our condensed consolidated balance sheets. We have no current plans to lease significant additional office space and many of our existing lease agreements provide us with the option to renew.
As of April 30, 2021, our unconditional purchase obligations totaled approximately $161.8 million. Our purchase obligations are primarily commitments to vendors for the procurement of goods and services in the ordinary course of business, commitments with contract manufacturers, and data center hosting services. Agreements to purchase goods or services that have cancellation provisions with no penalties are excluded from these purchase obligations.
It is not our business practice to enter into off-balance sheet arrangements. However, in the normal course of business, we believeenter into contracts in which we make representations and warranties that guarantee the performance of our products and services. Historically, there have been no material changessignificant losses related to our contractual obligations disclosed insuch guarantees.
Our consolidated balance sheet at April 30, 2021 included $15.0 million of non-current tax reserves, net of related benefits (including interest and penalties of $3.1 million) for uncertain tax positions. We do not expect to make any significant payments for these uncertain tax positions within the contractual obligations section of our Annual Report on Form 10-K for the year ended January 31, 2020. That table appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the report. next 12 months.
For additional information regarding our leases, long-term debt, convertible preferred stock, and our commitments and contingencies, see Note 15, “Leases”, Note 7, “Long-Term Debt”Debt,” Note 9, “Convertible Preferred Stock,” and Note 16, “Commitments and Contingencies” in the Form 10-K and Note 7, “Long-Term Debt” and Note 1415, “Commitments and Contingencies” in the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q.
Please refer to Note 1, “Basis of Presentation and Significant Accounting Policies", under "Description of Business", to our condensed consolidated financial statements included underItem I, Part I, Item 1 of this report for information regarding dividends on expected issuances of convertible preferred stock.report.
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 three months ended April 30, 2020,2021, we made $3.0$7.6 million of payments under contingent consideration arrangements. As of April 30, 2020,2021, potential future cash payments, and earned consideration expected to be paid, subsequent to April 30, 20202021 under contingent consideration arrangements total $133.6$15.6 million, the estimated fair value of which was $35.0$8.3 million, including $20.4$5.2 million reported in accrued expenses and other current liabilities, and $14.6$3.1 million reported in other liabilities. The performance periods associated with these potential payments extend through January 2022.
Off-Balance Sheet Arrangements
As of April 30, 2020, 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 use derivative instruments 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
The 2017 Credit Agreement bears interest at variable rates based on LIBOR plus a margin. The margin for the 2017 Term Loan is fixed at 2.00% for Eurodollar loans, and 1.00% for ABR loans. For loans under the 20172021 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.
To partially mitigate risks associated with the variable interest rate on our 2017 Term Loan, in April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement, which was originally set to expire on June 29, 2024. On April 13, 2021, we paid $16.5 million to the counterparty to early-settle the interest rate swap agreement as our interest rate risk exposure had been significantly reduced as we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100 million, during the three months ended April 30, 2021.
The Financial Conduct Authority of the United Kingdom plans to phase out LIBOR by the end of 2021, and we are considering the impact the planned phase out would have on this facility. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR. However, it is currently uncertain what, if any, alternative reference interest rates, including SOFR, 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 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, 20202021 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” and the market risk that is created by the global market disruptions and uncertainties resulting from COVID-19, we believe that our market risk profile did not materially change during the three months ended April 30, 2020.2021.
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 April 30, 2020.2021. 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 April 30, 2020.2021.
Changes in Internal Control Over Financial Reporting
During the three months ended April 30, 2021, we shifted from hosting our existing global Oracle-based enterprise resource planning (“ERP”) system on premises to a hosted cloud platform. There was no significant change in processes and controls that resulted from this change. We also deployed a new Human Capital Management (“HCM”) system with Oracle Cloud HCM. As a result of this system change, modifications to the specific processes and controls that are supported by the data within the HCM system were made to adapt to the changes arising from the new system.
There were no other 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 April 30, 2020,2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Due to the COVID-19 pandemic, a significant number of our employees are nowstill working from home. The design of our financial reporting processes, systems, and controls allows for remote execution with accessibility to secure data.
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
Other than as discussed 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, 2020.2021. 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, which could materially affect our business, financial condition, or operating results. The risks described in our Annual Report on Form 10-K 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.
The full extentWe have a significant amount of indebtedness, which exposes us to leverage risks and subjects us to covenants which the COVID-19 pandemic willmay adversely affect our business and results of operations cannot be predicted at this time.operations.
On March 11, 2020,As of April 30, 2021, we had total outstanding indebtedness of approximately $801.9 million under our 2017 Credit Agreement, our 2014 Notes, and our 2021 Notes. In addition, we have the World Health Organization declaredability to borrow additional amounts under our 2017 Credit Agreement, including the COVID-19 outbreakrevolving credit facility, for a global pandemic. The outbreak has reached allvariety of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Companies around the world, including us, our customers, partners, and vendors, have implemented actions in response,purposes, including, among others, office closings, site restrictions,acquisitions and employee travel restrictions. The global spreadstock repurchases. On May 28, 2021, we repaid the full amount (of approximately $390.0 million) of COVID-19principal and actions taken in response have negatively affected us, our customers, partners, and vendors and caused significant economic and business disruption the extent and duration of which is not currently known. We are monitoring and assessingfinal interest payment due under the impact of the COVID-19 pandemic daily, including recommendations and orders issued by government and public health authorities.2014 Notes.
During the first quarter, revenue in both of our operating segments was negatively impacted by delays and reduced spending attributed to the impact of the COVID-19 pandemic on our customers’ operational priorities and as a result of cost containment measures they have implemented. Due to the pandemic, we have seen a reduction or delay in large customer contracts, particularly on-premises arrangements, and we have been unable to conduct face-to-face meetings with existing or prospective customers and partners, present in-person demonstrations of our solutions, or host or attend in-person trade shows and conferences. Limitations on access to the facilities of our customers have also impactedOur leverage position may, among other things:
•limit our ability to deliver someobtain additional debt financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes;
•require us to dedicate a substantial portion of our products, complete certain implementations, and provide in-person consulting and training services, negatively impactingcash flow from operations to debt service, reducing the availability of our cash flow for other purposes;
•require us to repatriate cash for debt service from our foreign subsidiaries resulting in dividend tax costs or require us to adopt other disadvantageous tax structures to accommodate debt service payments; or
•increase our vulnerability to economic downturns, limit our ability to recognize revenue. We cannot predict how the pandemic will impactcapitalize on significant business opportunities, and restrict our resultsflexibility to react to changes in future periods, including to the extent that customers delaymarket or miss payments, customers defer, reduce, or refrain from placing orders or renewing subscriptions or support arrangements, or travel restrictions and site access restrictions remain necessary.industry conditions.
In lightaddition, because our indebtedness under our 2017 Credit Agreement bears interest at a variable rate, we are exposed to risk from fluctuations in interest rates. 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. The Financial Conduct Authority of the adverse impactUnited Kingdom plans to phase out LIBOR by the end of COVID-19 on global economic conditions2021, though the ICE Benchmark Administration, the administrator of LIBOR, announced that it would consider ceasing the publication of the one week and our revenue, along withtwo-month U.S. dollar LIBOR settings at the uncertainty associated withend of 2021 and phase out the extentremaining U.S. dollar LIBOR settings by June 30, 2023. The transition from LIBOR to a new replacement benchmark is uncertain at this time and timingthe consequences of a potential recovery, we have implemented several cost-reduction actions. Such actions have included,such developments cannot be entirely predicted but are not limited to, reducing our discretionary spending, substantially decreasing capital expenditures, extending days payable outstanding, consideringcould result in an increase in the optimal usescost of our cashborrowings under our existing credit facility and other capital resources, including with respect to our stock repurchase program, and reducing workforce-related costs. These actions may have an adverse impact on us, particularly if they remain in place for an extended period. We continue to evaluate and may decide to implement further cost control strategies to help us mitigate the impact of the pandemic.any future borrowings.
The ultimate impactrevolving credit facility under our 2017 Credit Agreement contains a financial covenant that requires us to satisfy a leverage ratio test. Our ability to comply with the leverage ratio covenant is dependent upon our ability to continue to generate sufficient earnings each quarter, or in the alternative, to reduce expenses and/or reduce the level of the COVID-19 pandemicour outstanding debt, and the effectswe cannot assure that we will be successful in any or all of the operational alterations we have made in response on our business, financial condition, liquidity and financial results cannot be predicted at this time.these regards.
Our 2017 Credit Agreement also includes several restrictive covenants which limit our ability to, among other things:
•incur additional indebtedness or liens or issue preferred stock;
•pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness;
•engage in transactions with affiliates;
•engage in sale-leaseback transactions;
•sell certain assets;
•change our lines of business;
•make investments, loans, or advances; and
•engage in consolidations, mergers, liquidations, or dissolutions.
These covenants could limit our ability to plan for or react to market conditions, to meet our capital needs, or to otherwise engage in transactions that might be considered beneficial to us.
If certain events of default occur under our 2017 Credit Agreement, our lenders could declare all amounts outstanding to be immediately due and payable. An acceleration of indebtedness under our 2017 Credit Agreement may also result in an event of default under the indenture governing the 2021 Notes. Additionally, if a change of control as defined in our 2017 Credit Agreement were to occur, the lenders under our credit facilities would have the right to require us to repay all our outstanding obligations under the facilities.
In connection with the maturity of our debt obligations or if any of the events described above were to occur, we may need to seek an amendment of and/or waiver under our debt agreements, raise additional capital through securities offerings, asset sales, or other transactions, or seek to refinance or restructure our debt. In such a case, there can be no assurance that we will be able to consummate such a transaction on reasonable terms or at all.
We consider other financing and refinancing options from time to time; however, we cannot assure you that such options will be available to us on reasonable terms or at all. If one or more rating agencies were to downgrade our credit ratings, that could also impede our ability to refinance our existing debt or secure new debt, increase our future cost of borrowing, and create third-party concerns about our financial condition or results of operations.
The prices of our common stock and the 2021 Notes may be volatile and your investment could lose value.
The prices of our common stock and the 2021 Notes may be volatile. Those prices could be affected by any of 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, 2021. In addition, other factors that could impact the prices of our common stock and/or the 2021 Notes include:
•announcements by us or our competitors regarding, among other things, strategic changes, expectations regarding our cloud transition, new products, product enhancements or technological advances, acquisitions, major transactions, significant litigation or regulatory matters, stock repurchases, or management changes;
•press or analyst publications, including with respect to changes in recommendations or earnings estimates or growth rates by financial analysts, changes in investors’ or analysts’ valuation measures for our securities, our credit ratings, speculation regarding strategy or M&A, or market trends unrelated to our performance;
•stock sales by our directors, officers, or other significant holders, or stock repurchases by us;
•hedging or arbitrage trading activity by third parties, including by the counterparties to the Capped Call transactions that we entered into in connection with the issuance of the 2021 Notes; and
•dilution that may occur upon any conversion of the 2021 Notes.
A significant drop in the price of our common stock or the 2021 Notes could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.
Apax owns a substantial portion of our equity and its interests may not be aligned with yours.
On December 4, 2019, we announced that the Apax Investor, an affiliate of Apax Partners, would make an investment in us in an amount of up to $400 million. Under the terms of the Investment Agreement, on May 7, 2020, the Apax Investor purchased $200.0 million of our Series A Preferred Stock. In connection with the completion of the Spin-Off, on April 6, 2021, the Apax Investor purchased $200.0 million of our Series B Preferred Stock. As of April 30, 2021, Apax’s ownership in us on an as-converted basis is approximately 12.9%. Additionally, under the Investment Agreement, Apax has the right to designate one director to our Board and the right to mutually select with us a second independent director. 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
Unregistered Sales of Equity Securities and Use of Proceeds
On April 6, 2021, we completed the sale of 200,000 shares of our Series B Preferred Stock to the Apax Investor for an aggregate purchase price of $200.0 million in a private placement that was exempt from registration under the Securities Act. See Note 9, "Convertible Preferred Stock" in our notes to our unaudited condensed consolidated financial statements for more information regarding our Preferred Stock.
On April 9, 2021, we issued $315.0 million in aggregate principal amount of our 2021 Notes. The 2021 Notes were sold to the initial purchasers in a private placement that was exempt from registration under the Securities Act. See Note 7, "Long-Term Debt" in our notes to our unaudited condensed consolidated financial statements for more information regarding our 2021 Notes.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 4, 2019,March 31, 2021, we announced that our board of directors had authorized a new stock repurchase program whereby we maywere authorized to repurchase up to $300 milliona number of shares of common stock overapproximately equal to the periodnumber of shares to be issued as equity compensation during the fiscal year ending on February 1, 2021. Share repurchase activity under this program duringJanuary 31, 2022. During the three months ended April 30, 2020 was as follows:
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| Period | | Total Number of Shares Purchased | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(in thousands) |
| February 1, 2020 - February 29, 2020 | | 359,379 | | | $ | 57.32 | | | 359,379 | | | $ | 163,381 | |
| March 1, 2020 - March 31, 2020 | | 253,518 | | | $ | 52.77 | | | 253,518 | | | $ | 150,003 | |
| April 1, 2020 - April 30, 2020 | | — | | | $ | — | | | — | | | $ | 150,003 | |
| Total | | 612,897 | | | $ | 55.44 | | | 612,897 | | | $ | 150,003 | |
2021, we acquired 1,600,000 shares of common stock at a cost of $75.4 million under this program.
(1) RepresentsNo further repurchases are expected under this program for the approximate weighted-average price paid per share.year ending January 31, 2022.
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 suchShare repurchase activity during the three months ended April 30, 2020.2021 was as follow:
Shortly after the conclusion of our first fiscal quarter ended April 30, 2020, on May 7, 2020, we closed the initial tranche of the previously announced strategic partnership with the Apax Investor. Pursuant to the agreement, dated as of December 4, 2019, at the Closing, we sold 200,000 shares of our Series A Convertible Perpetual Preferred Stock, par value $0.001 per share, for an aggregate purchase price of $200.0 million. See “Management’s discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 2 of this report for a more detailed discussion regarding the Apax investment. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number Shares Purchased | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that My Yet Be Purchased Under the Plans or Programs (in thousands) |
| February 1, 2021 - February 28, 2021 | | — | | | $ | — | | | — | | | $ | — | |
| March 1, 2021 - March 31, 2021 | | 1,436 | | | 47.50 | | | — | | | — | |
| April 1, 2021 - April 30, 2021 | | 1,600,000 | | | 47.11 | | | 1,600,000 | | | — | |
| | 1,601,436 | | | $ | 47.11 | | | 1,600,000 | | | $ | — | |
(1) Represents the approximate weighted-average price paid per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The following exhibit list includes agreements that we entered into or that became effective during the three months ended April 30, 2020:
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| Number | | Description | | Filed Herewith /
Incorporated by
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| | Third Amendment, dated April 9, 2021, to the Credit Agreement, dated June 29, 2017, among Verint Systems Inc., as borrower, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent | | |
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| 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 |
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| Number | | Description | | Filed Herewith /
Incorporated by
Reference from |
| 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.
* Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 6 of this report.
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.
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| | Verint Systems Inc. |
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June 9, 20202021 | /s/ Douglas E. Robinson |
| | Douglas E. Robinson |
| | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
