VERINT SYSTEMS INC
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 31, 2015
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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11-3200514
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(State or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S. Employer Identification No.)
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175 Broadhollow Road, Melville, New York
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11747
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(Address of Principal Executive Offices)
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(Zip Code)
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(631) 962-9600
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(Registrant’s Telephone Number, Including Area Code)
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer
þ
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller Reporting Company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
There were 62,253,779 shares of the registrant’s common stock outstanding on November 13, 2015.
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Verint Systems Inc. and Subsidiaries
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Index to Form 10-Q
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As of and For the Period Ended October 31, 2015
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i
Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances 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:
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•
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uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business;
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•
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risks associated with our ability to keep pace with technological changes, customer challenges, and evolving industry standards in our product offerings, adapt to changing market potential from area to area within our markets and successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer needs;
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•
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risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in our business;
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•
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risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have;
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•
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risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas of growth, management distraction, post-acquisition integration activities, and potential asset impairments;
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•
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risks relating to our ability to effectively and efficiently enhance our existing operations and execute on our growth strategy, including managing investments in our business and operations and enhancing and securing our internal and external operations;
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•
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risks associated with our ability to effectively and efficiently allocate limited financial and human resources to business, developmental, strategic, or other opportunities, and risk that such investments may not come to fruition or produce satisfactory returns;
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•
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risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators;
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•
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risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers ("OEMs") for certain components, products, or services, including companies that may compete with us or work with our competitors;
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•
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risks associated with the mishandling or perceived mishandling of sensitive or confidential information or with security lapses, including information technology system breaches, failures, or disruptions;
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•
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risks that our products or services, or those of third-party suppliers, partners, or OEMs which we incorporate into our offerings or otherwise rely on, may contain defects or may be vulnerable to cyber-attacks;
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•
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risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, and fluctuations in foreign currency exchange rates;
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•
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risks associated with a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for applicable projects;
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ii
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•
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risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate;
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•
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risks associated with our ability to retain and recruit qualified personnel in regions in which we operate, including in new markets and growth areas we may enter;
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•
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challenges associated with selling sophisticated solutions, including with respect to educating our customers on the benefits of our solutions or assisting them in realizing such benefits;
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•
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challenges associated with our strategy of pursuing larger sales opportunities that often involve longer sales cycles, including with respect to transaction reductions, deferrals, or cancellations during the sales cycle, ability to accurately forecast when a sales opportunity will convert to an order, or to forecast revenue and expenses, and increased volatility of our operating results from period to period;
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•
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risks that our intellectual property rights may not be adequate to protect our business or assets, or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;
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•
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risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
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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;
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risks associated with significant leverage resulting from our current debt position, 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;
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•
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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 CTI's former subsidiary, Xura, Inc. (formerly, Comverse, Inc., ("Xura")), being unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
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•
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risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, and personnel and our ability to successfully implement and maintain adequate systems and internal controls for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays; and
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•
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risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits.
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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, 2015. 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.
iii
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VERINT SYSTEMS INC. AND SUBSIDIARIES
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Index to Condensed Consolidated Financial Statements (Unaudited)
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Page
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1
VERINT SYSTEMS INC. AND SUBSIDIARIES
(Unaudited)
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October 31,
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January 31,
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(in thousands, except share and per share data)
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2015
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2015
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Assets
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Current Assets:
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Cash and cash equivalents
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$
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272,260
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$
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285,072
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Restricted cash and bank time deposits
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17,910
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36,920
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Short-term investments
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94,897
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35,751
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Accounts receivable, net of allowance for doubtful accounts of $0.8 million and $1.1 million, respectively
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254,668
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262,092
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Inventories
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17,827
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17,505
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Deferred cost of revenue
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3,460
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6,722
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Prepaid expenses and other current assets
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73,649
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66,130
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Total current assets
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734,671
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710,192
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Property and equipment, net
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64,482
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62,490
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Goodwill
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1,232,529
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1,200,817
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Intangible assets, net
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274,504
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311,894
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Capitalized software development costs, net
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11,530
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10,112
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Long-term deferred cost of revenue
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13,311
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14,555
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Other assets
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38,365
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40,936
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Total assets
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$
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2,369,392
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$
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2,350,996
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Liabilities and Stockholders' Equity
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Current Liabilities:
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Accounts payable
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$
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66,631
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$
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72,885
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Accrued expenses and other current liabilities
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211,552
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223,744
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Deferred revenue
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141,748
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181,259
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Total current liabilities
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419,931
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477,888
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Long-term debt
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743,311
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736,779
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Long-term deferred revenue
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21,434
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20,544
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Other liabilities
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111,021
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110,882
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Total liabilities
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1,295,697
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1,346,093
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Commitments and Contingencies
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Stockholders' Equity:
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Preferred stock - $0.001 par value; authorized 2,207,000 shares at October 31, 2015 and January 31, 2015, respectively; none issued.
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—
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—
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Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 62,601,000 and 61,253,000 shares; outstanding 62,253,000 and 60,905,000 shares at October 31, 2015 and January 31, 2015, respectively.
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63
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61
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Additional paid-in capital
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1,373,775
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1,321,455
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Treasury stock, at cost - 348,000 shares at October 31, 2015 and January 31, 2015.
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(10,251
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)
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(10,251
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)
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Accumulated deficit
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(218,941
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)
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(219,074
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)
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Accumulated other comprehensive loss
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(80,849
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)
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(94,335
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)
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Total Verint Systems Inc. stockholders' equity
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1,063,797
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997,856
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Noncontrolling interest
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9,898
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7,047
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Total stockholders' equity
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1,073,695
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1,004,903
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Total liabilities and stockholders' equity
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$
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2,369,392
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$
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2,350,996
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See notes to condensed consolidated financial statements.
2
VERINT SYSTEMS INC. AND SUBSIDIARIES
(Unaudited)
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Three Months Ended
October 31,
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Nine Months Ended
October 31,
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(in thousands, except per share data)
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2015
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2014
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2015
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2014
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Revenue:
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Product
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$
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115,573
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$
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118,346
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$
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340,139
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$
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339,657
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Service and support
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168,481
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164,228
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509,333
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477,126
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Total revenue
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284,054
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282,574
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849,472
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816,783
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Cost of revenue:
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Product
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34,982
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32,925
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111,756
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104,524
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Service and support
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61,475
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60,082
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188,576
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178,939
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Amortization of acquired technology
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9,060
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8,096
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26,896
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23,018
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Total cost of revenue
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105,517
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101,103
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327,228
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306,481
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Gross profit
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178,537
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181,471
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522,244
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510,302
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Operating expenses:
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Research and development, net
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45,443
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43,008
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134,741
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128,408
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Selling, general and administrative
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99,870
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102,738
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314,489
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310,946
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Amortization of other acquired intangible assets
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10,896
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11,367
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32,366
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34,124
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Total operating expenses
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156,209
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157,113
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481,596
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473,478
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Operating income
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22,328
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24,358
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40,648
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36,824
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Other income (expense), net:
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Interest income
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335
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208
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992
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683
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Interest expense
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(8,467
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)
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(8,494
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)
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(25,365
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)
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(28,103
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)
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Losses on early retirements of debt
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—
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—
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—
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(12,546
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)
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Other (expense) income, net
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(4,175
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)
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167
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(7,715
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)
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1,266
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Total other expense, net
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(12,307
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)
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(8,119
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)
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(32,088
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)
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(38,700
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)
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Income (loss) before provision (benefit) for income taxes
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10,021
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16,239
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8,560
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(1,876
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)
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Provision (benefit) for income taxes
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1,551
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4,766
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5,119
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(31,788
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)
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Net income
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8,470
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11,473
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3,441
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29,912
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Net income attributable to noncontrolling interest
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836
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803
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3,308
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3,564
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Net income attributable to Verint Systems Inc.
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$
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7,634
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$
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10,670
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$
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133
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$
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26,348
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Net income per common share attributable to Verint Systems Inc.:
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Basic
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$
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0.12
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$
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0.18
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$
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0.00
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$
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0.46
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Diluted
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$
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0.12
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$
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0.17
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$
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0.00
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$
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0.45
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Weighted-average common shares outstanding:
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||||||||||||
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Basic
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62,206
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60,644
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61,666
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57,222
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Diluted
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62,778
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61,492
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62,803
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58,332
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See notes to condensed consolidated financial statements.
3
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
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Three Months Ended
October 31,
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Nine Months Ended
October 31,
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(in thousands)
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2015
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2014
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2015
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2014
|
||||||||||||
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Net income
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$
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8,470
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$
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11,473
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$
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3,441
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$
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29,912
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Other comprehensive income (loss), net of reclassification adjustments:
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Foreign currency translation adjustments
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(6,568
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)
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(28,355
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)
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4,854
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(13,363
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)
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Net unrealized (losses) gains on available-for-sale securities
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(156
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)
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—
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(112
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)
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13
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Net unrealized (losses) gains on derivative financial instruments designated as hedges
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(686
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)
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(9,632
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)
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9,343
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(9,047
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)
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Benefit (provision) for income taxes on net unrealized (losses) gains on derivative financial instruments designated as hedges
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35
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|
998
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(1,056
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)
|
840
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|
||||||||
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Other comprehensive (loss) income
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(7,375
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)
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(36,989
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)
|
13,029
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(21,557
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)
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||||||||
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Comprehensive income (loss)
|
1,095
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(25,516
|
)
|
16,470
|
|
8,355
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|
||||||||
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Comprehensive income attributable to noncontrolling interest
|
468
|
|
627
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|
2,851
|
|
3,491
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|
||||||||
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Comprehensive income (loss) attributable to Verint Systems Inc.
|
$
|
627
|
|
$
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(26,143
|
)
|
$
|
13,619
|
|
$
|
4,864
|
|
||||
See notes to condensed consolidated financial statements.
4
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
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|
Verint Systems Inc. Stockholders’ Equity
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||||||||||||||||||||||||||||||||
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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
Interest
|
||||||||||||||||||||||||||||||
|
Balances at January 31, 2014
|
53,605
|
|
$
|
54
|
|
$
|
924,663
|
|
$
|
(8,013
|
)
|
$
|
(250,005
|
)
|
$
|
(39,725
|
)
|
$
|
626,974
|
|
$
|
6,144
|
|
$
|
633,118
|
|
|||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
26,348
|
|
—
|
|
26,348
|
|
3,564
|
|
29,912
|
|
|||||||||||||||||
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(21,484
|
)
|
(21,484
|
)
|
(73
|
)
|
(21,557
|
)
|
|||||||||||||||||
|
Common stock issued in public offering, net of issuance costs
|
5,750
|
|
6
|
|
264,927
|
|
—
|
|
—
|
|
—
|
|
264,933
|
|
—
|
|
264,933
|
|
|||||||||||||||||
|
Equity component of convertible notes, net of issuance costs
|
—
|
|
—
|
|
78,209
|
|
—
|
|
—
|
|
—
|
|
78,209
|
|
—
|
|
78,209
|
|
|||||||||||||||||
|
Purchase of convertible note hedges
|
—
|
|
—
|
|
(60,800
|
)
|
—
|
|
—
|
|
—
|
|
(60,800
|
)
|
—
|
|
(60,800
|
)
|
|||||||||||||||||
|
Issuance of warrants
|
—
|
|
—
|
|
45,188
|
|
—
|
|
—
|
|
—
|
|
45,188
|
|
—
|
|
45,188
|
|
|||||||||||||||||
|
Stock-based compensation - equity portion
|
—
|
|
—
|
|
35,702
|
|
—
|
|
—
|
|
—
|
|
35,702
|
|
—
|
|
35,702
|
|
|||||||||||||||||
|
Exercises of stock options
|
378
|
|
—
|
|
13,135
|
|
—
|
|
—
|
|
—
|
|
13,135
|
|
—
|
|
13,135
|
|
|||||||||||||||||
|
Common stock issued for stock awards and stock bonuses
|
1,020
|
|
1
|
|
4,531
|
|
—
|
|
—
|
|
—
|
|
4,532
|
|
—
|
|
4,532
|
|
|||||||||||||||||
|
Purchases of treasury stock
|
(46
|
)
|
—
|
|
—
|
|
(2,238
|
)
|
—
|
|
—
|
|
(2,238
|
)
|
—
|
|
(2,238
|
)
|
|||||||||||||||||
|
Tax effects from stock award plans
|
—
|
|
—
|
|
328
|
|
—
|
|
—
|
|
—
|
|
328
|
|
—
|
|
328
|
|
|||||||||||||||||
|
Balances at October 31, 2014
|
60,707
|
|
$
|
61
|
|
$
|
1,305,883
|
|
$
|
(10,251
|
)
|
$
|
(223,657
|
)
|
$
|
(61,209
|
)
|
$
|
1,010,827
|
|
|
$
|
9,635
|
|
1,020,462
|
|
|||||||||
|
Balances at January 31, 2015
|
60,905
|
|
$
|
61
|
|
$
|
1,321,455
|
|
$
|
(10,251
|
)
|
$
|
(219,074
|
)
|
$
|
(94,335
|
)
|
$
|
997,856
|
|
$
|
7,047
|
|
$
|
1,004,903
|
|
|||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
133
|
|
—
|
|
133
|
|
3,308
|
|
3,441
|
|
|||||||||||||||||
|
Other comprehensive income (loss)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,486
|
|
13,486
|
|
(457
|
)
|
13,029
|
|
|||||||||||||||||
|
Stock-based compensation - equity portion
|
—
|
|
—
|
|
43,771
|
|
—
|
|
—
|
|
—
|
|
43,771
|
|
—
|
|
43,771
|
|
|||||||||||||||||
|
Exercises of stock options
|
6
|
|
—
|
|
229
|
|
—
|
|
—
|
|
—
|
|
229
|
|
—
|
|
229
|
|
|||||||||||||||||
|
Common stock issued for stock awards and stock bonuses
|
1,342
|
|
2
|
|
7,743
|
|
—
|
|
—
|
|
—
|
|
7,745
|
|
—
|
|
7,745
|
|
|||||||||||||||||
|
Tax effects from stock award plans
|
—
|
|
—
|
|
577
|
|
—
|
|
—
|
|
—
|
|
577
|
|
—
|
|
577
|
|
|||||||||||||||||
|
Balances at October 31, 2015
|
62,253
|
|
$
|
63
|
|
$
|
1,373,775
|
|
$
|
(10,251
|
)
|
$
|
(218,941
|
)
|
$
|
(80,849
|
)
|
$
|
1,063,797
|
|
$
|
9,898
|
|
$
|
1,073,695
|
|
|||||||||
See notes to condensed consolidated financial statements.
5
VERINT SYSTEMS INC. AND SUBSIDIARIES
(Unaudited)
|
|
Nine Months Ended
October 31,
|
|||||||
|
(in thousands)
|
2015
|
2014
|
||||||
|
Cash flows from operating activities:
|
|
|
|
|
||||
|
Net income
|
$
|
3,441
|
|
$
|
29,912
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
||||
|
Depreciation and amortization
|
79,469
|
|
74,298
|
|
||||
|
Stock-based compensation - equity portion
|
43,771
|
|
35,048
|
|
||||
|
Amortization of discount on convertible notes
|
7,542
|
|
3,565
|
|
||||
|
Reduction of valuation allowance resulting from acquisition of KANA
|
—
|
|
(45,171
|
)
|
||||
|
Non-cash gains on derivative financial instruments, net
|
(583
|
)
|
(1,666
|
)
|
||||
|
Losses on early retirements of debt
|
—
|
|
12,546
|
|
||||
|
Other non-cash items, net
|
11,220
|
|
8,387
|
|
||||
|
Changes in operating assets and liabilities, net of effects of business combinations:
|
|
|
|
|
||||
|
Accounts receivable
|
6,241
|
|
(41,717
|
)
|
||||
|
Inventories
|
(2,138
|
)
|
(7,801
|
)
|
||||
|
Deferred cost of revenue
|
4,477
|
|
(3,177
|
)
|
||||
|
Prepaid expenses and other assets
|
(5,462
|
)
|
13,111
|
|
||||
|
Accounts payable and accrued expenses
|
(10,394
|
)
|
26,472
|
|
||||
|
Deferred revenue
|
(40,130
|
)
|
(10,903
|
)
|
||||
|
Other, net
|
(9,883
|
)
|
(2,663
|
)
|
||||
|
Net cash provided by operating activities
|
87,571
|
|
90,241
|
|
||||
|
Cash flows from investing activities:
|
|
|
|
|
||||
|
Cash paid for business combinations, including adjustments, net of cash acquired
|
(31,618
|
)
|
(602,943
|
)
|
||||
|
Purchases of property and equipment
|
(17,012
|
)
|
(15,831
|
)
|
||||
|
Purchases of investments
|
(90,689
|
)
|
(21,175
|
)
|
||||
|
Maturities and sales of investments
|
30,985
|
|
11,363
|
|
||||
|
Cash paid for capitalized software development costs
|
(3,453
|
)
|
(4,510
|
)
|
||||
|
Change in restricted cash and bank time deposits, including long-term portion, and other investing activities, net
|
16,843
|
|
(38,489
|
)
|
||||
|
Net cash used in investing activities
|
(94,944
|
)
|
(671,585
|
)
|
||||
|
Cash flows from financing activities:
|
|
|
|
|
||||
|
Proceeds from borrowings, net of original issuance discount
|
—
|
|
1,526,750
|
|
||||
|
Repayments of borrowings and other financing obligations
|
(260
|
)
|
(1,361,777
|
)
|
||||
|
Proceeds from public issuance of common stock
|
—
|
|
274,563
|
|
||||
|
Proceeds from issuance of warrants
|
—
|
|
45,188
|
|
||||
|
Payments for convertible note hedges
|
—
|
|
(60,800
|
)
|
||||
|
Payments of equity issuance, debt issuance and other debt-related costs
|
(239
|
)
|
(29,164
|
)
|
||||
|
Proceeds from exercises of stock options
|
229
|
|
13,081
|
|
||||
|
Purchases of treasury stock
|
—
|
|
(2,238
|
)
|
||||
|
Payments of contingent consideration for business combinations (financing portion)
|
(4,792
|
)
|
(8,684
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(5,062
|
)
|
396,919
|
|
||||
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
(377
|
)
|
(1,858
|
)
|
||||
|
Net decrease in cash and cash equivalents
|
(12,812
|
)
|
(186,283
|
)
|
||||
|
Cash and cash equivalents, beginning of period
|
285,072
|
|
378,618
|
|
||||
|
Cash and cash equivalents, end of period
|
$
|
272,260
|
|
$
|
192,335
|
|
||
See notes to condensed consolidated financial statements.
6
VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
|
1.
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
Unless the context otherwise requires, the terms "Verint", "we", "us", and "our" in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence
®
.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.
Preparation of Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") for the year ended January 31, 2015. The condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the periods ended October 31, 2015 and 2014, and the condensed consolidated balance sheet as of October 31, 2015, 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, 2015 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2015. 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 filed with the SEC for the year ended January 31, 2015. The results for interim periods are not necessarily indicative of a full year’s results.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries, and a joint venture in which we hold a
50%
equity interest. This joint venture functions as a systems integrator for Asian markets and is a variable interest entity in which we are the primary beneficiary. The noncontrolling interest in this joint venture is reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our equity. Investments in companies in which we have less than a
20%
ownership interest and do not exercise significant influence are accounted for at cost. We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
7
Significant Accounting Policies
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2015. There were no material changes to our significant accounting policies during the nine months ended October 31, 2015.
Correction of Immaterial Overstatement of Expenses
During the three months ended October 31, 2015, we identified an overstatement of stock-based compensation expense for the three months ended July 31, 2015, as reported in our previously issued condensed consolidated financial statements as of and for the three and six months ended July 31, 2015. We assessed the materiality of the misstatement, in accordance with guidance provided in SEC Staff Accounting Bulletin No. 99, and concluded that the misstatement was not material to the condensed consolidated financial statements as of and for the three and six months ended July 31, 2015. Nonetheless, the accompanying condensed consolidated financial statements as of and for the three and nine months ended October 31, 2015 reflect the impact of our retroactive correction of this immaterial misstatement in our operating results as of and for the three and six months ended July 31, 2015. We will also reflect the correction of this immaterial misstatement when operating results as of and for the three and six months ended July 31, 2015 are presented as comparable prior period amounts in our future filings.
The impacts of the immaterial misstatement correction on the condensed consolidated statements of operations as of and for the three and six months ended July 31, 2015 consisted of decreases in cost of product revenue, cost of service and support revenue, research and development, net, and selling, general and administrative expenses, of
$0.1 million
,
$0.6 million
,
$0.8 million
, and
$3.2 million
, respectively, in each period. As a result, both periods’ loss before benefit for income taxes decreased by
$4.7 million
, and, after the impact of income taxes, both periods’ net loss and net loss attributable to Verint Systems Inc. decreased by
$4.1 million
. Basic and diluted net loss per share attributable to Verint Systems Inc. decreased by
$0.07
in both periods, and our comprehensive income increased by
$4.1 million
in both periods. The impacts on our condensed consolidated balance sheet at July 31, 2015 consisted of a
$0.6 million
decrease in prepaid expenses and other current assets, a
$4.7 million
decrease in additional paid-in capital, and a
$4.1 million
decrease in accumulated deficit. There was no impact to our cash flows.
Change in Functional Currency
The functional currency for most of our foreign subsidiaries is the applicable local currency, although we have several subsidiaries with functional currencies that differ from their local currency, of which the most notable exceptions are our subsidiaries in Israel, whose functional currencies are the U.S. dollar. During the three months ended July 31, 2015, we changed the functional currency for one of our subsidiaries to the U.S. dollar in anticipation of an increase in U.S. dollar denominated revenue resulting from changes in the subsidiary's business model. This change in functional currency is applied on a prospective basis. Previously, this subsidiary was judged to operate in two economic environments which had differing foreign currency exchange risks, and therefore used a different functional currency (euro and U.S dollar) in each environment.
Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items . ASU No. 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity is no longer required to separately present an extraordinary item on its statement of operations, net of tax, after income from continuing operations or to disclose income taxes and net income per share data applicable to an extraordinary item. However, ASU No. 2015-01 still retains the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU No. 2015-01 was effective for us on February 1, 2015. The adoption of this standard did not impact our condensed consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
. ASU No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective for us on February 1, 2015. The adoption of this standard did not impact our condensed consolidated financial statements.
8
New Accounting Pronouncements Not Yet Effective
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.
Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The provisions of ASU No. 2015-17 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under existing standards, an acquirer in a business combination reports provisional amounts with respect to acquired assets and liabilities when their measurements are incomplete as of the end of the reporting period. Prior to the effectiveness of this ASU, an acquirer is required to adjust provisional amounts (and the related impact on earnings) by restating prior period financial statements during the measurement period, which cannot exceed one year from the date of acquisition. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The provisions of ASU No. 2015-16 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and are applied prospectively to measurement-period adjustments that occur after the effective date. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. ASU No. 2015-11 requires measurement of most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which inventory is measured at the lower of cost or market, with market defined as replacement cost, net realizable value, or net realizable value less a normal profit margin. ASU No. 2015-11 is effective for interim and annual periods beginning after December 15, 2016. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. The provisions of ASU No. 2015-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,
and in August 2015 issued ASU No. 2015-15,
Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
ASU No. 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. While ASU No. 2015-03 addresses costs related to term debt, ASU No. 2015-15 provides clarification regarding costs to secure revolving lines of credit, and indicates that the SEC staff would not object to an entity deferring and presenting costs associated with line-of-credit arrangements as an asset and subsequently amortizing them ratably over the term of the revolving debt arrangement. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in these updates. The provisions of these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. When adopted, this guidance must be applied on a retrospective basis. We plan to adopt the provisions of these ASUs effective on February 1, 2016. As of October 31, 2015, we had
$12.8 million
of net deferred debt issuance costs which are reported within Other assets on our condensed consolidated balance sheet,
$3.4 million
of which related to our Revolving Credit Facility and will continue to be reported within Other assets.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
. This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The provisions of ASU No. 2014-15 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, although early adoption is permitted. The adoption of ASU No. 2014-15 is not expected to have a material effect on our future condensed consolidated financial statements.
9
In June 2014, the FASB issued ASU No. 2014-12,
Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,
which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. ASU No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
. ASU No. 2014-10 removes the financial reporting distinction between development stage entities and other reporting entities from GAAP and it eliminates an exception provided in the consolidation guidance for development stage enterprises. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU No. 2014-09 supersedes the revenue recognition requirements in
Topic 605, Revenue Recognition
, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in
Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts
. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As originally issued, this guidance was effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In July 2015, the FASB deferred the effective date by one year, to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Entities may choose from two adoption methods, with certain practical expedients. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements and evaluating the available adoption methods.
|
2.
|
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
|
The following table summarizes the calculation of basic and diluted net income per common share attributable to Verint Systems Inc. for the
three and nine months ended
October 31, 2015
and
2014
:
|
Three Months Ended
October 31, |
Nine Months Ended
October 31, |
|||||||||||||||
|
(in thousands, except per share amounts)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Net income
|
$
|
8,470
|
|
$
|
11,473
|
|
$
|
3,441
|
|
$
|
29,912
|
|
||||
|
Net income attributable to noncontrolling interest
|
836
|
|
803
|
|
3,308
|
|
3,564
|
|
||||||||
|
Net income attributable to Verint Systems Inc.
|
$
|
7,634
|
|
$
|
10,670
|
|
$
|
133
|
|
$
|
26,348
|
|
||||
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
||||||||||
|
Basic
|
62,206
|
|
60,644
|
|
61,666
|
|
57,222
|
|
||||||||
|
Dilutive effect of employee equity award plans
|
572
|
|
848
|
|
1,137
|
|
1,110
|
|
||||||||
|
Dilutive effect of 1.50% convertible senior notes
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
Dilutive effect of warrants
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
Diluted
|
62,778
|
|
61,492
|
|
62,803
|
|
58,332
|
|
||||||||
|
Net income per common share attributable to Verint Systems Inc.:
|
|
|
|
|
|
|
||||||||||
|
Basic
|
$
|
0.12
|
|
$
|
0.18
|
|
$
|
0.00
|
|
$
|
0.46
|
|
||||
|
Diluted
|
$
|
0.12
|
|
$
|
0.17
|
|
$
|
0.00
|
|
$
|
0.45
|
|
||||
We excluded the following weighted-average potential common shares from the calculations of diluted net income per common share during the applicable periods because their inclusion would have been anti-dilutive:
10
|
Three Months Ended
October 31, |
Nine Months Ended
October 31, |
|||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||
|
Common shares excluded from calculation:
|
|
|
|
|
||||||||
|
Stock options and restricted stock-based awards
|
1,466
|
|
464
|
|
650
|
|
403
|
|
||||
|
1.50% convertible senior notes
|
6,205
|
|
6,205
|
|
6,205
|
|
3,091
|
|
||||
|
Warrants
|
6,205
|
|
6,205
|
|
6,205
|
|
3,091
|
|
||||
Our 1.50% convertible senior notes ("Notes") will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of
$64.46
per share. Likewise, diluted net income per share will not include any effect from the Warrants (as defined in Note 6, "Long-Term Debt") unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of
$75.00
per share.
Our Note Hedges (as defined in Note 6, "Long-Term Debt") do not impact the calculation of diluted net income per share, because their effect would be anti-dilutive. In the event of an actual conversion of any or all of the Notes, the common shares that would be delivered to us under the Note Hedges are designed to neutralize the dilutive effect of the common shares that we would issue under the Notes. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 6, "Long-Term Debt".
3. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of
October 31, 2015
and January 31, 2015:
|
October 31, 2015
|
||||||||||||||||
|
(in thousands)
|
Cost Basis
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
||||||||||||
|
Cash and cash equivalents:
|
||||||||||||||||
|
Cash and bank time deposits
|
$
|
272,104
|
|
$
|
—
|
|
$
|
—
|
|
$
|
272,104
|
|
||||
|
Money market funds
|
156
|
|
—
|
|
—
|
|
156
|
|
||||||||
|
Total cash and cash equivalents
|
$
|
272,260
|
|
$
|
—
|
|
$
|
—
|
|
$
|
272,260
|
|
||||
|
Short-term investments:
|
||||||||||||||||
|
Commercial paper and corporate debt securities (available-for-sale)
|
$
|
55,957
|
|
$
|
—
|
|
$
|
(11
|
)
|
$
|
55,946
|
|
||||
|
Bank time deposits
|
38,951
|
|
—
|
|
—
|
|
38,951
|
|
||||||||
|
Total short-term investments
|
$
|
94,908
|
|
$
|
—
|
|
$
|
(11
|
)
|
$
|
94,897
|
|
||||
|
January 31, 2015
|
||||||||||||||||
|
(in thousands)
|
Cost Basis
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
||||||||||||
|
Cash and cash equivalents:
|
||||||||||||||||
|
Cash and bank time deposits
|
$
|
281,890
|
|
$
|
—
|
|
$
|
—
|
|
$
|
281,890
|
|
||||
|
Money market funds
|
183
|
|
—
|
|
—
|
|
183
|
|
||||||||
|
Commercial paper
|
2,999
|
|
—
|
|
—
|
|
2,999
|
|
||||||||
|
Total cash and cash equivalents
|
$
|
285,072
|
|
$
|
—
|
|
$
|
—
|
|
$
|
285,072
|
|
||||
|
Short-term investments:
|
||||||||||||||||
|
Commercial paper and corporate debt securities (available-for-sale)
|
$
|
13,741
|
|
$
|
101
|
|
$
|
—
|
|
$
|
13,842
|
|
||||
|
Bank time deposits
|
21,909
|
|
—
|
|
$
|
—
|
|
21,909
|
|
|||||||
|
Total short-term investments
|
$
|
35,650
|
|
$
|
101
|
|
$
|
—
|
|
$
|
35,751
|
|
||||
11
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.
As of
October 31, 2015
and January 31, 2015, all of our available-for-sale investments had contractual maturities of less than one year. Gains and losses on sales of available-for-sale securities during the nine months ended
October 31, 2015
and 2014 were not significant.
During the nine months ended
October 31, 2015
and 2014, proceeds from maturities and sales of available-for-sale securities were
$31.0 million
and
$11.4 million
, respectively.
We believe that the investments we held at
October 31, 2015
were not other-than-temporarily impaired. We held available-for-sale securities with aggregate fair values of
$17.2 million
which had insignificant unrealized losses at
October 31, 2015
.
|
4.
|
BUSINESS COMBINATIONS
|
Nine Months Ended October 31, 2015
During the nine months ended October 31, 2015, we completed three business combinations:
|
•
|
On February 12, 2015, we completed the acquisition of a business that is being integrated into our Enterprise Intelligence operating segment.
|
|
•
|
On May 1, 2015, we completed the acquisition of a business that is being integrated into our Communications Intelligence operating segment.
|
|
•
|
On August 11, 2015, we acquired certain technology and other assets for use in our Enterprise Intelligence operating segment in a transaction that qualified as a business combination.
|
These business combinations were not individually material to our condensed consolidated financial statements.
The combined consideration for these business combinations was approximately
$49.7 million
, including
$33.5 million
of combined cash paid at the closings. For one of these business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately
$30.5 million
, contingent upon the achievement of certain performance targets over periods extending through April 2020. The fair value of these contingent consideration obligations was estimated to be
$16.2 million
at the applicable acquisition date.
The
$16.2 million
acquisition date fair value of the contingent consideration obligations was 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 included 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.
The purchase prices were allocated to the tangible assets 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 values assigned to identifiable intangible assets acquired in these business combinations were determined primarily by using the income approach, which discounts expected future cash flows attributable to these assets to present value using estimates and assumptions determined by management. The acquired identifiable finite-lived intangible assets are being amortized primarily on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
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 $29.0 million of goodwill associated with these business combinations, $8.0 million and $21.0 million was assigned to our Enterprise Intelligence and Communications Intelligence segments, respectively. For income tax purposes, $5.4 million of this goodwill is deductible and $23.6 million is not deductible.
12
Revenue and the impact on net income attributable to these acquisitions for the nine months ended October 31, 2015 were not significant.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $0.3 million and $1.0 million for the three and nine months ended October 31, 2015, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the nine months ended October 31, 2015 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes and reserves for uncertain income tax positions.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the nine months ended October 31, 2015:
|
(in thousands)
|
Amount
|
|||
|
Components of Purchase Prices:
|
|
|
||
|
Cash
|
$
|
33,482
|
|
|
|
Fair value of contingent consideration
|
16,237
|
|
||
|
Total purchase prices
|
$
|
49,719
|
|
|
|
Allocation of Purchase Prices:
|
|
|
||
|
Net tangible assets (liabilities):
|
|
|
||
|
Accounts receivable
|
$
|
992
|
|
|
|
Other current assets, including cash acquired
|
4,274
|
|
||
|
Other assets
|
395
|
|
||
|
Current and other liabilities
|
(3,037
|
)
|
||
|
Deferred revenue - current and long-term
|
(1,872
|
)
|
||
|
Deferred income taxes - current and long-term
|
(2,922
|
)
|
||
|
Net tangible liabilities
|
(2,170
|
)
|
||
|
Identifiable intangible assets:
|
|
|
||
|
Customer relationships
|
1,212
|
|
||
|
Developed technology
|
20,300
|
|
||
|
Trademarks and trade names
|
300
|
|
||
|
In-process research and development
|
1,100
|
|
||
|
Total identifiable intangible assets
|
22,912
|
|
||
|
Goodwill
|
28,977
|
|
||
|
Total purchase price allocations
|
$
|
49,719
|
|
|
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from five years to ten years, from four years to five years, and three years, respectively, the weighted average of which is approximately 4.4 years.
The pro forma impact of these acquisitions was not material to our historical consolidated operating results and is therefore not presented.
Year Ended January 31, 2015
KANA Software, Inc.
On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its affiliates (collectively, "KANA"), a leading global provider of on-premises and cloud-based solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market organizations. KANA, based in Sunnyvale, California, was acquired for
$516.6 million
of cash, which was net of KANA's cash acquired. KANA has been integrated into our Enterprise Intelligence operating segment.
13
The purchase price for KANA was funded by a combination of cash on hand,
$300.0 million
of incremental term loans incurred in connection with an amendment to our Credit Agreement, and
$125.0 million
of borrowings under our Revolving Credit Facility, further details for which appear in Note 6, "Long-Term Debt".
Transaction and related costs directly related to the acquisition of KANA, consisting primarily of professional fees and integration expenses, were
$0.1 million
and
$3.0 million
for the
three and nine months ended
October 31, 2015
, respectively. Such costs totaled
$1.8 million
and
$6.4 million
for the three and nine months ended October 31, 2014, respectively. All transaction and related costs were expensed as incurred, and the vast majority of these expenses are included in selling, general and administrative expenses.
UTX Technologies Limited
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited ("UTX"), a provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our Communications Intelligence operating segment prior to the acquisition. The purchase price consisted of
$82.9 million
of cash paid at closing, and
$1.5 million
paid subsequent to closing during the year ended January 31, 2015, upon UTX's achievement of certain performance targets. The acquisition date fair value of the contingent consideration was estimated to be
$1.3 million
.
UTX is based in the EMEA region and has been integrated into our Communications Intelligence operating segment.
Transaction and related costs directly related to the acquisition of UTX, consisting primarily of professional fees, integration expenses and related adjustments, were negligible and
$0.3 million
for the
three and nine months ended
October 31, 2015
, respectively. Such costs were a benefit of
$0.9 million
and a charge of
$2.1 million
for the three and nine months ended October 31, 2014, respectively. All transaction and related costs were expensed as incurred, and the vast majority of these expenses are included in selling, general and administrative expenses.
As a result of the UTX acquisition, we recorded a
$2.6 million
charge for the impairment of certain capitalized software development costs during the three months ended April 30, 2014, reflecting strategy changes in certain product development initiatives. This charge is reflected within cost of product revenue.
Other Business Combinations
We completed two separate acquisitions of certain technologies and other assets for use in our Communications Intelligence operating segment on April 16, 2014 and January 15, 2015, respectively, in transactions that qualified as business combinations. These business combinations were not material to our condensed consolidated financial statements, individually or in the aggregate.
Purchase Price Allocations
As of January 31, 2015, the purchase price allocation for UTX was preliminary, subject to change as additional information became available during the measurement period (up to one year from the acquisition date). During the nine months ended October 31, 2015, there were no changes to the purchase price allocation for UTX, which is now complete.
Pro Forma Information
The following table provides unaudited pro forma operating results for the three and nine months ended October 31, 2014, as if KANA and UTX had been acquired on February 1, 2013. These unaudited pro forma results reflect certain adjustments related to these acquisitions, including amortization expense on finite-lived intangible assets acquired from KANA and UTX, interest expense and fees associated with additional long-term debt incurred to partially fund the acquisition of KANA, and adjustments to recognize the fair value of revenue associated with performance obligations assumed in the acquisition of KANA.
For purposes of the following unaudited pro forma operating results, a
$45.2 million
income tax benefit recorded during the three months ended April 30, 2014 resulting from a reduction of valuation allowances associated from the acquisition of KANA is not reflected in the pro forma operating results for the nine months ended October 31, 2014.
The unaudited pro forma results do not include any operating efficiencies or potential cost savings which may result from these business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that
14
actually would have occurred had the acquisitions been completed on February 1, 2013, nor are they indicative of future operating results.
|
(in thousands, except per share amounts)
|
Three Months Ended
October 31, 2014
|
Nine Months Ended
October 31, 2014
|
||||||
|
Revenue
|
$
|
288,279
|
|
$
|
842,784
|
|
||
|
Net income
|
$
|
17,650
|
|
$
|
15,281
|
|
||
|
Net income attributable to Verint Systems Inc.
|
$
|
16,847
|
|
$
|
11,717
|
|
||
|
Net income per common share attributable to Verint Systems Inc.:
|
||||||||
|
Basic
|
$
|
0.28
|
|
$
|
0.20
|
|
||
|
Diluted
|
$
|
0.27
|
|
$
|
0.20
|
|
||
Other Business Combination Information
We include the financial results of all business combinations in our condensed consolidated financial statements from their respective acquisition dates.
For the three and nine months ended
October 31, 2015
, we recorded benefits of
$1.0 million
and
$0.1 million
, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. For the three and nine months ended October 31, 2014, we recorded charges of
$0.3 million
and
$0.6 million
, respectively, within selling, general and administrative expenses for changes in the fair values of these obligations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was
$25.7 million
at
October 31, 2015
.
Payments of contingent consideration earned under these agreements were
$1.9 million
and
$4.9 million
for the three and nine months ended October 31, 2015, respectively. Payments of contingent consideration earned under these agreements were
$3.1 million
and
$10.0 million
for the three and nine months ended October 31, 2014, respectively.
In connection with a business combination completed during the year ended January 31, 2012, we assumed approximately
$5.2 million
of long-term liabilities associated with uncertain tax positions of the acquired company. A corresponding indemnification asset of
$5.2 million
was also recorded, recognizing the selling shareholders’ contractual obligation to indemnify us for these pre-acquisition liabilities. As of
October 31, 2015
and January 31, 2015, these liabilities were
$1.1 million
and
$1.4 million
, respectively, and were included within other liabilities. The corresponding indemnification assets as of
October 31, 2015
and January 31, 2015 were
$0.3 million
and
$0.4 million
, respectively, and were included within other assets. There was no activity in these accounts during the nine months ended
October 31, 2015
and 2014. The carrying values of these assets and liabilities were impacted by foreign currency exchange rate fluctuations.
|
5.
|
INTANGIBLE ASSETS AND GOODWILL
|
Acquisition-related intangible assets consisted of the following as of
October 31, 2015
and January 31, 2015:
|
|
October 31, 2015
|
|||||||||||
|
(in thousands)
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||
|
Intangible assets, with finite lives:
|
|
|
|
|
|
|
||||||
|
Customer relationships
|
$
|
381,829
|
|
$
|
(206,619
|
)
|
$
|
175,210
|
|
|||
|
Acquired technology
|
215,923
|
|
(127,686
|
)
|
88,237
|
|
||||||
|
Trade names
|
19,081
|
|
(11,241
|
)
|
7,840
|
|
||||||
|
Non-competition agreements
|
3,047
|
|
(2,047
|
)
|
1,000
|
|
||||||
|
Distribution network
|
4,440
|
|
(3,323
|
)
|
1,117
|
|
||||||
|
Total intangible assets with finite lives
|
624,320
|
|
(350,916
|
)
|
273,404
|
|
||||||
|
In-process research and development, with indefinite lives
|
1,100
|
|
—
|
|
1,100
|
|
||||||
|
Total intangible assets
|
$
|
625,420
|
|
$
|
(350,916
|
)
|
$
|
274,504
|
|
|||
15
|
|
January 31, 2015
|
|||||||||||
|
(in thousands)
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||
|
Intangible assets, all with finite lives:
|
|
|
|
|
|
|
||||||
|
Customer relationships
|
$
|
378,756
|
|
$
|
(176,796
|
)
|
$
|
201,960
|
|
|||
|
Acquired technology
|
201,294
|
|
(104,117
|
)
|
97,177
|
|
||||||
|
Trade names
|
18,799
|
|
(9,131
|
)
|
9,668
|
|
||||||
|
Non-competition agreements
|
3,625
|
|
(2,331
|
)
|
1,294
|
|
||||||
|
Distribution network
|
4,440
|
|
(2,645
|
)
|
1,795
|
|
||||||
|
Total intangible assets
|
$
|
606,914
|
|
$
|
(295,020
|
)
|
$
|
311,894
|
|
|||
The following table presents net acquisition-related intangible assets by reportable segment as of
October 31, 2015
and January 31, 2015:
|
October 31,
|
January 31,
|
|||||||
|
(in thousands)
|
|
2015
|
|
2015
|
||||
|
Enterprise Intelligence
|
|
$
|
223,800
|
|
|
$
|
261,354
|
|
|
Communications Intelligence
|
|
50,246
|
|
|
49,670
|
|
||
|
Video Intelligence
|
|
458
|
|
|
870
|
|
||
|
Total
|
|
$
|
274,504
|
|
|
$
|
311,894
|
|
Total amortization expense recorded for acquisition-related intangible assets was
$20.0 million
and
$59.3 million
for the
three and nine months ended
October 31, 2015
, respectively, and
$19.5 million
and
$57.1 million
for the
three and nine months ended
October 31, 2014
, 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
|
||
|
2016 (remainder of year)
|
|
$
|
20,078
|
|
|
2017
|
|
78,148
|
|
|
|
2018
|
|
59,072
|
|
|
|
2019
|
|
30,814
|
|
|
|
2020
|
|
21,182
|
|
|
|
2021 and thereafter
|
|
64,110
|
|
|
|
Total
|
|
$
|
273,404
|
|
During the three months ended July 31, 2015, we recorded a
$2.3 million
impairment of an acquired technology asset, which is included within cost of product revenue. No other impairments of acquired intangible assets were recorded during the nine months ended October 31, 2015 and 2014.
Goodwill activity for the nine months ended
October 31, 2015
, in total and by reportable segment, was as follows:
16
|
|
|
Reportable Segment
|
||||||||||||||
|
(in thousands)
|
Total
|
Enterprise
Intelligence
|
Communications
Intelligence
|
Video
Intelligence
|
||||||||||||
|
Year Ended January 31, 2015:
|
||||||||||||||||
|
Goodwill, gross, at January 31, 2015
|
$
|
1,267,682
|
|
$
|
1,092,313
|
|
$
|
101,261
|
|
$
|
74,108
|
|
||||
|
Accumulated impairment losses through January 31, 2015
|
(66,865
|
)
|
(30,791
|
)
|
—
|
|
(36,074
|
)
|
||||||||
|
Goodwill, net, at January 31, 2015
|
1,200,817
|
|
1,061,522
|
|
101,261
|
|
38,034
|
|
||||||||
|
Business combinations
|
28,977
|
|
7,955
|
|
21,022
|
|
—
|
|
||||||||
|
Foreign currency translation and other
|
2,735
|
|
4,489
|
|
(1,420
|
)
|
(334
|
)
|
||||||||
|
Goodwill, net, at October 31, 2015
|
$
|
1,232,529
|
|
$
|
1,073,966
|
|
$
|
120,863
|
|
$
|
37,700
|
|
||||
|
Balance at October 31, 2015:
|
|
|
|
|
|
|
|
|
||||||||
|
Goodwill, gross, at October 31, 2015
|
$
|
1,299,394
|
|
$
|
1,104,757
|
|
$
|
120,863
|
|
$
|
73,774
|
|
||||
|
Accumulated impairment losses through October 31, 2015
|
(66,865
|
)
|
(30,791
|
)
|
—
|
|
(36,074
|
)
|
||||||||
|
Goodwill, net, at October 31, 2015
|
$
|
1,232,529
|
|
$
|
1,073,966
|
|
$
|
120,863
|
|
$
|
37,700
|
|
||||
No events or circumstances indicating the potential for goodwill impairment were identified during the nine months ended
October 31, 2015
.
|
6.
|
|
The following table summarizes our long-term debt at
October 31, 2015
and January 31, 2015:
|
October 31,
|
January 31,
|
|||||||
|
(in thousands)
|
2015
|
2015
|
||||||
|
1.50% Convertible Senior Notes:
|
||||||||
|
Principal amount
|
$
|
400,000
|
|
$
|
400,000
|
|
||
|
Unamortized debt discount
|
(66,544
|
)
|
(74,086
|
)
|
||||
|
1.50% Convertible Senior Notes, net
|
333,456
|
|
325,914
|
|
||||
|
February 2014 Term Loans:
|
||||||||
|
Gross amount
|
130,729
|
|
130,729
|
|
||||
|
Unamortized debt discount
|
(235
|
)
|
(277
|
)
|
||||
|
February 2014 Term Loans, net
|
130,494
|
|
130,452
|
|
||||
|
March 2014 Term Loans
|
280,413
|
|
280,413
|
|
||||
|
Other debt
|
—
|
|
23
|
|
||||
|
Total debt
|
744,363
|
|
736,802
|
|
||||
|
Less: current maturities
|
1,052
|
|
23
|
|
||||
|
Long-term debt
|
$
|
743,311
|
|
$
|
736,779
|
|
||
Current maturities of long-term debt are reported within accrued expenses and other current liabilities on the condensed consolidated balance sheet.
1.50% Convertible Senior Notes
On June 18, 2014, we issued
$400.0 million
in aggregate principal amount of
1.50%
convertible senior notes ("Notes") due June 1, 2021, unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were
$391.9 million
. The Notes pay interest in cash semiannually in arrears at a rate of
1.50%
per annum.
The Notes were issued concurrently with our issuance of
5,750,000
shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Credit Agreement.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in
17
right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount of the Notes.
The conversion price of the Notes at any time is equal to
$1,000
divided by the then-applicable conversion rate. The Notes have a conversion rate of
15.5129
shares of common stock per
$1,000
principal amount of Notes, which represents an effective conversion price of approximately
$64.46
per share of common stock and would result in the issuance of approximately
6,205,000
shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:
|
•
|
during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing sale price of our common stock, for at least
20
trading days (whether or not consecutive) in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than
130%
of the conversion price of the Notes in effect on each applicable trading day;
|
|
•
|
during the ten consecutive trading-day period following any
five
consecutive trading-day period in which the trading price for the Notes for each such trading day was less than
98%
of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or
|
|
•
|
upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.
|
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied.
As of
October 31, 2015
, the Notes were not convertible.
In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the carrying amount of the debt component of the Notes to be
$319.9 million
at the issuance date, assuming a
5.00%
non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately
$80.1 million
by deducting the carrying amount of the debt component from the principal amount of the Notes, and was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the "debt discount") is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of
$7.6 million
and
$1.9 million
to the debt and equity components, respectively. Issuance costs attributable to the debt component were recorded within other assets and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was
$78.2 million
at October 31, 2015. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the Notes was approximately
5.29%
at
October 31, 2015
.
Based on the closing market price of our common stock on
October 31, 2015
, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the "Note Hedges") and sold warrants (the "Warrants"). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to
$75.00
per share. The Note Hedges and Warrants are each separate instruments from the Notes.
18
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately
6,205,000
shares of our common stock, subject to customary anti-dilution adjustments, at a price of
$64.46
, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid
$60.8 million
for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of
October 31, 2015
, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately
6,205,000
shares of our common stock at a price of
$75.00
per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were
$45.2 million
and were recorded as additional paid-in capital. As of
October 31, 2015
, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreement
Background
In April 2011, we entered into a credit agreement with our lenders, which was amended and restated on March 6, 2013, and further amended on February 3, 2014, March 7, 2014, and June 18, 2014 (the "Credit Agreement"). The Credit Agreement, as amended and restated, provides for senior secured credit facilities, comprised of
$943.5 million
of term loans, of which
$300.0 million
was borrowed in February 2014 (the "February 2014 Term Loans") and
$643.5 million
was borrowed in March 2014 (the "March 2014 Term Loans"), all of which matures in September 2019, and a
$300.0 million
revolving credit facility maturing in September 2018 (the "Revolving Credit Facility"), subject to increase and reduction from time to time, as described in the Credit Agreement.
At October 31, 2015,
$130.7 million
and
$280.4 million
of borrowings were outstanding under the February 2014 Term Loans and March 2014 Term Loans, respectively, and there were no outstanding borrowings under the Revolving Credit Facility.
As further described below, on March 7, 2014,
$643.5 million
of term loans previously borrowed under the Credit Agreement
(the "March 2013 Term Loans") were extinguished and replaced with the March 2014 Term Loans, and the basis for determining the interest rate on borrowings under the Revolving Credit Facility was also amended.
From March 6, 2013 through March 6, 2014, the March 2013 Term Loans and borrowings under the Revolving Credit Facility, if any, incurred interest, payable quarterly or, in the case of Eurodollar loans with an interest period of
three months
or shorter, at the end of any interest period, at a per annum rate of, at our election:
|
•
|
in the case of Eurodollar loans, the
Adjusted LIBO Rate
plus
3.00%
(or, if our corporate credit ratings are BB- and Ba3 or better,
2.75%
). The Adjusted LIBO Rate is the greater of (i)
1.00%
per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the Credit Agreement), and
|
|
•
|
in the case of
Base Rate
loans, the Base Rate plus
2.00%
(or, if our corporate credit ratings are BB- and Ba3 or better,
1.75%
). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the
Federal Funds Effective Rate
(as defined in the Credit Agreement) plus
0.50%
and (iii) the Adjusted LIBO Rate for a
one
-month interest period plus
1.00%
.
|
Debt issuance costs incurred in connection with the Credit Agreement, as well as costs incurred for debt modifications, are deferred. These costs are amortized as adjustments to interest expense over the remaining contractual life of the associated borrowings. Original issuance discounts on term loans are also amortized as adjustments to interest expense over the remaining
19
contractual life of the associated term loans. Upon early retirement of debt, the associated deferred debt issuance costs and unamortized original issuance discount, if any, are written off as a loss on early retirement of debt.
We are required to pay a commitment fee equal to
0.50%
per annum of the undrawn portion on the Revolving Credit Facility, payable quarterly, and customary administrative agent and letter of credit fees.
2014 Amendments to Credit Agreement
During the year ended January 31, 2015, we entered into five separate amendments to the Credit Agreement as described below.
On February 3, 2014, in connection with the acquisition of KANA, we borrowed
$125.0 million
under the Revolving Credit Facility and entered into Amendment No. 1 pursuant to which, on such date, we incurred the February 2014 Term Loans of
$300.0 million
, maturing in September 2019. The net proceeds of these borrowings were used to fund a portion of the KANA purchase price.
The February 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of
three months
or less, at the end of the applicable interest period, at a per annum rate of, at our election:
|
•
|
in the case of Eurodollar loans, the
Adjusted LIBO Rate
plus
2.75%
. The Adjusted LIBO Rate is the greater of (i)
0.75%
per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the Credit Agreement), and
|
|
•
|
in the case of
Base Rate
loans, the Base Rate plus
1.75%
. The Base Rate is the greatest of (i) the administrative agent’s prime rate, (ii) the
Federal Funds Effective Rate
(as defined in the Credit Agreement) plus
0.50%
and (iii) the Adjusted LIBO Rate for a
one
-month interest period plus
1.00%
.
|
We incurred debt issuance costs of approximately
$7.1 million
associated with the February 2014 Term Loans, which were deferred and classified within other assets. The February 2014 Term Loans were also subject to an original issuance discount of
0.25%
, or
$0.8 million
.
On February 3, 2014, we also entered into Amendment No. 2 to, among other things, (i) permit us to increase the permitted amount of additional incremental term loans and revolving credit commitments under the Credit Agreement (beyond the February 2014 Term Loans borrowed under Amendment No. 1) by up to, in the aggregate,
$200.0 million
plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2) would not exceed the specified maximum ratio set forth therein, (ii) increase the size of certain negative covenant basket carve-outs, (iii) permit us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permit us to refinance all or a portion of any existing class of term loans under the Credit Agreement with replacement term loans.
On February 3, 2014, we also entered into Amendment No. 3 to extend by one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to our Revolving Credit Facility and, subject to the effectiveness of Amendment No. 4 (as described below), reprice the interest rate applicable to borrowings under the Revolving Credit Facility to the interest rate applicable to the February 2014 Term Loans.
On March 7, 2014, we entered into Amendment No. 4 to refinance all
$643.5 million
of outstanding March 2013 Term Loans at that date with the March 2014 Term Loans of
$643.5 million
, maturing in September 2019. The provisions for determining the interest rate on the March 2014 Term Loans are identical to such provisions for the February 2014 Term Loans. The repricing of the interest rate applicable to borrowings under the Revolving Credit Facility contemplated by Amendment No. 3 became effective on March 7, 2014, upon the effectiveness of Amendment No. 4.
The refinancing of the March 2013 Term Loans with the proceeds of the March 2014 Term Loans pursuant to Amendment No. 4 was accounted for as an early retirement of the March 2013 Term Loans and, as a result,
$4.3 million
of unamortized deferred debt issuance costs and
$2.8 million
of unamortized discount associated with the March 2013 Term Loans as of the March 7, 2014 effective date of Amendment No. 4 were written off as a
$7.1 million
loss on early retirement of debt.
As of
October 31, 2015
and January 31, 2015, the interest rate on both the February 2014 Term Loans and the March 2014 Term Loans was
3.50%
. Taking into account the impact of original issuance discounts, if any, and related deferred debt issuance costs, the effective interest rates on the February 2014 Term Loans and March 2014 Term Loans were approximately
4.03%
and
3.58%
, respectively, at
October 31, 2015
.
20
We incurred
$2.4 million
of debt issuance costs in consideration of Amendment No. 4.
There was no original issuance discount on the March 2014 Term Loans.
On June 18, 2014, we entered into Amendment No. 5, which increased the commitments under the Revolving Credit Facility to
$300.0 million
and extended the termination of the Revolving Credit Facility to September 2018.
Early Partial Retirement of Term Loans - June 2014
On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent issuance of
5,750,000
shares of common stock to retire
$530.0 million
of the February 2014 Term Loans and March 2014 Term Loans, and all
$106.0 million
of then-outstanding borrowings under the Revolving Credit Facility. As a result,
$3.8 million
and
$1.3 million
of deferred debt issuance costs associated with the February 2014 Term Loans and March 2014 Term Loans, respectively, and
$0.4 million
of unamortized discount associated with the February 2014 Term Loans, were written off as a
$5.5 million
loss on early retirement of debt.
Borrowings Under Revolving Credit Facility
There were no borrowings under the Revolving Credit Facility at
October 31, 2015
and January 31, 2015.
Other Provisions of the Credit Agreement
The Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type, which include limitations on us and our subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. The Revolving Credit Facility also contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than
5.00
to
1
until January 31, 2016 (as amended on February 3, 2014 by Amendment No. 3, as described above) and no greater than
4.50
to
1
thereafter. The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.
Future Principal Payments on Term Loans
Prior to June 2014, we were required to make quarterly principal payments on the February 2014 Term Loans and March 2014 Term Loans of
$0.8 million
and
$1.6 million
, respectively, through August 1, 2019, with the remaining balances due in September 2019. Following the partial retirements of the February 2014 Term Loans and March 2014 Term Loans in June 2014, future scheduled principal payments on the February 2014 Term Loans and March 2014 Term Loans as of October 31, 2015 were as follows:
|
(in thousands)
|
February
2014
|
March
2014
|
||||||
|
Years Ending January 31,
|
Term Loans
|
Term Loans
|
||||||
|
2016 (remainder of year)
|
$
|
—
|
|
$
|
—
|
|
||
|
2017
|
669
|
|
1,434
|
|
||||
|
2018
|
1,337
|
|
2,869
|
|
||||
|
2019
|
1,337
|
|
2,869
|
|
||||
|
2020
|
127,386
|
|
273,241
|
|
||||
|
Total
|
$
|
130,729
|
|
$
|
280,413
|
|
||
Interest Expense
21
The following table presents the components of interest expense incurred on the Notes and on borrowings under our Credit Agreement for the three and nine months ended
October 31, 2015
and 2014:
|
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
1.50% Convertible Senior Notes:
|
||||||||||||||||
|
Interest expense at 1.50% coupon rate
|
$
|
1,500
|
|
$
|
1,500
|
|
$
|
4,500
|
|
$
|
2,217
|
|
||||
|
Amortization of debt discount
|
2,547
|
|
2,417
|
|
7,542
|
|
3,565
|
|
||||||||
|
Amortization of deferred debt issuance costs
|
240
|
|
335
|
|
711
|
|
442
|
|
||||||||
|
Total Interest Expense - 1.50% Convertible Senior Notes
|
$
|
4,287
|
|
$
|
4,252
|
|
$
|
12,753
|
|
$
|
6,224
|
|
||||
|
Borrowings under Credit Agreement:
|
||||||||||||||||
|
Interest expense at contractual rates
|
$
|
3,677
|
|
$
|
3,677
|
|
$
|
10,912
|
|
$
|
19,559
|
|
||||
|
Amortization of debt discounts
|
14
|
|
14
|
|
42
|
|
102
|
|
||||||||
|
Amortization of deferred debt issuance costs
|
547
|
|
538
|
|
1,616
|
|
1,895
|
|
||||||||
|
Total Interest Expense - Borrowings under Credit Agreement
|
$
|
4,238
|
|
$
|
4,229
|
|
$
|
12,570
|
|
$
|
21,556
|
|
||||
|
7.
|
SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
|
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of
October 31, 2015
and January 31, 2015:
|
October 31,
|
January 31,
|
|||||||
|
(in thousands)
|
2015
|
2015
|
||||||
|
Raw materials
|
$
|
7,916
|
|
$
|
6,203
|
|
||
|
Work-in-process
|
5,141
|
|
8,481
|
|
||||
|
Finished goods
|
4,770
|
|
2,821
|
|
||||
|
Total inventories
|
$
|
17,827
|
|
$
|
17,505
|
|
||
Condensed Consolidated Statements of Operations
Other (expense) income, net consisted of the following for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Foreign currency losses, net
|
$
|
(2,517
|
)
|
$
|
(1,949
|
)
|
$
|
(5,434
|
)
|
$
|
(1,035
|
)
|
||||
|
Gains on derivative financial instruments, net
|
309
|
|
1,562
|
|
583
|
|
1,666
|
|
||||||||
|
Other, net
|
(1,967
|
)
|
554
|
|
(2,864
|
)
|
635
|
|
||||||||
|
Total other (expense) income, net
|
$
|
(4,175
|
)
|
$
|
167
|
|
$
|
(7,715
|
)
|
$
|
1,266
|
|
||||
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the nine months ended
October 31, 2015
and
2014
:
22
|
|
Nine Months Ended
October 31,
|
|||||||
|
(in thousands)
|
2015
|
2014
|
||||||
|
Cash paid for interest
|
$
|
13,949
|
|
$
|
22,735
|
|
||
|
Cash payments of income taxes, net
|
$
|
13,168
|
|
$
|
10,275
|
|
||
|
Non-cash investing and financing transactions:
|
|
|
||||||
|
Accrued but unpaid purchases of property and equipment
|
$
|
4,041
|
|
$
|
3,625
|
|
||
|
Inventory transfers to property and equipment
|
$
|
1,084
|
|
$
|
314
|
|
||
|
Liabilities for contingent consideration in business combinations
|
$
|
16,237
|
|
$
|
4,947
|
|
||
|
Stock options exercised, proceeds received subsequent to period end
|
$
|
—
|
|
$
|
140
|
|
||
|
Leasehold improvements funded by lease incentive
|
$
|
—
|
|
$
|
2,242
|
|
||
|
8.
|
STOCKHOLDERS’ EQUITY
|
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the nine months ended
October 31, 2015
and 2014. Under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost. At
October 31, 2015
and January 31, 2015, we held approximately
348,000
shares of treasury stock with a cost of
$10.3 million
.
We did not acquire any shares of treasury stock during the nine months ended
October 31, 2015
. During the nine months ended October 31, 2014, we acquired approximately
46,000
shares of treasury stock at a cost of
$2.2 million
.
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 as presented in our condensed consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the nine months ended
October 31, 2015
:
|
(in thousands)
|
Unrealized (Losses) Gains on Derivative Financial Instruments Designated as Hedges
|
Unrealized Gains (Losses) on Available-for-Sale Investments
|
Foreign Currency Translation Adjustments
|
Total
|
||||||||||||
|
Accumulated other comprehensive (loss) income at January 31, 2015
|
$
|
(7,992
|
)
|
$
|
101
|
|
$
|
(86,444
|
)
|
$
|
(94,335
|
)
|
||||
|
Other comprehensive income (loss) before reclassifications
|
1,212
|
|
(112
|
)
|
5,311
|
|
6,411
|
|
||||||||
|
Losses reclassified out of accumulated other comprehensive income (loss)
|
(7,075
|
)
|
—
|
|
—
|
|
(7,075
|
)
|
||||||||
|
Net other comprehensive income (loss), current period
|
8,287
|
|
(112
|
)
|
5,311
|
|
13,486
|
|
||||||||
|
Accumulated other comprehensive income (loss) at
October 31, 2015
|
$
|
295
|
|
$
|
(11
|
)
|
$
|
(81,133
|
)
|
$
|
(80,849
|
)
|
||||
23
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statement of operations, with presentation location, for the three and nine months ended
October 31, 2015
and 2014 were as follows:
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
|||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
Location
|
|||||||||||||
|
Unrealized (losses) gains on derivative financial instruments:
|
||||||||||||||||||
|
Foreign currency forward contracts
|
$
|
(162
|
)
|
$
|
(80
|
)
|
$
|
(703
|
)
|
$
|
65
|
|
Cost of product revenue
|
|||||
|
(164
|
)
|
(68
|
)
|
(650
|
)
|
61
|
|
Cost of service and support revenue
|
||||||||||
|
(1,029
|
)
|
(499
|
)
|
(4,458
|
)
|
578
|
|
Research and development, net
|
||||||||||
|
(527
|
)
|
(229
|
)
|
(2,136
|
)
|
289
|
|
Selling, general and administrative
|
||||||||||
|
(1,882
|
)
|
(876
|
)
|
(7,947
|
)
|
993
|
|
Total, before income taxes
|
||||||||||
|
187
|
|
111
|
|
872
|
|
(22
|
)
|
Benefit (provision) for income taxes
|
||||||||||
|
$
|
(1,695
|
)
|
$
|
(765
|
)
|
$
|
(7,075
|
)
|
$
|
971
|
|
Total, net of income taxes
|
||||||
|
9.
|
INCOME TAXES
|
Our interim provision (benefit) for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
For the three months ended
October 31, 2015
, we recorded an income tax provision of
$1.6 million
on pre-tax income of
$10.0 million
, which represented an effective income tax rate of
15.5%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax income in profitable jurisdictions, where we record tax provisions, was higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record tax benefits. In addition, following the receipt of an approval from a foreign government agency and of a tax ruling in a foreign jurisdiction, we adjusted certain unrecognized tax benefits and deferred tax items resulting in net discrete income tax benefits of
$3.4 million
. We also recorded a discrete income tax benefit of
$1.5 million
for the adjustment of certain unrecognized tax benefits established in connection with the KANA acquisition. The adjustment to the KANA acquisition unrecognized tax benefits resulted in a charge within other expense, net due to the write-off of an indemnification asset.
For the three months ended October 31, 2014, we recorded an income tax provision of
$4.8 million
on pre-tax income of
$16.2 million
, which represented an effective income tax rate of
29.3%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Pre-tax income in our profitable jurisdictions, where we recorded tax provisions, was higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and did not record the related tax benefits.
For the nine months ended
October 31, 2015
, we recorded an income tax provision of
$5.1 million
on pre-tax income of
$8.6 million
, which represented an effective income tax rate of
59.8%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax income in profitable jurisdictions, where we record tax provisions, was slightly higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record tax benefits. In addition, following the receipt in the three months ended October 31, 2015 of an approval from a foreign government agency and of a tax ruling in a foreign jurisdiction, we adjusted certain unrecognized tax benefits and deferred tax items resulting in net discrete income tax benefits of
$3.4 million
. During the three months ended October 31, 2015, we also recorded a discrete income tax benefit of
$1.5 million
for the adjustment of certain unrecognized tax
24
benefits established in connection with the KANA acquisition. The adjustment to the KANA acquisition unrecognized tax benefits resulted in a charge within other expense, net due to the write-off of an indemnification asset. Also, following the receipt of a tax ruling in a foreign jurisdiction in the three months ended April 30, 2015, we reorganized certain operations within the foreign jurisdiction, resulting in a discrete income tax benefit of
$3.0 million
.
For the nine months ended October 31, 2014, we recorded an income tax benefit of
$31.8 million
on a pre-tax loss of
$1.9 million
, which represented an effective income tax benefit rate of
1,694.5%
. The income tax benefit was primarily attributable to the release of
$45.2 million
of Verint valuation allowances in the three months ended April 30, 2014. We maintain valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions. In connection with the acquisition of KANA during the three months ended April 30, 2014, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, during the three months ended April 30, 2014, we reduced the valuation allowance recorded on our deferred income tax assets to the extent of the deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected as a discrete income tax benefit in the three months ended April 30, 2014 and not as a component of the KANA acquisition accounting. The effective income tax rate was also affected by the mix and levels of income and losses among taxing jurisdictions. Pre-tax income in our profitable jurisdictions, where we recorded tax provisions, was slightly less than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and did not record the related tax benefits. Excluding the income tax benefit attributable to the valuation allowance release, the result for the nine months ended October 31, 2014 was an income tax provision of
$13.4 million
on a pre-tax loss
$1.9 million
, resulting in a negative effective income tax rate of
713.4%
.
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 our federal and certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in the U.S. and in certain foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized tax benefits of
$167.6 million
and
$159.6 million
(excluding interest and penalties) as of
October 31, 2015
and January 31, 2015, respectively. The accrued liability for interest and penalties was
$10.2 million
and
$10.9 million
at
October 31, 2015
and January 31, 2015, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. As of
October 31, 2015
and January 31, 2015, the total amount of unrecognized tax benefits that, if recognized, would impact our effective income tax rate were approximately
$160.3 million
and
$153.1 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 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 tax benefits at
October 31, 2015
could decrease by approximately
$5.8 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 taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of 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 tax benefits; however, an estimate of such changes cannot reasonably be made.
|
10.
|
FAIR VALUE MEASUREMENTS
|
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
25
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy consists of three levels of inputs that may be used to measure fair value:
•
Level 1: quoted prices in active markets for identical assets or liabilities;
|
•
|
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
•
|
Level 3: unobservable inputs that are supported by little or no market activity.
|
We review the fair value hierarchy classification of our applicable assets and liabilities at each reporting period. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. We did not identify any transfers between levels of the fair value measurement hierarchy during the nine months ended
October 31, 2015
and 2014.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of
October 31, 2015
and January 31, 2015:
|
|
October 31, 2015
|
|||||||||||
|
|
Fair Value Hierarchy Category
|
|||||||||||
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
|
Assets:
|
|
|
|
|
|
|
||||||
|
Money market funds
|
$
|
156
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Short-term investments, classified as available-for-sale
|
—
|
|
94,897
|
|
—
|
|
||||||
|
Foreign currency forward contracts
|
—
|
|
1,812
|
|
—
|
|
||||||
|
Total assets
|
$
|
156
|
|
$
|
96,709
|
|
$
|
—
|
|
|||
|
Liabilities:
|
|
|
|
|
|
|
||||||
|
Foreign currency forward contracts
|
$
|
—
|
|
$
|
708
|
|
$
|
—
|
|
|||
|
Contingent consideration - business combinations
|
—
|
|
—
|
|
25,669
|
|
||||||
|
Total liabilities
|
$
|
—
|
|
$
|
708
|
|
$
|
25,669
|
|
|||
|
|
January 31, 2015
|
|||||||||||
|
|
Fair Value Hierarchy Category
|
|||||||||||
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
|
Assets:
|
|
|
|
|
|
|
||||||
|
Money market funds
|
$
|
183
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Commercial paper (1)
|
—
|
|
2,999
|
|
—
|
|
||||||
|
Short-term investments, classified as available-for-sale
|
—
|
|
13,842
|
|
—
|
|
||||||
|
Foreign currency forward contracts
|
—
|
|
763
|
|
—
|
|
||||||
|
Total assets
|
$
|
183
|
|
$
|
17,604
|
|
$
|
—
|
|
|||
|
Liabilities:
|
|
|
|
|
|
|
||||||
|
Foreign currency forward contracts
|
$
|
—
|
|
$
|
9,540
|
|
$
|
—
|
|
|||
|
Contingent consideration - business combinations
|
—
|
|
—
|
|
14,507
|
|
||||||
|
Total liabilities
|
$
|
—
|
|
$
|
9,540
|
|
$
|
14,507
|
|
|||
(1) Commercial paper investments with remaining maturities of 90 days or less at time of purchase, classified within cash and cash equivalents.
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the
nine months ended
October 31, 2015
and
2014
:
26
|
|
Nine Months Ended
October 31,
|
|||||||
|
(in thousands)
|
2015
|
2014
|
||||||
|
Fair value measurement at beginning of period
|
$
|
14,507
|
|
$
|
17,307
|
|
||
|
Contingent consideration liabilities recorded for business combinations
|
16,238
|
|
4,947
|
|
||||
|
Changes in fair values, recorded in operating expenses
|
(132
|
)
|
618
|
|
||||
|
Payments of contingent consideration
|
(4,944
|
)
|
(10,037
|
)
|
||||
|
Foreign currency translation and other
|
—
|
|
(56
|
)
|
||||
|
Fair value measurement at end of period
|
$
|
25,669
|
|
$
|
12,779
|
|
||
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.
Fair Value Measurements
Money Market Funds
- We value our money market funds using quoted active market prices for such funds.
Short-term Investments and Commercial Paper -
The fair values of short-term investments, as well as 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.
Contingent Consideration
-
Business Combinations
- The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from
2.0%
to
41.7%
in our calculations of the estimated fair values of our contingent consideration liabilities as of
October 31, 2015
. We utilized discount rates ranging from
2.0%
to
41.7%
in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2015.
Other Financial Instruments
The carrying amounts of accounts receivable, 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
$411 million
and
$409 million
at
October 31, 2015
and January 31, 2015, 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 participations in our term loans are traded. The indicative prices provided to us as at each of
October 31, 2015
and January 31, 2015 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders. We had no revolving credit borrowings at
October 31, 2015
and January 31, 2015.
27
The estimated fair values of our Notes were approximately
$405 million
and
$427 million
at
October 31, 2015
and January 31, 2015, respectively. The estimated fair values of the Notes are determined based on quoted bid and ask prices in the over-the-counter market in which the Notes trade. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets 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.
|
11.
|
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. Our joint venture, which has a Singapore dollar functional currency, also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations related to settlements of liabilities denominated in U.S. dollars. 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.
Notional Amounts of Derivative Financial Instruments
Our outstanding derivative financial instruments consisted only of foreign currency forward contracts with notional amounts of
$152.4 million
and
$156.8 million
as of
October 31, 2015
and January 31, 2015, respectively.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of
October 31, 2015
and January 31, 2015 were as follows:
|
Fair Value at
|
|||||||||
|
October 31,
|
January 31,
|
||||||||
|
(in thousands)
|
Balance Sheet Classification
|
2015
|
2015
|
||||||
|
Derivative assets:
|
|||||||||
|
Foreign currency forward contracts:
|
|||||||||
|
Designated as cash flow hedges
|
Prepaid expenses and other current assets
|
$
|
963
|
|
$
|
164
|
|
||
|
Not designated as hedging instruments
|
Prepaid expenses and other current assets
|
849
|
|
599
|
|
||||
|
Total derivative assets
|
$
|
1,812
|
|
$
|
763
|
|
|||
|
Derivative liabilities:
|
|||||||||
|
Foreign currency forward contracts:
|
|||||||||
|
Designated as cash flow hedges
|
Accrued expenses and other current liabilities
|
$
|
649
|
|
$
|
9,194
|
|
||
|
Not designated as hedging instruments
|
Accrued expenses and other current liabilities
|
59
|
|
346
|
|
||||
|
Total derivative liabilities
|
$
|
708
|
|
$
|
9,540
|
|
|||
28
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on other comprehensive income ("OCI") and on the condensed consolidated statements of operations for the three and nine months ended
October 31, 2015
and
2014
were as follows:
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
|||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Net (losses) gains recognized in OCI:
|
||||||||||||||||
|
Foreign currency forward contracts
|
$
|
(2,568
|
)
|
$
|
(10,508
|
)
|
$
|
1,396
|
|
$
|
(8,054
|
)
|
||||
|
Net (losses) gains reclassified from OCI to the condensed consolidated statements of operations:
|
||||||||||||||||
|
Foreign currency forward contracts
|
$
|
(1,882
|
)
|
$
|
(876
|
)
|
$
|
(7,947
|
)
|
$
|
993
|
|
||||
For information regarding the line item locations of the net (losses) gains on foreign currency forward contracts reclassified out of OCI into the condensed consolidated condensed statements of operations, see Note 8, "Stockholders' Equity".
There were no gains or losses from ineffectiveness of these cash flow hedges recorded for the three and nine months ended
October 31, 2015
and 2014. All of the foreign currency forward contracts underlying the
$0.3 million
of net unrealized gains recorded in our accumulated other comprehensive loss at
October 31, 2015
mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months.
Derivative
Financial Instruments
Not Designated as Hedging Instruments
Gains recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the
three and nine months ended
October 31, 2015
and 2014 were as follows:
|
Classification in Condensed Consolidated Statements of Operations
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||||
|
Foreign currency forward contracts
|
Other (expense) income, net
|
$
|
309
|
|
$
|
1,562
|
|
$
|
583
|
|
$
|
1,665
|
|
|||||
|
12.
|
STOCK-BASED COMPENSATION
|
Correction of Immaterial Overstatement of Expenses
Please refer to Note 1, "Basis of Presentation and Significant Accounting Policies" for information regarding the correction of an immaterial overstatement of stock-based compensation expense as reported in our previously issued condensed consolidated financial statements as of and for the three and six months ended July 31, 2015.
2015 Stock-Based Compensation Plan
On June 25, 2015, our stockholders approved the Verint Systems Inc. 2015 Long-Term Stock Incentive Plan (the "2015 Plan"). The 2015 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 2015 Plan, an aggregate of up to
9,700,000
shares of our common stock may be issued or transferred in connection with awards under the 2015 Plan. Each stock option or stock-settled stock appreciation right granted under the 2015 Plan will reduce the available plan capacity by
one
share and each other award denominated in shares that is granted under the 2015 Plan will reduce the available plan capacity by
2.29
shares.
Upon approval of the 2015 Plan on June 25, 2015, additional awards are no longer permitted under our other stock-based compensation plans. Awards outstanding at June 25, 2015 under our other stock-based compensation plans were not impacted by approval of the 2015 Plan.
29
Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three and nine months ended
October 31, 2015
and
2014
:
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
|||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Cost of revenue - product
|
$
|
431
|
|
$
|
224
|
|
$
|
1,051
|
|
$
|
675
|
|
||||
|
Cost of revenue - service and support
|
1,761
|
|
941
|
|
4,023
|
|
2,816
|
|
||||||||
|
Research and development, net
|
2,583
|
|
1,271
|
|
6,445
|
|
3,881
|
|
||||||||
|
Selling, general and administrative
|
11,649
|
|
10,190
|
|
38,738
|
|
31,181
|
|
||||||||
|
Total stock-based compensation expense
|
$
|
16,424
|
|
$
|
12,626
|
|
$
|
50,257
|
|
$
|
38,553
|
|
||||
The following table summarizes stock-based compensation expense by type of award for the three and nine months ended
October 31, 2015
, and
2014
:
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
|||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Restricted stock units and restricted stock awards
|
$
|
14,187
|
|
$
|
11,942
|
|
$
|
43,771
|
|
$
|
35,373
|
|
||||
|
Stock options
|
—
|
|
—
|
|
—
|
|
15
|
|
||||||||
|
Phantom stock units
|
27
|
|
40
|
|
158
|
|
120
|
|
||||||||
|
Stock bonus program and bonus share program
|
2,210
|
|
644
|
|
6,328
|
|
3,045
|
|
||||||||
|
Total stock-based compensation expense
|
$
|
16,424
|
|
$
|
12,626
|
|
$
|
50,257
|
|
$
|
38,553
|
|
||||
Total stock-based compensation expense by classification was as follows for the three and nine months ended
October 31, 2015
, and
2014
:
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
|||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Equity-classified awards
|
$
|
14,187
|
|
$
|
11,942
|
|
$
|
43,771
|
|
$
|
35,702
|
|
||||
|
Stock bonus program and other reclassifications
|
—
|
|
—
|
|
—
|
|
(654
|
)
|
||||||||
|
Total equity-settled awards
|
14,187
|
|
11,942
|
|
43,771
|
|
35,048
|
|
||||||||
|
Liability-classified awards
|
2,237
|
|
684
|
|
6,486
|
|
3,505
|
|
||||||||
|
Total stock-based compensation expense
|
$
|
16,424
|
|
$
|
12,626
|
|
$
|
50,257
|
|
$
|
38,553
|
|
||||
The increase in stock-based compensation expense during the three and nine months ended
October 31, 2015
, compared to the corresponding prior-year periods, resulted primarily from the combination of an increase in the number of outstanding RSUs, higher expenses associated with performance-based RSUs, a general increase in the price of our common stock, which is used to determine the grant-date fair value of an RSU, and a bonus share program, further details for which appear below under "Bonus Share Program".
Awards under our stock bonus program 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. Amounts reported in the stock bonus program and other reclassifications caption in the preceding table, if any, primarily represent stock bonus expenses recognized in those periods for awards that were subsequently settled with equity during the nine months ended October 31, 2015 and 2014. Expenses associated with stock bonus program awards that remained outstanding as of October 31, 2015 and 2014 are reflected within other liability-classified awards in the preceding table. Our other liability-classified awards include our phantom stock awards and certain discretionary bonuses. Upon settlement of other liability-classified awards with equity, compensation expense associated with those awards is reported within equity-classified awards in the table above.
Restricted Stock Units
We periodically award restricted stock units 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.
30
The following table summarizes restricted stock unit activity and related information for the nine months ended
October 31, 2015
:
|
(in thousands, except per share data)
|
Number of RSUs
|
Weighted-Average Grant Date Fair Value
|
|||||
|
RSUs outstanding, January 31, 2015
|
2,545
|
|
$
|
40.96
|
|
||
|
RSUs granted
|
1,604
|
|
$
|
64.23
|
|
||
|
RSUs released
|
(1,300
|
)
|
$
|
39.74
|
|
||
|
RSUs forfeited
|
(226
|
)
|
$
|
49.14
|
|
||
|
RSUs outstanding, October 31, 2015
|
2,623
|
|
$
|
55.10
|
|
||
Substantially all of the restricted stock units granted during the year ended January 31, 2013 included a provision which allows those awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of
October 31, 2015
, for such awards that remain outstanding, settlement of these awards with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards.
With respect of 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 plan 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. 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".
As of
October 31, 2015
, there was approximately
$98.3 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
1.9 years
. The unrecognized compensation expense does not include compensation expense related to shares for which a grant date has been established but the requisite service period has not begun.
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 have been eligible to participate in this program from and after the year ended January 31, 2014 to the extent that shares remained available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a
one
-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is determined using a
five
-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the "discount"). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash. Obligations under this program are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of common stock determined using a discounted average price of our common stock.
For the year ended January 31, 2015, our board of directors approved up to
125,000
shares of common stock for awards under the program and a discount of
15%
.
The following table summarizes activity under the stock bonus program during the nine months ended October 31, 2015 and 2014:
|
Nine Months Ended
October 31,
|
||||||
|
(in thousands)
|
2015
|
2014
|
||||
|
Shares in lieu of cash bonus - granted and released
|
43
|
|
82
|
|
||
|
Shares in respect of discount:
|
||||||
|
Granted
|
7
|
|
12
|
|
||
|
Released
|
5
|
|
9
|
|
||
31
On March 19, 2015, our board of directors approved up to
125,000
shares of common stock, and a discount of
15%
, for awards under our stock bonus program for the year ending January 31, 2016 (the "2016 Stock Bonus Program").
Bonus Share Program
In February 2015, our board of directors authorized the use of shares of common stock available under our equity incentive plans to award up to approximately
$4.7 million
in discretionary bonuses in respect of performance during the year ended January 31, 2015 to employees other than executive officers, subject to certain limitations on the aggregate number of shares that may be issued. There is no discount feature associated with awards under the bonus share program. Similar to the accounting for the stock bonus program, obligations for these bonuses are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known, to be settled with a variable number of shares of common stock. During the three months ended July 31, 2015, approximately
74,000
shares of common stock were awarded and released under the bonus share program in respect of the year ended January 31, 2015.
In March 2015, our board of directors authorized the continuation of the bonus share program in respect of bonuses for the year ending January 31, 2016, and has approved up to
75,000
shares of common stock, plus any shares not used under the 2016 Stock Bonus Program, for awards under this program in respect of the year ending January 31, 2016 (not to exceed
200,000
shares in aggregate between the two programs). Shares awarded in respect of the bonus share program period ending January 31, 2016 are expected to be issued during the first half of the year ending January 31, 2017.
The combined accrued liabilities for the stock bonus program and the bonus share program were
$6.6 million
and
$8.0 million
at
October 31, 2015
and January 31, 2015, respectively.
Other Stock-Based Compensation Awards
We periodically grant stock options, phantom stock, and restricted stock awards to our directors, officers, and other employees. Activity for these awards was not significant for the nine months ended
October 31, 2015
and 2014.
|
13.
|
COMMITMENTS AND CONTINGENCIES
|
Warranty Liability
The following table summarizes the activity in our warranty liability, which is included in accrued expenses and other liabilities in the condensed consolidated balance sheets, for the nine months ended
October 31, 2015
and 2014:
|
Nine Months Ended
October 31,
|
||||||||
|
(in thousands)
|
2015
|
2014
|
||||||
|
Warranty liability at beginning of period
|
$
|
633
|
|
$
|
706
|
|
||
|
Provision charged to (credited against) expenses
|
187
|
|
(93
|
)
|
||||
|
Warranty charges
|
(120
|
)
|
—
|
|
||||
|
Foreign currency translation and other
|
(2
|
)
|
(5
|
)
|
||||
|
Warranty liability at end of period
|
$
|
698
|
|
$
|
608
|
|
||
Operating Leases
During the three months ended October 31, 2015, we entered into a new operating lease for a facility in Herzeliya, Israel, the term of which we expect to commence on or about February 1, 2016. The aggregate minimum lease commitment over the
12
-year term of this new lease, excluding operating expenses, is approximately
$40.5 million
.
Legal Proceedings
On March 26, 2009, legal actions were commenced by Ms. Orit Deutsch, a former employee of our subsidiary, Verint Systems Limited ("VSL"), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the "Deutsch Labor Action") and against CTI in the Tel Aviv District Court (Case Number 1335/09) (the "Deutsch District Action"). In the Deutsch Labor Action, Ms. Deutsch filed a motion to approve a class action lawsuit on the grounds that she purports to represent a class of our
32
employees and former employees who were granted Verint and CTI stock options and were allegedly damaged as a result of the suspension of option exercises during our previous extended filing delay period. In the Deutsch District Action, in addition to a small amount of individual damages, Ms. Deutsch is seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class certification motions do not specify an amount of damages. On February 8, 2010, the Deutsch Labor Action was dismissed for lack of material jurisdiction and was transferred to the Tel Aviv District Court and consolidated with the Deutsch District Action. On March 16, 2009 and March 26, 2009, respectively, legal actions were commenced by Ms. Roni Katriel, a former employee of CTI's former subsidiary, Comverse Limited, against Comverse Limited in the Tel Aviv Regional Labor Court (Case Number 3444/09) (the "Katriel Labor Action") and against CTI in the Tel Aviv District Court (Case Number 1334/09) (the "Katriel District Action"). In the Katriel Labor Action, Ms. Katriel is seeking to certify a class of plaintiffs who were granted CTI stock options and were allegedly damaged as a result of the suspension of option exercises during CTI's previous extended filing delay period. In the Katriel District Action, in addition to a small amount of individual damages, Ms. Katriel is seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class certification motions do not specify an amount of damages. On March 2, 2010, the Katriel Labor Action was transferred to the Tel Aviv District Court, based on an agreed motion filed by the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on June 7, 2012, the District Court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an amended consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to effect the distribution of all of the issued and outstanding shares of capital stock of its former subsidiary, Comverse, Inc., on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order CTI to set aside up to
$150.0
million in assets to secure any future judgment. The District Court ruled that it would not decide this motion until the Deutsch and Katriel class certification motion was heard. Plaintiffs initially filed a motion to appeal this ruling in August 2012, but subsequently withdrew it in July 2014.
Prior to the consummation of the Comverse share distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in us and Comverse) to Comverse or unaffiliated third parties. On October 31, 2012, CTI completed the Comverse share distribution, in which it distributed all of the outstanding shares of common stock of Comverse to CTI's shareholders. As a result of the Comverse share distribution, Comverse became an independent public company and ceased to be a wholly owned subsidiary of CTI, and CTI ceased to have any material assets other than its equity interest in us. On September 9, 2015, Comverse changed its name to Xura, Inc. ("Xura").
On February 4, 2013, we merged with CTI. As a result of the merger, we have assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action. However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share distribution, we, as successor to CTI, are entitled to indemnification from Comverse (now Xura) for any losses we suffer in our capacity as successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
Following an unsuccessful mediation process, the proceeding before the District Court resumed and the parties have filed summations on the plaintiffs’ motion to certify the suit as a class action, which remain under consideration by the District Court.
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any current claims will have a material effect on our consolidated financial position, results of operations, or cash flows.
|
14.
|
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.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We conduct our business through
three
operating segments—Enterprise Intelligence Solutions ("Enterprise Intelligence"), Communications and Cyber Intelligence Solutions ("Communications Intelligence"), and Video and Situation Intelligence Solutions ("Video Intelligence"). Organizing our
33
business through three operating segments allows us to align our resources and domain expertise to effectively address the Actionable Intelligence market. We address the Customer Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the Security Intelligence market opportunity through solutions from our Communications Intelligence segment and Video Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through solutions from all three operating segments.
We measure the performance of our operating segments based upon operating segment revenue and operating segment contribution. Operating segment contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs, research and development and selling, marketing, and administrative expenses. We do not allocate certain expenses, which include the majority of general and administrative expenses, facilities and communication expenses, purchasing expenses, manufacturing support and logistic expenses, depreciation and amortization, amortization of capitalized software development costs, stock-based compensation, and special charges such as restructuring costs when calculating operating segment contribution. These expenses are included in the unallocated expenses section of the table presented below. Revenue from transactions between our operating segments is not material.
Operating results by segment for the three and nine months ended
October 31, 2015
and
2014
were as follows:
|
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Revenue:
|
|
|
|
|
||||||||||||
|
Enterprise Intelligence
|
|
|
|
|
||||||||||||
|
Segment revenue
|
$
|
161,365
|
|
$
|
171,270
|
|
$
|
468,947
|
|
$
|
506,382
|
|
||||
|
Revenue adjustments
|
(1,168
|
)
|
(5,744
|
)
|
(2,477
|
)
|
(25,263
|
)
|
||||||||
|
160,197
|
|
165,526
|
|
466,470
|
|
481,119
|
|
|||||||||
|
Communications Intelligence
|
|
|
|
|
||||||||||||
|
Segment revenue
|
95,064
|
|
93,241
|
|
293,941
|
|
256,688
|
|
||||||||
|
Revenue adjustments
|
(122
|
)
|
(201
|
)
|
(851
|
)
|
(523
|
)
|
||||||||
|
|
94,942
|
|
93,040
|
|
293,090
|
|
256,165
|
|
||||||||
|
Video Intelligence
|
|
|
|
|
||||||||||||
|
Segment revenue
|
28,915
|
|
24,008
|
|
89,912
|
|
79,499
|
|
||||||||
|
Revenue adjustments
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
|
28,915
|
|
24,008
|
|
89,912
|
|
79,499
|
|
||||||||
|
Total revenue
|
$
|
284,054
|
|
$
|
282,574
|
|
$
|
849,472
|
|
$
|
816,783
|
|
||||
|
Segment contribution:
|
|
|
|
|
||||||||||||
|
Enterprise Intelligence
|
$
|
64,699
|
|
$
|
67,750
|
|
$
|
172,023
|
|
$
|
195,320
|
|
||||
|
Communications Intelligence
|
28,991
|
|
32,495
|
|
93,398
|
|
79,966
|
|
||||||||
|
Video Intelligence
|
7,683
|
|
4,500
|
|
25,769
|
|
18,108
|
|
||||||||
|
Total segment contribution
|
101,373
|
|
104,745
|
|
291,190
|
|
293,394
|
|
||||||||
|
Unallocated expenses, net:
|
|
|
|
|
||||||||||||
|
Amortization of acquired intangible assets
|
19,956
|
|
19,463
|
|
59,262
|
|
57,142
|
|
||||||||
|
Stock-based compensation
|
16,424
|
|
12,626
|
|
50,257
|
|
38,553
|
|
||||||||
|
Other unallocated expenses
|
42,665
|
|
48,298
|
|
141,023
|
|
160,875
|
|
||||||||
|
Total unallocated expenses, net
|
79,045
|
|
80,387
|
|
250,542
|
|
256,570
|
|
||||||||
|
Operating income
|
22,328
|
|
24,358
|
|
40,648
|
|
36,824
|
|
||||||||
|
Other expense, net
|
(12,307
|
)
|
(8,119
|
)
|
(32,088
|
)
|
(38,700
|
)
|
||||||||
|
Income (loss) before provision (benefit) for income taxes
|
$
|
10,021
|
|
$
|
16,239
|
|
$
|
8,560
|
|
$
|
(1,876
|
)
|
||||
Revenue adjustments represent revenue of acquired companies which is included within segment revenue reviewed by the CODM, but 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
34
believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the obligations’ acquisition-date fair values.
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. There were no material changes in the allocation of goodwill and acquired intangible assets by operating segment during the nine months ended
October 31, 2015
and
2014
. The allocations of goodwill and acquired intangible assets by operating segment appear in Note 5, "Intangible Assets and Goodwill".
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, 2015 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
Our Business
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.
We conduct our business through three operating segments—Enterprise Intelligence Solutions ("Enterprise Intelligence"), Communications and Cyber Intelligence Solutions ("Communications Intelligence"), and Video and Situation Intelligence Solutions ("Video Intelligence"). Organizing our business through three operating segments allows us to align our resources and domain expertise to more effectively address the Actionable Intelligence market. We address the Customer Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the Security Intelligence market opportunity through solutions from our Communications Intelligence segment and Video Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through solutions from all three operating segments.
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, 2015 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, 2015, and include the following:
|
•
|
Revenue recognition;
|
35
|
•
|
Accounting for business combinations;
|
|
•
|
Impairment of goodwill and other intangible assets;
|
|
•
|
Accounting for income taxes;
|
|
•
|
Contingencies;
|
|
•
|
Accounting for stock-based compensation;
|
|
•
|
Accounting for cost of revenue; and
|
|
•
|
Allowance for doubtful accounts
|
There were no significant changes to our critical accounting policies and estimates during the nine months ended October 31, 2015.
Correction of Immaterial Overstatement of Expenses
During the three months ended October 31, 2015, we identified an overstatement of stock-based compensation expense for the three months ended July 31, 2015, as reported in our previously issued condensed consolidated financial statements as of and for the three and six months ended July 31, 2015. We assessed the materiality of the misstatement, in accordance with guidance provided in SEC Staff Accounting Bulletin No. 99, and concluded that the misstatement was not material to the condensed consolidated financial statements as of and for the three and six months ended July 31, 2015. Nonetheless, the accompanying condensed consolidated financial statements as of and for the three and nine months ended October 31, 2015, and the information provided in this management's discussion and analysis, reflect the impact of our retroactive correction of this immaterial misstatement in our operating results as of and for the three and six months ended July 31, 2015. We will also reflect the correction of this immaterial misstatement when operating results as of and for the three and six months ended July 31, 2015 are presented as comparable prior period amounts in our future filings.
Further information regarding the correction of this immaterial misstatement appears in Note 1, "Basis of Presentation and Significant Accounting Policies" to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Results of Operations
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. On an organic basis, 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, potentially by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of incentive compensation plans for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, may also have an impact on our business and financial results.
Overview of Operating Results
The following table sets forth a summary of certain key financial information for the
three and nine months ended
October 31, 2015
and
2014
:
|
Three Months Ended
October 31, |
Nine Months Ended
October 31, |
|||||||||||||||
|
(in thousands, except per share data)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Revenue
|
$
|
284,054
|
|
$
|
282,574
|
|
$
|
849,472
|
|
$
|
816,783
|
|
||||
|
Operating income
|
$
|
22,328
|
|
$
|
24,358
|
|
$
|
40,648
|
|
$
|
36,824
|
|
||||
|
Net income attributable to Verint Systems Inc.
|
$
|
7,634
|
|
$
|
10,670
|
|
$
|
133
|
|
$
|
26,348
|
|
||||
|
Net income per common share attributable to Verint Systems Inc.:
|
|
|
|
|
||||||||||||
|
Basic
|
$
|
0.12
|
|
$
|
0.18
|
|
$
|
0.00
|
|
$
|
0.46
|
|
||||
|
Diluted
|
$
|
0.12
|
|
$
|
0.17
|
|
$
|
0.00
|
|
$
|
0.45
|
|
||||
36
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Our revenue
increased
approximately
$1.5 million
, or
1%
, to
$284.1 million
in the
three months ended
October 31, 2015
from
$282.6 million
in the
three months ended
October 31, 2014
. The
increase
consisted of a
$4.3 million
increase
in service and support revenue, partially offset by a
$2.7 million
decrease
in product revenue. In our Communications Intelligence segment, revenue
increased
approximately
$1.9 million
, or
2%
, from
$93.0 million
in the
three months ended
October 31, 2014
to
$94.9 million
in the
three months ended
October 31, 2015
. The
increase
consisted of a
$4.2 million
increase
in service and support revenue, partially offset by a
$2.3 million
decrease
in product revenue. In our Video Intelligence segment, revenue
increased
approximately
$4.9 million
, or
20%
, from
$24.0 million
in the
three months ended
October 31, 2014
to
$28.9 million
in the
three months ended
October 31, 2015
. In our Enterprise Intelligence segment, revenue
decreased
$5.3 million
, or approximately
3%
, from
$165.5 million
in the
three months ended
October 31, 2014
to
$160.2 million
in the
three months ended
October 31, 2015
. As noted below, revenue for the three months ended October 31, 2015, when compared to revenue for the three months ended October 31, 2014, was unfavorably impacted by movements in foreign currency exchange rates, compared to foreign currency exchange rates in effect during the three months ended October 31, 2014. For additional details on our revenue by segment, see "—Revenue by Operating Segment". Revenue in the Americas, in Europe, the Middle East and Africa ("EMEA"), and in the Asia-Pacific ("APAC") regions represented approximately
54%
,
29%
, and
17%
of our total revenue, respectively, in the
three months ended
October 31, 2015
, compared to approximately
53%
,
33%
, and
14%
, respectively, in the
three months ended
October 31, 2014
. Further details of changes in revenue are provided below.
Operating income was
$22.3 million
in the
three months ended
October 31, 2015
compared to
$24.4 million
in the
three months ended
October 31, 2014
. This
decrease
in operating income was primarily due to a
$3.0 million
decrease
in gross profit, from
$181.5 million
to
$178.5 million
, partially offset by a
$0.9 million
decrease
in operating expenses, from
$157.1 million
to
$156.2 million
. The
decrease
in operating expenses consisted of a
$2.8 million
decrease
in selling, general and administrative expenses and a
$0.5 million
decrease
in amortization of other acquired intangible assets, partially offset by a
$2.4 million
increase
in net research and development expenses. Further details of changes in operating income are provided below. The
decrease
in gross profit was primarily due to decreased gross profit in our Enterprise Intelligence segment.
Net income attributable to Verint Systems Inc. was
$7.6 million
, and diluted net income per common share was
$0.12
, in the
three months ended
October 31, 2015
compared to net income attributable to Verint Systems Inc. of
$10.7 million
, and diluted net income per common share of
$0.17
, in the
three months ended
October 31, 2014
. The
decrease
in net income attributable to Verint Systems Inc. and diluted net income per common share in the
three months ended
October 31, 2015
was primarily due to decreased operating income described above, a
$1.3 million
decrease in net gains on derivative financial instruments, a
$0.6 million
increase in net foreign currency losses, and a
$2.5 million
increase in other expense, net. These increases were partially offset by a
$3.2 million
decrease
in our provision for income taxes. Further details of changes in total other expense, net, are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates for the
three months ended
October 31, 2015
to average exchange rates for the
three months ended
October 31, 2014
, the U.S. dollar strengthened relative to the British pound sterling, euro, Australian dollar, Brazilian real, Singapore dollar, and Israeli shekel, resulting in an overall decrease in our revenue, cost of revenue. and operating expenses on a U.S. dollar-denominated basis. For the
three months ended
October 31, 2015
, had foreign currency exchange rates remained unchanged from rates in effect for the
three months ended
October 31, 2014
, our revenue would have been approximately
$12.5 million
higher
and our cost of revenue and operating expenses on a combined basis would have been approximately
$12.6 million
higher
, which would have resulted in a
$0.1 million
decrease
in operating income.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Our revenue
increased
approximately
$32.7 million
, or
4%
, to
$849.5 million
in the
nine months ended
October 31, 2015
from
$816.8 million
in the
nine months ended
October 31, 2014
. The
increase
consisted of a
$32.2 million
increase
in service and support revenue and a
$0.5 million
increase
in product revenue. In our Enterprise Intelligence segment, revenue
decreased
$14.6 million
, or approximately
3%
, from
$481.1 million
in the
nine months ended
October 31, 2014
to
$466.5 million
in the
nine months ended
October 31, 2015
. The
decrease
consisted of a
$19.6 million
decrease
in product revenue, partially offset by a
$5.0 million
increase
in service revenue. In our Communications Intelligence segment, revenue
increased
approximately
$36.9 million
, or
14%
, from
$256.2 million
in the
nine months ended
October 31, 2014
to
$293.1 million
in the
nine months ended
October 31, 2015
. The
increase
consisted of a
$24.5 million
increase
in service and support revenue and a
$12.4 million
increase
in product revenue. In our Video Intelligence segment, revenue
increased
approximately
$10.4 million
, or
13%
, from
$79.5 million
in the
nine months ended
October 31, 2014
to
$89.9 million
in the
nine months ended
October 31, 2015
, primarily due to
an increase
in product revenue. As noted below, revenue for the nine months ended October 31, 2015, when compared to revenue for the nine months ended October 31, 2014, was unfavorably impacted by movements in foreign currency exchange rates, compared to foreign currency exchange rates in effect during the nine months ended October 31, 2014. For additional details on our
37
revenue by segment, see "—Revenue by Operating Segment". Revenue in the Americas, EMEA, and APAC regions represented approximately
52%
,
31%
, and
17%
of our total revenue in each of the
nine months ended
October 31, 2015
and 2014. Further details of changes in revenue are provided below.
Operating income was
$40.6 million
in the
nine months ended
October 31, 2015
compared to
$36.8 million
in the
nine months ended
October 31, 2014
. This
increase
in operating income was primarily due to a
$11.9 million
increase
in gross profit from
$510.3 million
to
$522.2 million
, partially offset by a
$8.1 million
increase
in operating expenses, from
$473.5 million
to
$481.6 million
. The
increase
in gross profit was primarily due to increased gross profit in our Communications Intelligence segment. The
increase
in operating expenses consisted of a
$6.3 million
increase
in net research and development expenses and a
$3.6 million
increase
in selling, general and administrative expenses, partially offset by a
$1.7 million
decrease
in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. was
$0.1 million
, and net income per common share was
$0.00
, in the
nine months ended
October 31, 2015
compared to net income attributable to Verint Systems Inc. of
$26.3 million
, and diluted net income per common share of
$0.45
, in the
nine months ended
October 31, 2014
. The
decrease
in net income attributable to Verint Systems Inc. and diluted net income per common share in the
nine months ended
October 31, 2015
was primarily due to a
$36.9 million
decrease
in our benefit for income taxes, from a benefit of
$31.8 million
in the
nine months ended
October 31, 2014
to an expense of
$5.1 million
in the
nine months ended
October 31, 2015
, and a
$9.0 million
increase
in other expense, net, from a net benefit of
$1.3 million
in the
nine months ended
October 31, 2014
to a net expense of
$7.7 million
in the
nine months ended
October 31, 2015
. These decreases to net income attributable to Verint Systems Inc. were partially offset by our
increased
operating income, as described above, a
$2.7 million
decrease
in interest expense, and a
$12.5 million
loss upon early retirement of debt recorded during the
nine months ended
October 31, 2014
, with no comparable loss during the
nine months ended
October 31, 2015
. Further details of changes in total other expense, net, are provided below.
When comparing average exchange rates for the
nine months ended
October 31, 2015
to average exchange rates for the
nine months ended
October 31, 2014
, the U.S. dollar strengthened relative to the British pound sterling, euro, Australian dollar, Brazilian real, Israeli shekel, and Singapore dollar, resulting in an overall decrease in our revenue, cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the
nine months ended
October 31, 2015
, had foreign currency exchange rates remained unchanged from rates in effect for the
nine months ended
October 31, 2014
, our revenue would have been approximately
$36.0 million
higher
and our cost of revenue and operating expenses on a combined basis would have been approximately
$39.4 million
higher
, which would have resulted in a
$3.4 million
decrease
in operating income.
As of
October 31, 2015
, we employed approximately
4,800
professionals, including part-time employees and certain contractors, as compared to approximately
4,700
at
October 31, 2014
.
Revenue by Operating Segment
The following table sets forth revenue for each of our three operating segments for the
three and nine months ended
October 31, 2015
and 2014:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Enterprise Intelligence
|
$
|
160,197
|
|
$
|
165,526
|
|
(3)%
|
$
|
466,470
|
|
$
|
481,119
|
|
(3)%
|
||||||
|
Communications Intelligence
|
94,942
|
|
93,040
|
|
2%
|
293,090
|
|
256,165
|
|
14%
|
||||||||||
|
Video Intelligence
|
28,915
|
|
24,008
|
|
20%
|
89,912
|
|
79,499
|
|
13%
|
||||||||||
|
Total revenue
|
$
|
284,054
|
|
$
|
282,574
|
|
1%
|
$
|
849,472
|
|
$
|
816,783
|
|
4%
|
||||||
Revenue for each operating segment for the three and nine months ended October 31, 2015 was unfavorably impacted by movements in foreign currency exchange rates, compared to foreign currency exchange rates in effect during the three and nine months ended October 31, 2014, as described above in "Overview of Operating Results".
Enterprise Intelligence Segment
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Enterprise Intelligence revenue
decreased
approximately
$5.3 million
, or
3%
, from
$165.5 million
in the
three months ended
October 31, 2014
to
$160.2 million
in the
three months ended
October 31, 2015
. The
decrease
consisted of a
$4.0 million
decrease
in product revenue and a
$1.3 million
decrease
in service and support revenue. The
decrease
in product revenue primarily reflects a lower aggregate
38
value of executed license arrangements, which comprises the majority of our product revenue and which can fluctuate from period to period. The
decrease
in service and support revenue was primarily due to a decrease in revenue from professional services and consulting projects in the
three months ended
October 31, 2015
.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Enterprise Intelligence revenue
decreased
approximately
$14.6 million
, or
3%
, from
$481.1 million
in the
nine months ended
October 31, 2014
to
$466.5 million
in the
nine months ended
October 31, 2015
. The
decrease
consisted of a
$19.6 million
decrease
in product revenue, partially offset by a
$5.0 million
increase
in service and support revenue. The decrease in product revenue primarily reflects a lower aggregate value of executed license arrangements, which comprises the majority of our product revenue and which can fluctuate from period to period. The
increase
in service and support revenue was primarily due to an increase in our customer install base, and the related support revenue generated from this customer base during the
nine months ended
October 31, 2015
, as well as increased revenue from new service offerings in the
nine months ended
October 31, 2015
. The continued growth of service revenue on a year over year basis is attributable to various factors, including an increase in services associated with customer product upgrades, a higher component of service offerings in our standard arrangements, and growth in our customer install base.
Communications Intelligence Segment
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Communications Intelligence revenue
increased
approximately
$1.9 million
, or
2%
, from
$93.0 million
in the
three months ended
October 31, 2014
to
$94.9 million
in the
three months ended
October 31, 2015
. The
increase
consisted of a a
$4.2 million
increase
in service and support revenue, partially offset by a
$2.3 million
decrease
in product revenue. The
increase
in service and support revenue was primarily attributable to an increase in progress realized during the current year on projects with revenue recognized using the percentage of completion ("POC") method, some of which commenced in the previous fiscal year, and an increase in support revenue from new and existing customers. The
decrease
in product revenue was primarily due to a decrease in product deliveries to customers, partially offset by an increase in progress realized during the current year on projects with revenue recognized using the POC method, some of which commenced in the previous fiscal year.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Communications Intelligence revenue
increased
approximately
$36.9 million
, or
14%
, from
$256.2 million
in the
nine months ended
October 31, 2014
to
$293.1 million
in the
nine months ended
October 31, 2015
. The
increase
consisted of a
$24.5 million
increase
in service and support revenue and a
$12.4 million
increase
in product revenue. The
increase
in service and support revenue was primarily attributable to an increase in progress realized during the current year on projects with revenue recognized using the POC method, some of which commenced in the previous fiscal year, and an increase in support revenue from new and existing customers. The
increase
in product revenue was primarily due to an increase in progress realized during the current year on projects with revenue recognized using the POC method, some of which commenced in the previous fiscal year, and an increase in product deliveries to customers.
Video Intelligence Segment
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Video Intelligence revenue
increased
approximately
$4.9 million
, or
20%
, from $
24.0 million
in the
three months ended
October 31, 2014
to
$28.9 million
in the
three months ended
October 31, 2015
. The
increase
was primarily attributable to an increase in product deliveries to customers during the
three months ended
October 31, 2015
compared to the
three months ended
October 31, 2014
.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Video Intelligence revenue
increased
approximately
$10.4 million
, or
13%
, from $
79.5 million
in the
nine months ended
October 31, 2014
to
$89.9 million
in the
nine months ended
October 31, 2015
. The
increase
was primarily attributable to an increase in product deliveries to customers during the
nine months ended
October 31, 2015
compared to the
nine months ended
October 31, 2014
.
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
39
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products and sale of hardware products (which include software that works together with the hardware to deliver the product's essential functionality), and (b) service and support revenue, including revenue from installation services, post-contract customer support, project management, hosting services, software-as-a-service ("SaaS"), product warranties, consulting services, and training services. For multiple-element arrangements for which we are unable to establish vendor-specific objective evidence ("VSOE") for one or more elements, we use various available indicators of fair value and apply our best judgment to reasonably classify the arrangement's revenue into product revenue and service and support revenue.
The following table sets forth product revenue and service and support revenue for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Product revenue
|
$
|
115,573
|
|
$
|
118,346
|
|
(2)%
|
$
|
340,139
|
|
$
|
339,657
|
|
—%
|
||||||
|
Service and support revenue
|
168,481
|
|
164,228
|
|
3%
|
509,333
|
|
477,126
|
|
7%
|
||||||||||
|
Total revenue
|
$
|
284,054
|
|
$
|
282,574
|
|
1%
|
$
|
849,472
|
|
$
|
816,783
|
|
4%
|
||||||
Product Revenue
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Product revenue
decreased
approximately
$2.7 million
, or
2%
, from
$118.3 million
for the
three months ended
October 31, 2014
to
$115.6 million
for the
three months ended
October 31, 2015
, resulting from a
$4.0 million
decrease
in our Enterprise Intelligence segment and a
$2.3 million
decrease
in our Communications Intelligence segment, partially offset by a
$3.6 million
increase
in our Video Intelligence segment.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Product revenue
increased
approximately
$0.5 million
, from
$339.7 million
for the
nine months ended
October 31, 2014
to
$340.1 million
for the
nine months ended
October 31, 2015
, resulting from a
$12.4 million
increase
in our Communications Intelligence segment and a
$7.7 million
increase
in our Video Intelligence segment, offset by a
$19.6 million
decrease
in our Enterprise Intelligence segment.
For additional information see "—Revenue by Operating Segment".
Service and Support Revenue
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Service and support revenue
increased
approximately
$4.3 million
, or
3%
, from
$164.2 million
for the
three months ended
October 31, 2014
to
$168.5 million
for the
three months ended
October 31, 2015
. This
increase
was primarily attributable to increases of
$4.2 million
, and
$1.4 million
in our Communications Intelligence and Video Intelligence segments, respectively, partially offset by a
$1.3 million
decrease
in our Enterprise Intelligence segment.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Service and support revenue
increased
approximately
$32.2 million
, or
7%
, from
$477.1 million
for the
nine months ended
October 31, 2014
to
$509.3 million
for the
nine months ended
October 31, 2015
. This
increase
was primarily attributable to increases of
$24.5 million
,
$5.0 million
, and
$2.7 million
in our Communications Intelligence, Enterprise Intelligence, and Video Intelligence segments, respectively.
For additional information see "— Revenue by Operating Segment".
Cost of Revenue
The following table sets forth cost of revenue by product and service and support, as well as amortization of acquired technology for the
three and nine months ended
October 31, 2015
and
2014
:
40
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31,
|
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Cost of product revenue
|
$
|
34,982
|
|
$
|
32,925
|
|
6%
|
$
|
111,756
|
|
$
|
104,524
|
|
7%
|
||||||
|
Cost of service and support revenue
|
61,475
|
|
60,082
|
|
2%
|
188,576
|
|
178,939
|
|
5%
|
||||||||||
|
Amortization of acquired technology
|
9,060
|
|
8,096
|
|
12%
|
26,896
|
|
23,018
|
|
17%
|
||||||||||
|
Total cost of revenue
|
$
|
105,517
|
|
$
|
101,103
|
|
4%
|
$
|
327,228
|
|
$
|
306,481
|
|
7%
|
||||||
We exclude certain costs of both product revenue and service and support revenue, including shared support costs, stock-based compensation, and asset impairment charges (if any), among others, as well as amortization of acquired technology, when calculating our operating segment gross margins.
Cost of Product Revenue
Cost of product revenue primarily consists of hardware material costs and royalties due to third parties for software components that are embedded in our software solutions. When revenue is deferred, we also defer hardware material costs and third-party software royalties and recognize those costs over the same period that the product revenue is recognized. Cost of product revenue also includes amortization of capitalized software development costs, employee compensation and related expenses associated with our global operations, facility costs, and other allocated overhead expenses. In our Communications 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.
Our product gross margins are impacted by the mix of products that we sell from period to period. As with many other technology companies, our software products tend to have higher gross margins than our hardware products.
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Cost of product revenue
increased
approximately
$2.1 million
, or
6%
, from
$32.9 million
in the
three months ended
October 31, 2014
to
$35.0 million
in the
three months ended
October 31, 2015
. Our overall product gross margins decreased to
70%
in the
three months ended
October 31, 2015
from
72%
in the three months ended October 31, 2014. As noted above, certain costs are not allocated to our operating segments when we calculate product gross margins by operating segment. Product gross margins in our Enterprise Intelligence segment were
94%
in each of the
three months ended
October 31, 2015
and 2014. Product gross margins in our Communications Intelligence segment
decreased
from
62%
in the
three months ended
October 31, 2014
to
61%
in the
three months ended
October 31, 2015
primarily due to a change in product mix. Product gross margins in our Video Intelligence segment
increased
to
60%
in the
three months ended
October 31, 2015
from
57%
in the
three months ended
October 31, 2014
due to a change in product mix.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Cost of product revenue
increased
approximately
$7.3 million
, or
7%
, from
$104.5 million
in the
nine months ended
October 31, 2014
to
$111.8 million
in the
nine months ended
October 31, 2015
primarily due to a $2.8 million increase in employee compensation, a $2.7 million increase in contractor expense, and a $0.7 million increase in travel expenses, each primarily in our Communications Intelligence segment. For the
nine months ended
October 31, 2015
, we recorded a $2.3 million charge for the impairment of certain technology assets associated with a prior business combination in our Communications Intelligence segment. For the
nine months ended
October 31, 2014
, we recorded a $2.6 million charge for the impairment of certain capitalized software development costs, reflecting strategy changes in certain product development initiatives in our Communications Intelligence segment as a result of the UTX acquisition. Our overall product gross margins decreased to
67%
in the
nine months ended
October 31, 2015
from
69%
in the nine months ended October 31, 2014. As noted above, certain costs are not allocated to our operating segments when we calculate product gross margins by operating segment. Product gross margins in our Enterprise Intelligence segment
decreased
to
93%
in the nine months ended
October 31, 2015
from
94%
in the
nine months ended
October 31, 2014
. Product gross margins in our Communications Intelligence segment
increased
from
60%
in the
nine months ended
October 31, 2014
to
61%
in the
nine months ended
October 31, 2015
primarily due to a change in product mix. Product gross margins in our Video Intelligence segment were
60%
in each of the
nine months ended
October 31, 2015
and 2014.
Cost of Service and Support Revenue
Cost of service and support revenue primarily consists of employee compensation and related expenses, contractor 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
41
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, with the exception of certain transactions accounted for using the POC method.
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Cost of service and support revenue
increased
approximately
$1.4 million
, or
2%
, from
$60.1 million
in the
three months ended
October 31, 2014
to
$61.5 million
in the
three months ended
October 31, 2015
. The
increase
is primarily attributable to a $1.3 million increase in contractor expenses resulting from increased use of contractors in the
three months ended
October 31, 2015
compared to the
three months ended
October 31, 2014
to support an overall increase in service revenue. Our overall service and support gross margins
increased
from
63%
in the
three months ended
October 31, 2014
to
64%
in the
three months ended
October 31, 2015
.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Cost of service and support revenue
increased
approximately
$9.7 million
, or
5%
, from
$178.9 million
in the
nine months ended
October 31, 2014
to
$188.6 million
in the
nine months ended
October 31, 2015
. The increase is primarily attributable to a $10.1 million increase in employee compensation and related expenses due primarily to increased services and support employee headcount in our Enterprise Intelligence and Communications Intelligence segments, partially offset by a $1.4 million decrease in travel expenses primarily in our Enterprise Intelligence segment. Our overall service and support gross margins
increased
from
62%
in the
nine months ended
October 31, 2014
to
63%
in the
nine months ended
October 31, 2015
.
Amortization of Acquired Technology
Amortization of acquired technology consists of amortization of technology assets acquired in connection with business combinations.
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Amortization of acquired technology
increased
approximately
$1.0 million
, or
12%
, from
$8.1 million
in the
three months ended
October 31, 2014
to
$9.1 million
in the
three months ended
October 31, 2015
primarily due to an increase in amortization expense of acquired technology-based intangible assets associated with business combinations that closed subsequent to October 31, 2014.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Amortization of acquired technology
increased
approximately
$3.9 million
, or
17%
, from
$23.0 million
in the
nine months ended
October 31, 2014
to
$26.9 million
in the
nine months ended
October 31, 2015
primarily due to an increase in amortization expense of acquired technology-based intangible assets associated with business combinations that closed subsequent to October 31, 2014.
Further discussion regarding our business combinations appears in Note 4, "Business Combinations" to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Research and Development, Net
Research and development expenses consist primarily of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized as well as reimbursements under government programs. Software development costs are capitalized upon the establishment of technological feasibility and continue to be capitalized through the general release of the related software product.
The following table sets forth research and development, net for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Research and development, net
|
$
|
45,443
|
|
$
|
43,008
|
|
6%
|
$
|
134,741
|
|
$
|
128,408
|
|
5%
|
||||||
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Research and development, net
increased
approximately
$2.4 million
, or
6%
, from
$43.0 million
in the
three months ended
October 31, 2014
to
$45.4 million
in the
three months ended
October 31, 2015
. The increase was primarily attributable to a $1.3 million increase in stock-based compensation expense due primarily to the combination of an increase in the number of outstanding RSUs, higher expenses associated with performance-based RSUs, a general increase in the price of our common stock, which is used to determine the grant-date fair value of an RSU, and our bonus share program, further details for which appear in Note 12, "Stock-Based Compensation" to our condensed consolidated financial statements included under Part I, Item 1 of this report. Contractor expense increased $0.9 million primarily due to increased use of contractors for research and development activities in our
42
Communications Intelligence and Enterprise Intelligence segments during the
nine months ended
October 31, 2015
compared to the
nine months ended
October 31, 2014
.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Research and development, net
increased
approximately
$6.3 million
, or
5%
, from
$128.4 million
in the
nine months ended
October 31, 2014
to
$134.7 million
in the
nine months ended
October 31, 2015
. The increase was primarily attributable to a $2.6 million increase in stock-based compensation expense due primarily to the combination of an increase in the number of outstanding RSUs, higher expenses associated with performance-based RSUs, a general increase in the price of our common stock, which is used to determine the grant-date fair value of an RSU, and our bonus share program, further details for which appear in Note 12, "Stock-Based Compensation" to our condensed consolidated financial statements included under Part I, Item 1 of this report. Employee compensation and related expenses increased $1.4 million due primarily to increased research and development employee headcount in our Communications Intelligence segment. Contractor expenses increased $1.8 million due to increased use of contractors for research and development activities in our Communications Intelligence segment during the
nine months ended
October 31, 2015
compared to the
nine months ended
October 31, 2014
. Depreciation expense on fixed assets used for research and development activities in our Communications Intelligence segment increased $1.0 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions and sales referral fees, facility costs, communication expenses, and other administrative expenses.
The following table sets forth selling, general and administrative expenses for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Selling, general and administrative
|
$
|
99,870
|
|
$
|
102,738
|
|
(3)%
|
$
|
314,489
|
|
$
|
310,946
|
|
1%
|
||||||
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Selling, general and administrative expenses
decreased
approximately
$2.8 million
, or
3%
, from
$102.7 million
in the
three months ended
October 31, 2014
to
$99.9 million
in the
three months ended
October 31, 2015
. This
decrease
was primarily attributable to a $1.9 million decrease in employee compensation and related expenses due primarily to a decrease in headcount of general and administrative employees in our Enterprise Intelligence segment, and a decrease in the change in fair value of our obligations under contingent consideration arrangements from a $0.3 million net expense during the three months ended October 31, 2014 to a $1.0 million net benefit during the three months ended October 31, 2015, resulting in a $1.3 million decrease in selling, general, and administrative expense.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Selling, general and administrative expenses
increased
approximately
$3.6 million
, or
1%
, from
$310.9 million
in the
nine months ended
October 31, 2014
to
$314.5 million
in the
nine months ended
October 31, 2015
. Stock-based compensation expense increased $7.6 million due primarily to the combination of an increase in the number of outstanding RSUs, higher expenses associated with performance-based RSUs, a general increase in the price of our common stock, which is used to determine the grant-date fair value of an RSU, and our bonus share program, further details for which appear in Note 12, "Stock-Based Compensation" to our condensed consolidated financial statements included under Part I, Item 1 of this report. Facilities expenses increased $1.1 million due primarily to costs associated with the early termination of a facility lease in the Americas region. Contractor expenses increased $1.3 million due primarily to increased use of contractors for corporate support activities, including activities related to acquisitions and related expenses. These increases were partially offset by a $6.2 million decrease in employee compensation and related expenses due primarily to a decrease in headcount of general and administrative employees in our Enterprise Intelligence segment, and a $0.9 million decrease in travel expenses due primarily to decreased travel expenses in our Enterprise Intelligence segment.
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.
43
The following table sets forth amortization of other acquired intangible assets for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Amortization of other acquired intangible assets
|
$
|
10,896
|
|
$
|
11,367
|
|
(4)%
|
$
|
32,366
|
|
$
|
34,124
|
|
(5)%
|
||||||
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Amortization of other acquired intangible assets
decreased
approximately
$0.5 million
, or
4%
, from
$11.4 million
in the
three months ended
October 31, 2014
to
$10.9 million
in the
three months ended
October 31, 2015
primarily due to acquired intangible assets from historical business combinations becoming fully amortized subsequent to the
three months ended
October 31, 2014
.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Amortization of other acquired intangible assets
decreased
approximately
$1.7 million
, or
5%
, from
$34.1 million
in the
nine months ended
October 31, 2014
to
$32.4 million
in the
nine months ended
October 31, 2015
primarily due to acquired intangible assets from historical business combinations becoming fully amortized subsequent to the
nine months ended
October 31, 2014
.
Further discussion regarding our business combinations appears in Note 4, "Business Combinations" to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Other Income (Expense), Net
The following table sets forth total other expense, net for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Interest income
|
$
|
335
|
|
$
|
208
|
|
61%
|
$
|
992
|
|
$
|
683
|
|
45%
|
||||||
|
Interest expense
|
(8,467
|
)
|
(8,494
|
)
|
—%
|
(25,365
|
)
|
(28,103
|
)
|
(10)%
|
||||||||||
|
Losses on early retirements of debt
|
—
|
|
—
|
|
—%
|
—
|
|
(12,546
|
)
|
(100)%
|
||||||||||
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Foreign currency losses
|
(2,517
|
)
|
(1,949
|
)
|
29%
|
(5,434
|
)
|
(1,035
|
)
|
*
|
||||||||||
|
Gains on derivatives
|
309
|
|
1,562
|
|
(80)%
|
583
|
|
1,666
|
|
*
|
||||||||||
|
Other, net
|
(1,967
|
)
|
554
|
|
*
|
(2,864
|
)
|
635
|
|
*
|
||||||||||
|
Total other (expense) income, net
|
(4,175
|
)
|
167
|
|
*
|
(7,715
|
)
|
1,266
|
|
*
|
||||||||||
|
Total other expense, net
|
$
|
(12,307
|
)
|
$
|
(8,119
|
)
|
52%
|
$
|
(32,088
|
)
|
$
|
(38,700
|
)
|
(17)%
|
||||||
* Percentage is not meaningful.
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Total other expense, net,
increased
by
$4.2 million
from
$8.1 million
in the
three months ended
October 31, 2014
to
$12.3 million
in the
three months ended
October 31, 2015
.
We recorded
$2.5 million
of net foreign currency losses in the
three months ended
October 31, 2015
compared to
$1.9 million
of net foreign currency losses in the
three months ended
October 31, 2014
. Foreign currency losses in the
three months ended
October 31, 2015
resulted primarily from strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-denominated net assets in certain entities which use a U.S. dollar functional currency and foreign currency losses on U.S dollar-denominated net liabilities in certain entities which use a Singapore dollar functional currency. Also contributing to the loss was the strengthening of the U.S. dollar against the British pound sterling, resulting in foreign currency losses on U.S dollar-denominated net liabilities in certain entities which use a British pound sterling functional currency.
Other, net, was a
$2.0 million
net expense in the
three months ended
October 31, 2015
compared to a net benefit of
$0.6 million
in the
three months ended
October 31, 2014
. Other, net, expense in the
three months ended
October 31, 2015
consisted
44
primarily of write-offs of indemnification assets associated with tax liabilities recorded in connection with prior business combinations.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Total other expense, net,
decreased
by
$6.6 million
from
$38.7 million
in the
nine months ended
October 31, 2014
to
$32.1 million
in the
nine months ended
October 31, 2015
.
During the
nine months ended
October 31, 2014
, we recorded a $12.5 million loss upon early retirements of debt. Of this amount, $7.1 million was recorded in connection with the extinguishment of the March 2013 Term Loans, and $5.5 million was recorded in connection with the retirement of $530.0 million of the February 2014 Term Loans and March 2014 Term Loans. Further discussion regarding our Credit Agreement appears in Note 6, "Long-term Debt" to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Interest expense
decreased
to
$25.4 million
in the
nine months ended
October 31, 2015
from
$28.1 million
in the
nine months ended
October 31, 2014
primarily due to lower interest rates on outstanding borrowings during the
nine months ended
October 31, 2015
.
We recorded
$5.4 million
of net foreign currency losses in the
nine months ended
October 31, 2015
compared to
$1.0 million
of net foreign currency losses in the
nine months ended
October 31, 2014
. Foreign currency losses in the
nine months ended
October 31, 2015
resulted primarily from strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-denominated net assets in certain entities which use a U.S. dollar functional currency and foreign currency losses on U.S dollar-denominated net liabilities in certain entities which use a Singapore dollar functional currency. Also contributing to the net foreign currency loss was the weakening of the U.S dollar against the British pound sterling, resulting in foreign currency losses on U.S dollar-denominated net assets in certain entities which use a British pound sterling functional currency, and the strengthening of the U.S dollar against the Brazilian real, resulting in foreign currency losses on U.S dollar denominated net liabilities in certain entities which use a Brazilian real functional currency.
Other, net, was a
$2.9 million
net expense in the
nine months ended
October 31, 2015
compared to a net benefit of
$0.6 million
in the
nine months ended
October 31, 2014
. Other, net, expense in the
three months ended
October 31, 2015
consisted primarily of write-offs of indemnification assets associated with tax liabilities recorded in connection with prior business combinations.
Provision (Benefit) for Income Taxes
The following table sets forth our provision (benefit) for income taxes for the
three and nine months ended
October 31, 2015
and
2014
:
|
|
Three Months Ended
October 31, |
% Change
|
Nine Months Ended
October 31, |
% Change
|
||||||||||||||||
|
(in thousands)
|
2015
|
2014
|
2015 - 2014
|
2015
|
2014
|
2015 - 2014
|
||||||||||||||
|
Provision (benefit) for income taxes
|
$
|
1,551
|
|
$
|
4,766
|
|
(67)%
|
$
|
5,119
|
|
$
|
(31,788
|
)
|
*
|
||||||
* Percentage is not meaningful.
Three Months Ended
October 31, 2015
compared to
Three Months Ended
October 31, 2014
.
Our effective income tax rate was
15.5%
for the
three months ended
October 31, 2015
, compared to an effective income tax rate of
29.3%
for the
three months ended
October 31, 2014
. For the
three months ended
October 31, 2015
, pre-tax income in our profitable jurisdictions, where we recorded tax provisions, was higher than the pre-tax losses in our domestic and foreign jurisdictions where we maintain valuation allowances and did not record the related tax benefits. In addition, following the receipt of an approval from a foreign government agency and of a tax ruling in a foreign jurisdiction, we adjusted certain unrecognized tax benefits and deferred tax items resulting in net discrete income tax benefits of
$3.4 million
. We also recorded a discrete income tax benefit of
$1.5 million
for the adjustment of certain unrecognized tax benefits established in connection with the KANA acquisition. The adjustment to the KANA acquisition unrecognized tax benefits resulted in a charge within other expense, net due to the write-off of an indemnification asset. The result was an income tax provision of
$1.6 million
on pre-tax income of
$10.0 million
, which represented an effective income tax rate of
15.5%
.
For the three months ended October 31, 2014, pre-tax income in our profitable jurisdictions, where we recorded income tax provisions, was higher than the pre-tax losses in our domestic and foreign jurisdictions where we maintain valuation
45
allowances and did not record the related income tax benefits. The result was an income tax provision of
$4.8 million
on pre-tax income of
$16.2 million
, resulting in an effective income tax rate of
29.3%
.
Nine Months Ended
October 31, 2015
compared to
Nine Months Ended
October 31, 2014
.
Our effective income tax rate was
59.8%
for the
nine months ended
October 31, 2015
, compared to an effective income tax benefit rate of
1,694.5%
for the
nine months ended
October 31, 2014
. For the
nine months ended
October 31, 2015
, pre-tax income in our profitable jurisdictions, where we recorded tax provisions, was higher than the pre-tax losses in our domestic and foreign jurisdictions where we maintain valuation allowances and did not record the related tax benefits. In addition, following the receipt in the three months ended October 31, 2015 of an approval from a foreign government agency and of a tax ruling in a foreign jurisdiction, we adjusted certain unrecognized tax benefits and deferred tax items resulting in net discrete income tax benefits of
$3.4 million
. During the three months ended October 31, 2015, we also recorded a discrete income tax benefit of
$1.5 million
for the adjustment of certain unrecognized tax benefits established in connection with the KANA acquisition. The adjustment to the KANA acquisition unrecognized tax benefits resulted in a charge within other expense, net due to the write-off of an indemnification asset. Also, following the receipt of a tax ruling in a foreign jurisdiction in the three months ended April 30, 2015, we reorganized certain operations within the foreign jurisdiction, resulting in a discrete income tax benefit of
$3.0 million
. The result was an income tax provision of
$5.1 million
on pre-tax income of
$8.6 million
, which represented an effective income tax rate of
59.8%
.
For the nine months ended October 31, 2014, our effective income tax rate was significantly impacted by the release of $45.2 million of Verint valuation allowances. We maintain valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions. In connection with the acquisition of KANA, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we reduced the valuation allowance recorded on our deferred income tax assets to the extent of the deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected as a discrete income tax benefit and not as a component of the KANA acquisition accounting. The result was an income tax benefit of
$31.8 million
on a pre-tax loss of
$1.9 million
resulting in an effective income tax benefit rate of
1,694.5%
for the
nine months ended
October 31, 2014
. The effective income tax rate was also affected by the mix and levels of income and losses among taxing jurisdictions. Pre-tax income in our profitable jurisdictions, where we recorded income tax provisions, was slightly less than the pre-tax losses in our domestic and foreign jurisdictions where we maintain valuation allowances and did not record the related income tax benefits. Excluding the income tax benefit attributable to the valuation allowance release, the result for the nine months ended October 31, 2014 was an income tax provision of
$13.4 million
on a pre-tax loss
$1.9 million
, resulting in a negative effective income tax rate of
713.4%
.
Backlog
The delivery cycles of most of our products are generally very short, ranging from days to several months, with the exception of certain projects with multiple deliverables over longer periods of time. Therefore, we do not view backlog as a meaningful indicator of future business activity and do not consider it a meaningful financial metric for evaluating our business.
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.
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 under our Credit Agreement and our Notes, and periodically for business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term investments, are our primary sources of operating liquidity, and we believe that our operating liquidity is sufficient to support our current business operations, including debt service and capital expenditure requirements.
In February 2014, in connection with our acquisition of KANA, we borrowed $125.0 million under the revolving credit facility under our Credit Agreement (the "Revolving Credit Facility") and we also incurred $300.0 million of incremental term loans under our Credit Agreement, both for purposes of funding a portion of the purchase price for KANA. In June 2014, we
46
completed concurrent public offerings of 5,750,000 shares of our common stock and $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021 (the "Notes"). The aggregate net proceeds from the concurrent offerings were $657.5 million, the majority of which we used to repay a portion of the outstanding indebtedness under our Credit Agreement. Further discussion of our Credit Agreement, Notes, call options and warrants 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 have used cash as consideration for substantially all of our historical business acquisitions, including approximately
$32 million
of net cash expended for business acquisitions during the nine months ended October 31, 2015, and approximately $605 million expended during the year ended January 31, 2015, comprised primarily of the acquisitions of KANA in February 2014 and UTX in April 2014. The acquisition of KANA was funded through a combination of cash on hand, and as described above, incremental term loans and borrowings under our Revolving Credit Facility.
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 additional equity or debt capital in the capital markets.
A considerable portion of our operating income is earned outside of the United States. Cash, cash equivalents, short-term investments, and restricted cash and bank time deposits (including any long-term portions) held by our subsidiaries outside of the United States were $302.7 million and $297.2 million as of October 31, 2015 and January 31, 2015, respectively, and are generally used to fund the subsidiaries’ operating requirements and to invest in growth initiatives, including business acquisitions. We currently do not anticipate that we will need funds generated from foreign operations to fund our domestic operations for the next 12 months and for the foreseeable future.
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. If available, our NOLs, particularly those in the United States, could reduce potential income tax liabilities that may result from repatriated earnings from foreign jurisdictions to the United States. We generally have not provided for deferred income taxes on the excess of the amount for financial reporting over the tax basis of investments in our foreign subsidiaries because we currently plan to indefinitely reinvest such earnings outside the United States.
The following table summarizes our total cash, cash equivalents, restricted cash and bank time deposits, and short-term investments, as well as our total debt, as of
October 31, 2015
and January 31, 2015:
|
October 31,
|
January 31,
|
|||||||
|
(in thousands)
|
2015
|
2015
|
||||||
|
Cash and cash equivalents
|
$
|
272,260
|
|
$
|
285,072
|
|
||
|
Restricted cash and bank time deposits
|
17,910
|
|
36,920
|
|
||||
|
Short-term investments
|
94,897
|
|
35,751
|
|
||||
|
Total cash, cash equivalents, restricted cash and bank time deposits, and short-term investments
|
$
|
385,067
|
|
$
|
357,743
|
|
||
|
Total debt, including current portion
|
$
|
744,363
|
|
$
|
736,802
|
|
||
Condensed Consolidated Cash Flow Activity
The following table summarizes selected items from our condensed consolidated statements of cash flows for the nine months ended
October 31, 2015
and
2014
:
|
|
Nine Months Ended
October 31, |
|||||||
|
(in thousands)
|
2015
|
2014
|
||||||
|
Net cash provided by operating activities
|
$
|
87,571
|
|
$
|
90,241
|
|
||
|
Net cash used in investing activities
|
(94,944
|
)
|
(671,585
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(5,062
|
)
|
396,919
|
|
||||
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
(377
|
)
|
(1,858
|
)
|
||||
|
Net decrease in cash and cash equivalents
|
$
|
(12,812
|
)
|
$
|
(186,283
|
)
|
||
47
Net Cash Provided by Operating Activities
Net cash provided by operating activities is driven primarily by our net income, as adjusted for non-cash items and working capital changes. Operating activities generated $
87.6 million
of net cash during the nine months ended
October 31, 2015
, compared to $
90.2 million
generated during the
nine months ended
October 31, 2014
.
As our business grows and we generate higher revenue, we generally expect our operating cash flow to also increase. However, our cash flow from operating activities can fluctuate from period to period due to several factors, including the timing of our billings and collections, the timing and amounts of interest, income tax and other payments, and our operating results.
Net Cash Used in Investing Activities
During the nine months ended
October 31, 2015
, our investing activities used
$94.9 million
of net cash, including
$59.7 million
of net purchases of short-term investments,
$20.5 million
of payments for property, equipment, and capitalized software development costs, and
$31.6 million
of net cash utilized for business acquisitions. Partially offsetting those uses was
$16.8 million
of net cash provided by other investing activities, consisting primarily of decreases in restricted cash and bank time deposits during the period. Restricted cash and bank time deposits are typically short-term deposits used to secure bank guarantees in connection with sales contracts, the amounts of which will fluctuate from period to period.
During the nine months ended October 31, 2014, our investing activities used $671.6 million of net cash, the primary component of which was $602.9 million of net cash utilized for business acquisitions, including KANA in February 2014 and UTX in March 2014. We also had a $37.0 million increase in restricted cash and bank time deposits during this period reflecting deposits associated with several large sales contracts. In addition, we made $20.3 million of payments for property, equipment, and capitalized software development costs, and made $9.8 million of net purchases of short-term investments, during the period.
We had no significant commitments for capital expenditures at October 31, 2015.
Net Cash (Used in) Provided by Financing Activities
For the nine months ended
October 31, 2015
, our financing activities used
$5.1 million
of net cash, the most significant portion of which was payments of
$4.8 million
for the financing portion of payments under contingent consideration arrangements related to prior business combinations.
For the nine months ended October 31, 2014, our financing activities provided $396.9 million of net cash. In connection with the February 3, 2014 acquisition of KANA, we incurred $300.0 million of incremental term loans and borrowed $125.0 million under our Revolving Credit Facility. Additionally, in March 2014, we incurred $643.5 million of new term loans, the proceeds of which were used to repay $643.5 million of prior term loans. In June 2014, we completed concurrent public offerings of 5,750,000 shares of our common stock, gross proceeds from which were $274.6 million, and $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021. We used $15.6 million of the net proceeds from these offerings to pay the net costs of an arrangement consisting of the purchase of call options and the sale of warrants to purchase our common stock, the intent of which is to reduce the potential dilution to our common stock upon conversion of the Notes. We used the majority of the remainder of the net proceeds to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and all $106.0 million of then-outstanding borrowings under the Revolving Credit Facility. In connection with these various financing activities, we paid $29.2 million of debt and equity issuance costs, including underwriting discounts and commissions associated with the public offerings. Other financing activities during the nine months ended October 31, 2014 included payments of $8.7 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, the receipt of $13.1 million of proceeds from exercises of stock options, and payments of $2.2 million for purchases of 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, 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 cash dividends on our common stock, which are not permitted under the terms of our Credit Agreement.
48
Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the impact of changes in customer buying behavior due to circumstances over which we have no control. If we determine to make additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could involve the issuance of additional equity or debt securities.
Financing Arrangements
1.50% Convertible Senior Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021, unless earlier converted by the holders pursuant to their terms. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Credit Agreement, as further described below.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount of the Notes.
The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. 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. An adjustment to the conversion rate will result in a corresponding (but inverse) adjustment to the conversion price.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:
|
•
|
during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;
|
|
•
|
during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or
|
|
•
|
upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.
|
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the
maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied.
If we satisfy our conversion obligation in solely cash or a combination of cash and shares of common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value for each trading day in a 50 trading-day conversion period. Holders will not receive any additional cash payment or additional shares of common stock representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Instead, interest will be deemed to be paid by the consideration delivered upon conversion of a Note.
If specified "make-whole adjustment events" occur, the conversion rate for any Notes converted in connection with such make-whole adjustment event will, in specified circumstances, be increased by a number of additional shares of common stock. In
49
addition, holders may require us to purchase for cash all or any portion of their Notes upon the occurrence of a "fundamental change" at a price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
As of October 31, 2015, the Notes were not convertible.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the "Note Hedges") and sold warrants (the "Warrants"). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of October 31, 2015, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of October 31, 2015, no Warrants had been exercised and all Warrants remained outstanding.
Credit Agreement
In April 2011, we entered into a credit agreement with our lenders, which was amended and restated on March 6, 2013, and further amended on February 3, 2014, March 7, 2014, and June 18, 2014 (the "Credit Agreement"). The Credit Agreement, as amended and restated, provides for senior secured credit facilities, comprised of
$943.5 million
of term loans, of which
$300.0 million
was borrowed in February 2014 (the "February 2014 Term Loans") and
$643.5 million
was borrowed in March 2014 (the "March 2014 Term Loans"), all of which matures in September 2019, and a
$300.0 million
revolving credit facility maturing in September 2018, subject to increase and reduction from time to time, as described in the Credit Agreement.
At October 31, 2015,
$130.7 million
and
$280.4 million
of borrowings were outstanding under the February 2014 Term Loans and March 2014 Term Loans, respectively, currently bearing interest at an annual rate of 3.50%, and there were no outstanding borrowings under the Revolving Credit Facility.
As noted above, in February 2014, in connection with our acquisition of KANA, we borrowed $125.0 million under the Revolving Credit Facility and we also incurred $300.0 million of incremental term loans pursuant to an amendment to our Credit Agreement, both for purposes of funding a portion of the purchase price for KANA.
In March 2014, we refinanced $643.5 million of term loans previously borrowed under the Credit Agreement (the "March 2013 Term Loans") with the proceeds of the March 2014 Term Loans, primarily for purposes of reducing the interest rate on such loans. We also amended our Credit Agreement in February and March 2014 to, among other things, (i) change the basis for determining the interest rate on borrowings under the Revolving Credit Facility, (ii) increase the permitted amount of incremental term loans and revolving credit commitments (beyond the incremental term loans borrowed in February 2014) by up to an aggregate of $200.0 million plus an additional amount such that our leverage ratio (as defined in the Credit Agreement) would not exceed a specified maximum ratio, (iii) permit us to issue convertible indebtedness (as defined in the Credit Agreement), (iv) permit us to refinance all or a portion of any existing term loans with replacement term loans, and (v)
50
extend by one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to the Revolving Credit Facility.
On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and to repay all $106.0 million of then-outstanding borrowings under the Revolving Credit Facility.
Also in June 2014, we further amended our Credit Agreement to increase the lending commitments under our Revolving Credit Facility to $300.0 million and to extend the facility's term by approximately six months to September 6, 2018.
Following the partial retirements of the term loans in June 2014, there are no scheduled principal payments on the term loans until August 2016. The vast majority of the term loan balances are due upon maturity in September 2019.
The Revolving Credit Facility contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1 until January 31, 2016 and no greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). At October 31, 2015, our consolidated leverage ratio was approximately 2.3 to 1 compared to a permitted consolidated leverage ratio of 5.00 to 1, and our EBITDA for the twelve-month period then ended exceeded by at least $150.0 million the minimum EBITDA required to satisfy the Leverage Ratio Covenant given our outstanding debt as of such date.
Contractual Obligations
Our Annual Report on Form 10-K for the year ended January 31, 2015 includes a table summarizing our contractual obligations of approximately $1.1 billion as of January 31, 2015, including approximately $920 million for long-term debt obligations, including projected future interest. That table appears under Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in that report. We believe that our contractual obligations and commercial commitments did not materially change during the nine months ended October 31, 2015.
Contingent Payments Associated with Business Combinations
In connection with certain of our business combinations, we have agreed to make contingent cash payments to the former owners of the acquired companies based upon achievement of performance targets following the acquisition dates.
For the nine months ended October 31, 2015, we made
$4.9 million
of payments under contingent consideration arrangements. As of October 31, 2015, potential future cash payments and earned consideration expected to be paid subsequent to October 31, 2015 under contingent consideration arrangements total $58.3 million, the estimated fair value of which was
$25.7 million
, including $7.8 million reported in accrued expenses and other current liabilities, and $17.9 million reported in other liabilities. The performance periods associated with these potential payments extend through April 2020.
Off-Balance Sheet Arrangements
As of
October 31, 2015
, 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 to the condensed consolidated financial statements in Part I, Item 1 of this report.
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. We are exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations. To manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to enter into derivative transactions 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.
51
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, 2015 provides detailed quantitative and qualitative discussions of the market risks affecting our operations. We believe that our market risk profile did not materially change during the nine months ended October 31, 2015.
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of October 31, 2015. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2015.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended October 31, 2015, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be achieved. Further, the design of a control system must reflect the impact of resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all possible conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
52
See Note 13, "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
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, 2015. 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.
None.
None.
Not applicable.
Not applicable.
53
The following exhibit list includes agreements that we entered into or that became effective during the three months ended October 31, 2015:
|
Number
|
Description
|
Filed Herewith /
Incorporated by
Reference from
|
||
|
10.1
|
Consulting Services Agreement dated September 15, 2015 between Verint Systems Ltd. and Meir Sperling
|
Form 8-K filed on September 18, 2015
|
||
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 (1)
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Filed herewith
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32.2
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Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 (1)
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Filed herewith
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101.INS
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XBRL Instance Document
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Filed herewith
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101.SCH
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XBRL Taxonomy Extension Schema Document
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Filed herewith
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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Filed herewith
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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Filed herewith
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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Filed herewith
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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Filed herewith
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(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.
54
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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December 2, 2015
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/s/ Douglas E. Robinson
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Douglas E. Robinson
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Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
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55
TABLE OF CONTENTS
Part IItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits