UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2019April 30, 2020
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 001-34807
Verint Systems Inc
(Exact Name of Registrant as Specified in its Charter)
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Delaware | | | 11-3200514 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
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175 Broadhollow Road | | | |
Melville, | New York | | 11747 |
(Address of Principal Executive Offices) | | | (Zip Code) |
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| (631) | 962-9600 | |
(Registrant’s Telephone Number, Including Area Code) | | | |
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Securities registered pursuant to Section 12(b) of the Act: | | | | |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| | | | The NASDAQ Stock Market, LLC |
Common Stock, $.001 par value per share | | VRNT | | (NASDAQ Global Select Market) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 66,771,47964,525,660 shares of the registrant’s common stock outstanding on AugustMay 15, 2019.2020.
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Verint Systems Inc. and Subsidiaries | | |
Index to Form 10-Q | | |
As of and For the Period Ended July 31, 2019April 30, 2020 | | |
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Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are often identified by future or conditional words such as “will”, “plans”, “expects”, “intends”, “believes”, “seeks”, “estimates”, or “anticipates”, or by variations of such words or by similar expressions. There can be no assurance that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
•uncertainties regarding the impact of generalchanges in macroeconomic and/or global conditions, including as a result of slowdowns, recessions, economic conditions ininstability, political unrest, armed conflicts, natural disasters, or outbreaks of disease, such as the United States and abroad, particularly inCOVID-19 pandemic, as well as the resulting impact on information technology spending and government budgets, on our business;
•risks that our customers delay, cancel, or refrain from placing orders, refrain from renewing subscriptions or service contracts, or are unable to honor contractual commitments or payment obligations due to liquidity issues or other challenges in their business, due to the COVID-19 pandemic or otherwise;
•risks that continuing restrictions resulting from the COVID-19 pandemic or actions taken in response to the pandemic adversely impact our operations or our ability to fulfill orders, complete implementations, or recognize revenue;
•risks associated with our ability to keep pace with technological advances and challenges and evolving industry standards; to adapt to changing market potential from area to area within our markets; and to successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer needs, while simultaneously preserving our legacy businesses and migrating away from areas of commoditization;
•risks due to aggressive competition in all of our markets, including with respect to maintaining revenues,revenue, margins, and sufficient levels of investment in our business and operations;
•risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have;
•risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, reputational considerations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas, management distraction, post-acquisition integration activities, and potential asset impairments;
•risks relating to our ability to properly manage investments in our business and operations, execute on growth initiatives, and enhance our existing operations and infrastructure, including the proper prioritization and allocation of limited financial and other resources;
•risks associated with our ability to retain, recruit, and train qualified personnel in regions in which we operate, including in new markets and growth areas we may enter;
•risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators and risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers (“OEMs”) for certain components, products, or services, including companies that may compete with us or work with our competitors;
•risks associated with the mishandling or perceived mishandling of sensitive or confidential information, including information that may belong to our customers or other third parties, and with security vulnerabilities or lapses, including cyber-attacks, information technology system breaches, failures, or disruptions;
•risks that our products or services, or those of third-party suppliers, partners, or OEMs which we use in or with our offerings or otherwise rely on, including third-party hosting platforms, may contain defects, develop operational problems, or be vulnerable to cyber-attacks;
•risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, fluctuations in foreign exchange rates, and challenges associated with a significant portion of our cash being held overseas;
risks associated with political factors related to our business or operations, including reputational risks associated with our security solutions and our ability to maintain security clearances where required, as well as risks associated with a significant amount of our business coming from domestic and foreign government customers;
•risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate, including, among others, with respect to trade compliance, anti-corruption, information security, data privacy and protection, tax, labor, government contracts, relating to our own operations as well as to the use of our solutions by our customers;
•challenges associated with selling sophisticated solutions, including with respect to assisting customers in understanding and realizing the benefits of our solutions, and developing, offering, implementing, and maintaining a broad and sophisticated solution portfolio;
•challenges associated with pursuing larger sales opportunities, including with respect to longer sales cycles, transaction reductions, deferrals, or cancellations during the sales cycle,cycle; risk of customer concentration,concentration; challenges associated with our ability to accurately forecast when a sales opportunity will convert to an order, or to accurately forecast revenue and expenses,expenses;
•challenges associated with our Customer Engagement segment cloud transition and our Cyber Intelligence segment software model transition, and risk of increased volatility of our operating results from period to period;
•risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property, claim infringement on their intellectual property rights, or claim a violation of their license rights, including relative to free or open source components we may use;
risks that our customers delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
•risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
•risks associated with significant leverage resulting from our current debt position or our ability to incur additional debt, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
•risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of the successor to CTI’s business operations, Mavenir Inc. (“Mavenir”), being unwilling or unable to provide us with certain indemnities to which we are entitled;
•risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, internal controls, and personnel, and our ability to successfully implement and maintain enhancements to the foregoing, for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays;
•risks associated with changing accounting principles or standards, tax laws and regulations, tax rates, and the continuing availability of expected tax benefits; and
•risks associated with market volatility in the prices of our common stock and convertible notes based on our performance, third-party publications or speculation, or other factors and risks associated with actions of activist stockholders.stockholders;
•risks associated with the issuance of preferred stock to an affiliate of Apax Partners, including with respect to completion of the second tranche of the investment and Apax's significant ownership position and potential that its interests will not be aligned with those of our common stockholders; and
•risks associated with the planned spin-off of our Cyber Intelligence Solutions business, including the possibility that the spin-off transaction may not be completed in the expected timeframe or at all, that it does not achieve the benefits anticipated, or that it negatively impacts our operations or stock price, including as a result of management distraction from our business.
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, 2019 and under Item 1A of our Quarterly Report on Form 10-Q for the quarter ended April 30, 2019.2020. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
Part I
Item 1. Financial Statements
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VERINT SYSTEMS INC. AND SUBSIDIARIES | |
Index to Condensed Consolidated Financial Statements (Unaudited) | |
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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| | April 30, | | January 31, |
(in thousands, except share and per share data) | | 2020 | | 2020 |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 556,671 | | | $ | 379,146 | |
Restricted cash and cash equivalents, and restricted bank time deposits | | 46,451 | | | 43,860 | |
Short-term investments | | 19,741 | | | 20,215 | |
Accounts receivable, net of allowance for doubtful accounts of $6.3 million and $5.3 million, respectively | | 308,304 | | | 382,435 | |
Contract assets, net | | 62,249 | | | 64,961 | |
Inventories | | 25,030 | | | 20,495 | |
Prepaid expenses and other current assets | | 92,168 | | | 87,946 | |
Total current assets | | 1,110,614 | | | 999,058 | |
Property and equipment, net | | 115,481 | | | 116,111 | |
Operating lease right-of-use assets | | 97,878 | | | 102,149 | |
Goodwill | | 1,452,434 | | | 1,469,211 | |
Intangible assets, net | | 182,503 | | | 197,764 | |
Other assets | | 135,798 | | | 131,765 | |
Total assets | | $ | 3,094,708 | | | $ | 3,016,058 | |
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Liabilities and Stockholders' Equity | | | | |
Current Liabilities: | | | | |
Accounts payable | | $ | 70,987 | | | $ | 71,604 | |
Accrued expenses and other current liabilities | | 228,256 | | | 233,948 | |
Contract liabilities | | 378,548 | | | 397,350 | |
Total current liabilities | | 677,791 | | | 702,902 | |
Long-term debt | | 990,390 | | | 832,798 | |
Long-term contract liabilities | | 40,566 | | | 40,565 | |
Operating lease liabilities | | 87,340 | | | 90,372 | |
Other liabilities | | 105,715 | | | 106,984 | |
Total liabilities | | 1,901,802 | | | 1,773,621 | |
Commitments and Contingencies | | | | |
Stockholders' Equity: | | | | |
Preferred stock - $0.001 par value; authorized 2,207,000 shares at April 30, 2020 and January 31, 2020, respectively; none issued. | | — | | | — | |
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 68,930,000 and 68,529,000 shares; outstanding 64,526,000 and 64,738,000 shares at April 30, 2020 and January 31, 2020, respectively. | | 69 | | | 68 | |
Additional paid-in capital | | 1,677,775 | | | 1,660,889 | |
Treasury stock, at cost - 4,404,000 and 3,791,000 shares at April 30, 2020 and January 31, 2020, respectively. | | (208,124) | | | (174,134) | |
Accumulated deficit | | (112,544) | | | (105,590) | |
Accumulated other comprehensive loss | | (178,774) | | | (151,865) | |
Total Verint Systems Inc. stockholders' equity | | 1,178,402 | | | 1,229,368 | |
Noncontrolling interests | | 14,504 | | | 13,069 | |
Total stockholders' equity | | 1,192,906 | | | 1,242,437 | |
Total liabilities and stockholders' equity | | $ | 3,094,708 | | | $ | 3,016,058 | |
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| | July 31, | | January 31, |
(in thousands, except share and per share data) |
| 2019 | | 2019 |
Assets |
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Current Assets: |
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Cash and cash equivalents |
| $ | 388,546 |
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| $ | 369,975 |
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Restricted cash and cash equivalents, and restricted bank time deposits |
| 24,239 |
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| 42,262 |
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Short-term investments | | 25,590 |
| | 32,329 |
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Accounts receivable, net of allowance for doubtful accounts of $5.5 million and $3.8 million, respectively |
| 349,161 |
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| 375,663 |
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Contract assets | | 55,239 |
| | 63,389 |
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Inventories |
| 28,459 |
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| 24,952 |
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Prepaid expenses and other current assets |
| 89,556 |
|
| 97,776 |
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Total current assets |
| 960,790 |
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| 1,006,346 |
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Property and equipment, net |
| 106,393 |
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| 100,134 |
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Operating lease right-of-use assets | | 100,924 |
| | — |
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Goodwill |
| 1,430,082 |
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| 1,417,481 |
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Intangible assets, net |
| 215,332 |
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| 225,183 |
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Other assets |
| 118,185 |
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| 117,883 |
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Total assets |
| $ | 2,931,706 |
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| $ | 2,867,027 |
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Liabilities and Stockholders' Equity |
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Current Liabilities: |
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Accounts payable |
| $ | 73,021 |
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| $ | 71,621 |
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Accrued expenses and other current liabilities |
| 218,533 |
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| 212,824 |
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Contract liabilities |
| 347,226 |
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| 377,376 |
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Total current liabilities |
| 638,780 |
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| 661,821 |
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Long-term debt |
| 782,589 |
|
| 777,785 |
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Long-term contract liabilities |
| 34,967 |
|
| 30,094 |
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Operating lease liabilities | | 93,137 |
| | — |
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Other liabilities |
| 94,255 |
|
| 136,523 |
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Total liabilities |
| 1,643,728 |
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| 1,606,223 |
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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 July 31, 2019 and January 31, 2019, respectively; none issued. | | — |
| | — |
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Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 68,444,000 and 66,998,000 shares; outstanding 66,771,000 and 65,333,000 shares at July 31, 2019 and January 31, 2019, respectively. |
| 68 |
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| 67 |
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Additional paid-in capital |
| 1,628,665 |
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| 1,586,266 |
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Treasury stock, at cost - 1,673,000 and 1,665,000 shares at July 31, 2019 and January 31, 2019, respectively. |
| (58,072 | ) |
| (57,598 | ) |
Accumulated deficit |
| (122,140 | ) |
| (134,274 | ) |
Accumulated other comprehensive loss |
| (175,197 | ) |
| (145,225 | ) |
Total Verint Systems Inc. stockholders' equity |
| 1,273,324 |
|
| 1,249,236 |
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Noncontrolling interests |
| 14,654 |
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| 11,568 |
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Total stockholders' equity |
| 1,287,978 |
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| 1,260,804 |
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Total liabilities and stockholders' equity |
| $ | 2,931,706 |
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| $ | 2,867,027 |
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See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | Three Months Ended July 31, | | Six Months Ended July 31, | | | Three Months Ended April 30, | |
(in thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 | (in thousands, except per share data) | | 2020 | | 2019 |
Revenue: | | |
| | |
| | | | | Revenue: | | | | |
Product | | $ | 109,983 |
| | $ | 110,042 |
| | $ | 214,207 |
| | $ | 215,906 |
| Product | | $ | 77,284 | | | $ | 104,224 | |
Service and support | | 214,322 |
| | 196,285 |
| | 425,357 |
| | 379,628 |
| Service and support | | 210,011 | | | 211,035 | |
Total revenue | | 324,305 |
| | 306,327 |
| | 639,564 |
| | 595,534 |
| Total revenue | | 287,295 | | | 315,259 | |
Cost of revenue: | | |
| | |
| | | | | Cost of revenue: | | | | |
Product | | 29,424 |
| | 32,984 |
| | 57,544 |
| | 67,793 |
| Product | | 21,318 | | | 28,120 | |
Service and support | | 81,430 |
| | 74,803 |
| | 160,791 |
| | 146,660 |
| Service and support | | 76,399 | | | 79,361 | |
Amortization of acquired technology | | 5,587 |
| | 5,520 |
| | 12,294 |
| | 12,946 |
| Amortization of acquired technology | | 4,609 | | | 6,707 | |
Total cost of revenue | | 116,441 |
| | 113,307 |
| | 230,629 |
| | 227,399 |
| Total cost of revenue | | 102,326 | | | 114,188 | |
Gross profit | | 207,864 |
| | 193,020 |
| | 408,935 |
| | 368,135 |
| Gross profit | | 184,969 | | | 201,071 | |
Operating expenses: | | |
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| | | | | Operating expenses: | | | | |
Research and development, net | | 58,685 |
| | 52,254 |
| | 115,854 |
| | 104,406 |
| Research and development, net | | 59,079 | | | 57,169 | |
Selling, general and administrative | | 126,265 |
| | 104,083 |
| | 247,986 |
| | 211,580 |
| Selling, general and administrative | | 111,651 | | | 121,721 | |
Amortization of other acquired intangible assets | | 7,639 |
| | 7,452 |
| | 15,352 |
| | 15,136 |
| Amortization of other acquired intangible assets | | 8,065 | | | 7,713 | |
Total operating expenses | | 192,589 |
| | 163,789 |
| | 379,192 |
| | 331,122 |
| Total operating expenses | | 178,795 | | | 186,603 | |
Operating income | | 15,275 |
| | 29,231 |
| | 29,743 |
| | 37,013 |
| Operating income | | 6,174 | | | 14,468 | |
Other income (expense), net: | | |
| | |
| | | | | Other income (expense), net: | | | | |
Interest income | | 1,687 |
| | 1,134 |
| | 3,113 |
| | 1,927 |
| Interest income | | 1,017 | | | 1,426 | |
Interest expense | | (10,107 | ) | | (9,922 | ) | | (20,041 | ) | | (18,984 | ) | Interest expense | | (10,698) | | | (9,934) | |
Other income (expense), net | | 909 |
| | (1,241 | ) | | 119 |
| | (1,705 | ) | |
Other expense, net | | Other expense, net | | (2,230) | | | (790) | |
Total other expense, net | | (7,511 | ) | | (10,029 | ) | | (16,809 | ) | | (18,762 | ) | Total other expense, net | | (11,911) | | | (9,298) | |
Income before benefit from income taxes | | 7,764 |
| | 19,202 |
| | 12,934 |
| | 18,251 |
| |
Benefit from income taxes | | (4,507 | ) | | (3,722 | ) | | (3,098 | ) | | (3,448 | ) | |
Net income | | 12,271 |
| | 22,924 |
| | 16,032 |
| | 21,699 |
| |
(Loss) income before (benefit) provision for income taxes | | (Loss) income before (benefit) provision for income taxes | | (5,737) | | | 5,170 | |
(Benefit) provision for income taxes | | (Benefit) provision for income taxes | | (1,762) | | | 1,409 | |
Net (loss) income | | Net (loss) income | | (3,975) | | | 3,761 | |
Net income attributable to noncontrolling interests | | 1,713 |
| | 944 |
| | 3,898 |
| | 1,934 |
| Net income attributable to noncontrolling interests | | 2,039 | | | 2,185 | |
Net income attributable to Verint Systems Inc. | | $ | 10,558 |
| | $ | 21,980 |
| | $ | 12,134 |
| | $ | 19,765 |
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Net (loss) income attributable to Verint Systems Inc. | | Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 1,576 | |
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Net income per common share attributable to Verint Systems Inc.: | | |
| | |
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Net (loss) income per common share attributable to Verint Systems Inc.: | | Net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
Basic | | $ | 0.16 |
| | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.31 |
| Basic | | $ | (0.09) | | | $ | 0.02 | |
Diluted | | $ | 0.16 |
| | $ | 0.33 |
| | $ | 0.18 |
| | $ | 0.30 |
| Diluted | | $ | (0.09) | | | $ | 0.02 | |
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Weighted-average common shares outstanding: | | |
| | |
| | | | | Weighted-average common shares outstanding: | | | | |
Basic | | 66,272 |
| | 64,694 |
| | 65,870 |
| | 64,314 |
| Basic | | 64,376 | | | 65,438 | |
Diluted | | 67,519 |
| | 65,840 |
| | 67,338 |
| | 65,509 |
| Diluted | | 64,376 | | | 67,088 | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) IncomeLoss
(Unaudited)
| | | | Three Months Ended July 31, | | Six Months Ended July 31, | | | Three Months Ended April 30, | |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (in thousands) | | 2020 | | 2019 |
Net income | | $ | 12,271 |
| | $ | 22,924 |
| | $ | 16,032 |
| | $ | 21,699 |
| |
Net (loss) income | | Net (loss) income | | $ | (3,975) | | | $ | 3,761 | |
Other comprehensive loss, net of reclassification adjustments: | | |
| | |
| | |
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| Other comprehensive loss, net of reclassification adjustments: | | | | |
Foreign currency translation adjustments | | (23,611 | ) | | (20,101 | ) | | (27,573 | ) | | (33,729 | ) | Foreign currency translation adjustments | | (20,999) | | | (3,962) | |
Net increase (decrease) from foreign exchange contracts designated as hedges | | 1,637 |
| | (1,354 | ) | | 2,918 |
| | (7,937 | ) | |
Net (decrease) increase from interest rate swap designated as a hedge | | (4,541 | ) | | 392 |
| | (6,558 | ) | | 612 |
| |
Net (decrease) increase from foreign exchange contracts designated as hedges | | Net (decrease) increase from foreign exchange contracts designated as hedges | | (873) | | | 1,281 | |
Net decrease from interest rate swap designated as a hedge | | Net decrease from interest rate swap designated as a hedge | | (6,944) | | | (2,017) | |
Benefit from income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges | | 790 |
| | 718 |
| | 1,084 |
| | 796 |
| Benefit from income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges | | 1,548 | | | 294 | |
Other comprehensive loss | | (25,725 | ) | | (20,345 | ) | | (30,129 | ) | | (40,258 | ) | Other comprehensive loss | | (27,268) | | | (4,404) | |
Comprehensive (loss) income | | (13,454 | ) | | 2,579 |
| | (14,097 | ) | | (18,559 | ) | |
Comprehensive loss | | Comprehensive loss | | (31,243) | | | (643) | |
Comprehensive income attributable to noncontrolling interests | | 1,662 |
| | 726 |
| | 3,741 |
| | 1,764 |
| Comprehensive income attributable to noncontrolling interests | | 1,680 | | | 2,079 | |
Comprehensive (loss) income attributable to Verint Systems Inc. | | $ | (15,116 | ) | | $ | 1,853 |
| | $ | (17,838 | ) | | $ | (20,323 | ) | |
Comprehensive loss attributable to Verint Systems Inc. | | Comprehensive loss attributable to Verint Systems Inc. | | $ | (32,923) | | | $ | (2,722) | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Verint Systems Inc. Stockholders’ Equity | | | | |
| | Common Stock | | Additional Paid-in Capital | | | | | | Accumulated Other Comprehensive Loss | | Total Verint Systems Inc. Stockholders’ Equity | | | | Total Stockholders’ Equity |
(in thousands) | | Shares | | Par Value | | | Treasury Stock | | Accumulated Deficit | | | | Non-controlling Interests | |
Balances as of January 31, 2018 | | 63,836 |
| | $ | 65 |
| | $ | 1,519,724 |
| | $ | (57,425 | ) | | $ | (238,312 | ) | | $ | (103,460 | ) | | $ | 1,120,592 |
| | $ | 11,744 |
| | $ | 1,132,336 |
|
Net (loss) income | | — |
| | — |
| | — |
| | — |
| | (2,215 | ) | | — |
| | (2,215 | ) | | 990 |
| | (1,225 | ) |
Other comprehensive (loss) income | | — |
| | — |
| | — |
| | — |
| | — |
| | (19,961 | ) | | (19,961 | ) | | 48 |
| | (19,913 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 14,898 |
| | — |
| | — |
| | — |
| | 14,898 |
| | — |
| | 14,898 |
|
Common stock issued for stock awards and stock bonuses | | 180 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Treasury stock acquired | | (4 | ) | | — |
| | — |
| | (173 | ) | | — |
| | — |
| | (173 | ) | | — |
| | (173 | ) |
Capital contributions by noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
Dividends to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (760 | ) | | (760 | ) |
Cumulative effect of adoption of ASU No. 2014-09 | | — |
| | — |
| | — |
| | — |
| | 38,047 |
| | — |
| | 38,047 |
| | — |
| | 38,047 |
|
Balances as of April 30, 2018 | | 64,012 |
| | 66 |
| | 1,534,622 |
| | (57,598 | ) | | (202,480 | ) | | (123,421 | ) | | 1,151,189 |
|
| 12,082 |
| | 1,163,271 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 21,980 |
| | — |
| | 21,980 |
| | 944 |
| | 22,924 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (20,127 | ) | | (20,127 | ) | | (218 | ) | | (20,345 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 15,113 |
| | — |
| | — |
| | — |
| | 15,113 |
| | — |
| | 15,113 |
|
Common stock issued for stock awards and stock bonuses | | 893 |
| | 1 |
| | 8,879 |
| | — |
| | — |
| | — |
| | 8,880 |
| | — |
| | 8,880 |
|
Balances as of July 31, 2018 | | 64,905 |
| | $ | 67 |
| | $ | 1,558,614 |
| | $ | (57,598 | ) | | $ | (180,500 | ) | | $ | (143,548 | ) | | $ | 1,177,035 |
| | $ | 12,808 |
| | $ | 1,189,843 |
|
| | | | | | | | | | | | | | | | | | |
Balances as of January 31, 2019 | | 65,333 |
| | $ | 67 |
| | $ | 1,586,266 |
| | $ | (57,598 | ) | | $ | (134,274 | ) | | $ | (145,225 | ) | | $ | 1,249,236 |
| | $ | 11,568 |
| | $ | 1,260,804 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 1,576 |
| | — |
| | 1,576 |
| | 2,185 |
| | 3,761 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,298 | ) | | (4,298 | ) | | (106 | ) | | (4,404 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 14,890 |
| | — |
| | — |
| | — |
| | 14,890 |
| | — |
| | 14,890 |
|
Common stock issued for stock awards and stock bonuses | | 448 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock acquired | | (8 | ) | | — |
| | — |
| | (474 | ) | | — |
| | — |
| | (474 | ) | | — |
| | (474 | ) |
Balances as of April 30, 2019 | | 65,773 |
| | 67 |
| | 1,601,156 |
| | (58,072 | ) | | (132,698 | ) | | (149,523 | ) | | 1,260,930 |
| | 13,647 |
| | 1,274,577 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 10,558 |
| | — |
| | 10,558 |
| | 1,713 |
| | 12,271 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (25,674 | ) | | (25,674 | ) | | (51 | ) | | (25,725 | ) |
Stock-based compensation - equity-classified awards | | — |
| | — |
| | 17,966 |
| | — |
| | — |
| | — |
| | 17,966 |
| | — |
| | 17,966 |
|
Common stock issued for stock awards and stock bonuses | | 998 |
| | 1 |
| | 9,543 |
| | — |
| | — |
| | — |
| | 9,544 |
| | — |
| | 9,544 |
|
Distribution to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (655 | ) | | (655 | ) |
Balances as of July 31, 2019 | | 66,771 |
| | $ | 68 |
| | $ | 1,628,665 |
| | $ | (58,072 | ) | | $ | (122,140 | ) | | $ | (175,197 | ) | | $ | 1,273,324 |
| | $ | 14,654 |
| | $ | 1,287,978 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Verint Systems Inc. Stockholders’ Equity | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Additional Paid-in Capital | | | | | | Accumulated Other Comprehensive Loss | | Total Verint Systems Inc. Stockholders’ Equity | | | | Total Stockholders’ Equity |
(in thousands) | | Shares | | Par Value | | | | Treasury Stock | | Accumulated Deficit | | | | | | Non-controlling Interests | | |
Balances as of January 31, 2019 | | 65,333 | | | $ | 67 | | | $ | 1,586,266 | | | $ | (57,598) | | | $ | (134,274) | | | $ | (145,225) | | | $ | 1,249,236 | | | $ | 11,568 | | | $ | 1,260,804 | |
Net income | | | — | | | — | | | — | | | — | | | 1,576 | | | — | | | 1,576 | | | 2,185 | | | 3,761 | |
Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (4,298) | | | (4,298) | | | (106) | | | (4,404) | |
Stock-based compensation - equity-classified awards | | | — | | | — | | | 14,890 | | | — | | | — | | | — | | | 14,890 | | | — | | | 14,890 | |
Common stock issued for stock awards and stock bonuses | | | 448 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Treasury stock acquired | | | (8) | | | — | | | — | | | (474) | | | — | | | — | | | (474) | | | — | | | (474) | |
Balances as of April 30, 2019 | | 65,773 | | | | $ | 67 | | | | $ | 1,601,156 | | | | $ | (58,072) | | | | $ | (132,698) | | | | $ | (149,523) | | | | $ | 1,260,930 | | | | $ | 13,647 | | | | $ | 1,274,577 | |
| | | | | | | | | | | | | | | | | | |
Balances as of January 31, 2020 | | 64,738 | | | $ | 68 | | | $ | 1,660,889 | | | $ | (174,134) | | | $ | (105,590) | | | $ | (151,865) | | | $ | 1,229,368 | | | $ | 13,069 | | | $ | 1,242,437 | |
Net (loss) income | | | — | | | — | | | — | | | — | | | (6,014) | | | — | | | (6,014) | | | 2,039 | | | (3,975) | |
Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (26,909) | | | (26,909) | | | (359) | | | (27,268) | |
Stock-based compensation - equity-classified awards | | | — | | | — | | | 15,029 | | | — | | | — | | | — | | | 15,029 | | | — | | | 15,029 | |
Common stock issued, or to be issued, for stock awards and stock bonuses | | | 399 | | | 1 | | | 1,845 | | | — | | | — | | | — | | | 1,846 | | | — | | | 1,846 | |
Exercises of stock options | | | 2 | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | — | | | 12 | |
Treasury stock acquired | | | (613) | | | — | | | — | | | (33,990) | | | — | | | — | | | (33,990) | | | — | | | (33,990) | |
Distribution to noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (245) | | | (245) | |
Cumulative effect of adoption of ASU No. 2016-13 | | | — | | | — | | | — | | | — | | | (940) | | | — | | | (940) | | | — | | | (940) | |
Balances as of April 30, 2020 | | 64,526 | | | $ | 69 | | | $ | 1,677,775 | | | $ | (208,124) | | | $ | (112,544) | | | $ | (178,774) | | | $ | 1,178,402 | | | $ | 14,504 | | | $ | 1,192,906 | |
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net (loss) income | | $ | (3,975) | | | $ | 3,761 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 23,931 | | | 22,954 | |
Stock-based compensation, excluding cash-settled awards | | 14,192 | | | 17,065 | |
Amortization of discount on convertible notes | | 3,226 | | | 3,061 | |
Non-cash gains on derivative financial instruments, net | | (1,014) | | | (549) | |
Other non-cash items, net | | (3,537) | | | 2,646 | |
Changes in operating assets and liabilities, net of effects of business combinations: | | | | |
Accounts receivable | | 70,087 | | | 58,900 | |
Contract assets | | 2,094 | | | (39) | |
Inventories | | (5,118) | | | (3,118) | |
Prepaid expenses and other assets | | (11,630) | | | 5,268 | |
Accounts payable and accrued expenses | | 564 | | | 8,487 | |
Contract liabilities | | (14,776) | | | (24,648) | |
Other, net | | 1,934 | | | (725) | |
Net cash provided by operating activities | | 75,978 | | | 93,063 | |
| | | | |
Cash flows from investing activities: | | | | |
Cash paid for business combinations, including adjustments, net of cash acquired | | — | | | (20,210) | |
Purchases of property and equipment | | (8,835) | | | (8,331) | |
Purchases of investments | | (15,198) | | | (9,995) | |
Maturities and sales of investments | | 15,648 | | | 2,965 | |
Cash paid for capitalized software development costs | | (3,146) | | | (2,819) | |
Change in restricted bank time deposits, and other investing activities, net | | 20,824 | | | 2,941 | |
Net cash provided by (used in) investing activities | | 9,293 | | | (35,449) | |
| | | | |
Cash flows from financing activities: | | | | |
Proceeds from borrowings, net of original issuance discount | | 155,000 | | | — | |
Repayments of borrowings and other financing obligations | | (1,898) | | | (1,584) | |
Purchases of treasury stock | | (36,836) | | | (474) | |
Distribution paid to noncontrolling interest | | (245) | | | — | |
Payments of deferred purchase price and contingent consideration for business combinations (financing portion) and other financing activities | | (1,282) | | | (11,674) | |
Net cash provided by (used in) financing activities | | 114,739 | | | (13,732) | |
Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (3,106) | | | (853) | |
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 196,904 | | | 43,029 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 411,657 | | | 412,699 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 608,561 | | | $ | 455,728 | |
| | | | |
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period to the condensed consolidated balance sheets: | | | | |
Cash and cash equivalents | | $ | 556,671 | | | $ | 412,024 | |
Restricted cash and cash equivalents included in restricted cash and cash equivalents, and restricted bank time deposits | | 38,004 | | | 39,373 | |
Restricted cash and cash equivalents included in other assets | | 13,886 | | | 4,331 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 608,561 | | | $ | 455,728 | |
|
| | | | | | | | |
| | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 |
Cash flows from operating activities: | | |
| | |
|
Net income | | $ | 16,032 |
| | $ | 21,699 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 44,766 |
| | 44,935 |
|
Stock-based compensation, excluding cash-settled awards | | 37,605 |
| | 33,871 |
|
Amortization of discount on convertible notes | | 6,163 |
| | 5,848 |
|
Non-cash gains on derivative financial instruments, net | | (728 | ) | | (2,709 | ) |
Other non-cash items, net | | 3,305 |
| | (2,606 | ) |
Changes in operating assets and liabilities, net of effects of business combinations: | | |
| | |
|
Accounts receivable | | 23,439 |
| | 45,515 |
|
Contract assets | | 7,884 |
| | (12,217 | ) |
Inventories | | (4,436 | ) | | 175 |
|
Prepaid expenses and other assets | | 8,169 |
| | (2,984 | ) |
Accounts payable and accrued expenses | | (8,291 | ) | | (14,736 | ) |
Contract liabilities | | (24,460 | ) | | (5,695 | ) |
Other, net | | (11,169 | ) | | (6,943 | ) |
Net cash provided by operating activities | | 98,279 |
| | 104,153 |
|
| | | | |
Cash flows from investing activities: | | | | |
Cash paid for business combinations, including adjustments, net of cash acquired | | (49,258 | ) | | (27,442 | ) |
Purchases of property and equipment | | (17,718 | ) | | (17,897 | ) |
Purchases of investments | | (20,101 | ) | | (9,261 | ) |
Maturities and sales of investments | | 23,836 |
| | 7,152 |
|
Cash paid for capitalized software development costs | | (6,581 | ) | | (2,902 | ) |
Change in restricted bank time deposits, and other investing activities, net | | 3,807 |
| | (22,079 | ) |
Net cash used in investing activities | | (66,015 | ) | | (72,429 | ) |
| | | | |
Cash flows from financing activities: | | | | |
Repayments of borrowings and other financing obligations | | (3,194 | ) | | (2,728 | ) |
Payments of debt-related costs | | (212 | ) | | (206 | ) |
Purchases of treasury stock | | (474 | ) | | (173 | ) |
Dividends or distributions paid to noncontrolling interests | | (655 | ) | | (760 | ) |
Payments of deferred purchase price and contingent consideration for business combinations (financing portion) | | (22,601 | ) | | (9,351 | ) |
Other financing activities, net | | — |
| | (433 | ) |
Net cash used in financing activities | | (27,136 | ) | | (13,651 | ) |
Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (1,890 | ) | | (3,578 | ) |
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 3,238 |
| | 14,495 |
|
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 412,699 |
| | 398,210 |
|
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 415,937 |
| | $ | 412,705 |
|
| | | | |
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period to the condensed consolidated balance sheets: | | | | |
Cash and cash equivalents | | $ | 388,546 |
| | $ | 375,077 |
|
Restricted cash and cash equivalents included in restricted cash and cash equivalents, and restricted bank time deposits | | 23,702 |
| | 35,476 |
|
Restricted cash and cash equivalents included in other assets | | 3,689 |
| | 2,152 |
|
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 415,937 |
|
| $ | 412,705 |
|
See notes to condensed consolidated financial statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unless the context otherwise requires, the terms “Verint”, “we”, “us”, and “our” in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint is a global leader in Actionable Intelligence solutions. In a world of massive information growth, our solutions empower organizations with crucial, actionable insights and enable decision makers to anticipate, respond, and take action. Today, over 10,000 organizations in more than 180 countries, including over 85 percent of the Fortune 100, use Verint’s Actionable Intelligence solutions, deployed in the cloud and on premises,on-premises, to make more informed, timely, and effective decisions.
Our Actionable Intelligence leadership is powered by innovative, enterprise-class software built with artificial intelligence, analytics, automation, and deep domain expertise established by working closely with some of the most sophisticated and forward-thinking organizations in the world. OurWe believe we have one of the industry's strongest research and development (“R&D”) team isteams focused on actionable intelligence and is comprisedconsisting of approximately 1,900one-third of our approximately 6,300 professionals. Our innovative solutions are backed-up by a strong IP portfolio with approximatelyover 1,000 patents and patent applications worldwide across areas including data capture, artificial intelligence, machine learning, unstructured data analytics, predictive analytics and automation.
On December 4, 2019, we announced our intention to separate into two independent publicly traded companies: one which will consist of our Customer Engagement Solutions business, and one which will consist of our Cyber Intelligence Solutions business. We expect to implement the separation through a pro-rata distribution of common stock of a new entity that will hold the Cyber Intelligence Solutions business to our stockholders (the “Spin-Off”) that is intended to be tax-free to our stockholders for U.S. federal income tax purposes. We currently expect to complete the Spin-Off shortly after the end of this fiscal year ending January 31, 2021, though this timeline may be impacted by the current business environment brought on by the COVID-19 pandemic. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments” under Item 2 of this report for a more detailed discussion of the planned Spin-Off.
On December 4, 2019, we also announced that Valor Parent LP (the “Apax Investor”), an affiliate of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the “Investment Agreement”), the Apax Investor initially purchased $200 million of our Series A convertible preferred stock, which closed on May 7, 2020. Please refer to Note 16, “Subsequent Events” for additional information regarding the closing of the initial tranche. Shortly following the Spin-Off, the Apax Investor will purchase, subject to certain conditions, up to $200 million of Series B convertible preferred stock in the Company, as the entity holding the Customer Engagement Solutions business. Following the closing of the Series A investment, Apax’s ownership in us on an as-converted basis is approximately 5.5%. Following completion of the Spin-Off and assuming the issuance of the Series B preferred stock, Apax’s ownership in us on an as-converted basis will be between 11.5% and 15%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 2 of this report for a more detailed discussion of the planned Apax investment.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.
Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Companies around the world, including us, our customers, partners, and vendors, have implemented actions in response, including among others, office closings, site restrictions, and employee travel restrictions. The global spread of COVID-19 and actions taken in response have negatively affected us, our customers, partners, and vendors and caused significant economic and business disruption the extent and duration of which is not currently known. In response to these challenges, we quickly adjusted our operations to work from home and we believe our business continuity plan is working well.
We are monitoring and assessing the impact of the COVID-19 pandemic daily, including recommendations and orders issued by government and public health authorities. We continue to work to help our customers meet their business continuity needs and help keep the world safe during this difficult time and are managing our operations with a view to resuming normal business activity as soon as possible.
See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments” of this report for a more detailed discussion of the impact of COVID-19 on our business.
Preparation of Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 20192020 filed with the U.S. Securities and Exchange Commission (“SEC”), except for the recently adopted accounting pronouncements described below. The condensed consolidated statements of operations, comprehensive income (loss) income,, stockholders’ equity, and cash flows for the periods ended July 31,April 30, 2020 and 2019, and 2018, and the condensed consolidated balance sheet as of July 31, 2019,April 30, 2020, 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, 20192020 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2019.2020. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 20192020 filed with the SEC. The results for interim periods are not necessarily indicative of a full year’s results.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned or otherwise controlled subsidiaries, and a joint venture in which we hold a 50% equity interest. The joint venture is a variable interest entity in which we are the primary beneficiary. Noncontrolling interests in less than wholly owned subsidiaries are reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our stockholders’ equity. We hold an option to acquire the noncontrolling interests in two majority owned subsidiaries and we account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries.
Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
In light of the currently unknown extent and duration of the COVID-19 pandemic, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply to certain of our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts COVID-19 as of April 30, 2020 and through the date of this report. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from those estimates.these estimates under different assumptions or conditions.
Significant Accounting Policies
There have been no material changes in our significant accounting policies during the sixthree months ended July 31, 2019,April 30, 2020, as compared to the significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2019.2020.
Leases
We determine if an arrangement is a lease at inception. Operating lease assets are presented as operating lease right-of-use (“ROU”) assets, and corresponding operating lease liabilities are presented within accrued expenses and other current liabilities (current portions), and as operating lease liabilities (long-term portions), on our condensed consolidated balance sheet. Finance lease assets are included in property and equipment, and corresponding finance lease liabilities are included within accrued expenses and other current liabilities (current portions), and other liabilities (long-term portions), on our condensed consolidated balance sheet.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the remaining lease payments over the lease term at commencement date. Our leases do not provide an implicit interest rate. We calculate the incremental borrowing rate to reflect the interest rate that we would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term, and consider our historical borrowing activities and market data in this determination. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we account for as a single lease component. Some of our leases contain variable lease payments, which are expensed as incurred unless those payments are based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and included in the measurement of the lease liability; thereafter, changes to lease payments due to rate or index updates are recorded as rent expense in the period incurred. We have elected not to recognize ROU assets and lease liabilities for short-term leases that have a term of twelve months or less. The effect of short-term leases on our ROU assets and lease liabilities was not material. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, we do not have any related party leases and our sublease transactions are de minimis.
Recently Adopted Accounting Pronouncements
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued ASUAccounting Standard Update ("ASU") No. 2016-02,2016-13, LeasesFinancial Instruments - Credit Losses (Topic 842)326) - Measurement of Credit Losses on Financial Instruments. . ASU No. 2016-02 supersedesThis new standard requires entities to measure expected credit losses for certain financial assets held at the requirements in Topic 840, Leases,reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and requires lessees to recognize ROU assetsreasonable and liabilities for leases with lease termssupportable forecasts. The Company's financial instruments within the scope of more than 12 months. We adopted ASU No. 2016-02 as ofthis guidance primarily includes accounts receivable and contract assets. On February 1, 2019 using2020, we adopted the new standard under the modified retrospective transition method of applying the new standard at the adoption date. Results for reporting periods beginning on or after February 1, 2019 are presented under the new guidance, while prior periods amounts areapproach, such that comparative information has not adjustedbeen restated and continuecontinues to be reported under accounting standards in accordance with previous guidance. Disclosures required under the new standard will not be providedeffect for dates and periods before February 1, 2019.
The new standard provided a number of optional practical expedients in transition. We elected the transition package of practical expedients available in the standard, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs and the practical expedient to not account for lease and non-lease components separately. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
those periods. The adoption of ASU No. 2016-022016-13 resulted in the recognitiona $1.1 million increase in our allowance for expected credit losses related to accounts receivable and contract assets, a $0.2 million increase to deferred tax assets, and an impact of ROU assets of approximately $100.4$0.9 million and lease liabilities for operating leases of approximately $110.4 million on our consolidated balance sheet as of February 1, 2019 with no material
impact to our consolidated statements of operations. The ROU assets are lower than the operating lease liabilities primarily because previously recorded net deferred rent balances were reclassified into the ROU assets. There was no impact to our accumulated deficit upon adoption of the standard.deficit. The adoption of the new accounting standard also resulted in significant additional disclosures regarding our leasing activities. Please refer to Note 14, Leases for further details.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides companies the option to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The stranded tax effect represents the difference between the amount previously recorded in other comprehensive income at the historical U.S. federal tax rate that remains in accumulated other comprehensive loss at the time the 2017 Tax Act was effective and the amount that would have been recorded using the newly enacted rate. We adopted this guidance on February 1, 2019, and the adoption did not have ana material impact on our condensed consolidated financial statements.statements, including accounting policies, given our limited historical write-off activity.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting,to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Adoption of this standard had an immaterial impact on our condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Effective
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting forrequires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize and which costs to expense. Under the new standard, implementation costs are deferred and presented in cloud computing arrangements. This standard is effective for annual reporting periods beginningthe same financial statement caption on the condensed consolidated balance sheet as a prepayment of related arrangement fees. The deferred costs are recognized over the term of the arrangement in the same financial statement caption in the condensed consolidated income statement as the related fees of the arrangement. We adopted ASU No. 2018-15 prospectively to eligible costs incurred on or after December 15, 2019, including interim reporting periods within those annual reporting periods, with early adoption permitted. We are currently reviewing this standard to assessFebruary 1, 2020 and the implementation did not have a material impact on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to The Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ThisSince the standard is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods, with earlyaffects only disclosure requirements, the adoption permitted. We are currently reviewing thisof the standard to assess thedid not have an impact on our condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Effective
In June 2016,December 2019, the FASB issued ASU No. 2016-13,2019-12, Financial Instruments - Credit LossesIncome Taxes (Topic 326) - Measurement of Credit Losses on Financial Instruments. 740): Simplifying the Accounting for Income TaxesThis new standard changes, which affects general principles within Topic 740, Income Taxes and is meant to simplify and reduce the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. The newaccounting for income taxes. This standard is effective for interim and annual periods, and for interim periods within those annualreporting periods beginning after December 15, 2019, with early adoption permitted.2020. We are currently reviewing this standard to assess thebut do not expect that it will have a material impact on our condensed consolidated financial statements.
2. REVENUE RECOGNITION
We derive our revenue primarily from the licensing of our software products and related services and support based on when control of the software passes to our customers or the services are provided, in an amount that reflects the consideration we expect to be entitled to in exchange for such goods or services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction, including mandatory government charges that are passed through to our customers.
We determine revenue recognition through the following five steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, performance obligations are satisfied.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Disaggregation of Revenue
The following table provides information about disaggregated revenue for our Customer Engagement and Cyber Intelligence segments by product revenue and service and support revenue, as well as by the recurring or nonrecurring nature of revenue for each business segment. Recurring revenue is the portion of our revenue that we believe is likely to be renewed in the future. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers' renewal decisions.
For our Customer Engagement segment:
•Recurring revenue primarily consists of cloud revenue and initial and renewal post-contract customer support revenue.
◦Cloud revenue consists primarily of software as a service (“PCS”SaaS”) revenue with some optional managed services revenue.
◦SaaS revenue consists predominately of bundled SaaS (software with standard managed services) with some unbundled SaaS (software licensing rights sold separately from managed services and accounted for as term-based licenses). Unbundled SaaS can be deployed in the cloud either by us or a cloud partner.
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◦ | Cloud revenue consists primarily of software as a service (“SaaS”) revenue with some optional managed services revenue. |
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◦ | SaaS revenue consists predominately of bundled SaaS (software with standard managed services) with some unbundled SaaS (software licensing rights sold separately from managed services and accounted for as term-based licenses). Unbundled SaaS can be deployed in the cloud either by us or a cloud partner. |
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◦ | Bundled SaaS revenue is recognized over time and unbundled SaaS revenue is recognized at a point in time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one-and three-year time frame. |
◦Bundled SaaS revenue is recognized over time and unbundled SaaS revenue is recognized at a point in time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one- and three-year time frame.
•Nonrecurring revenue primarily consists of our perpetual licenses, consulting, implementation and installation services, and training.
For our Cyber Intelligence segment:
•Recurring revenue primarily consists of initial and renewal PCS,support, subscription software licenses, and SaaS in certain limited transactions.
•Nonrecurring revenue primarily consists of our perpetual licenses, long-term projects including software customizations that are recognized over time as control transfers to the customer using a percentage of completionpercentage-of-completion (“POC”) method, consulting, implementation and installation services, training, and hardware.
To conform with the presentation described above, the classification of Customer Engagement unbundled SaaS revenue for the three and six months ended July 31, 2018 in the tables below has been updated to reflect $4.8 million and $7.0 million, respectively, of recurring revenue which had previously been presented within nonrecurring revenue.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, 2019 | | Three Months Ended July 31, 2018 |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
Revenue: | | | | | | | | | | | | |
Product | | $ | 54,468 |
| | $ | 55,515 |
| | $ | 109,983 |
| | $ | 55,528 |
| | $ | 54,514 |
| | $ | 110,042 |
|
Service and support | | 156,968 |
| | 57,354 |
| | 214,322 |
| | 145,279 |
| | 51,006 |
| | 196,285 |
|
Total revenue | | $ | 211,436 |
| | $ | 112,869 |
| | $ | 324,305 |
| | $ | 200,807 |
| | $ | 105,520 |
| | $ | 306,327 |
|
| | | | | | | | | | | | |
Revenue by recurrence: | | | | | | | | | | | | |
Recurring revenue | | $ | 129,332 |
| | $ | 46,171 |
| | $ | 175,503 |
| | $ | 117,759 |
| | $ | 42,739 |
| | $ | 160,498 |
|
Nonrecurring revenue | | 82,104 |
| | 66,698 |
| | 148,802 |
| | 83,048 |
| | 62,781 |
| | 145,829 |
|
Total revenue | | $ | 211,436 |
| | $ | 112,869 |
| | $ | 324,305 |
| | $ | 200,807 |
| | $ | 105,520 |
| | $ | 306,327 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, 2020 | | | | | | Three Months Ended April 30, 2019 | | | | |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
Revenue: | | | | | | | | | | | | |
Product | | $ | 33,997 | | | $ | 43,287 | | | $ | 77,284 | | | $ | 54,002 | | | $ | 50,222 | | | $ | 104,224 | |
Service and support | | 151,868 | | | 58,143 | | | 210,011 | | | 153,093 | | | 57,942 | | | 211,035 | |
Total revenue | | $ | 185,865 | | | $ | 101,430 | | | $ | 287,295 | | | $ | 207,095 | | | $ | 108,164 | | | $ | 315,259 | |
| | | | | | | | | | | | |
Revenue by recurrence: | | | | | | | | | | | | |
Recurring revenue | | $ | 129,070 | | | $ | 56,038 | | | $ | 185,108 | | | $ | 123,358 | | | $ | 46,817 | | | $ | 170,175 | |
Nonrecurring revenue | | 56,795 | | | 45,392 | | | 102,187 | | | 83,737 | | | 61,347 | | | 145,084 | |
Total revenue | | $ | 185,865 | | | $ | 101,430 | | | $ | 287,295 | | | $ | 207,095 | | | $ | 108,164 | | | $ | 315,259 | |
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended July 31, 2019 | | Six Months Ended July 31, 2018 |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
Revenue: | | | | | | | | | | | | |
Product | | $ | 108,470 |
| | $ | 105,737 |
| | $ | 214,207 |
| | $ | 103,892 |
| | $ | 112,014 |
| | $ | 215,906 |
|
Service and support | | 310,061 |
| | 115,296 |
| | 425,357 |
| | 283,371 |
| | 96,257 |
| | 379,628 |
|
Total revenue | | $ | 418,531 |
| | $ | 221,033 |
| | $ | 639,564 |
| | $ | 387,263 |
| | $ | 208,271 |
| | $ | 595,534 |
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| | | | | | | | | | | | |
Revenue by recurrence: | | | | | | | | | | | | |
Recurring revenue | | $ | 252,690 |
| | $ | 92,988 |
| | $ | 345,678 |
| | $ | 225,589 |
| | $ | 78,889 |
| | $ | 304,478 |
|
Nonrecurring revenue | | 165,841 |
| | 128,045 |
| | 293,886 |
| | 161,674 |
| | 129,382 |
| | 291,056 |
|
Total revenue | | $ | 418,531 |
| | $ | 221,033 |
| | $ | 639,564 |
| | $ | 387,263 |
| | $ | 208,271 |
| | $ | 595,534 |
|
The following table provides a further disaggregation of revenue for our Customer Engagement segment.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Customer Engagement revenue: | | | | | | | | |
Recurring revenue | | | | | | | | |
Cloud | | $ | 47,813 |
| | $ | 36,658 |
| | $ | 94,898 |
| | $ | 69,463 |
|
PCS | | 81,519 |
| | 81,101 |
| | 157,792 |
| | 156,126 |
|
Total recurring revenue | | 129,332 |
| | 117,759 |
| | 252,690 |
| | 225,589 |
|
Nonrecurring revenue | | 82,104 |
| | 83,048 |
| | 165,841 |
| | 161,674 |
|
Total Customer Engagement revenue | | $ | 211,436 |
| | $ | 200,807 |
| | $ | 418,531 |
| | $ | 387,263 |
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| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Customer Engagement revenue | | | | |
Recurring revenue | | | | |
Bundled SaaS revenue | | $ | 33,393 | | | $ | 27,204 | |
Unbundled SaaS revenue | | 5,472 | | | 6,252 | |
Optional managed services revenue | | 14,132 | | | 13,629 | |
Total cloud revenue | | 52,997 | | | 47,085 | |
Support revenue | | 76,073 | | | 76,273 | |
Total recurring revenue | | 129,070 | | | 123,358 | |
Nonrecurring revenue | | | | | | |
Perpetual revenue | | 28,525 | | | 47,602 | |
Professional services revenue | | 28,270 | | | 36,135 | |
Total nonrecurring revenue | | 56,795 | | | 83,737 | |
Total Customer Engagement revenue | | $ | 185,865 | | | $ | 207,095 | |
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
| | | | | | | | | | | | | | |
(in thousands) | | April 30, 2020 | | January 31, 2020 |
Accounts receivable, net | | $ | 308,304 | | | $ | 382,435 | |
Contract assets, net | | $ | 62,249 | | | $ | 64,961 | |
Long-term contract assets (included in Other assets) | | $ | 9,260 | | | $ | 1,358 | |
Contract liabilities | | $ | 378,548 | | | $ | 397,350 | |
Long-term contract liabilities | | $ | 40,566 | | | $ | 40,565 | |
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| | | | | | | | |
(in thousands) | | July 31, 2019 | | January 31, 2019 |
Accounts receivable, net | | $ | 349,161 |
| | $ | 375,663 |
|
Contract assets | | 55,239 |
| | 63,389 |
|
Long-term contract assets (included in Other assets) | | 1,005 |
| | 1,375 |
|
Contract liabilities | | 347,226 |
| | 377,376 |
|
Long-term contract liabilities | | 34,967 |
| | 30,094 |
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We receive payments from customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled amounts related to multi-year unbundled SaaS contracts and arrangements where our significantly customized solutions as the right to consideration is subject to the contractually agreed upon billing schedule. We expect billing and collection of a majority of our contract assets to occur within the next twelve months and asset impairment charges related to contract assets were immaterial in the three months ended April 30, 2020 and 2019. There are two customers in our Cyber Intelligence segment that combined accounted for $74.0a combined $47.3 million and $84.3$51.7 million of our aggregated accounts receivable and contract assets at July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively. These amounts result from both direct and indirect contracts with governmental agencies outside of the U.S. which we believe present insignificant credit risk.
Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract. Revenue recognized during the sixthree months ended July 31,April 30, 2020 and 2019 and 2018 from amounts included in contract liabilities at the beginning of each period was $231.4$139.1 million and $207.8$134.6 million, respectively.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The majority of our arrangements are for periods of up to three years, with a significant portion being one year or less. We had $1.0 billion of remaining performance obligations as of July 31, 2019.
We elected to exclude amounts of variable consideration attributable to sales- or usage-based royalties in exchange for a license of our IP from the remaining performance obligations. We currently expect to recognize approximately two-thirds of our remaining revenue backlog over the next twelve months and the remainder thereafter. The timing and amount of revenue recognition for our remaining performance obligations is influenced by several factors, including seasonality, the timing of PCSsupport renewals, and the revenue recognition for certain projects, particularly in our Cyber Intelligence segment, that can extend over longer periods of time,
delivery under which, for various reasons, may be delayed, modified, or canceled. Further, we have historically generated a large portion of our business each quarter by orders that are sold and fulfilled within the same reporting period. Therefore, the amount of remaining obligations may not be a meaningful indicator of future results.
The following table provides information about remaining performance obligations for each of our operating segments:
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3. | NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2020 | | | | | | January 31, 2020 | | | | |
(in thousands) | | Customer Engagement | | Cyber Intelligence | | Total | | Customer Engagement | | Cyber Intelligence | | Total |
RPO: | | | | | | | | | | | | |
Expected to be recognized within 1 year | | $ | 363,496 | | | $ | 363,710 | | | $ | 727,206 | | | $ | 374,982 | | | $ | 356,677 | | | $ | 731,659 | |
Expected to be recognized in more than 1 year | | 113,340 | | | 197,729 | | | 311,069 | | | 117,497 | | | 225,056 | | | 342,553 | |
Total RPO | | $ | 476,836 | | | $ | 561,439 | | | $ | 1,038,275 | | | $ | 492,479 | | | $ | 581,733 | | | $ | 1,074,212 | |
3. NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net (loss) income per common share attributable to Verint Systems Inc. for the three and six months ended July 31, 2019April 30, 2020 and 2018:2019:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands, except per share amounts) | | 2020 | | 2019 |
Net (loss) income | | $ | (3,975) | | | $ | 3,761 | |
Net income attributable to noncontrolling interests | | 2,039 | | | 2,185 | |
Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 1,576 | |
Weighted-average shares outstanding: | | | | |
Basic | | 64,376 | | | 65,438 | |
Dilutive effect of employee equity award plans | | — | | | 1,650 | |
Dilutive effect of 1.50% convertible senior notes | | — | | | — | |
Dilutive effect of warrants | | — | | | — | |
Diluted | | 64,376 | | | 67,088 | |
Net (loss) income per common share attributable to Verint Systems Inc.: | | | | |
Basic | | $ | (0.09) | | | $ | 0.02 | |
Diluted | | $ | (0.09) | | | $ | 0.02 | |
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| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 12,271 |
| | $ | 22,924 |
| | $ | 16,032 |
| | $ | 21,699 |
|
Net income attributable to noncontrolling interests | | 1,713 |
| | 944 |
| | 3,898 |
| | 1,934 |
|
Net income attributable to Verint Systems Inc. | | $ | 10,558 |
| | $ | 21,980 |
| | $ | 12,134 |
| | $ | 19,765 |
|
Weighted-average shares outstanding: | | |
| | | | |
| | |
Basic | | 66,272 |
| | 64,694 |
| | 65,870 |
| | 64,314 |
|
Dilutive effect of employee equity award plans | | 1,247 |
| | 1,146 |
| | 1,468 |
| | 1,195 |
|
Dilutive effect of 1.50% convertible senior notes | | — |
| | — |
| | — |
| | — |
|
Dilutive effect of warrants | | — |
| | — |
| | — |
| | — |
|
Diluted | | 67,519 |
| | 65,840 |
| | 67,338 |
| | 65,509 |
|
Net income per common share attributable to Verint Systems Inc.: | | |
| |
|
| | |
| |
|
|
Basic | | $ | 0.16 |
| | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.31 |
|
Diluted | | $ | 0.16 |
| | $ | 0.33 |
| | $ | 0.18 |
| | $ | 0.30 |
|
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:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Common shares excluded from calculation: | | | | |
Stock options and restricted stock-based awards | | 1,491 | | | 606 | |
1.50% convertible senior notes | | 6,205 | | | 6,205 | |
Warrants | | 6,205 | | | 6,205 | |
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| | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Common shares excluded from calculation: | | |
| | |
| | | | |
Stock options and restricted stock-based awards | | 1,817 |
| | 401 |
| | 1,221 |
| | 325 |
|
1.50% convertible senior notes | | 6,205 |
| | 6,205 |
| | 6,205 |
| | 6,205 |
|
Warrants | | 6,205 |
| | 6,205 |
| | 6,205 |
| | 6,205 |
|
In periods for which we report a net loss attributable to Verint Systems Inc., basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.
Our 1.50% convertible senior notes (“Notes”) will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the Warrants (as defined in Note 7, “Long-Term Debt”) unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share.
Our Note Hedges (as defined in Note 7, “Long-Term Debt”) do not impact the calculation of diluted net income per share under the treasury stock method, because their effect would be anti-dilutive. However, in the event of an actual conversion of any or all of the Notes, the common shares that would be delivered to us under the Note Hedges would neutralize the dilutive effect of the common shares that we would issue under the Notes. As a result, actual conversion of any or all of the Notes would not increase our outstanding common stock. Up to 6,205,000 common shares could be issued upon exercise of the Warrants. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 7, “Long-Term Debt”.
On December 4, 2019, we announced that Valor Parent LP, an affiliate of Apax Partners, would invest up to $400 million in us, in the form of convertible preferred stock. On May 7, 2020, the initial purchase of $200 million of our Series A convertible preferred stock closed. As a result, the calculation of basic and diluted net income (loss) per common share will be impacted beginning in the second quarter of this current fiscal year ending January 31, 2021. Further details regarding the convertible preferred stock investment appear in Note 1, “Basis of Presentation and Significant Accounting Policies” under “Description of Business” and Note 16, “Subsequent Events”.
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of July 31, 2019April 30, 2020 and January 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2020 | | | | | | |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 411,926 | | | $ | — | | | $ | — | | | $ | 411,926 | |
Money market funds | | 144,745 | | | — | | | — | | | 144,745 | |
Total cash and cash equivalents | | $ | 556,671 | | | $ | — | | | $ | — | | | $ | 556,671 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 19,741 | | | $ | — | | | $ | — | | | $ | 19,741 | |
Total short-term investments | | $ | 19,741 | | | $ | — | | | $ | — | | | $ | 19,741 | |
|
| | | | | | | | | | | | | | | | |
| | July 31, 2019 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 383,109 |
| | $ | — |
| | $ | — |
| | $ | 383,109 |
|
Money market funds | | 5,437 |
| | — |
| | — |
| | 5,437 |
|
Total cash and cash equivalents | | $ | 388,546 |
| | $ | — |
| | $ | — |
| | $ | 388,546 |
|
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 25,590 |
| | $ | — |
| | $ | — |
| | $ | 25,590 |
|
Total short-term investments | | $ | 25,590 |
| | $ | — |
| | $ | — |
| | $ | 25,590 |
|
|
| | | | | | | | | | | | | | | | |
| | January 31, 2019 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 359,266 |
| | $ | — |
| | $ | — |
| | $ | 359,266 |
|
Money market funds | | 10,709 |
| | — |
| | — |
| | 10,709 |
|
Total cash and cash equivalents | | $ | 369,975 |
| | $ | — |
| | $ | — |
| | $ | 369,975 |
|
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 32,329 |
| | $ | — |
| | $ | — |
| | $ | 32,329 |
|
Total short-term investments | | $ | 32,329 |
| | $ | — |
| | $ | — |
| | $ | 32,329 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 31, 2020 | | | | | | |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 379,057 | | | $ | — | | | $ | — | | | $ | 379,057 | |
Money market funds | | 89 | | | — | | | — | | | 89 | |
Total cash and cash equivalents | | $ | 379,146 | | | $ | — | | | $ | — | | | $ | 379,146 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 20,215 | | | $ | — | | | $ | — | | | $ | 20,215 | |
Total short-term investments | | $ | 20,215 | | | $ | — | | | $ | — | | | $ | 20,215 | |
Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.
During the sixthree months ended July 31,April 30, 2020 and 2019, and 2018, proceeds from maturities and sales of short-term investments were $23.8$15.6 million and $7.2$3.0 million, respectively.
Six5. BUSINESS COMBINATIONS
Three Months Ended JulyApril 30, 2020
We did not complete any business combinations during the three months ended April 30, 2020.
Year Ended January 31, 20192020
During the six monthsyear ended JulyJanuary 31, 2019,2020, we completed twofour business combinations:
•On February 1, 2019, we completed the acquisition of a SaaS workforce optimization company focused on the small and medium-sized business (“SMB”) market as part of our strategy to expand our SMB portfolio. This company is beinghas been integrated into our Customer Engagement segment.
•On July 25, 2019, we completed the acquisition of a SaaS company focused on cloud-based knowledge management solutions as part of our strategy to add additional artificial intelligence and machine learning capabilities into our portfolio. This company has been integrated into our Customer Engagement segment.
•On December 18, 2019, we completed the acquisition of two software companies under common control focused on multi source intelligence and fusion analytics domains. These companies are being integrated into our Cyber Intelligence segment.
•On January 13, 2020, we completed the acquisition of a SaaS based company providing web and mobile session replay solutions. This company is being integrated into our Customer Engagement segment.
These business combinations were not individually material to our condensed consolidated financial statements.
The combined consideration for these business combinations was approximately $58.4$89.3 million including $53.2consisted of (i) $76.2 million of combined cash paid at the closings or shortly thereafter, partially offset by $4.2$2.4 million of cash acquired.acquired, resulting in net cash consideration at closing of $73.8 million; and (ii) the fair value of the contingent consideration arrangements described below of $15.3 million; offset by (iii) $2.1 million of other purchase price adjustments. For onethree of the business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately
$9.1 $23.5 million, contingent upon the achievement of certain performance targets over periods extending through January 2021. The2022, the fair value of these contingent consideration obligationswhich was estimated to be $5.2$15.3 million at the acquisition date. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. All ofOf the $34.4$50.4 million of goodwill associated with these business combinations, $39.1 million and $11.3 million was assigned to our Customer Engagement segment,and Cyber Intelligence segments, respectively, and $15.7 million of which is deductible for income tax purposes.
Revenue and net income (loss) attributable to these acquisitions for the six monthsyear ended JulyJanuary 31, 20192020 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $2.1$1.1 million and $3.1$1.0 million for the three and six months ended July 31,months ended April 30, 2020 and April 30, 2019, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the six months ended July 31,subsequent to April 30, 2019 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, goodwill, deferred income taxes, and reserves for uncertain income tax positions. Given one of the transaction's proximity to the end of the current reporting period, we recorded a provisional fair value estimate of assets acquired and liabilities assumed based on observation of industry trends and preliminary data, and expect to finalize the valuation and useful life determination for the acquired customer relationships, developed technology, and trade names during the third quarter. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be adjusted to reflect new information obtained about the facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the six monthsyear ended JulyJanuary 31, 2019:2020 including adjustments identified subsequent to the valuation date, none of which were material:
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Price: | | |
Cash | | $ | 53,209 |
|
Fair value of contingent consideration | | 5,200 |
|
Total purchase price | | $ | 58,409 |
|
| | |
Allocation of Purchase Price: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 1,288 |
|
Other current assets, including cash acquired | | 6,021 |
|
Other assets | | 3,283 |
|
Current and other liabilities | | (4,956 | ) |
Contract liabilities - current and long-term | | (2,960 | ) |
Deferred income taxes | | (1,239 | ) |
Net tangible assets | | 1,437 |
|
Identifiable intangible assets: | | |
Customer relationships | | 10,000 |
|
Developed technology | | 11,000 |
|
Trademarks and trade names | | 1,600 |
|
Total identifiable intangible assets | | 22,600 |
|
Goodwill | | 34,372 |
|
Total purchase price allocations | | $ | 58,409 |
|
| | | | | | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | | |
Cash | | $ | 76,198 | |
Fair value of contingent consideration | | 15,253 | |
Other purchase price adjustments | | (2,137) | |
Total purchase prices | | $ | 89,314 | |
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 3,950 | |
Other current assets, including cash acquired | | 14,394 | |
Other assets | | 6,556 | |
Current and other liabilities | | (8,531) | |
Contract liabilities - current and long-term | | (3,794) | |
Deferred income taxes | | (4,061) | |
Net tangible assets | | 8,514 | |
Identifiable intangible assets: | | |
Customer relationships | | 13,299 | |
Developed technology | | 14,443 | |
Trademarks and trade names | | 1,367 | |
Non-compete agreements | | 1,307 | |
Total identifiable intangible assets | | 30,416 | |
Goodwill | | 50,384 | |
Total purchase prices allocation | | $ | 89,314 | |
For these acquisitions, customer relationships, developed technology, and trademarks and trade names, and non-compete agreements were assigned estimated useful lives of from sevenfive years to nine years, four years to five years, and fivethree years respectively, the weighted average of which is approximately 6.4 years.
Year Ended January 31, 2019
ForeSee Results, Inc.
On December 19, 2018, we completed the acquisition of all of the outstanding shares of ForeSee Results, Inc. and all of the outstanding membership interests of RSR Acquisition LLC (together, “ForeSee”), a leading cloud Voice of the Customer (“VOC”) vendor with software solutions designed to measure and benchmark a 360-degree view of the customer across every touch point. ForeSee is based in Ann Arbor, Michigan.
The purchase price of $65.2 million consisted of (i) $58.9 million of cash paid at closing, funded from cash on hand, partially offset by $0.4 million of ForeSee’s cash received in the acquisition, resulting in net cash consideration at closing of $58.5 million; (ii) a post-closing deferred purchase price adjustment of $6.0 million which was paid in April 2019; and (iii) $0.3 million of other purchase price adjustments. The purchase price is subject to customary purchase price adjustments related to the final determination of ForeSee’s cash, net working capital, transaction expenses, and taxes as of December 19, 2018. The acquired business is being integrated into our Customer Engagement operating segment.
The purchase price for ForeSee was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts the expected future cash flows to present value using estimates and assumptions determined by management.
Among the factors contributing to the recognition of goodwill as a component of the ForeSee purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. The $36.0 million of goodwill has been assigned to our Customer Engagement segment. For income tax purposes, $1.1 million of this goodwill is deductible and $34.9 million is not deductible.
In connection with the purchase price allocation for ForeSee, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculated fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which
approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $9.8 million of current and long-term contract liabilities, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not been received, we recorded a $10.2 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $5.5 million of which is included within prepaid expenses and other current assets, and $4.7 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.
Transaction and related costs directly related to the acquisition of ForeSee, consisting primarily of professional fees and integration expenses, were $0.7 million and $2.0 million for the three and six months ended July 31, 2019, respectively, and were expensed as incurred and are included in selling, general and administrative expenses.
The following table sets forth the components and the allocation of the purchase price for our acquisition of ForeSee:
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Price: | | |
Cash | | $ | 58,901 |
|
Deferred purchase price consideration | | 6,000 |
|
Other purchase price adjustments | | 262 |
|
Total purchase price | | $ | 65,163 |
|
| | |
Allocation of Purchase Price: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 7,245 |
|
Other current assets, including cash acquired | | 8,059 |
|
Other assets | | 6,075 |
|
Current and other liabilities | | (12,868 | ) |
Contract liabilities - current and long-term | | (9,821 | ) |
Deferred income taxes | | (12,207 | ) |
Net tangible liabilities | | (13,517 | ) |
Identifiable intangible assets: | | |
Customer relationships | | 19,400 |
|
Developed technology | | 20,000 |
|
Trademarks and trade names | | 3,300 |
|
Total identifiable intangible assets | | 42,700 |
|
Goodwill | | 35,980 |
|
Total purchase price allocations | | $ | 65,163 |
|
The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of five years, and nine years, four years, and fourthree years, respectively, the weighted average of which is approximately 6.1 years. The acquired identifiable assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Other Business Combinations
During the year ended January 31, 2019, we completed three other business combinations:
On July 18, 2018, we completed the acquisition of a business that has been integrated into our Customer Engagement operating segment.
| |
• | On November 8, 2018, we completed the acquisition of a business that has been integrated into our Cyber Intelligence operating segment, in which we had a $2.2 million, or approximately 19%, noncontrolling equity investment prior to the acquisition.
|
On November 9, 2018, we acquired certain technology and other assets for use in our Customer Engagement operating segment in a transaction that qualified as a business combination.
These business combinations were not individually material to our consolidated financial statements.
The combined consideration for these business combinations was approximately $51.3 million, including $33.1 million of combined cash paid at the closings. For two of these business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $35.5 million, contingent upon the achievement of certain performance targets over periods extending through January 2021. The fair value of these contingent consideration obligations was estimated to be $15.9 million at the applicable acquisition dates. The acquisition date fair value of our previously held equity interest was approximately $2.2 million and was included in the measurement of the consideration transferred. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $25.1 million of goodwill associated with these business combinations, $14.3 million and $10.8 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively, and for income tax purposes is not deductible.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $0.2 million and $0.4 million for the three and six months ended July 31, 2019. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed subsequent to July 31, 2018 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes, and reserves for uncertain income tax positions.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations, other than ForeSee, completed during the year ended January 31, 2019:
|
| | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | |
Cash | | $ | 33,138 |
|
Fair value of contingent consideration | | 15,875 |
|
Fair value of previously held equity interest | | 2,239 |
|
Total purchase prices | | $ | 51,252 |
|
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 1,897 |
|
Other current assets, including cash acquired | | 6,901 |
|
Other assets | | 9,432 |
|
Current and other liabilities | | (2,151 | ) |
Contract liabilities - current and long-term | | (771 | ) |
Deferred income taxes | | (7,914 | ) |
Net tangible assets | | 7,394 |
|
Identifiable intangible assets: | | |
Customer relationships | | 7,521 |
|
Developed technology | | 10,692 |
|
Trademarks and trade names | | 500 |
|
Total identifiable intangible assets | | 18,713 |
|
Goodwill | | 25,145 |
|
Total purchase price allocations | | $ | 51,252 |
|
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from seven years to 10 years, 3 years to 5 years, and 4 years, respectively, the weighted average of which is approximately 6.6 years.
Other Business Combination Information
The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general, and administrative expenses in our condensed consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
For the three months ended July 31,April 30, 2020 and 2019, and 2018, we recorded benefits of $0.8 million and $3.9 million, respectively, and for the six months ended July 31, 2019 and 2018, we recorded a chargebenefit of $0.4$4.8 million and a benefitcharge of $4.7$1.2 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair values of the remaining contingent consideration obligations associated with business combinations was $43.0$35.0 million at July 31, 2019,April 30, 2020, of which $27.2$20.4 million was recorded within accrued expenses and other current liabilities, and $15.8$14.6 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $17.4$3.0 million and $9.0$6.4 million for the three months ended July 31,April 30, 2020 and 2019, and respectively.
2018, respectively, and $23.7 million and $12.0 million for the six months ended July 31, 2019 and 2018, respectively.
6. INTANGIBLE ASSETS AND GOODWILL | |
6. | INTANGIBLE ASSETS AND GOODWILL
|
Acquisition-related intangible assets consisted of the following as of July 31, 2019April 30, 2020 and January 31, 2019:2020:
| | | | July 31, 2019 | | | April 30, 2020 | |
(in thousands) | | Cost | | Accumulated Amortization | | Net | (in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | |
| | |
| | |
| Intangible assets with finite lives: | | | | | | |
Customer relationships | | $ | 453,565 |
| | $ | (307,408 | ) | | $ | 146,157 |
| Customer relationships | | $ | 458,725 | | | $ | (330,492) | | | $ | 128,233 | |
Acquired technology | | 291,273 |
| | (229,962 | ) | | 61,311 |
| Acquired technology | | 291,603 | | | (243,894) | | | 47,709 | |
Trade names | | 14,246 |
| | (6,382 | ) | | 7,864 |
| Trade names | | 12,823 | | | (7,411) | | | 5,412 | |
Distribution network | | 4,440 |
| | (4,440 | ) | | — |
| Distribution network | | 4,440 | | | (4,440) | | | — | |
Non-competition agreements | | Non-competition agreements | | 1,307 | | | (158) | | | 1,149 | |
Total intangible assets | | $ | 763,524 |
| | $ | (548,192 | ) | | $ | 215,332 |
| Total intangible assets | | $ | 768,898 | | | $ | (586,395) | | | $ | 182,503 | |
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2020 | | | | |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | | | | | |
Customer relationships | | $ | 465,130 | | | $ | (328,069) | | | $ | 137,061 | |
Acquired technology | | 294,841 | | | (241,585) | | | 53,256 | |
Trade names | | 12,957 | | | (6,783) | | | 6,174 | |
Distribution network | | 4,440 | | | (4,440) | | | — | |
Non-competition agreements | | 1,307 | | | (34) | | | 1,273 | |
Total intangible assets | | $ | 778,675 | | | $ | (580,911) | | | $ | 197,764 | |
|
| | | | | | | | | | | | |
| | January 31, 2019 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | |
| | |
| | |
|
Customer relationships | | $ | 452,918 |
| | $ | (299,549 | ) | | $ | 153,369 |
|
Acquired technology | | 285,230 |
| | (221,145 | ) | | 64,085 |
|
Trade names | | 12,859 |
| | (5,130 | ) | | 7,729 |
|
Distribution network | | 4,440 |
| | (4,440 | ) | | — |
|
Total intangible assets | | $ | 755,447 |
| | $ | (530,264 | ) | | $ | 225,183 |
|
We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic to assess whether a triggering event had occurred that would result in a potential impairment of our indefinite-lived intangible assets. Based on this assessment, we concluded that a triggering event has not occurred which would require further impairment testing to be performed.
The following table presents net acquisition-related intangible assets by reportable segment as of July 31, 2019April 30, 2020 and January 31, 2019: 2020:
|
| | | | | | | | |
| | July 31, | | January 31, |
(in thousands) |
| 2019 |
| 2019 |
Customer Engagement |
| $ | 210,838 |
|
| $ | 218,738 |
|
Cyber Intelligence |
| 4,494 |
|
| 6,445 |
|
Total |
| $ | 215,332 |
|
| $ | 225,183 |
|
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
(in thousands) | | 2020 | | 2020 |
Customer Engagement | | $ | 175,241 | | | $ | 189,896 | |
Cyber Intelligence | | 7,262 | | | 7,868 | |
Total | | $ | 182,503 | | | $ | 197,764 | |
Total amortization expense recorded for acquisition-related intangible assets was $13.2$12.7 million and $13.0$14.4 million for the three months ended July 31,April 30, 2020 and 2019, and 2018, respectively, and $27.6 million and $28.1 million for the six months ended July 31, 2019 and 2018, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
|
| | | | |
(in thousands) |
| |
|
Years Ending January 31, |
| Amount |
2020 (remainder of year) |
| $ | 27,320 |
|
2021 |
| 47,880 |
|
2022 |
| 44,489 |
|
2023 |
| 36,613 |
|
2024 |
| 26,732 |
|
2025 and thereafter |
| 32,298 |
|
Total |
| $ | 215,332 |
|
| | | | | | | | |
(in thousands) | | |
Years Ending January 31, | | Amount |
2021 (remainder of year) | | $ | 36,856 | |
2022 | | 45,885 | |
2023 | | 37,978 | |
2024 | | 27,805 | |
2025 | | 11,754 | |
2026 and thereafter | | 22,225 | |
Total | | $ | 182,503 | |
Goodwill activity for the sixthree months ended July 31, 2019,April 30, 2020, in total and by reportable segment, was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Reportable Segment | | |
(in thousands) | | Total | | Customer Engagement | | Cyber Intelligence |
Three Months Ended April 30, 2020: | | | | | | |
Goodwill, gross, at January 31, 2020 | | $ | 1,536,076 | | | $ | 1,367,111 | | | $ | 168,965 | |
Accumulated impairment losses through January 31, 2020 | | (66,865) | | | (56,043) | | | (10,822) | |
Goodwill, net, at January 31, 2020 | | 1,469,211 | | | 1,311,068 | | | 158,143 | |
Foreign currency translation and other | | (16,420) | | | (15,764) | | | (656) | |
Business combinations, including adjustments to prior period acquisitions | | (357) | | | — | | | (357) | |
Goodwill, net, at April 30, 2020 | | $ | 1,452,434 | | | $ | 1,295,304 | | | $ | 157,130 | |
| | | | | | |
Balance at April 30, 2020: | | | | | | |
Goodwill, gross, at April 30, 2020 | | $ | 1,519,299 | | | $ | 1,351,347 | | | $ | 167,952 | |
Accumulated impairment losses through April 30, 2020 | | (66,865) | | | (56,043) | | | (10,822) | |
Goodwill, net, at April 30, 2020 | | $ | 1,452,434 | | | $ | 1,295,304 | | | $ | 157,130 | |
We evaluated whether there has been a change in circumstances as of April 30, 2020 and as of the date of this filing in response to the economic impacts seen globally from COVID-19. The valuation methodology to determine the fair value of the reporting units is sensitive to management's forecasts of future revenue, profitability and market conditions. At this time, the impact of COVID-19 on our forecasts is uncertain and increases the subjectivity that will be involved in evaluating goodwill for potential impairment. We do expect declines in our reporting unit fair values as a result of delayed or reduced demand for our products and services, driving lower revenue and operating income across our businesses. However, given the significant difference between the reporting unit fair values and their carrying values in the most recent quantitative analyses completed as of November 1, 2019, as well as expected long-term recovery within all reporting units, management does not believe that these events were severe enough to result in an impairment trigger. We will continue to monitor the environment to determine whether the impacts to our reporting units represent an event or change in circumstances that may trigger a need to assess for impairment.
|
| | | | | | | | | | | | |
| | | | Reportable Segment |
(in thousands) | | Total | | Customer Engagement | | Cyber Intelligence |
Six Months Ended July 31, 2019: | | | | | | |
Goodwill, gross, at January 31, 2019 | | $ | 1,484,346 |
| | $ | 1,326,370 |
| | $ | 157,976 |
|
Accumulated impairment losses through January 31, 2019 | | (66,865 | ) | | (56,043 | ) | | (10,822 | ) |
Goodwill, net, at January 31, 2019 | | 1,417,481 |
| | 1,270,327 |
| | 147,154 |
|
Business combinations, including adjustments to prior period acquisitions | | 36,652 |
| | 36,652 |
| | — |
|
Foreign currency translation and other | | (24,051 | ) | | (23,820 | ) | | (231 | ) |
Goodwill, net, at July 31, 2019 | | $ | 1,430,082 |
| | $ | 1,283,159 |
| | $ | 146,923 |
|
| | | | | | |
Balance at July 31, 2019: | |
|
| | |
| | |
|
Goodwill, gross, at July 31, 2019 | | $ | 1,496,947 |
| | $ | 1,339,202 |
| | $ | 157,745 |
|
Accumulated impairment losses through July 31, 2019 | | (66,865 | ) | | (56,043 | ) | | (10,822 | ) |
Goodwill, net, at July 31, 2019 | | $ | 1,430,082 |
| | $ | 1,283,159 |
| | $ | 146,923 |
|
No events or circumstances indicating the potential for goodwill impairment were identified during the six months ended July 31, 2019.
7. LONG-TERM DEBT
The following table summarizes our long-term debt at July 31, 2019April 30, 2020 and January 31, 2019:2020:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
(in thousands) | | 2020 | | 2020 |
1.50% Convertible Senior Notes | | $ | 400,000 | | | $ | 400,000 | |
June 2017 Term Loan | | 413,313 | | | 414,375 | |
Borrowings under 2017 Revolving Credit Facility | | 200,000 | | | 45,000 | |
Less: Unamortized debt discounts and issuance costs | | (18,673) | | | (22,327) | |
Total debt | | 994,640 | | | 837,048 | |
Less: current maturities | | 4,250 | | | 4,250 | |
Long-term debt | | $ | 990,390 | | | $ | 832,798 | |
|
| | | | | | | | |
| | July 31, | | January 31, |
(in thousands) | | 2019 | | 2019 |
| | | | |
1.50% Convertible Senior Notes | | $ | 400,000 |
| | $ | 400,000 |
|
2017 Term Loan | | 416,500 |
| | 418,625 |
|
Other debt | | 13 |
| | 92 |
|
Less: Unamortized debt discounts and issuance costs | | (29,661 | ) | | (36,589 | ) |
Total debt | | 786,852 |
| | 782,128 |
|
Less: current maturities | | 4,263 |
| | 4,343 |
|
Long-term debt | | $ | 782,589 |
| | $ | 777,785 |
|
Current maturities of long-term debt are reported within accrued expenses and other current liabilities on our condensed consolidated balance sheet.
1.50% Convertible Senior Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021 (“Notes”), unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under a prior credit agreement.
The Notes are unsecured and are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods. If converted, we currently intend to pay cash in
respect of the principal amount of the Notes. We currently expect to refinance the Notes at or prior to maturity with new convertible notes or other debt.
The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the other specified conditions for conversion have been satisfied.
As of July 31, 2019,April 30, 2020, the Notes were not convertible.
In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the “debt discount”) is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component of the Notes are presented as a reduction of long-term debt and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at July 31, 2019.April 30, 2020.
As of July 31, 2019,April 30, 2020, the carrying value of the debt component was $373.7$384.1 million, which is net of unamortized debt discount and issuance costs of $24.0$14.5 million and $2.3$1.4 million, respectively. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the Notes was approximately 5.29% at July 31, 2019.April 30, 2020.
Based on the closing market price of our common stock on July 31, 2019,April 30, 2020, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of July 31, 2019,April 30, 2020, 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 July 31, 2019,April 30, 2020, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreements
2017 Credit Agreement
On June 29, 2017, we entered into a new credit agreement (the “2017 Credit Agreement”) with certain lenders and terminated a prior credit agreement.
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”) and a $300.0 million revolving credit facility maturing on June 29, 2022 (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement. The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility will be accelerated to March 1, 2021 if on such date any Notes remain outstanding.
The majority of the proceeds from the 2017 Term Loan were used to repay all outstanding terms loans under our prior credit agreement.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million. This discount is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
On January 31, 2018, we entered into an amendment to the 2017 Credit Agreement (the “2018 Amendment”) providing for, among other things, a reduction of the interest rate margins on the 2017 Term Loan from 2.25% to 2.00% for Eurodollar loans,
and from 1.25% to 1.00% for ABR loans. The vast majority of the impact of the 2018 Amendment was accounted for as a debt modification. For the portion of the 2017 Term Loan which was considered extinguished and replaced by new loans, we wrote off $0.2 million of unamortized deferred debt issuance costs as a loss on early retirement of debt during the three months ended January 31, 2018. The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining term of the 2017 Term Loan.
On June 8, 2020, we entered into a second amendment to the 2017 Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, our Notes will not be deemed to be outstanding if such Notes are cash collateralized in accordance with the 2017 Credit Agreement, as amended, for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above. We currently intend to cash collateralize, or otherwise refinance or repurchase, the Notes prior to their maturity. Refer to Note 16, “Subsequent Events” for further details regarding the Second Amendment to the 2017 Credit Agreement.
As of April 30, 2020, the interest rate on the 2017 Term Loan was 3.37%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 3.55% at April 30, 2020. As of January 31, 2020 the interest rate on 2017 Term Loan was 3.85%.
Borrowings under the 2017 Revolving Credit Facility were $200.0 million at April 30, 2020, which is included in long-term debt on our condensed consolidated balance sheet. For loansborrowings under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the “Leverage Ratio”"Leverage Ratio").
As of July 31, 2019,April 30, 2020, the weighted average interest rate on the 2017 Term Loanour revolving credit facility borrowings was 4.40%2.33%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 4.58% at July 31, 2019. As of January 31, 2019 the interest rate on 2017 Term Loan was 4.52%.
WeIn addition, we are required to pay a commitment fee with respect to unused availability under the 2017 Revolving Credit Facility at a raterates per annum determined by reference to our Leverage Ratio. The proceeds of borrowings under the 2017 Revolving Credit Facility were used to fund a portion of our stock repurchase program or will be used for general corporate purposes. Please refer to Note 9, “Stockholders’ Equity”, for more information regarding the stock repurchase program.
The 2017 Term Loan requires quarterly principal payments of approximately $1.1 million, which commenced on August 1, 2017, with the remaining balance due on June 29, 2024. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2017 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
2017 Credit Agreement Issuance Costs
We incurred debt issuance costs of approximately $6.8 million in connection with the 2017 Credit Agreement, of which $4.1 million were associated with the 2017 Term Loan, and $2.7 million were associated with the 2017 Revolving Credit Facility, which were deferred and are being amortized as interest expense over the terms of the facilities under the 2017 Credit Agreement. As noted previously, during the three months ended January 31, 2018, we wrote off $0.2 million of deferred debt issuance costs associated with the 2017 Term Loan as a result of the 2018 Amendment. Deferred debt issuance costs associated with the 2017 Term Loan are being amortized using the effective interest rate method, and deferred debt issuance costs associated with the 2017 Revolving Credit Facility are being amortized on a straight-line basis.
Future Principal Payments on Term Loan
As of July 31, 2019,April 30, 2020, future scheduled principal payments on the 2017 Term Loan were as follows:
|
| | | | |
(in thousands) | | |
Years Ending January 31, | | Amount |
2020 (remainder of year) | | $ | 2,125 |
|
2021 | | 4,250 |
|
2022 | | 4,250 |
|
2023 | | 4,250 |
|
2024 | | 4,250 |
|
2025 and thereafter | | 397,375 |
|
Total | | $ | 416,500 |
|
| | | | | | | | |
(in thousands) | | |
Years Ending January 31, | | Amount |
2021 (remainder of year) | | $ | 3,188 | |
2022 | | 4,250 | |
2023 | | 4,250 | |
2024 | | 4,250 | |
2025 | | 397,375 | |
Total | | $ | 413,313 | |
Interest Expense
The following table presents the components of interest expense incurred on the Notes and on borrowings under our credit agreements for the three months ended July 31, 2019April 30, 2020 and 2018:2019:
| | | | Three Months Ended July 31, | | Six Months Ended July 31, | | | Three Months Ended April 30, | |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (in thousands) | | 2020 | | 2019 |
1.50% Convertible Senior Notes: | | | | | | | | | 1.50% Convertible Senior Notes: | | | | |
Interest expense at 1.50% coupon rate | | $ | 1,500 |
| | $ | 1,500 |
| | $ | 3,000 |
| | $ | 3,000 |
| Interest expense at 1.50% coupon rate | | $ | 1,500 | | | $ | 1,500 | |
Amortization of debt discount | | 3,102 |
| | 2,943 |
| | 6,163 |
| | 5,847 |
| Amortization of debt discount | | 3,226 | | | 3,061 | |
Amortization of deferred debt issuance costs | | 292 |
| | 278 |
| | 581 |
| | 552 |
| Amortization of deferred debt issuance costs | | 304 | | | 289 | |
Total Interest Expense - 1.50% Convertible Senior Notes | | $ | 4,894 |
| | $ | 4,721 |
| | $ | 9,744 |
| | $ | 9,399 |
| Total Interest Expense - 1.50% Convertible Senior Notes | | $ | 5,030 | | | $ | 4,850 | |
| | | | | | | | | | | | |
Borrowings under Credit Agreements: | | | | | | | | | Borrowings under Credit Agreements: | |
Interest expense at contractual rates | | $ | 4,730 |
| | $ | 4,733 |
| | $ | 9,375 |
| | $ | 8,599 |
| Interest expense at contractual rates | | $ | 4,513 | | | $ | 4,645 | |
Impact of interest rate swap | | Impact of interest rate swap | | 591 | | | — | |
Amortization of debt discounts | | 17 |
| | 17 |
| | 33 |
| | 33 |
| Amortization of debt discounts | | 18 | | | 16 | |
Amortization of deferred debt issuance costs | | 401 |
| | 392 |
| | 775 |
| | 770 |
| Amortization of deferred debt issuance costs | | 391 | | | 374 | |
Total Interest Expense - Borrowings under Credit Agreements | | $ | 5,148 |
| | $ | 5,142 |
| | $ | 10,183 |
| | $ | 9,402 |
| Total Interest Expense - Borrowings under Credit Agreements | | $ | 5,513 | | | $ | 5,035 | |
8. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION | |
8. | SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION |
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of July 31, 2019April 30, 2020 and January 31, 2019: 2020:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
(in thousands) | | 2020 | | 2020 |
Raw materials | | $ | 12,422 | | | $ | 9,628 | |
Work-in-process | | 4,943 | | | 4,749 | |
Finished goods | | 7,665 | | | 6,118 | |
Total inventories | | $ | 25,030 | | | $ | 20,495 | |
|
| | | | | | | | |
| | July 31, | | January 31, |
(in thousands) | | 2019 | | 2019 |
Raw materials | | $ | 11,768 |
| | $ | 10,875 |
|
Work-in-process | | 6,893 |
| | 5,567 |
|
Finished goods | | 9,798 |
| | 8,510 |
|
Total inventories | | $ | 28,459 |
| | $ | 24,952 |
|
Condensed Consolidated Statements of Operations
Other income (expense),expense, net consisted of the following for the three and six months ended July 31, 2019April 30, 2020 and 2018:2019:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Foreign currency losses, net | | $ | (3,254) | | | $ | (1,187) | |
Gains on derivative financial instruments, net | | 1,014 | | | 549 | |
Other, net | | 10 | | | (152) | |
Total other expense, net | | $ | (2,230) | | | $ | (790) | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency gains (losses), net | | $ | 774 |
| | $ | (2,079 | ) | | $ | (412 | ) | | $ | (3,914 | ) |
Gains on derivative financial instruments, net | | 179 |
| | 1,221 |
| | 728 |
| | 2,709 |
|
Other, net | | (44 | ) | | (383 | ) | | (197 | ) | | (500 | ) |
Total other income (expense), net | | $ | 909 |
| | $ | (1,241 | ) | | $ | 119 |
| | $ | (1,705 | ) |
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the sixthree months ended July 31, 2019April 30, 2020 and 2018:2019:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Cash paid for interest | | $ | 5,302 | | | $ | 4,673 | |
Cash payments (refunds) of income taxes, net | | $ | 9,557 | | | $ | (1,513) | |
Cash payments for operating leases | | $ | 6,277 | | | $ | 6,841 | |
Non-cash investing and financing transactions: | | | | |
Liabilities for contingent consideration in business combinations | | $ | — | | | $ | 5,200 | |
Finance leases of property and equipment | | $ | 760 | | | $ | — | |
Accrued but unpaid purchases of property and equipment | | $ | 3,295 | | | $ | 3,301 | |
Inventory transfers to property and equipment | | $ | 153 | | | $ | 73 | |
|
| | | | | | | | |
| | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 |
Cash paid for interest | | $ | 12,410 |
| | $ | 10,233 |
|
Cash payments of income taxes, net | | $ | 16,419 |
| | $ | 16,846 |
|
Non-cash investing and financing transactions: | | |
| | |
Accrued but unpaid purchases of property and equipment | | $ | 4,505 |
| | $ | 3,261 |
|
Inventory transfers to property and equipment | | $ | 463 |
| | $ | 944 |
|
Liabilities for contingent consideration in business combinations, including measurement period adjustments | | $ | 5,200 |
| | $ | 10,569 |
|
Finance leases of property and equipment | | $ | 377 |
| | $ | 62 |
|
21
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the sixthree months ended July 31, 2019April 30, 2020 and 2018.2019. Under the terms of our 2017 Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.
ShareStock Repurchase Program
On March 29, 2016,December 4, 2019, we announced that our board of directors had authorized a common stock repurchase program ofwhereby we may repurchase up to $150.0$300 million of common stock over two years. This program expiredthe period ending on March 29, 2018.February 1, 2021. We made a total of $46.9$34.0 million in repurchases under the program.program during the three months ended April 30, 2020 and $116.1 million of repurchases during the year ended January 31, 2020. Due to the uncertainty surrounding the impact of the COVID-19 pandemic, we will consider further repurchases under the stock repurchase program based on economic and market conditions as they evolve.
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost, but may from time to time be retired. We periodically purchase treasury stock from directors, officers, and other employees to facilitate income tax withholding by us or the payment of required income taxes by such holders in connection with the vesting of equity awards.
During the sixthree months ended July 31,April 30, 2020, we repurchased approximately 613,000 shares of treasury stock for a cost of $34.0 million under the share repurchase described above. During the three months ended April 30, 2019, we repurchased approximately 8,000 shares of treasury stock for a cost of $0.5 million to facilitate income tax withholding and payment requirements upon vesting of equity awards. During the six months ended July 31, 2018, we acquired approximately 4,000 shares of stock in a nonmonetary transaction valued at $0.2 million.
At July 31, 2019,April 30, 2020, we held approximately 1,673,0004,404,000 shares of treasury stock with a cost of $58.1$208.1 million. At January 31, 2019,2020, we held approximately 1,665,0003,791,000 shares of treasury stock with a cost of $57.6$174.1 million.
Issuance of Convertible Preferred Stock
On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we announced that an affiliate of Apax Partners would invest up to $400 million in us, in the form of convertible preferred stock. Under the terms of the Investment Agreement, the Apax Investor initially purchased $200 million of our Series A convertible preferred stock, which closed on May 7, 2020. Please refer to Note 16, “Subsequent Events” for additional information regarding the closing of the initial tranche.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income (loss) as presented in our condensed consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the sixthree months ended July 31, 2019:
April 30, 2020:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges | | Unrealized Loss on Interest Rate Swap Designated as Hedge | | Foreign Currency Translation Adjustments | | Total |
Accumulated other comprehensive loss at January 31, 2019 | | $ | (981 | ) | | $ | (3,043 | ) | | $ | (141,201 | ) | | $ | (145,225 | ) |
Other comprehensive income (loss) before reclassifications | | 1,780 |
| | (5,181 | ) | | (27,416 | ) | | (30,817 | ) |
Amounts reclassified out of accumulated other comprehensive income (loss) | | (845 | ) | | — |
| | — |
| | (845 | ) |
Net other comprehensive income (loss) | | 2,625 |
| | (5,181 | ) | | (27,416 | ) | | (29,972 | ) |
Accumulated other comprehensive income (loss) at July 31, 2019 | | $ | 1,644 |
| | $ | (8,224 | ) | | $ | (168,617 | ) | | $ | (175,197 | ) |
22
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges | | Unrealized Loss on Interest Rate Swap Designated as Hedge | | Foreign Currency Translation Adjustments | | Total |
Accumulated other comprehensive income (loss) at January 31, 2020 | | $ | 626 | | | $ | (10,528) | | | $ | (141,963) | | | $ | (151,865) | |
Other comprehensive loss before reclassifications | | (829) | | | (5,949) | | | (20,640) | | | (27,418) | |
Amounts reclassified out of accumulated other comprehensive income (loss) | | (46) | | | (463) | | | — | | | (509) | |
Net other comprehensive loss | | (783) | | | (5,486) | | | (20,640) | | | (26,909) | |
Accumulated other comprehensive loss at April 30, 2020 | | $ | (157) | | | $ | (16,014) | | | $ | (162,603) | | | $ | (178,774) | |
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 six months ended July 31,April 30, 2020 and 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | |
(in thousands) | | 2020 | | 2019 | | Location |
Unrealized losses on derivative financial instruments: | | | | | | |
Foreign currency forward contracts | | $ | (3) | | | | $ | (72) | | | Cost of product revenue |
| | (5) | | | | (84) | | | Cost of service and support revenue |
| | (27) | | | | (472) | | | Research and development, net |
| | (17) | | | | (311) | | | Selling, general and administrative |
| | (52) | | | (939) | | | Total, before income taxes |
| | 6 | | | 94 | | | Benefit from income taxes |
| | $ | (46) | | | $ | (845) | | | Total, net of income taxes |
| | | | | | |
Interest rate swap agreement | | $ | (591) | | | $ | — | | | Interest expense |
| | (591) | | | — | | | Total, before income taxes |
| | 128 | | | — | | | Benefit from income taxes |
| | $ | (463) | | | $ | — | | | Total, net of income taxes |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, | | |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Location |
Unrealized losses on derivative financial instruments: | | | | | | | | | | |
Foreign currency forward contracts | | $ | — |
| | $ | (125 | ) | | $ | (72 | ) | | $ | (88 | ) | | Cost of product revenue |
| | — |
| | (134 | ) | | (84 | ) | | (94 | ) | | Cost of service and support revenue |
| | — |
| | (712 | ) | | (472 | ) | | (492 | ) | | Research and development, net |
| | — |
| | (442 | ) | | (311 | ) | | (306 | ) | | Selling, general and administrative |
| | — |
| | (1,413 | ) | | (939 | ) | | (980 | ) | | Total, before income taxes |
| | — |
| | 141 |
| | 94 |
| | 98 |
| | Benefit for income taxes |
| | $ | — |
| | $ | (1,272 | ) | | $ | (845 | ) | | $ | (882 | ) | | Total, net of income taxes |
10. INCOME TAXES
Our interim (benefit) 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 July 31, 2019,April 30, 2020, we recorded an income tax benefit of $4.5$1.8 million on a pre-tax incomeloss of $7.8$5.7 million, which represented a negativean effective income tax rate of 58.0%30.7%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, offset by lower statutory rates in several foreign jurisdictions and a netdeferred tax benefit of $6.7 million recorded in relationdue to changes in unrecognized incomea tax benefits and other items as a result of an audit settlementrate change in a foreign jurisdiction andjurisdiction.
For the three months ended April 30, 2019, we recorded an income tax provision of $1.4 million on pre-tax income of $5.2 million, which represented an effective income tax rate of 27.3%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, offset by lower statutory rates in several foreign jurisdictions. Excluding the income tax benefit attributable to the audit settlement, the result was an income tax provision of $2.2 million on pre-tax income of $7.8 million, resulting in an effective tax rate of 27.8%.
For the three months ended July 31, 2018, we recorded an income tax benefit of $3.7 million on pre-tax income of $19.2 million, which represented a negative effective income tax rate of 19.4%. We maintained valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions. In connection with an acquisition in our Customer Engagement segment during the second quarter, we recorded deferred income tax liabilities primarily attributable to acquired
intangible assets to the extent the amortization would 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 expected 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 of $7.7 million and not as a component of the acquisition accounting. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances. Our pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record tax benefits were significantly less than the pre-tax income in jurisdictions where we record tax provisions. Excluding the income tax benefit attributable to the valuation allowance release, the result was an income tax provision of $4.0 million on pre-tax income of $19.2 million, resulting in an effective tax rate of 20.9%.
For the six months ended July 31, 2019, we recorded an income tax benefit of $3.1 million on pre-tax income of $12.9 million, which represented a negative effective income tax rate of 24.0%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to a net tax benefit of $6.7 million recorded in relation to changes in unrecognized income tax benefits and other items as a result of an audit settlement in a foreign jurisdiction and the impact of U.S. taxation of certain foreign activities, offset by lower statutory rates in several foreign jurisdictions. Excluding the income tax benefit attributable to the audit settlement, the result was an income tax provision of $3.6 million on pre-tax income of $12.9 million, resulting in an effective tax rate of 27.6%.
For the six months ended July 31, 2018, we recorded an income tax benefit of $3.4 million on pre-tax income of $18.3 million, which represented a negative effective income tax rate of 18.9%. In connection with an acquisition in our Customer Engagement segment, discussed in more detail above, we reduced the valuation allowance on our U.S. federal and certain state deferred income tax assets resulting in a discrete income tax benefit of $7.7 million. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintained valuation allowances. Our pre-tax losses in domestic and foreign jurisdictions where we maintained valuation allowances and did not record tax benefits were significantly less than the pre-tax income in jurisdictions where we recorded tax provisions. Excluding the income tax benefit attributable to the valuation allowance release, the result was an income tax provision of $4.3 million on pre-tax income of $18.3 million, resulting in an effective tax rate of 23.5%.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting guidance for income taxes requires that a valuation allowance
be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in certain state and foreign jurisdictions. As of January 31, 2019, we had a net federal deferred tax liability position in the U.S. and therefore no valuation allowance was recorded in relation to U.S. federal deferred tax items. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized income tax benefits of $95.0$92.3 million and $109.1$91.3 million (excluding interest and penalties) as of July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively. The accrued liability for interest and penalties was $3.1$3.0 million and $4.6$2.9 million at July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. As of July 31, 2019April 30, 2020 and January 31, 2019,2020, the total amount of unrecognized income tax benefits that, if recognized, would impact our effective income tax rate were approximately $90.9$92.3 million and $100.9$91.3 million, respectively. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at July 31, 2019April 30, 2020 could decrease by approximately $2.8$1.3 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. However, we plan to defer the timing of employer payroll taxes and accelerate the refund of AMT credits as permitted by the CARES Act.
| |
11. | FAIR VALUE MEASUREMENTS |
11. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of July 31, 2019April 30, 2020 and January 31, 2019:2020:
| | | | July 31, 2019 | | | April 30, 2020 | |
| | Fair Value Hierarchy Category | | | Fair Value Hierarchy Category | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
| Assets: | | | | | | |
Money market funds | | $ | 5,437 |
| | $ | — |
| | $ | — |
| Money market funds | | $ | 144,745 | | | $ | — | | | $ | — | |
Foreign currency forward contracts | | — |
| | 2,071 |
| | — |
| Foreign currency forward contracts | | — | | | 1,270 | | | — | |
Interest rate swap agreements | | — |
| | 773 |
| | — |
| |
Contingent consideration receivable | | Contingent consideration receivable | | — | | | — | | | 668 | |
Total assets | | $ | 5,437 |
| | $ | 2,844 |
| | $ | — |
| Total assets | | $ | 144,745 | | | $ | 1,270 | | | $ | 668 | |
Liabilities: | | |
| | |
| | |
| Liabilities: | | | | | | |
Foreign currency forward contracts | | $ | — |
| | $ | 27 |
| | $ | — |
| Foreign currency forward contracts | | $ | — | | | $ | 724 | | | $ | — | |
Interest rate swap agreements | | — |
| | 10,586 |
| | — |
| |
Interest rate swap agreement | | Interest rate swap agreement | | — | | | 20,445 | | | — | |
Contingent consideration - business combinations | | — |
| | — |
| | 42,980 |
| Contingent consideration - business combinations | | — | | | — | | | 35,002 | |
Option to acquire noncontrolling interests of consolidated subsidiaries | | — |
| | — |
| | 2,950 |
| Option to acquire noncontrolling interests of consolidated subsidiaries | | — | | | — | | | 2,650 | |
Total liabilities | | $ | — |
| | $ | 10,613 |
| | $ | 45,930 |
| Total liabilities | | $ | — | | | $ | 21,169 | | | $ | 37,652 | |
|
| | | | | | | | | | | | |
| | January 31, 2019 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
|
Money market funds | | $ | 10,709 |
| | $ | — |
| | $ | — |
|
Foreign currency forward contracts | | — |
| | 1,401 |
| | — |
|
Interest rate swap agreements | | — |
| | 2,072 |
| | — |
|
Total assets | | $ | 10,709 |
| | $ | 3,473 |
| | $ | — |
|
Liabilities: | | |
| | |
| | |
|
Foreign currency forward contracts | | $ | — |
| | $ | 2,086 |
| | $ | — |
|
Interest rate swap agreements | | — |
| | 4,028 |
| | — |
|
Contingent consideration - business combinations | | — |
| | — |
| | 61,340 |
|
Option to acquire noncontrolling interests of consolidated subsidiaries | | — |
| | — |
| | 3,000 |
|
Total liabilities | | $ | — |
| | $ | 6,114 |
| | $ | 64,340 |
|
24
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2020 | | | | |
| | Fair Value Hierarchy Category | | | | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Money market funds | | $ | 89 | | | $ | — | | | $ | — | |
Foreign currency forward contracts | | — | | | 812 | | | — | |
Contingent consideration receivable | | — | | | — | | | 738 | |
Total assets | | $ | 89 | | | $ | 812 | | | $ | 738 | |
Liabilities: | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 132 | | | $ | — | |
Interest rate swap agreements | | — | | | 13,501 | | | — | |
Contingent consideration - business combinations | | — | | | — | | | 42,875 | |
Option to acquire noncontrolling interests of consolidated subsidiaries | | — | | | — | | | 2,900 | |
Total liabilities | | $ | — | | | $ | 13,633 | | | $ | 45,775 | |
In January 2020, we completed the sale of an insignificant subsidiary in our Customer Engagement segment. In accordance with the terms of the sale agreement, 100% of the aggregate purchase price is contingent in nature based on a percentage of net sales of the former subsidiary’s products during the thirty-six month period following the transaction closing. We include the fair value of the contingent consideration receivable within prepaid expenses and other current assets and other assets on our consolidated balance sheet. The estimated fair value of this asset as of April 30, 2020, which is measured using Level 3 inputs, was $0.7 million. We did not receive any payments, and the change in the estimated fair value of this contingent receivable was not material, during the three months ended April 30, 2020.
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the sixthree months ended July 31, 2019April 30, 2020 and 2018: 2019:
|
| | | | | | | | |
| | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 |
Fair value measurement at beginning of period | | $ | 61,340 |
| | $ | 62,829 |
|
Contingent consideration liabilities recorded for business combinations, including measurement period adjustments | | 5,200 |
| | 10,569 |
|
Changes in fair values, recorded in operating expenses | | 370 |
| | (4,706 | ) |
Payments of contingent consideration | | (23,712 | ) | | (12,044 | ) |
Foreign currency translation and other | | (218 | ) | | (283 | ) |
Fair value measurement at end of period | | $ | 42,980 |
| | $ | 56,365 |
|
| | | | | | | | | | | | | | |
| | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Fair value measurement at beginning of period | | $ | 42,875 | | | $ | 61,340 | |
Contingent consideration liabilities recorded for business combinations, including measurement period adjustments | | — | | | 5,200 | |
Changes in fair values, recorded in operating expenses | | (4,803) | | | 1,213 | |
Payments of contingent consideration | | (3,031) | | | (6,361) | |
Foreign currency translation and other | | (39) | | | (13) | |
Fair value measurement at end of period | | $ | 35,002 | | | $ | 61,379 | |
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
During the year ended January 31, 2017, we acquired two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interests. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries. The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the sixthree months ended July 31, 2019April 30, 2020 and 2018: 2019:
|
| | | | | | | | |
| | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 |
Fair value measurement at beginning of period | | $ | 3,000 |
| | $ | 2,950 |
|
Change in fair value, recorded in operating expenses | | (50 | ) | | (50 | ) |
Fair value measurement at end of period | | $ | 2,950 |
| | $ | 2,900 |
|
| | | | | | | | | | | | | | |
| | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Fair value measurement at beginning of period | | $ | 2,900 | | | $ | 3,000 | |
Change in fair value, recorded in operating expenses | | (250) | | | (150) | |
Fair value measurement at end of period | | $ | 2,650 | | | $ | 2,850 | |
There were no transfers between levels of the fair value measurement hierarchy during the sixthree months ended July 31, 2019April 30, 2020 and 2018.2019.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments, Corporate Debt Securities, and Commercial Paper - The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Interest Rate Swap Agreements - The fair value of our interest rate swap agreements are based in part on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration Asset or Liability - Business Combinations and Divestitures - The fair value of the contingent consideration related to business combinations and divestitures is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 3.1%3.2% to 5.6%6.7%, with a weighted average discount rate of 4.8%, in our calculations of the estimated fair values of our contingent consideration liabilities as of July 31, 2019.April 30, 2020. We utilized discount rates ranging from 3.8%2.1% to 5.8%4.9% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2019.2020. We utilized discount rates ranging from 6.4% to 6.8%, with a weighted average discount rate of 6.6%, in our calculation of the estimated fair value of our contingent consideration asset as of April 30, 2020. We utilized discount rates ranging from 4.3% to 4.9%, in our calculation of the estimated fair value of our contingent consideration asset as of January 31, 2020.
Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries - The fair value of the option is determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasure the fair value of the option at each reporting period, and any changes in fair value are recorded within selling, general, and administrative expenses. We utilized discount rates of 11.5%11.0% and 12.5%9.0% in our calculation of the estimated fair value of the option as of July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively.
Other Financial Instruments
The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair values of our term loan and our revolving credit borrowings at April 30, 2020 were $419$406 million and $412$190 million, respectively. The estimated fair values of our term loan and our revolving credit borrowings at July 31, 2019 and January 31, 2019.2020 were $417 million and $45 million, 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 participationsparticipation in our term loans are traded. The indicative prices provided to us as at each of July 31, 2019April 30, 2020 and January 31, 20192020 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
July 31, 2019 and January 31, 2019.
The estimated fair values of our Notes were approximately $444$386 million and $400$438 million at July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively. The estimated fair values of the Notes are determined based on quoted bid and ask prices in the over-the-counter market in which the Notes trade. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
As of July 31, 2019,April 30, 2020, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $3.8 million. There were no observable price changes in our investments in privately-held companies and we did not recognize any impairments or other adjustments during the sixthree months ended July 31, 2019.April 30, 2020.
| |
12. | DERIVATIVE FINANCIAL INSTRUMENTS |
12. DERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $89.3$106.2 million and $123.0$89.0 million as of July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively.
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the term loan borrowings under athe prior credit agreement, in February 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we paypaid interest at a fixed rate of 4.143% and receivereceived variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”). Although the prior credit agreement was terminated on June 29, 2017, the 2016 Swap agreement remainsremained in effect until September 6, 2019, and servesserved as an economic hedge to partially mitigate the risk of higher borrowing costs under our 2017 Credit Agreement resulting from increases in
market interest rates. Settlements with the counterparty under the 2016 Swap occuroccurred quarterly, and the 2016 Swap will terminatematured on September 6, 2019.
Prior to June 29, 2017, the 2016 Swap was designated as a cash flow hedge for accounting purposes. purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and were reclassified into the statement of operations within interest expense in the period in which the hedged transaction affected earnings. Hedge ineffectiveness, if any, was recognized currently in the condensed consolidated statement of operations.
On June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the prior credit agreement, the 2016 Swap was no longer designated as a cash flow hedge for accounting purposes and, because occurrence of the specific forecasted variable cash flows which had been hedged by the 2016 Swap agreement was no longer probable, the $0.9 million fair value of the 2016 Swap at that date was reclassified from accumulated other comprehensive income (loss) into the condensed
consolidated statement of operations as income within other income (expense), net. Ongoing changes in the fair value of the 2016 Swap agreement are nowwere recognized within other income (expense), net in the condensed consolidated statement of operations.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap in September 2019, under which we will pay interest at a fixed rate of 2.949% and receive variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap iswas September 6, 2019, and settlements with the counterparty will occur on a quarterly basis, beginning on November 1, 2019. The 2018 Swap will terminate on June 29, 2024.
During the operating term of the 2018 Swap, if we elect three-month LIBOR at the periodic interest rate reset dates for at least $200.0 million of our 2017 Term Loan, the annual interest rate on that amount of the 2017 Term Loan will be fixed at 4.949% (including the impact of our current 2.00% interest rate margin on Eurodollar loans) for the applicable interest rate period.
The 2018 Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and are reclassified into the condensed statement of operations within interest expense in the periods in which the hedged transactions affect earnings.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of July 31, 2019April 30, 2020 and January 31, 20192020 were as follows:
| | | | | | | | | | | | | | | | | |
| | | Fair Value at | | |
| | | April 30, | | January 31, |
(in thousands) | Balance Sheet Classification | | 2020 | | 2020 |
Derivative assets: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | 544 | | | $ | 710 | |
Not designated as hedging instruments | Prepaid expenses and other current assets | | 726 | | | 102 | |
Total derivative assets | | | $ | 1,270 | | | $ | 812 | |
| | | | | |
Derivative liabilities: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | 724 | | | $ | 16 | |
Not designated as hedging instruments | Accrued expenses and other current liabilities | | — | | | 116 | |
Interest rate swap agreements: | | | | | |
Designated as a cash flow hedge | Accrued expenses and other current liabilities | | 3,897 | | | 2,060 | |
Designated as a cash flow hedge | Other liabilities | | 16,548 | | | 11,441 | |
Total derivative liabilities | | | $ | 21,169 | | | $ | 13,633 | |
|
| | | | | | | | | |
| | | Fair Value at |
| | | July 31, | | January 31, |
(in thousands) | Balance Sheet Classification | | 2019 | | 2019 |
Derivative assets: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | 1,827 |
| | $ | 738 |
|
Not designated as hedging instruments | Prepaid expenses and other current assets | | 244 |
| | 663 |
|
Interest rate swap agreements: | | | | | |
Not designated as hedging instrument | Prepaid expenses and other current assets | | 773 |
| | 2,072 |
|
Total derivative assets | | | $ | 2,844 |
| | $ | 3,473 |
|
| | | | | |
Derivative liabilities: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | — |
| | $ | 1,830 |
|
Not designated as hedging instruments | Accrued expenses and other current liabilities | | 27 |
| | 256 |
|
Interest rate swap agreements: | | | | | |
Designated as a cash flow hedge | Accrued expenses and other current liabilities | | 1,065 |
| | 122 |
|
Designated as a cash flow hedge | Other liabilities | | 9,521 |
| | 3,906 |
|
Total derivative liabilities | | | $ | 10,613 |
| | $ | 6,114 |
|
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the condensed consolidated statements of operations for the three and six months ended July 31,April 30, 2020 and 2019 and 2018 were as follows:
| | | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended April 30, | |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (in thousands) | | 2020 | | 2019 |
Net (losses) gains recognized in AOCL: | | | | | | | | | Net (losses) gains recognized in AOCL: | | | | |
Foreign currency forward contracts | | $ | 1,637 |
| | $ | (2,767 | ) | | $ | 1,979 |
| | $ | (8,916 | ) | Foreign currency forward contracts | | $ | (925) | | | $ | 342 | |
Interest rate swap agreement | | (4,541 | ) | | 392 |
| | (6,558 | ) | | 612 |
| Interest rate swap agreement | | (7,535) | | | (2,017) | |
| | $ | (2,904 | ) | | $ | (2,375 | ) | | $ | (4,579 | ) | | $ | (8,304 | ) | | $ | (8,460) | | | | $ | (1,675) | |
| | | | | | | | | | | | |
Net losses reclassified from AOCL to the condensed consolidated statements of operations: | | | | | | | | | Net losses reclassified from AOCL to the condensed consolidated statements of operations: | |
Foreign currency forward contracts | | $ | — |
| | $ | (1,413 | ) | | $ | (939 | ) | | $ | (980 | ) | Foreign currency forward contracts | | $ | (52) | | | $ | (939) | |
Interest rate swap agreement | | Interest rate swap agreement | | (591) | | | — | |
| | | $ | (643) | | | $ | (939) | |
For information regarding the line item locations of the net (losses) gains on derivative financial instruments reclassified out of AOCL into the condensed consolidated condensed statements of operations, see Note 9, “Stockholders’ Equity”.
All of the foreign currency forward contracts underlying the $1.6$0.2 million of net unrealized gainslosses recorded in our accumulated other comprehensive loss at July 31, 2019April 30, 2020 mature within twelve months, and therefore we expect all such gainslosses to be reclassified into earnings within the next twelve months. Approximately $0.8$3.1 million of the $8.2$16.0 million of net unrealized losses related to our interest rate swap agreement recorded in our accumulated other comprehensive loss at July 31, 2019April 30, 2020 settle within twelve months, and therefore we expect those losses to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three and six months ended months ended July 31,April 30, 2020 and 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Classification in Condensed Consolidated Statements of Operations | | Three Months Ended April 30, | | |
(in thousands) | | | | 2020 | | 2019 |
Foreign currency forward contracts | | Other income (expense), net | | $ | 1,014 | | | $ | 564 | |
Interest rate swap agreement | | Other income (expense), net | | — | | | (15) | |
| | | | $ | 1,014 | | | $ | 549 | |
|
| | | | | | | | | | | | | | | | | | |
| | Classification in Condensed Consolidated Statements of Operations | | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | | 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency forward contracts | | Other income (expense), net | | $ | 212 |
| | $ | 1,137 |
| | $ | 776 |
| | $ | 1,898 |
|
Interest rate swap agreement | | Other income (expense), net | | (33 | ) | | 84 |
| | (48 | ) | | 811 |
|
| | | | $ | 179 |
| | $ | 1,221 |
| | $ | 728 |
| | $ | 2,709 |
|
| |
13. | 13. STOCK-BASED COMPENSATION |
New
Stock-Based Compensation Plan
On June 20, 2019, our stockholders approved the Verint Systems Inc. 2019 Long-Term Stock Incentive Plan (the “2019 Plan”). Upon approval of the 2019 Plan, on June 20, 2019, additional awards are no longer permitted under our prior stock-based compensation plan (the “2017 Amended Plan”). Awards outstanding at June 20, 2019 under the 2017 Amended Plan or other previous stock-based compensation plans were not impacted by the approval of the 2019 Plan. Collectively, our stock-based compensation plans are referred to herein as the “Plans”.
The 2019 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, other stock-based awards, and performance compensation awards. Subject to adjustment as provided in the 2019 Plan, up to an aggregate of (i) 9,475,000 shares of our common stock plus (ii) the number of shares of our common stock available for issuance under the 2017 Amended Plan as of June 20, 2019, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 2017 Amended Plan or the 2019 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2019 Plan will reduce the available plan capacity by one share and each other award denominated in shares that is granted under the 2019 Plan will reduce the available plan capacity by 2.38 shares.
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 six months ended July 31, 2019April 30, 2020 and 2018: 2019:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Cost of revenue - product | | $ | 310 | | | $ | 334 | |
Cost of revenue - service and support | | 657 | | | 1,070 | |
Research and development, net | | 2,336 | | | 2,590 | |
Selling, general and administrative | | 10,881 | | | 13,109 | |
Total stock-based compensation expense | | $ | 14,184 | | | $ | 17,103 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Cost of revenue - product | | $ | 488 |
| | $ | 388 |
| | $ | 822 |
| | $ | 505 |
|
Cost of revenue - service and support | | 1,546 |
| | 1,557 |
| | 2,616 |
| | 2,286 |
|
Research and development, net | | 3,347 |
| | 3,039 |
| | 5,937 |
| | 4,548 |
|
Selling, general and administrative | | 15,170 |
| | 12,471 |
| | 28,279 |
| | 26,575 |
|
Total stock-based compensation expense | | $ | 20,551 |
| | $ | 17,455 |
| | $ | 37,654 |
| | $ | 33,914 |
|
The following table summarizes stock-based compensation expense by type of award for the three and six months ended July 31, 2019April 30, 2020 and 2018:2019:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock units and restricted stock awards | | $ | 17,966 |
| | $ | 15,098 |
| | $ | 32,856 |
| | $ | 29,992 |
|
Stock bonus program and bonus share program | | 2,574 |
| | 2,330 |
| | 4,749 |
| | 3,879 |
|
Total equity-settled awards | | 20,540 |
| | 17,428 |
| | 37,605 |
| | 33,871 |
|
Phantom stock units (cash-settled awards) | | 11 |
| | 27 |
| | 49 |
| | 43 |
|
Total stock-based compensation expense | | $ | 20,551 |
| | $ | 17,455 |
| | $ | 37,654 |
| | $ | 33,914 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Restricted stock units and restricted stock awards | | $ | 15,029 | | | $ | 14,890 | |
Stock bonus program and bonus share program | | (837) | | | 2,175 | |
Total equity-settled awards | | 14,192 | | | 17,065 | |
Phantom stock units (cash-settled awards) | | (8) | | | 38 | |
Total stock-based compensation expense | | $ | 14,184 | | | $ | 17,103 | |
Awards under our stock bonus and bonus share programs are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of our common stock, which for awards under our stock bonus program is determined using a discounted average price of our common stock.
Restricted Stock Units and Performance Stock Units
We periodically award RSUs to our directors, officers, and other employees. These awards contain various vesting conditions and are subject to certain restrictions and forfeiture provisions prior to vesting. Some of these awards to executive officers and certain employees vest upon the achievement of specified performance goals or market conditions (performance stock units or “PSUs”).
The following table (“Award Activity Table”) summarizes activity for RSUs, PSUs, and other stock awards that reduce available Plan capacity under the Plans for the sixthree months ended July 31, 2019April 30, 2020 and 2018:2019:
|
| | | | | | | | | | | | | | |
| | Six Months Ended July 31, |
| | 2019 | | 2018 |
(in thousands, except per share data) | | Shares or Units | | Weighted-Average Grant Date Fair Value | | Shares or Units | | Weighted-Average Grant Date Fair Value |
Beginning balance | | 2,777 |
| | $ | 41.05 |
| | 2,808 |
| | $ | 41.18 |
|
Granted | | 1,554 |
| | $ | 60.75 |
| | 1,527 |
| | $ | 42.32 |
|
Released | | (1,349 | ) | | $ | 40.36 |
| | (1,074 | ) | | $ | 43.90 |
|
Forfeited | | (139 | ) | | $ | 42.56 |
| | (184 | ) | | $ | 41.13 |
|
Ending balance | | 2,843 |
| | $ | 52.22 |
| | 3,077 |
| | $ | 40.84 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | | | 2019 | | |
(in thousands, except per share data) | | Shares or Units | | Weighted-Average Grant Date Fair Value | | Shares or Units | | Weighted-Average Grant Date Fair Value |
Beginning balance | | 2,736 | | | $ | 52.53 | | | 2,777 | | | $ | 41.05 | |
Granted | | 107 | | | $ | 51.26 | | | 1,444 | | | $ | 61.10 | |
Released | | (399) | | | $ | 46.96 | | | (448) | | | $ | 39.50 | |
Forfeited | | (81) | | | $ | 51.84 | | | (60) | | | $ | 35.44 | |
Ending balance | | 2,363 | | | $ | 53.44 | | | 3,713 | | | $ | 49.23 | |
With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under “Stock Bonus Program” and “Bonus Share Program”.
Our RSU awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of July 31, 2019,April 30, 2020, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards and are included in the table above.
The following table summarizes PSU activity in isolation under the Plans for the sixthree months ended July 31,April 30, 2020 and 2019 and 2018 (these amounts are already included in the Award Activity Table above for 20192020 and 2018)2019):
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Beginning balance | | 526 | | | 512 | |
Granted | | 107 | | | 286 | |
Released | | (231) | | | (234) | |
Forfeited | | (20) | | | (26) | |
Ending balance | | 382 | | | 538 | |
|
| | | | | | |
| | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 |
Beginning balance | | 512 |
| | 506 |
|
Granted | | 286 |
| | 174 |
|
Released | | (233 | ) | | (72 | ) |
Forfeited | | (30 | ) | | (83 | ) |
Ending balance | | 535 |
| | 525 |
|
Excluding PSUs, we granted 1,268,000did not grant any RSUs or other equity awards during the sixthree months ended July 31, 2019.April 30, 2020.
As of July 31, 2019,April 30, 2020, there was approximately $114.1$70.2 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 2.01.4 years.
Stock Bonus Program
Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent that shares remain available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a one-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is determined using a 5-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the “discount”). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash.
Awards under the stock bonus program for the performance period ended January 31, 2019 consisted of shares earned in respect of employee and officer incentive plans with a 15% discount and were issued during the three months ended July 31, 2019.
The following table summarizes activity under the stock bonus program during the six months ended July 31, 2019 and 2018 in isolation. There was no activity under the stock bonus program during the three months ended April 30, 2020 and 2019. As noted above, shares issued
For bonuses in respect of the year ending January 31, 2020, our board of directors approved the use of up to 200,000 shares of common stock, and a discount featureof 15%, under the program reduce available plan capacity and are included in the Award Activity Table above. Otherstock bonus program. We currently expect to issue no more than 32,000 shares issued under the stock bonus program do not reduce available plan capacity andfor the performance period ended January 31, 2020, which are therefore excluded fromexpected to be issued during the Award Activity Table above.second half of the year ending January 31, 2021.
|
| | | | | | |
| | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 |
Shares in lieu of cash bonus - granted and released (not included in Award Activity Table above) | | 97 |
| | — |
|
Shares in respect of discount (included in Award Activity Table above): | | | | |
Granted | | 16 |
| | — |
|
Released | | 13 |
| | — |
|
In March 2019,2020, our board of directors approved up to 150,000200,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period endingended January 31, 2020. In August 2019, our board of directors2021.
changed this maximum number of shares to 200,000 based on strong enrollment and made a corresponding reduction of 50,000 shares in the number of shares available for issuance under our bonus share program for the performance period ending January 31, 2020.
Bonus Share Program
Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature. As noted above, shares issued under this program are included in the Award Activity Table above.
During the three months ended July 31, 2019, approximately 59,000 shares were awarded in respect of the bonus share program for the performance period ended January 31, 2019.
For bonuses in respect of the year ending January 31, 2020, our board of directors has approved the use of up to 300,000305,000 shares of common stock under the bonus share program, reduced by any shares issued under the stock bonus program in respect of the same performance period. Assuming all 200,000For the performance period ended January 31, 2020, we currently expect to issue no more than 32,000 shares currently authorized for issuance under the stock bonus program, with the remaining 273,000 shares authorized by the board of directors available for the performance period ending January 31, 2020 are issued, no more than 100,000 shares will be issueduse under the bonus share program for suchthe same performance period. Awards under the bonus share program for the
performance period ended January 31, 2020 are expected to be issued during the second half of the year ending January 31, 2021.
For bonuses in respect of the year ending January 31, 2021, our board of directors has approved the use of up to 300,000 shares of common stock under this program, reduced by any shares used under the stock bonus program in respect of the same performance period.
The combined accrued liabilities for the stock bonus program and the bonus share program were $4.5$14.6 million and $9.3$17.3 million at July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively.
14. LEASES
We have entered into operating leases primarily for corporate offices, research and development facilities, datacenters, and automobiles. Our finance leases primarily relate to infrastructure equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which may include options to extend the leases for up to 6 years, and some of which may include options to terminate the leases within 1 year. As of July 31, 2019, assets recorded under finance leases were $7.2 million and accumulated depreciation associated with finance leases was $0.4 million.
The components of lease expenses for the three and six months ended July 31, 2019 were as follows:
|
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in thousands) | | July 31, 2019 |
Operating lease expenses | | $ | 7,471 |
| | $ | 14,908 |
|
Finance lease expenses: | | | | |
Amortization of right-of-use assets | | 160 |
| | 253 |
|
Interest on lease liabilities | | 45 |
| | 75 |
|
Total finance lease expenses | | 205 |
| | 328 |
|
Variable lease expenses | | 1,952 |
| | 3,918 |
|
Short-term lease expenses | | 184 |
| | 439 |
|
Sublease income | | (223 | ) | | (446 | ) |
Total lease expenses | | $ | 9,589 |
| | $ | 19,147 |
|
Other information related to leases was as follows:
|
| | | | |
(dollars in thousands) | | Six Months Ended July 31, 2019 |
Supplemental cash flow information | | |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 13,688 |
|
Operating cash flows from finance leases | | 75 |
|
Financing cash flows from finance leases | | 1,121 |
|
Right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases | | $ | 12,906 |
|
Finance leases | | 377 |
|
Weighted average remaining lease terms | | |
Operating leases | | 6 years |
|
Finance leases | | 3 years |
|
Weighted average discount rates | | |
Operating leases | | 5.3 | % |
Finance leases | | 5.5 | % |
14. COMMITMENTS AND CONTINGENCIES
Maturities of lease liabilities as of July 31, 2019 were as follows: |
| | | | | | | | |
| | July 31, 2019 |
(in thousands) | | Operating Leases | | Finance Leases |
Year Ending January 31, | | | | |
2020 (remainder of year) | | $ | 13,728 |
| | $ | 779 |
|
2021 | | 25,865 |
| | 1,812 |
|
2022 | | 20,967 |
| | 1,616 |
|
2023 | | 18,514 |
| | 1,075 |
|
2024 | | 16,941 |
| | 106 |
|
Thereafter | | 39,408 |
| | — |
|
Total future minimum lease payments | | 135,423 |
| | 5,388 |
|
Less imputed interest | | (21,331 | ) | | (379 | ) |
Total | | $ | 114,092 |
| | $ | 5,009 |
|
| | | | |
Reported as of July 31, 2019: | | | | |
Accrued expenses and other current liabilities | | $ | 20,955 |
| | $ | 1,563 |
|
Operating lease liabilities | | 93,137 |
| | — |
|
Other liabilities | | — |
| | 3,446 |
|
Total | | $ | 114,092 |
| | $ | 5,009 |
|
As of July 31, 2019, we had no material leases that have not yet commenced.
As previously disclosed in our January 31, 2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable operating leases as of January 31, 2019 were as follows (in thousands):
|
| | | | | | | | |
(in thousands) | | Operating | | Capital |
Years Ending January 31, | | Leases | | Leases |
2020 | | $ | 22,769 |
| | $ | 1,343 |
|
2021 | | 21,942 |
| | 1,252 |
|
2022 | | 19,157 |
| | 1,130 |
|
2023 | | 16,882 |
| | 765 |
|
2024 | | 15,152 |
| | 107 |
|
Thereafter | | 33,477 |
| | — |
|
Total | | $ | 129,379 |
| | 4,597 |
|
Less: amount representing interest and other charges | | | | (315 | ) |
Present value of minimum lease payments | | | | $ | 4,282 |
|
| |
15. | COMMITMENTS AND CONTINGENCIES |
Legal Proceedings
In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our primary Israeli subsidiary, Verint Systems Limited (“VSL”) (Case Number 4186/09) and against our affiliate CTI (Case Number 1335/09). Also in March 2009, a former employee of Comverse Limited (CTI’s primary Israeli subsidiary at the time), MsMs. Roni Katriel, commenced similar legal actions in Israel against Comverse Limited (Case Number 3444/09). In these actions, the plaintiffs generally sought to certify class action suits against the defendants on behalf of current and former employees of VSL and Comverse Limited who had been granted stock options in Verint and/or CTI and who were allegedly damaged as a result of a suspension on option exercises during an extended filing delay period that is discussed in our and CTI’s historical public filings. On June 7, 2012, the Tel Aviv District Court, where the cases had been filed or transferred, allowed the plaintiffs to consolidate and amend their complaints against the three defendants: VSL, CTI, and Comverse Limited.
On October 31, 2012, CTI distributed of all of the outstanding shares of common stock of Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI’s shareholders (the “Comverse Share Distribution”). In the period leading up to the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in Verint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. As the result of these transactions, Comverse, Inc. became an independent company and ceased to be affiliated with CTI, and CTI ceased to have any material assets other than its equity interests in Verint. Prior to the completion of the Comverse Share Distribution, the plaintiffs sought to compel CTI to set aside up to $150.0 million in assets to secure any future judgment, but the District Court did not rule on this motion. In February 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.
On February 4, 2013, Verint acquired the remaining CTI shell company in a merger transaction (the “CTI Merger”). As a result of the CTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the foregoing legal actions. However, under the terms of a Distribution Agreement entered into in connection with the Comverse Share Distribution, we, as successor to CTI, are entitled to indemnification from Comverse, Inc. (now Mavenir) for any losses we may suffer in our capacity as successor to CTI related to the foregoing legal actions.
Following an unsuccessful mediation process, on August 28, 2016, the District Court (i) denied the plaintiffs’ motion to certify the suit as a class action with respect to all claims relating to Verint stock options and (ii) approved the plaintiffs’ motion to certify the suit as a class action with respect to claims of current or former employees of Comverse Limited (now part of Mavenir) or of VSL who held unexercised CTI stock options at the time CTI suspended option exercises. The court also ruled that the merits of the case would be evaluated under New York law.
As a result of this ruling (which excluded claims related to Verint stock options from the case), one of the original plaintiffs in the case, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin. CTI appealed portions of the District Court’s ruling to the Israeli Supreme Court. On August 8, 2017, the Israeli Supreme Court partially allowed CTI’s appeal and ordered the case to be returned to the District Court to determine whether a cause of action exists under New York law based on the parties’ expert opinions.
Following a secondtwo unsuccessful roundrounds of mediation in mid to late 2018 and in mid-2019, the proceedings resumed. The plaintiffs have filedOn April 16, 2020, the District Court accepted plaintiffs’ application to amend the motion to certify a class action and set deadlines for filing amended pleadings by the parties. CTI recently submitted a motion to amendappeal the class certification motion and CTI has filed a corresponding motiondecision to dismiss and a response. At athe Supreme Court.
hearing on April 16, 2019, the District Court suggested that the parties consider another round of mediation, which is currently in process.
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any current claims will have a material effect on our consolidated financial position, results of operations, or cash flows.
15. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the enterprise’s chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is our CODM.
We report our results in 2 operating segments—Customer Engagement Solutions (“Customer Engagement”) and Cyber Intelligence Solutions (“Cyber Intelligence”).Intelligence. Our Customer Engagement solutions help customer-centric organizations optimize customer engagement, increase customer loyalty, and maximize revenue opportunities, while generating operational efficiencies, reducing cost, and mitigating risk. Our Cyber Intelligence solutions are used for a wide range of applications, including predictive intelligence, advanced and complex investigations, security threat analysis, and electronic data and physical assets protection, as well as for generating legal evidence and preventing criminal activity and terrorism.
We measure the performance of our operating segments primarily based on segment revenue and segment contribution.
Segment revenue includes adjustments associated with revenue of acquired companies which are not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the obligations’ acquisition-date fair values. Segment revenue adjustments can also result from aligning an acquired company’s historical revenue recognition policies to our policies.
Segment contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs, research and development, selling, marketing, and certain administrative expenses. When determining segment contribution, we do not allocate certain operating expenses which are provided by shared resources or are otherwise generally not controlled by segment management. These expenses are reported as “Shared support expenses” in our table of segment operating results, the majority of which are expenses for administrative support functions, such as information technology, human resources, finance, legal, and other general corporate support, and for occupancy expenses. These unallocated expenses also include procurement, manufacturing support, and logistics expenses. We share resources across our segments for efficiency and to avoid duplicative costs.
In addition, segment contribution does not include amortization of acquired intangible assets, stock-based compensation, and other expenses that either can vary significantly in amount and frequency, are based upon subjective assumptions, or in certain cases are unplanned for or difficult to forecast, such as restructuring expenses and business combination transaction and integration expenses, all of which are not considered when evaluating segment performance.
Revenue from transactions between our operating segments is not material.
Operating results by segment for the three and six months ended July 31,April 30, 2020 and 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | |
| | |
| | | | |
Customer Engagement | | |
| | |
| | | | |
Segment revenue | | $ | 218,424 |
| | $ | 202,933 |
| | $ | 434,291 |
| | $ | 392,108 |
|
Revenue adjustments | | (6,988 | ) | | (2,126 | ) | | (15,760 | ) | | $ | (4,845 | ) |
| | 211,436 |
| | 200,807 |
|
| 418,531 |
| | 387,263 |
|
Cyber Intelligence | | |
| | |
| | | | |
Segment revenue | | 112,893 |
| | 105,545 |
| | 221,184 |
| | 208,340 |
|
Revenue adjustments | | (24 | ) | | (25 | ) | | (151 | ) | | (69 | ) |
| | 112,869 |
| | 105,520 |
|
| 221,033 |
| | 208,271 |
|
Total revenue | | $ | 324,305 |
| | $ | 306,327 |
|
| $ | 639,564 |
| | $ | 595,534 |
|
| | | | | | | | |
Segment contribution: | | |
| | |
| | | | |
Customer Engagement | | $ | 78,788 |
| | $ | 78,759 |
| | $ | 157,606 |
| | $ | 145,561 |
|
Cyber Intelligence | | 31,571 |
| | 24,549 |
| | 58,861 |
| | 45,771 |
|
Total segment contribution | | 110,359 |
| | 103,308 |
|
| 216,467 |
| | 191,332 |
|
| | | | | | | | |
Reconciliation of segment contribution to operating income: | | |
| | |
| | | | |
Revenue adjustments | | 7,012 |
| | 2,151 |
| | 15,911 |
| | 4,914 |
|
Shared support expenses | | 44,416 |
| | 39,896 |
| | 88,270 |
| | 81,805 |
|
Amortization of acquired intangible assets | | 13,226 |
| | 12,972 |
| | 27,646 |
| | 28,082 |
|
Stock-based compensation | | 20,551 |
| | 17,455 |
| | 37,654 |
| | 33,914 |
|
Acquisition, integration, restructuring, and other unallocated expenses | | 9,879 |
| | 1,603 |
| | 17,243 |
| | 5,604 |
|
Total reconciling items, net | | 95,084 |
| | 74,077 |
|
| 186,724 |
| | 154,319 |
|
Operating income | | $ | 15,275 |
| | $ | 29,231 |
|
| $ | 29,743 |
| | $ | 37,013 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2020 | | 2019 |
Revenue: | | | | |
Customer Engagement | | | | |
Segment revenue | | $ | 189,127 | | | $ | 215,867 | |
Revenue adjustments | | (3,262) | | | (8,772) | |
| | 185,865 | | | 207,095 | |
Cyber Intelligence | | | | |
Segment revenue | | 102,522 | | | 108,291 | |
Revenue adjustments | | (1,092) | | | (127) | |
| | 101,430 | | | 108,164 | |
Total revenue | | $ | 287,295 | | | $ | 315,259 | |
| | | | |
Segment contribution: | | | | |
Customer Engagement | | $ | 65,797 | | | $ | 78,818 | |
Cyber Intelligence | | 24,964 | | | 27,290 | |
Total segment contribution | | 90,761 | | | 106,108 | |
| | | | |
Reconciliation of segment contribution to operating income: | | | | |
Revenue adjustments | | 4,354 | | | 8,899 | |
Shared support expenses | | 43,341 | | | 43,854 | |
Amortization of acquired intangible assets | | 12,674 | | | 14,420 | |
Stock-based compensation | | 14,184 | | | 17,103 | |
Acquisition, integration, restructuring, and other unallocated expenses | | 10,034 | | | 7,364 | |
Total reconciling items, net | | 84,587 | | | 91,640 | |
Operating income | | $ | 6,174 | | | $ | 14,468 | |
With the exception of goodwill and acquired intangible assets, we do not identify or allocate our assets by operating segment. Consequently, it is not practical to present assets by operating segment. The allocations of goodwill and acquired intangible assets by operating segment appear in Note 6, “Intangible Assets and Goodwill”.
16. SUBSEQUENT EVENTS
Apax Convertible Preferred Stock Investment
On May 7, 2020, we closed the initial tranche of the previously announced strategic partnership (the “Closing”) with the Apax Investor. Pursuant to the Investment Agreement, dated as of December 4, 2019, at the Closing, we sold 200,000 shares of our Series A Convertible Perpetual Preferred Stock, par value $0.001 per share, for an aggregate purchase price of $200.0 million. See “Management’s discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 2 of this report for a more detailed discussion regarding the Apax investment.
In connection with the Closing, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which, among other things, we have agreed to use commercially reasonable efforts to prepare and file a shelf registration statement with the SEC no later than the first business day after the Common Stock Restricted Period (as defined in the agreement) and to use commercially reasonable efforts to cause such shelf registration statement to be declared effective as promptly as is reasonably practicable after its filing to permit the public resale of registrable securities covered by the Registration Rights Agreement. The registrable securities generally include any shares of our common stock, par value $0.001 per share (“Common Stock”), into which the Preferred Stock is convertible, and any other securities issued or issuable with respect to any such shares of Common Stock by way of share split, share dividend, distribution, recapitalization, merger, exchange, replacement or similar event or otherwise.
We generally will be required to effect registrations for up to three underwritten offerings of the registrable securities within any twelve-month period during the term of the Registration Rights Agreement, subject to certain limitations, including that the anticipated gross proceeds of any offering be at least $50.0 million. The Apax Investor is also entitled to customary “piggy-back” registration and shelf take-down rights. The rights of any particular holder to cause us to register securities under the
Registration Rights Agreement will terminate with respect to that holder upon the date on which the holder no longer holds any Preferred Stock or any registrable securities covered thereby. The registration rights set forth in the Registration Rights Agreement will terminate on the date on which all shares of Common Stock issuable (or actually issued) upon conversion of the Preferred Stock cease to be registrable securities covered thereby.
Amendment to 2017 Credit Agreement
On June 8, 2020, we entered into the Second Amendment to the 2017 Credit Agreement, pursuant to which (i) we are permitted to effect the previously announced Spin-Off of our Cyber Intelligence business within the parameters set forth in the 2017 Credit Agreement, as amended, and (ii) for purposes of the acceleration of the maturity of the 2017 Term Loan and 2017 Revolving Credit Facility under the 2017 Credit Agreement, our Notes will not be deemed to be outstanding if such Notes are cash collateralized in accordance with the 2017 Credit Agreement, as amended.
Other than the changes described above, all other material provisions of the 2017 Credit Agreement as described in Note 7, “Long-Term Debt” remain unchanged.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis is provided to assist readers in understanding our financial condition, results of operations, and cash flows. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended January 31, 20192020 and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under “Cautionary Note on Forward-Looking Statements”.
Overview
Recent Developments
Separation of Businesses
On December 4, 2019, we announced our intention to separate into two independent publicly traded companies: one which will consist of our Customer Engagement Solutions business, and one which will consist of our Cyber Intelligence Solutions business. We expect to implement the separation through a pro-rata distribution of common stock of a new entity that will hold the Cyber Intelligence Solutions business to our stockholders (the “Spin-Off”) that is intended to be tax-free to our stockholders for U.S. federal income tax purposes. We currently expect to complete the Spin-Off shortly after the end of this fiscal year ending January 31, 2021, though this timeline may be impacted by the current business environment brought on by the COVID-19 pandemic. We believe the two independent, publicly traded companies will both benefit from the separation and be well positioned to pursue their own strategies, drive opportunities to accelerate growth and extend their market leadership. The separation will make it easier for investors to evaluate and make independent investment decisions in each business. We believe that both our businesses are leaders in their respective markets and the separation will enable them to achieve better performance over the long term as a result of several factors, including having; separate boards of directors with further differentiated skillsets to support tailored strategic plans; specific incentive programs more closely aligned with standalone business performance; capital structures tailored to the unique characteristics of each business; and enhanced appeal to a broader set of investors suited to the strategic and financial characteristics of each company.
We expect to incur significant costs in connection with the planned separation of our Cyber Intelligence Solutions business. The costs include developing stand-alone Cyber Intelligence Solutions information systems and related IT costs, third-party advisory, consulting, legal and professional services, as well as other items that are incremental and one-time in nature that are related to the planned Spin-Off. We capitalized $1.5 million of these costs and expensed $7.8 million during the three months ended April 30, 2020. We have capitalized $5.5 million and expensed $13.1 million of separation related costs since commencing in the year ended January 31, 2020. The expense portion is reflected in selling, general and administrative expenses.
Apax Investment
On December 4, 2019, we also announced that Valor Parent LP, an affiliate of Apax Partners would make an investment in us in an amount of up to $400 million. Under the terms of the Investment Agreement, the Apax Investor initially purchased $200 million of our Series A convertible preferred stock, which closed on May 7, 2020. Further discussion regarding the Apax investment and the initial closing appears in Note 16, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item 1 of this report and the “Liquidity and Capital Resources-Overview” section below.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Companies around the world, including us, our customers, partners, and vendors, have implemented actions in response, including among others, office closings, site restrictions, and employee travel restrictions. The global spread of COVID-19 and actions taken in response have negatively affected us, our customers, partners, and vendors and caused significant economic and business disruption the extent and duration of which is not currently known. In response to these challenges, we quickly adjusted our operations to work from home and we believe our business continuity plan is working well.
We are monitoring and assessing the impact of the COVID-19 pandemic daily, including recommendations and orders issued by government and public health authorities. We continue to work to help our customers meet their business continuity needs and help keep the world safe during this difficult time and are managing our operations with a view to resuming normal business activity as soon as possible.
During the first quarter, revenue in both of our operating segments was negatively impacted by delays and reduced spending attributed to the impact of the COVID-19 pandemic on our customers’ operational priorities and as a result of cost containment measures they have implemented. Due to the pandemic, we have seen a reduction or delay in large customer contracts, particularly on-premises arrangements, and we have been unable to conduct face-to-face meetings with existing or prospective customers and partners, present in-person demonstrations of our solutions, or host or attend in-person trade shows and conferences. Limitations on access to the facilities of our customers have also impacted our ability to deliver some of our products, complete certain implementations, and provide in-person consulting and training services, negatively impacting our ability to recognize revenue. We continued to experience high recurring revenue renewal rates during the first quarter. We have also begun to offer new versions of our solutions in both of our segments designed to help our customers address challenges created by the pandemic and to offer simpler packages of software and services for some of our Customer Engagement solutions to make it easier and faster for customers to make purchases. Notwithstanding our strong first quarter recurring renewal rates and these new offerings, we cannot predict how the pandemic will impact our results in future periods, including to the extent that customers delay or miss payments, customers defer, reduce, or refrain from placing orders or renewing subscriptions or support arrangements, or travel restrictions and site access restrictions remain necessary.
In light of the adverse impact of COVID-19 on global economic conditions and our revenue, along with the uncertainty associated with the extent and timing of a potential recovery, we have implemented several cost-reduction actions, some of which did not take effect until the beginning of our second quarter. Such actions have included, but are not limited to, reducing our discretionary spending, substantially decreasing capital expenditures, extending days payable outstanding, considering the optimal uses of our cash and other capital resources, including with respect to our stock repurchase program, and reducing workforce-related costs. These actions may have an adverse impact on us, particularly if they remain in place for an extended period. We continue to evaluate and may decide to implement further cost control strategies to help us mitigate the impact of the pandemic.
The ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity and financial results cannot be predicted at this time.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on our consolidated financial condition or results of operations as of and for the quarter ended April 30, 2020. However, we plan to defer the timing of employer payroll taxes and accelerate the refund of AMT credits as permitted by the CARES Act.
Our Business
Verint is a global leader in Actionable Intelligence solutions. In a world of massive information growth, our solutions empower organizations with crucial, actionable insights and enable decision makers to anticipate, respond, and take action. Today, over 10,000 organizations in more than 180 countries, including over 85 percent of the Fortune 100, use Verint’s Actionable Intelligence solutions, deployed in the cloud and on premises,on-premises, to make more informed, timely, and effective decisions.
Our Actionable Intelligence leadership is powered by innovative, enterprise-class software built with artificial intelligence, analytics, automation, and deep domain expertise established by working closely with some of the most sophisticated and forward-thinking organizations in the world. We believe we have one of the industry’s strongest R&D teams focused on actionable intelligence consisting of approximately 1,900one-third of our approximately 6,300 professionals. Our innovative solutions are backed-up by a strong IP portfolio with approximatelyover 1,000 patents and patent applications worldwide across areas including data capture, artificial intelligence, machine learning, unstructured data analytics, predictive analytics, and automation.
Verint’s Actionable Intelligence strategy is focused on two use cases and the companyCompany has two operating segments: Customer Engagement Solutions and Cyber Intelligence Solutions.Intelligence. Generally, we make business decisions by evaluating the risks and rewards of the opportunities available to us in the markets served by each of our segments. We view each operating segment differently and allocate capital, personnel, resources, and management attention accordingly. In reviewing each operating segment, we also review the performance of that segment by geography. Our marketing and sales strategies, expansion opportunities, and product offerings may differ materially within a particular segment geographically, as may our allocation of resources between
segments. When making decisions regarding investments in our business, capital expenditures, or other decisions that may affect our profitability, we also consider the leverage ratio in our revolving credit facility. See “— Liquidity"Liquidity and Capital Resources” for more information.
Key Trends and Factors That May Impact our Performance
WeIn addition to the impact of the COVID-19 pandemic discussed above, we see the following business trends and factors which may impact our performance:
Customer Engagement
| |
• | Reducing Complexity and Enhancing Agility. Many organizations have complex environments that were assembled over many years, with multiple legacy systems from many different vendors deployed in silos across the enterprise. To reduce complexity and simplify operations, these organizations are looking for new solutions that are open and flexible and make it easier to address evolving requirements, while protecting their legacy investments. Organizations are also seeking open platforms that address their customer engagement needs across many enterprise functions, including the contact center, back-office and branch operations, self-service, e-commerce, customer experience, marketing, IT, and compliance.
|
| |
• | Modernizing Customer Engagement IT Architectures. Many organizations are looking to modernize their legacy customer engagement operations by transitioning to the cloud, adopting modern architectures that facilitate the orchestration of disparate systems and the sharing of data across enterprise functions. Organizations which are at different stages of migrating to the cloud and other modernization initiatives are also looking for vendors that can help them evolve customer engagement at their own pace with minimal disruption to their operations.
|
•Digital Transformation. Many organizations are going through digital transformations by expanding their customer service interactions to include digital channels, such as chat, virtual assistants, mobile apps and social media. Remote work arrangements and site restrictions due to the COVID-19 pandemic have increased this trend. While these new channels make it easier for consumers to connect, they caused organizations increased system complexity and new challenges. In many cases these new customer touch points reside in different functional groups and are not connected, resulting in siloed information, a decentralized customer service workforce and difficulty gaining insight into customer experiences. To facilitate effective digital transformations, organizations are looking for vendors that help them to connect silos across the enterprise, take proactive action to improve customer experience and facilitate open and modular design to simplify integration across systems.
| |
• | Automating Customer Engagement Operations.
•Cloud Migration. Many organizations are looking to modernize their legacy customer engagement operations by transitioning to the cloud, adopting modern architectures that facilitate the orchestration of disparate systems and the sharing of data across enterprise functions. Organizations which are at different stages of migrating to the cloud and other modernization initiatives are also looking for vendors that can help them evolve customer engagement at their own pace while protecting their legacy investments with minimal disruption to their operations. Remote work arrangements and site restrictions due to the COVID-19 pandemic have increased this trend.
•Automation Adoption. Many organizations are seeking solutions that incorporate artificial intelligence and analytics to reduce manual work and increase workforce efficiency through automation. They also seek to empower their customers with self-service backed by AI-powered bots and human/bot collaboration, to elevate the customer experience in a fast, personalized way.
Many organizations are seeking solutions that incorporate machine learning and analytics to reduce manual work and increase workforce efficiency through automation. They also seek to empower their customers with self-service backed by AI-powered bots and human/bot collaboration, to elevate the customer experience in a fast, personalized way.
|
Cyber Intelligence
| |
• | •Security Threats Becoming Increasingly Pervasive and Complex. Governments, critical infrastructure providers, and enterprises face many types of security threats from criminal and terrorist organizations and foreign governments. Some of these security threats come from well-organized and well-funded organizations that utilize new and increasingly sophisticated methods. As a result, security and intelligence organizations find it more difficult and complicated to detect, investigate and neutralize threats. Many of these organizations are seeking to deploy more advanced data mining solutions that generate predictive intelligence and accelerate investigations by correlating massive amounts of data from a wide range of disparate sources to uncover previously unknown connections to identify suspicious behaviors and current and future threats.
•Shortage of Security Analysts Increasing the Need for Automation. Security organizations are using data mining solutions to help conduct investigations and generate actionable insights. Typically, data mining solutions require security organizations to employ analysts and data scientists to operate them. However, there is a shortage of such qualified personnel globally leading to elongated investigations and increased risk that security threats go undetected or are not addressed. To overcome this challenge, many security organizations are seeking advanced data mining solutions that automate functions historically performed manually to improve the quality and speed of investigations. These organizations are also increasingly seeking artificial intelligence and other advanced data analysis tools to gain actionable intelligence faster with fewer analysts and data scientists.
•Security Organizations Seeking Faster Innovation Through Open Software Solutions. As security threats have become more pervasive and complex, security organizations have been seeking faster innovation from security vendors. Historically, security organizations purchased customized solutions incorporating software, hardware and integration services. This project-based approach resulted in closed systems, limiting the pace of innovation as upgrades were complex, costly and time consuming. Today, we see a growing preference to purchase software
solutions that are open and can run on standard hardware, that are faster and easier to deploy, and that can be refreshed more quickly to keep up with the accelerating pace of evolving threats.
Governments, critical infrastructure providers, and enterprises face many types of security threats from criminal and terrorist organizations and foreign governments. Some of these security threats come from well-organized and well-funded organizations that utilize new and increasingly sophisticated methods. As a result, security and intelligence organizations find it more difficult and complicated to detect, investigate and neutralize threats. Many of these organizations are seeking to deploy more advanced data mining solutions that can help them capture and analyze data from multiple sources to effectively and efficiently address the challenge of increased sophistication and complexity.
|
| |
• | Shortage of Security Analysts Increasing the Need for Automation. Security organizations are using data mining solutions to help conduct investigations and generate actionable insights. Typically, data mining solutions require security organizations to employ intelligence analysts and data scientists to operate them. However, there is a shortage of such qualified personnel globally leading to elongated investigations and increased risk that security threats go undetected or are not addressed. To overcome this challenge, many security organizations are seeking advanced data mining solutions that automate functions historically performed manually to improve the quality and speed of investigations and intelligence production. These organizations are also increasingly seeking artificial intelligence and other advanced data analysis tools to gain intelligence faster with fewer analysts and data scientists.
|
| |
• | Need for Predictive Intelligence as a Force Multiplier. Predictive intelligence is generated by correlating massive amounts of data from a wide range of disparate sources to uncover previously unknown connections, identify suspicious behaviors using advanced analytics, and predict future events. Predictive intelligence is a force multiplier, enabling security organizations to allocate resources more effectively to prioritize various operational tasks based on actionable intelligence. Security organizations are seeking advanced data mining solutions that can generate accurate and actionable predictive intelligence to shorten investigation times and empower their teams with greater insights.
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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, 20192020 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, 2019,2020, and include the following:
•Revenue recognition;
•Accounting for business combinations;
Impairment of goodwill•Goodwill and other intangible assets;
•Income taxes; and
Contingencies; and
•Accounting for stock-based compensation.
There were no significant changes to our critical accounting policies and estimates during the sixthree months ended July 31, 2019.April 30, 2020.
Results of Operations
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. In most years, our revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter (prior to the impact of unusual or nonrecurring items). Moreover, revenue and operating income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, in some years, by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that
these seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of incentive compensation plans for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, mayand more recently, the impact of the COVID-19 pandemic, also have an impact on our business and financial results.
Overview of Operating Results
The following table sets forth a summary of certain key financial information for the three and six months ended July 31, 2019April 30, 2020 and 2018:2019: | | | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended April 30, | |
(in thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 | (in thousands, except per share data) | | 2020 | | 2019 |
Revenue | | $ | 324,305 |
| | $ | 306,327 |
| | $ | 639,564 |
| | $ | 595,534 |
| Revenue | | $ | 287,295 | | | $ | 315,259 | |
Operating income | | $ | 15,275 |
| | $ | 29,231 |
| | $ | 29,743 |
| | $ | 37,013 |
| Operating income | | $ | 6,174 | | | $ | 14,468 | |
Net income attributable to Verint Systems Inc. | | $ | 10,558 |
| | $ | 21,980 |
| | $ | 12,134 |
| | $ | 19,765 |
| |
Net income per common share attributable to Verint Systems Inc.: | | |
| | | | | | | |
Net (loss) income attributable to Verint Systems Inc. | | Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 1,576 | |
Net (loss) income per common share attributable to Verint Systems Inc.: | | Net (loss) income per common share attributable to Verint Systems Inc.: | | | |
Basic | | $ | 0.16 |
| | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.31 |
| Basic | | $ | (0.09) | | | $ | 0.02 | |
Diluted | | $ | 0.16 |
| | $ | 0.33 |
| | $ | 0.18 |
| | $ | 0.30 |
| Diluted | | $ | (0.09) | | | $ | 0.02 | |
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Our revenue increaseddecreased approximately $18.0$28.0 million, or 6%9%, to $324.3$287.3 million in the three months ended July 31, 2019April 30, 2020 from $306.3$315.3 million in the three months ended July 31, 2018.April 30, 2019. The increase is due to an $18.0decrease consisted of a $27.0 million increasedecrease in product revenue and a $1.0 million decrease in service and support revenue. In our Customer Engagement segment, revenue increased $10.6decreased $21.2 million, or approximately 5%10%, from $200.8$207.1 million in the three months ended July 31, 2018April 30, 2019 to $211.4$185.9 million in the three months ended July 31, 2019.April 30, 2020. The increasedecrease consisted of an $11.6a $20.0 million increasedecrease in product revenue and a $1.2 million decrease in service and support revenue and a $1.0 million decrease in product revenue. In our Cyber Intelligence segment, revenue increaseddecreased approximately $7.4$6.8 million, or 7%, from $105.5$108.2 million in the three months ended July 31, 2018
April 30, 2019 to $112.9$101.4 million in the three months ended July 31, 2019.April 30, 2020. The increasedecrease consisted of a $6.4$7.0 million decrease in product revenue, partially offset by a $0.2 million increase in service and support revenue and a $1.0 million increase in product revenue. For additional details on our revenue by segment, see “—Revenue by Operating Segment”. Revenue in the Americas, in Europe, the Middle East and Africa (“EMEA”), and in the Asia-Pacific (“APAC”) regions represented approximately 52%51%, 29%, and 19%20% of our total revenue, respectively, in the three months ended July 31, 2019,April 30, 2020, compared to approximately 54%, 25%28%, and 21%18%, respectively, in the three months ended July 31, 2018.April 30, 2019. Further details of changes in revenue are provided below.
We reported operating income of $15.3$6.2 million in the three months ended July 31, 2019April 30, 2020 compared to operating income of $29.2$14.5 million in the three months ended July 31, 2018.April 30, 2019. The decrease in operating income was primarily due to a $28.8$16.1 million increasedecrease in operating expenses,gross profit, from $163.8$201.1 million to $192.6$185.0 million, partially offset by a $14.9$7.8 million increasedecrease in gross profit,operating expenses, from $193.0$186.6 million to $207.9$178.8 million. The increasedecrease in operating expenses consisted of a $22.2$10.1 million increasedecrease in selling, general and administrative expenses, partially offset by a $6.4$1.9 million increase in net research and development expenses and a $0.2$0.4 million increase in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.
Net incomeloss attributable to Verint Systems Inc. was $10.6$6.0 million, and diluted net incomeloss per common share was $0.16,$0.09, in the three months ended July 31, 2019April 30, 2020 compared to net income attributable to Verint Systems Inc. of $22.0$1.6 million, and diluted net income per common share of $0.33,$0.02, in the three months ended July 31, 2018. The decrease in net income and diluted net income per common shareApril 30, 2019. These reduced operating results in the three months ended July 31, 2019 wasApril 30, 2020 were primarily due to a $13.9an $8.3 million decrease in operating income described above, a $2.6 million increase in total other expense, net, partially offset by a $3.2 million decrease in provision from income taxes and a $0.8$0.1 million increasedecrease in net income attributable to our noncontrolling interests, partially offset by a $2.5 million decrease in total other expense, net and a $0.8 million increase in benefit from income taxes.interests. Further details of these changes are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates for the three months ended July 31, 2019April 30, 2020 to average exchange rates for the three months ended July 31, 2018,April 30, 2019, the U.S. dollar strengthened relative to the euro,Singapore dollar, Australian dollar, British pound sterling, Australian dollar,Brazilian real, and our hedged Israeli shekel rate,euro 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 July 31, 2019,April 30, 2020, had foreign currency exchange rates remained unchanged from rates in effect for the three months ended July 31, 2018,April 30, 2019, our revenue would have been approximately $3.3 million higher and our cost of revenue and operating
expenses on a combined basis would have been approximately $3.9 million higher, which would have resulted in a $0.6 million decrease in our operating income.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Our revenue increased approximately $44.1 million, or 7%, to $639.6 million in the six months ended July 31, 2019 from $595.5 million in the six months ended July 31, 2018. The increase consisted of a $45.8 million increase in service and support revenue, partially offset by a $1.7 million decrease in product revenue. In our Customer Engagement segment, revenue increased $31.3 million, or approximately 8%, from $387.3 million in the six months ended July 31, 2018 to $418.6 million in the six months ended July 31, 2019. The increase consisted of a $26.7 million increase in service and support revenue and a $4.6 million increase in product revenue. In our Cyber Intelligence segment, revenue increased approximately $12.8 million, or 6%, from $208.3 million in the six months ended July 31, 2018 to $221.1 million in the six months ended July 31, 2019. The increase consisted of a $19.1 million increase in service and support revenue, partially offset by a $6.3 million decrease in product revenue. For additional details on our revenue by segment, see “—Revenue by Operating Segment”. Revenue in the Americas, EMEA, and in APAC regions represented approximately 53%, 28%, and 19% of our total revenue, respectively, in the six months ended July 31, 2019, compared to approximately 53%, 26%, and 21%, respectively, in the six months ended July 31, 2018. Further details of changes in revenue are provided below.
We reported operating income of $29.7 million in the six months ended July 31, 2019, compared to operating income of $37.0 million in the six months ended July 31, 2018. The decrease in operating income was primarily due to a $48.1 million increase in operating expenses, from $331.1 million to $379.2 million, partially offset by $40.8 million increase in gross profit, from $368.1 million to $408.9 million. The increase in operating expenses consisted of a $36.4 million increase in selling, general and administrative expenses, an $11.5 million increase in net research and development expenses, and a $0.2 million increase in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. was $12.1 million, and diluted net income per common share was 0.18, in the six months ended July 31, 2019 compared to net income attributable to Verint Systems Inc. of $19.8 million, and a net income per common share of 0.30, in the six months ended July 31, 2018. The decrease in net income and diluted net income per common share in the six months ended July 31, 2019 was primarily due to a $7.3 million decrease in operating income described above, a $2.0 million increase in net income attributable to our noncontrolling interests, and a $0.4 million decrease in benefit for income taxes, partially offset by a $2.0 million decrease in total other expense, net. Further details of these changes are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates for the six months ended July 31, 2019 to average exchange rates for the six months ended July 31, 2018, the U.S. dollar strengthened relative to the euro, British pound sterling, Australian dollar, 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 six months ended July 31, 2019, had foreign currency exchange rates remained unchanged from rates in effect for the six months ended July 31, 2018, our revenue would have been approximately $9.0$3.8 million higher and our cost of revenue and operating expenses on a combined basis would have been approximately $8.6$3.2 million higher,, which would have resulted in a $0.4$0.6 million increase in our operating income.
As of July 31, 2019,April 30, 2020, we employed approximately 6,4006,300 professionals, including part-time employees and certain contractors, as compared to approximately 5,7006,200 at July 31, 2018.April 30, 2019.
Revenue by Operating Segment
The following table sets forth revenue for each of our two operating segments for the three and six months endedJuly 31, 2019 April 30, 2020 and 2018:2019:
| | | | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change | | | Three Months Ended April 30, | | | % Change |
(in thousands) | | 2019 | | 2018 | | 2019-2018 | | 2019 | | 2018 | | 2019-2018 | (in thousands) | | 2020 | | 2019 | | 2020-2019 |
Customer Engagement | | $ | 211,436 |
| | $ | 200,807 |
| | 5% | | $ | 418,531 |
| | $ | 387,263 |
| | 8 | % | Customer Engagement | | $ | 185,865 | | | $ | 207,095 | | | (10)% |
Cyber Intelligence | | 112,869 |
| | 105,520 |
| | 7% | | 221,033 |
| | 208,271 |
| | 6 | % | Cyber Intelligence | | 101,430 | | | 108,164 | | | (6)% |
Total revenue | | $ | 324,305 |
| | $ | 306,327 |
| | 6% | | $ | 639,564 |
| | $ | 595,534 |
| | 7 | % | Total revenue | | $ | 287,295 | | | $ | 315,259 | | | (9)% |
Customer Engagement Segment
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Customer Engagement revenue increaseddecreased approximately $10.6$21.2 million, or 5%10%, from $200.8$207.1 million in the three months ended July 31, 2018April 30, 2019 to $211.4$185.9 million in the three months ended July 31, 2019.April 30, 2020. The increasedecrease consisted of an $11.6a $20.0 million increasedecrease in product revenue and a $1.2 million decrease in service and support revenue, partially offset by a $1.0 million decrease in product revenue. The increase in service and support revenue was primarily driven by growth in recurring revenue as we continued to see positive demand from customers across our portfolio of cloud-based solutions and growth in services and support revenue associated with recent business combinations. The decrease in product revenue reflects a lower aggregate value of executed nonrecurring software license arrangements. We expect our revenue mix to continue to shift to recurring sources. This shift is consistent with our cloud-first strategy and a general market shift from on premises to cloud solutions.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Customer Engagement revenue increased approximately $31.3 million, or 8%, from $387.3 million in the six months ended July 31, 2018 to $418.6 million in the six months ended July 31, 2019. The increase consisted of a $26.7 million increase in service and support revenue and a $4.6 million increase in product revenue. The increase in service and support revenue was primarily driven by growth in recurring revenue as we continued to see positive demand from customers across our portfolio of cloud-based solutions and growth in services and support revenue associated with recent business combinations. The increase in product revenue was primarily due to the recognitiondelayed purchasing decisions on large contracts, particularly on-premises arrangements, and reduced spending by customers, both due to COVID-19. The impact of a large license arrangement executed during the six months ended July 31, 2019 with no comparable transactionCOVID-19 was most pronounced in the prior period.last month of the quarter when the vast majority of transactions typically close, as our customers’ priorities shifted to maintaining the stability of their operations and the preservation of cash. Our product revenue can fluctuate from period to period, as some large contracts can represent a significant share of our product revenue for a given period. The slight decrease in service and support revenue was primarily
driven by a decrease in implementation revenue due to COVID-19 and related containment measures, including customer facility closures and travel restrictions, partially offset by growth in recurring revenue as we continue to see positive demand from customers across our portfolio of cloud-based solutions. We expect our revenue mix to continue to shift to recurring sources. This shiftsources, which is consistent with our cloud-first strategy and a general market shift from on premiseson-premises to cloud solutions.
Cyber Intelligence Segment
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Cyber Intelligence revenue increaseddecreased approximately $7.4$6.8 million, or 7%, from $105.5$108.2 million in the three months ended July 31, 2018April 30, 2019 to $112.9$101.4 million in the three months ended July 31, 2019.April 30, 2020. The increasedecrease consisted of a $6.4$7.0 million decrease in product revenue, partially offset by a $0.2 million increase in service and support revenue. The decrease in product revenue was primarily due to a decrease in product deliveries due to delays attributed to the impact of COVID-19, as our customers shifted their attention to addressing operational challenges associated with the pandemic, and a $1.0 million increasedecrease in product revenue.progress realized during the current period on long-term projects for which revenue is recognized over time using the percentage-of-completion ("POC") method. The increase in service and support revenue was primarily attributable to an increase in support revenue from existing customers, and to a lesser extent an increase in progress realized during the current year on long-term projects for whichSaaS revenue, is recognized over time using the percentage of completion (“POC”) method. The increase in product revenue was primarily due to an increase in progress realized during the current period on long-term projects for which revenue is recognized over time using the POC method, partially offset by a decrease in product deliveries.
Six Months Ended July 31, 2019 compareddeployment services due to Six Months Ended July 31, 2018. Cyber Intelligence revenue increased approximately $12.8 million, or 6%, from $208.3 million in the six months ended July 31, 2018 to $221.1 million in the six months ended July 31, 2019. The increase consisted ofCOVID-19 restrictions and a $19.1 million increase in service and support revenue, partially offset by $6.3 million decrease in product revenue. The increase in service and support revenue was primarily attributable to an increase in support revenue from existing customers and an increase in progress realized during the current year on long-term projects for which revenue is recognized over time using the POC method. The decrease in product revenue was primarily due to a decrease in product deliveries and the recognition of a long-term customization project that was recognized upon customer acceptance in the six months ended July 31, 2018, partially offset by an increase in progress realized during the current period on long-term projects for which revenue is recognized over time using the POC method.
Volume and Price
We sell products in multiple configurations, and the price of any particular product varies depending on the configuration of the product sold. Due to the variety of customized configurations for each product we sell, we are unable to quantify the amount of any revenue changes attributable to a change in the price of any particular product and/or a change in the number of products sold.
Product Revenue and Service and Support Revenue
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products, unbundled SaaS, and sale of hardware products (which include software that works together with the hardware to deliver the product’s essential functionality), and (b) service and support revenue, including revenue from installation services, post-contract customerinitial and renewal support, project management, hosting services, cloud deployments, bundled SaaS, optional managed services, product warranties, and business advisory consulting and training services.
The following table sets forth product revenue and service and support revenue for the three and six months endedJuly 31, 2019 April 30, 2020 and 2019:
2018:
| | | | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change | | | Three Months Ended April 30, | | | % Change |
(in thousands) | | 2019 |
| 2018 | | 2019-2018 | | 2019 | | 2018 | | 2019-2018 | (in thousands) | | 2020 | | 2019 | | 2020-2019 |
Product revenue | | $ | 109,983 |
| | $ | 110,042 |
| | —% | | $ | 214,207 |
| | $ | 215,906 |
| | (1)% | Product revenue | | $ | 77,284 | | | $ | 104,224 | | | (26)% |
Service and support revenue | | 214,322 |
| | 196,285 |
| | 9% | | 425,357 |
| | 379,628 |
| | 12% | Service and support revenue | | 210,011 | | | 211,035 | | | —% |
Total revenue | | $ | 324,305 |
| | $ | 306,327 |
| | 6% | | $ | 639,564 |
| | $ | 595,534 |
| | 7% | Total revenue | | $ | 287,295 | | | $ | 315,259 | | | (9)% |
Product Revenue
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Product revenue wasdecreased approximately $110.0$26.9 million, or 26%, from $104.2 million for each of the three month periodsmonths ended July 31,April 30, 2019 and 2018, asto $77.3 million for the $1.0 million increase in our Cyber Intelligence segment was offset bythree months ended April 30, 2020, resulting from a $1.0$20.0 million decrease in our Customer Engagement segment.
Six Months EndedJuly 31, 2019 compared to Six Months Ended July 31, 2018. Product revenue decreased approximately $1.7 million, or 1%, from $215.9 million for the six months ended July 31, 2018 to $214.2 million for the six months ended July 31, 2019, resulting fromsegment and a $6.3$6.9 million decrease in our Cyber Intelligence segment, partially offset by a $4.6 million increase in our Customer Engagement segment.
For additional information see “—Revenue by Operating Segment”.
Service and Support Revenue
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Service and support revenue increaseddecreased approximately $18.0$1.0 million, or 9%, from $196.3$211.0 million for the three months ended July 31, 2018April 30, 2019 to $214.3$210.0 million for the three
months ended July 31, 2019.April 30, 2020. This increasedecrease was the result of an $11.6a $1.2 million increasedecrease in our Customer Engagement segment, andpartially offset by a $6.4$0.2 million increase in our Cyber Intelligence segment.
Six Months Ended
July 31, 2019 compared to Six Months Ended July 31, 2018. Service and support revenue increased approximately $45.8 million, or 12%, from $379.6 million for the six months ended July 31, 2018 to $425.4 million for the six months ended July 31, 2019. This increase was the result of a $26.7 million increase in our Customer Engagement segment and a $19.1 million increase in our Cyber Intelligence segment.
For additional information see “— Revenue by Operating Segment”.
Cost of Revenue
The following table sets forth cost of revenue by product and service and support, as well as amortization of acquired technology for the three and six months endedJuly 31, 2019 April 30, 2020 and 2018:2019:
| | | | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change | | | Three Months Ended April 30, | | | % Change |
(in thousands) | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 | (in thousands) | | 2020 | | 2019 | | 2020-2019 |
Cost of product revenue | | $ | 29,424 |
| | $ | 32,984 |
| | (11)% | | $ | 57,544 |
| | $ | 67,793 |
| | (15)% | Cost of product revenue | | $ | 21,318 | | | $ | 28,120 | | | (24)% |
Cost of service and support revenue | | 81,430 |
| | 74,803 |
| | 9% | | 160,791 |
| | 146,660 |
| | 10% | Cost of service and support revenue | | 76,399 | | | 79,361 | | | (4)% |
Amortization of acquired technology | | 5,587 |
| | 5,520 |
| | 1% | | 12,294 |
| | 12,946 |
| | (5)% | Amortization of acquired technology | | 4,609 | | | 6,707 | | | (31)% |
Total cost of revenue | | $ | 116,441 |
| | $ | 113,307 |
| | 3% | | $ | 230,629 |
| | $ | 227,399 |
| | 1% | Total cost of revenue | | $ | 102,326 | | | $ | 114,188 | | | (10)% |
We exclude certain costs of both product revenue and service and support revenue, including shared support costs, stock-based compensation, and asset impairment charges, among others, when calculating our operating segment gross margins.
Cost of Product Revenue
Cost of product revenue primarily consists of hardware material costs and royalties due to third parties for software components that are embedded in our software solutions. Cost of product revenue also includes amortization of capitalized software development costs, employee compensation and related expenses associated with our global operations, facility costs, and other allocated overhead expenses. In our Cyber Intelligence segment, cost of product revenue also includes employee compensation and related expenses, contractor and consulting expenses, and travel expenses, in each case for resources dedicated to project management and associated product delivery.
As with many other technology companies, our software products tend to have higher gross margins than our hardware products, so the mix of products we sell in a particular period can have a significant impact on our gross margins in that period.
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Cost of product revenue decreased approximately $3.6$6.8 million, or 11%24%, from $33.0$28.1 million in the three months ended July 31, 2018April 30, 2019 to $29.4$21.3 million in the three months ended July 31, 2019,April 30, 2020, primarily due to a decreased cost of product revenue in both our Cyber Intelligence segment, dueand Customer Engagement segments, driven primarily by a corresponding decrease in product revenue as discussed above, and by a decrease in Cyber Intelligence subcontractor costs resulting from prior investments to a reduction in the amount of pass-through hardware reselling, and to a lesser extent the timing of hardware deliveries as described further below.productize our portfolio. Our overall product gross margins increaseddecreased to 72% in the three months ended April 30, 2020 from 73% in the three months ended July 31, 2019 from 70% in the three months ended July 31, 2018.April 30, 2019. Product gross margins in our Cyber Intelligence segment increased from 57%64% in the three months ended July 31, 2018April 30, 2019 to 66%69% in the three months ended July 31, 2019,April 30, 2020, primarily due to a change in product mix and a reductiondecrease in the amount of pass-through hardware reselling,product customization work that is not considered a separate performance obligation driven by recent and the timing of hardware deliveries relatedongoing investments to certain long-term projects, for which fulfillment costs are recognized upon delivery but the associated revenue is recognized over time using the POC method.productize our portfolio. Cyber Intelligence product margins are subject to considerable fluctuation from period to period, based on the product mix sold and the timing of hardware deliveries related to POC revenue.sold. Product gross margins in our Customer Engagement segment decreased from 85% in the three months ended July 31, 2018 to 84% in the three months ended July 31,April 30, 2019 to 79% in the three months ended April 30, 2020, primarily due to a change in product mix.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Cost of product revenue decreased approximately $10.3 million, or 15%, from $67.8 million in the six months ended July 31, 2018 to $57.5 million in the six months ended July 31, 2019 primarilylower sales volume due to decreased cost ofCOVID-19, which resulted in revenue decreasing at a faster rate than product revenue in our Cyber Intelligence segment, driven primarily by a corresponding decrease in Cyber Intelligence product revenue as discussed above, a reduction in the amount of pass-through hardware reselling, and the timing of hardware deliveries as described further below. Our overall product gross margins increased to 73% in the six months ended July 31, 2019 from 69% in the six months ended July 31, 2018. Product gross margins in our Cyber Intelligence segment increased from 57% in the six months ended July 31, 2018 to 65% in the six months ended July 31, 2019, primarily due to a change in product mix, a reduction in the amount of pass-through hardware reselling, and the timing of hardware deliveries related to certain long-term projects, for which fulfillment costs, are recognized upon delivery but the associated revenue is recognized over time using the POC method. Cyber Intelligence product margins are subject to considerable fluctuation from period to period, based on the product mix sold and the timing of hardware deliveries related to POC revenue. Product gross margins in our Customer Engagement segment increased from 83% in the six months ended July 31, 2018 to 84% in the six months ended July 31, 2019, primarily due to a change in product mix.including software amortization costs.
Cost of Service and Support Revenue
Cost of service and support revenue primarily consists of employee compensation and related expenses, contractor costs, hosting infrastructure costs, and travel expenses relating to installation, training, consulting, and maintenance services. Cost of service and support revenue also includes stock-based compensation expenses, facility costs, and other overhead expenses. In accordance with GAAP and our accounting policy, the cost of service and support revenue is generally expensed as incurred in the period in which the services are performed.
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Cost of service and support revenue increaseddecreased approximately $6.6$3.0 million, or 9%4%, from $74.8 million in the three months ended July 31, 2018 to $81.4$79.4 million in the three months ended July 31, 2019.April 30, 2019 to $76.4 million in the three months ended April 30, 2020. The increasedecrease was primarily due to increaseda decrease in travel costs and employee compensation and related expenses as a result of additional services employee headcountcost reduction initiatives related to support the delivery of our services and support revenue andCOVID-19, offset by an increase in data center and cloud costs associated with the increase in cloud revenue. Our overall service and support gross margins were 62% in each of the three months ended July 31, 2019 and 2018.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Cost of service and support revenue increased approximately $14.1 million, or 10%, from $146.7 million in the six months ended July 31, 2018 to $160.8 million in the six months ended July 31, 2019. The increase was primarily due to increased employee compensation and related expenses as a result of additional services employee headcount to support the delivery of our services and support revenue and an increase in data center and cloud costs associated with the increase in cloud revenue. Our overall service and support gross margins increased from 61% in the six months ended July 31, 2018 to 62% in the sixthree months ended July 31, 2019.April 30, 2019 to 64% in the three months ended April 30, 2020.
Amortization of Acquired Technology
Amortization of acquired technology consists of amortization of technology assets acquired in connection with business combinations.
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018. Amortization of acquired technology increased approximately $0.1 million, or 1%, from $5.5 million in the three months ended July 31, 2018 to $5.6 million in the three months ended July 31,April 30, 2019. The increase was attributable to amortization expense associated with recent business combinations, partially offset by acquired technology intangible assets from historical business combinations becoming fully amortized.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Amortization of acquired technology decreased approximately $0.6$2.1 million, or 5%31%, from $12.9$6.7 million in the sixthree months ended July 31, 2018April 30, 2019 to $12.3$4.6 million sixin the three months ended July 31, 2019.April 30, 2020. The decrease was attributable to acquired technology intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense of acquired technology-basedtechnology intangible assets associated with recent business combinations.
Further discussion regarding our business combinations appears in Note 5, “Business Combinations” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Research and Development, Net
Research and development expenses consist primarily of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized, as well as reimbursements under government programs. Software development costs are capitalized upon the establishment of technological feasibility and continue to be capitalized through the general release of the related software product.
The following table sets forth research and development, net for the three and six months endedJuly 31, 2019 months ended April 30, 2020 and 2018: 2019:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | % Change |
(in thousands) | | 2020 | | 2019 | | 2020-2019 |
Research and development, net | | $ | 59,079 | | | $ | 57,169 | | | 3% |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change |
(in thousands) | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Research and development, net | | $ | 58,685 |
| | $ | 52,254 |
| | 12% | | $ | 115,854 |
| | $ | 104,406 |
| | 11% |
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Research and development, net increased approximately $6.4$1.9 million, or 12%3%, from $52.3$57.2 million in the three months ended July 31, 2018April 30, 2019 to $58.7$59.1 million in the three months ended July 31, 2019.April 30, 2020. The increase was primarily due to a $6.2$2.9 million increase in employee compensation and related expenses, as a result of increased investment in R&D headcount, a $0.5 million increase in software subscription expenses related to internal-use software, a $0.5 million increase in R&D contractor expenses primarily related to our Cyber Intelligence segment, and a $0.3 million increase in stock-based compensation expenses, partially offset by a $1.7$1.0 million increase in capitalized software development costs in the three months ended July 31, 2019April 30, 2020 compared to the three months ended July 31, 2018.April 30, 2019.
Six Months EndedJuly 31, 2019 compared to Six Months Ended July 31, 2018. Research and development, net increased approximately $11.5 million, or 11%, from $104.4 million in the six months ended July 31, 2018 to $115.9 million in the six months ended July 31, 2019. The increase was primarily due to a $11.0 million increase in employee compensation and related expenses as a result of increased investment in R&D headcount, a $1.4 million increase in stock-based compensation expenses as a result of a change in R&D employee bonus payment structure, a $1.3 million increase in software subscription expenses related to internal-use software, and a $0.9 million increase in R&D contractor expenses primarily related to our Cyber Intelligence segment, partially offset by a $3.2 million increase in capitalized software development costs in the six months ended July 31, 2019 compared to the six months ended July 31, 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, changes in the fair values of our obligations under contingent consideration arrangements, sales and marketing expenses,
including travel costs, sales commissions and sales referral fees, facility costs, communication expenses, and other administrative expenses.
The following table sets forth selling, general and administrative expenses for the three and six months endedJuly 31, 2019 April 30, 2020 and 2018:2019:
| | | | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change | | | Three Months Ended April 30, | | | % Change |
(in thousands) | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 | (in thousands) | | 2020 | | 2019 | | 2020-2019 |
Selling, general and administrative | | $ | 126,265 |
| | $ | 104,083 |
| | 21% | | $ | 247,986 |
| | $ | 211,580 |
| | 17% | Selling, general and administrative | | $ | 111,651 | | | $ | 121,721 | | | (8)% |
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Selling, general and administrative expenses increaseddecreased approximately $22.2$10.0 million, or 21%8%, from $104.1 million in the three months ended July 31, 2018 to $126.3 million in the three months ended July 31, 2019. This increase was primarily attributable to a $7.6 million increase in employee compensation expense due to increased headcount, including due to recent acquisitions, a $5.6 million increase in professional fees related to a shareholder proxy contest that was settled during three months ended July 31, 2019, a $2.7 million increase in stock-based compensation expenses due to a year-over-year increase in our stock price and an increase in number of participants due to recent acquisitions, and a $2.4 million increase in marketing expenses. Selling, general, and administrative expense was also impacted by a $3.1 million increase due to the change in fair value of our obligations under contingent consideration arrangements, from a net benefit of $3.9$121.7 million in the three months ended July 31, 2018April 30, 2019 to a net benefit of $0.8$111.7 million duringin the three months ended July 31, 2019,April 30, 2020. This decrease was primarily attributable to cost reduction initiatives we implemented in response to the COVID-19 pandemic, which resulted in a $3.7 million decrease in travel related costs, a $1.6 million decrease in marketing related expenses due to the cancellation of certain sales and marketing events and trade shows, a $0.7 million decrease in employee compensation related expenses, a $0.7 million decrease in facility expenses as a result of revised outlooks for achieving the performance targets set forthmajority of our workforce working from home, and $0.5 million decrease in several unrelated contingent consideration arrangements.overhead expenses. Additionally,
Six Months Ended July 31, 2019 comparedstock-based compensation decreased by $2.2 million due to Six Months Ended July 31, 2018.a year-over-year decrease in our stock price and professional fees decreased by $1.9 million. Selling, general, and administrative expenses increased approximately $36.4 million, or 17%, from $211.6 million in the six months ended July 31, 2018 to $248.0 million in the six months ended July 31, 2019. This increase was primarily attributable to a $17.0 million increase in employee compensation expenses due to increased headcount as a result of recent acquisitions, a $7.5 million increase in professional fees related to a shareholder proxy contest that was settled during three months ended July 31, 2019, a $2.6 million increase in marketing expenses, a $2.3 million increase in software subscription expenses related to internal-use software, and a $1.7 million increase in stock-based compensation expenses due to a year-over-year increase in our stock price and an increase in number of participants due to recent acquisitions. Selling, general, and administrative expense waswere also impacted by a $5.1$6.0 million increasedecrease due to the change in the fair value of our obligations under contingent consideration arrangements, from a net benefitexpense of $4.7$1.2 million in the sixthree months ended July 31, 2018April 30, 2019 to a net expensebenefit of $0.4$4.8 million during the sixthree months ended July 31, 2019,April 30, 2020, as a result of revised outlooks for achieving the performance targets set forth inunder several unrelated contingent consideration arrangements. These decreases were partially offset by a $7.8 million increase in expenses related to the planned separation of our businesses (as discussed in “Overview” above).
The impact of contingent consideration arrangements on our operating results can vary over time as we revise our outlook for achieving the performance targets underlying the arrangements. This impact on our operating results may be more significant in some periods than in others, depending on a number of factors, including the magnitude of the change in the outlook for each arrangement separately as well as the number of contingent consideration arrangements in place, the liabilities requiring adjustment in that period, and the net effect of those adjustments.
Amortization of Other Acquired Intangible Assets
Amortization of other acquired intangible assets consists of amortization of certain intangible assets acquired in connection with business combinations, including customer relationships, distribution networks, trade names, and non-compete agreements.
The following table sets forth amortization of other acquired intangible assets for the three and six months ended July 31, 2019April 30, 2020 and 2018:2019:
| | | | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change | | | Three Months Ended April 30, | | | % Change |
(in thousands) | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 | (in thousands) | | 2020 | | 2019 | | 2020-2019 |
Amortization of other acquired intangible assets | | $ | 7,639 |
| | $ | 7,452 |
| | 3% | | $ | 15,352 |
| | $ | 15,136 |
| | 1% | Amortization of other acquired intangible assets | | $ | 8,065 | | | $ | 7,713 | | | 5% |
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Amortization of other acquired intangible assets increased approximately $0.1$0.4 million, or 3%5%, from $7.5$7.7 million in the three months ended July 31, 2018April 30, 2019 to $7.6$8.1 million in the three months ended July 31, 2019.April 30, 2020. The increase was attributable to amortization expense associated with acquired intangible assets from recent business combinations, partially offset by acquired customer-related intangible assets from historical business combinations becoming fully amortized.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Amortization of other acquired intangible assets increased approximately $0.3 million, or 1%, from $15.1 million in the six months ended July 31, 2018 to $15.4 million in the six months ended July 31, 2019. The increase was attributable to amortization expense associated with acquired intangible assets from recent business combinations, partially offset by acquired customer-related intangible assets from historical business combinations becoming fully amortized.
Further discussion regarding our business combinations appears in Note 5, “Business Combinations” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Other Expense, Net
The following table sets forth total other expense, net for the three and six months endedJuly 31, 2019 April 30, 2020 and 2019:
2018:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Three Months Ended April 30, | | | | % Change |
(in thousands) | | 2020 | | 2019 | | 2020-2019 |
Interest income | | $ | 1,017 | | | $ | 1,426 | | | (29)% |
Interest expense | | (10,698) | | | (9,934) | | | 8% |
Other income (expense): | | | | | | |
Foreign currency losses, net | | (3,254) | | | (1,187) | | | * |
Gains on derivatives | | 1,014 | | | 549 | | | 85% |
Other, net | | 10 | | | (152) | | | * |
Total other expense, net | | (2,230) | | | (790) | | | * |
Total other expense, net | | $ | (11,911) | | | $ | (9,298) | | | 28% |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change |
(in thousands) | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 |
Interest income | | $ | 1,687 |
| | $ | 1,134 |
| | 49% | | $ | 3,113 |
| | $ | 1,927 |
| | 62% |
Interest expense | | (10,107 | ) | | (9,922 | ) | | 2% | | (20,041 | ) | | (18,984 | ) | | 6% |
Other income (expense): | | |
| | |
| |
| | | | | | |
Foreign currency gains (losses), net | | 774 |
| | (2,079 | ) | | (137)% | | (412 | ) | | (3,914 | ) | | (89)% |
Gains on derivatives | | 179 |
| | 1,221 |
| | (85)% | | 728 |
| | 2,709 |
| | (73)% |
Other, net | | (44 | ) | | (383 | ) | | (89)% | | (197 | ) | | (500 | ) | | (61)% |
Total other income (expense), net | | 909 |
| | (1,241 | ) | | (173)% | | 119 |
| | (1,705 | ) | | (107)% |
Total other expense, net | | $ | (7,511 | ) | | $ | (10,029 | ) | | (25)% | | $ | (16,809 | ) | | $ | (18,762 | ) | | (10)% |
* Percentage is not meaningful.
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Total other expense, net, decreasedincreased by $2.5$2.6 million from $10.0$9.3 million in the three months ended July 31, 2018April 30, 2019 to $7.5$11.9 million in the three months ended July 31, 2019.April 30, 2020.
Interest expense increased from $9.9 million in the three months ended July 31, 2018April 30, 2019 to $10.1$10.7 million in the three months ended July 31, 2019April 30, 2020 primarily due to higheran increase in borrowings under our revolving credit facility, partially offset by lower interest rates onrates. Further discussion of our outstanding borrowings.borrowings appears in Note 7, “Long-term Debt” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
We recorded $0.8 million of net foreign currency gains in the three months ended July 31, 2019 compared to $2.1$3.3 million of net foreign currency losses in the three months ended July 31, 2018. ForeignApril 30, 2020 compared to $1.2 million of net foreign currency gainslosses in the three months ended July 31, 2019April 30, 2019. Our foreign currency losses resulted primarily from the weakeningstrengthening of the U.S.U.S dollar against certain foreign currencies from January 31, 2020 to April 30, 2020, mainly the Brazilian real, from April 30, 2019 to July 31, 2019, resulting in foreign currency gains on U.S. dollar-denominated net liabilities in certain entities which use the Brazilian real functional currency and the weakening of the U.S. dollar against the Israeli shekel resulting in foreign currency gains on Israeli shekel denominated net assets in certain entities that use a U.S. dollar functional currency.
and British pound sterling.
In the three months ended July 31, 2019,April 30, 2020, there were net gains on derivative financial instruments (not designated as hedging instruments) of $0.2$1.0 million, compared to net gains of $1.2$0.5 million on such instruments for the three months ended July 31, 2018. The net gains in the current period primarily reflected gains on contracts executed to hedge movements in the exchange rate between the U.S. dollar and the Singapore dollar.
Six Months Ended July 31, 2019 compared to Six Months EndedJuly 31, 2018. Total other expense, net, decreased by $2.0 million from $18.8 million in the six months ended July 31, 2018 to $16.8 million in the six months ended July 31,April 30, 2019.
Interest expense increased from $19.0 million in the six months ended July 31, 2018 to $20.0 million in the six months ended July 31, 2019 primarily due to higher interest rates on outstanding borrowings.
We recorded $0.4 million of net foreign currency losses in the six months ended July 31, 2019 compared to $3.9 million of net foreign currency losses in the six months ended July 31, 2018. Foreign currency losses in the six months ended July 31, 2019
resulted primarily from the strengthening of the U.S. dollar against the euro from January 31, 2019 to July 31, 2019, resulting in foreign currency losses on euro denominated net assets in certain entities which use a U.S. dollar functional currency and foreign currency losses on U.S. dollar-denominated net payables in certain entities which use a euro functional currency.
In the six months ended July 31, 2019, there were net gains on derivative financial instruments of $0.7 million, compared to net gains of $2.7 million on such instruments for the six months ended July 31, 2018. The net gains in the current period primarily reflected gains on contracts executed to hedge movements in the exchange rate between the U.S. dollar and the Singapore dollar.
Benefit from(Benefit) Provision for Income Taxes
The following table sets forth our benefit(benefit) provision from income taxes for the three and six months ended July 31, 2019April 30, 2020 and 2018:2019:
| | | | Three Months Ended July 31, | | % Change | | Six Months Ended July 31, | | % Change | | | Three Months Ended April 30, | | | % Change |
(in thousands) | | 2019 |
| 2018 |
| 2019-2018 | | 2019 | | 2018 | | 2019-2018 | (in thousands) | | 2020 | | 2019 | | 2020-2019 |
Benefit from income taxes | | $ | (4,507 | ) | | $ | (3,722 | ) | | 21% | | $ | (3,098 | ) | | $ | (3,448 | ) | | (10)% | |
(Benefit) provision for income taxes | | (Benefit) provision for income taxes | | $ | (1,762) | | | $ | 1,409 | | | (225)% |
Three Months Ended July 31, 2019April 30, 2020 compared to Three Months Ended July 31, 2018.April 30, 2019. Our negative effective income tax rate was 58.0%30.7% for the three months ended July 31, 2019,April 30, 2020, compared to a negativean effective income tax rate of 19.4%27.3% for the three months ended July 31, 2018.April 30, 2019.
For the three months ended July 31, 2019,April 30, 2020, the income tax rate no longer reflects a limitation of the tax benefit for U.S. losses due to a valuation allowance. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, offset by lower statutory rates in several foreign jurisdictions and a netdeferred tax benefit due to a tax rate change in a foreign jurisdiction. The result was an income tax benefit of $6.7$1.8 million recorded in relation to changes in unrecognizedon a pre-tax loss of $5.7 million, which represented an effective income tax benefits and other items as a resultrate of an audit settlement in a foreign jurisdiction and30.7%.
For the three months ended April 30, 2019, the effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, offset by lower statutory rates in several foreign jurisdictions. The result was an income tax benefit of $4.5 million on pre-tax income of $7.8 million, which represented a negative effective income tax rate of 58.0%. Excluding the income tax benefit attributable to the audit settlement, the result was an income tax provision of $2.2 million and an effective tax rate of 27.8%.
For the three months ended July 31, 2018, the pre-tax losses in domestic and foreign jurisdictions where we maintained valuation allowances and did not record tax benefits were significantly lower than the pre-tax income in jurisdictions where we recorded tax provisions. In connection with an acquisition in our Customer Engagement segment, we reduced the valuation allowance on our U.S. federal and certain state deferred income tax assets resulting in a discrete income tax benefit of $7.7 million. The result was an income tax benefit of $3.7$1.4 million on a pre-tax income of $19.2$5.2 million, which represented a negativean effective income tax rate of 19.4%. Excluding the income tax benefit attributable to the valuation allowance release, the result was an income tax provision of $4.0 million and an effective tax rate of 20.9%27.3%.
Six Months Ended July 31, 2019 compared to Six Months Ended July 31, 2018. Our negative effective income tax rate was 24.0% for the six months ended July 31, 2019, compared to a negative effective income tax rate of 18.9% for the six months ended July 31, 2018. For the six months ended July 31, 2019, the income tax rate no longer reflects a limitation of the tax benefit for U.S. losses due to a valuation allowance. The effective tax rate differs from the U.S. federal statutory rate of
21.0% primarily due to a net tax benefit of $6.7 million recorded in relation to changes in unrecognized income tax benefits and other items as a result of an audit settlement in a foreign jurisdiction and the impact of U.S. taxation of certain foreign activities, offset by lower statutory rates in several foreign jurisdictions. The result was an income tax benefit of $3.1 million on pre-tax income of $12.9 million, which represented a negative effective income tax rate of 24.0%. Excluding the income tax benefit attributable to the audit settlement, the result was an income tax provision of $3.6 million and an effective tax rate of 27.6%.
For the six months ended July 31, 2018, the pre-tax losses in domestic and foreign jurisdictions where we maintained valuation allowances and did not record tax benefits were significantly lower than the pre-tax income in jurisdictions where we recorded tax provisions. In connection with an acquisition in our Customer Engagement segment, we reduced the valuation allowance on our U.S. federal and certain state deferred income tax assets resulting in a discrete income tax benefit of $7.7 million. The result was an income tax benefit of $3.4 million on pre-tax income of $18.3 million, which represented a negative effective income tax rate of 18.9%. Excluding the income tax benefit attributable to the valuation allowance release, the result was an income tax provision of $4.3 million and an effective tax rate of 23.5%.
Liquidity and Capital Resources
Overview
Our primary recurring source of cash is the collection of proceeds from the sale of products and services to our customers, including cash periodically collected in advance of delivery or performance.
On December 4, 2019, we announced that Valor Parent LP (the “Apax Investor”), an affiliate of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400 million. Under the terms of the Investor Agreement, the Apax Investor initially purchased $200 million of our Series A convertible preferred stock, which closed on May 7, 2020, with an initial conversion price of $53.50. The initial conversion price represents a conversion premium of 17.1% over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to the signing date. Assuming completion of the Spin-Off described above, the Series A convertible preferred stock will not participate in the Spin-Off distribution of the shares of the company holding the Company’s Cyber Intelligence Solutions business, and instead, the conversion price will be adjusted based on the ratio of the trading prices of the two companies over a short period following the Spin-Off, subject to a collar. Shortly following the Spin-Off, the Apax Investor will purchase, subject to certain conditions, up to $200 million of Series B convertible preferred stock in the Company, as the entity holding the Customer Engagement Solutions business.The Series B convertible preferred stock will be convertible at a conversion price that is 100% of the average of the volume-weighted average price per share of the common stock for the 20 consecutive trading days immediately following the consummation of the Spin-Off, subject to a collar on the minimum and maximum enterprise value of the
Company post consummation of the Spin-Off. Following the closing of the Series A investment, Apax’s ownership in us on an as-converted basis is approximately 5.5%. Following completion of the Spin-Off and assuming the issuance of the Series B preferred stock, Apax’s ownership in us on an as-converted basis will be between 11.5% and 15%. The convertible preferred stock will pay dividends at an annual rate of 5.2% until the 48-month anniversary of the closing of the Series A preferred stock investment, and thereafter at a rate of 4.0%, subject to adjustment under certain circumstances. Dividends will be cumulative and payable semiannually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of preferred stock. We intend to use the proceeds from the initial Apax investment to repay outstanding indebtedness, including borrowings under our revolving credit facility used to fund our stock repurchase program (as described below under “Liquidity and Capital Resources Requirements”), and/or for general corporate purposes. Please refer to Note 1, “Basis of Presentation and Significant Accounting Policies”, under “Description of Business” and Note 16, "Subsequent Events", to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding the Apax convertible preferred stock investment.
Our primary recurring use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs, and capital expenditures. We also utilize cash for debt service, stock repurchases, dividends on the convertible preferred stock, and periodically for business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term investments, are our primary sources of operating liquidity, and we believe that our operating liquidity is currently sufficient to support our current business operations, including debt service, and capital expenditure requirements.requirements, and dividends on the convertible preferred stock.
On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders, and terminated a prior credit agreement. The 2017 Credit Agreement was amended on January 31, 2018 (the “2018 Amendment”). Further discussion of our 2017 Credit Agreement and 2018 Amendment appears below, under “Financing Arrangements”.
We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of products, technologies, and businesses. We may finance such acquisitions using cash, debt, stock, or a combination of the foregoing, however, we have used cash as consideration for substantially all of our historical business acquisitions, including approximately $49 million and $90$74 million of net cash expended for business acquisitions during the six months ended July 31, 2019 and year ended January 31, 2019, respectively.2020. There were no business acquisitions during the three months ended April 30, 2020.
We continually examine our options with respect to terms and sources of existing and future short-term and long-term capital resources to enhance our operating results and to ensure that we retain financial flexibility, and may from time to time elect to raise capital through the issuance of additional equity or the incurrence of additional debt. During the three months ended April 30, 2020, we increased borrowings under our revolving credit facility by $155.0 million to a total of $200.0 million as of April 30, 2020. The proceeds of these borrowings were used to fund a portion of our stock repurchase program or will be used for general corporate purposes.
A considerable portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term investments, and restricted cash, cash equivalents, and bank time deposits (excluding any long-term portions) held by our subsidiaries outside of the United States were $415.5were $458.8 million and $399.4$426.6 million as of July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively, and are generally used to fund the subsidiaries’ operating requirements and to invest in growth initiatives, including business acquisitions. These subsidiaries also held long-term restricted cash and cash equivalents, and restricted bank time deposits of $27.2$22.5 million and $23.1$26.3 million, at July 31, 2019April 30, 2020 and January 31, 2019,2020, respectively.
We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries, which, as a result of the 2017 Tax Act, may now be repatriated without incurring additional U.S. federal income taxes.
Should other circumstances arise whereby we require more capital in the United States than is generated by our domestic operations, or should we otherwise consider it in our best interests, we could repatriate future earnings from foreign jurisdictions, which could result in higher effective tax rates. As noted above, we currently intend to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent of the U.S. tax provided on earnings of our foreign subsidiaries as of July 31, 2019April 30, 2020 and withholding taxes of approximately $15.0 million accrued as of July 31, 2019,April 30, 2020, with respect to certain identified cash that may be repatriated to the U.S., we have not provided tax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income and withholding taxes that would have to be provided on such earnings.
The following table summarizes our total cash, cash equivalents, restricted cash, cash equivalents, and bank time deposits, and short-term investments, as well as our total debt, as of July 31, 2019April 30, 2020 and January 31, 2019:2020:
| | | | July 31, | | January 31, | | April 30, | | January 31, |
(in thousands) | | 2019 | | 2019 | (in thousands) | | 2020 | | 2020 |
Cash and cash equivalents | | $ | 388,546 |
| | $ | 369,975 |
| Cash and cash equivalents | | $ | 556,671 | | | $ | 379,146 | |
Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | | 24,239 |
| | 42,262 |
| Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | | 46,451 | | | 43,860 | |
Short-term investments | | 25,590 |
| | 32,329 |
| Short-term investments | | 19,741 | | | 20,215 | |
Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | | $ | 438,375 |
| | $ | 444,566 |
| Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | | $ | 622,863 | | | $ | 443,221 | |
Total debt, including current portions | | $ | 786,852 |
| | $ | 782,128 |
| Total debt, including current portions | | $ | 994,640 | | | $ | 837,048 | |
Capital Allocation Framework
As noted above, after cash utilization required for working capital, and capital expenditures, required debt service, and dividends on the convertible preferred stock, we expect that our primary usage of cash will be for business combinations. However, if we do not identify desirable business combinations, repayment of outstanding indebtedness, and our current stock repurchase program (including the repayment of any borrowings under our revolving credit facility used to fund the stock repurchase program). Due to the uncertainty surrounding the impact of the COVID-19 pandemic, we will consider using our excess cash tofurther repurchases under the stock repurchase shares (subject to the terms of our 2017 Credit Agreement) or to repay outstanding indebtedness.program based on economic and market conditions as they evolve.
Condensed Consolidated Cash Flow Activity
The following table summarizes selected items from our condensed consolidated statements of cash flows for the
sixthree months ended
July 31, 2019April 30, 2020 and
2018:2019: | | | | Six Months Ended July 31, | | | Three Months Ended April 30, | |
(in thousands) | | 2019 | | 2018 | (in thousands) | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 98,279 |
| | $ | 104,153 |
| Net cash provided by operating activities | | $ | 75,978 | | | $ | 93,063 | |
Net cash used in investing activities | | (66,015 | ) | | (72,429 | ) | |
Net cash used in financing activities | | (27,136 | ) | | (13,651 | ) | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | | 9,293 | | | (35,449) | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | 114,739 | | | (13,732) | |
Effect of foreign currency exchange rate changes on cash and cash equivalents | | (1,890 | ) | | (3,578 | ) | Effect of foreign currency exchange rate changes on cash and cash equivalents | | (3,106) | | | (853) | |
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 3,238 |
| | $ | 14,495 |
| Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 196,904 | | | $ | 43,029 | |
Our operating activities generated $98.3$76.0 million of cash during the sixthree months ended July 31, 2019,April 30, 2020, which was partially offset by $93.2in addition to $124.0 million of net cash used inprovided by combined investing and financing activities during this period. Further discussion of these items appears below.
Net Cash Provided by Operating Activities
Net cash provided by operating activities is driven primarily by our net income or loss, as adjusted for non-cash items and working capital changes. Operating activities generated $98.3$76.0 million of net cash during the sixthree months ended July 31, 2019,April 30, 2020, compared to $104.2$93.1 million generated during the sixthree months ended July 31, 2018. The decrease inApril 30, 2019. Our reduced operating cash flow in the current period was primarily due to our net loss, the net effect of non-cash items, and $11.7 million of higher combined interest and net income tax payments, partially offset by a $4.9 million increase forfavorable impact on operating cash flow from changes in operating assets and liabilities, as compared to the non-financing portion of payments under contingent consideration arrangements related to prior business combinations and lower operating income.period.
Our cash flow from operating activities can fluctuate from period to period due to several factors, including the timing of our billings and collections, the timing and amounts of interest, income tax and other payments, and our operating results.
Net Cash Used inProvided by (Used in) Investing Activities
During the sixthree months ended July 31, 2019,April 30, 2020, our investing activities used $66.0provided $9.3 million of net cash, including $49.3 million of net cash utilized for a business acquisition, $24.3 million of payments for property, equipment and capitalized software development costs, and $3.7 million of net purchases of short-term investments, partially offset by $3.8$20.8 million of net cash provided by other investing activities, consisting primarily of a net decrease in restricted bank time deposits and settlements of derivative instruments during the period and settlements$0.5 million of derivative instruments.net sales and maturities of short-term
investments, partially offset by $12.0 million of payments for property, equipment and capitalized software development costs. Restricted bank time deposits are typically deposits, which do not qualify as cash equivalents, used to secure bank guarantees in connection with sales contracts, the amounts of which will fluctuate from period to period.
During the sixthree months ended July 31, 2018,April 30, 2019, our investing activities used $72.4$35.4 million of net cash, including $27.4$20.2 million of net cash utilized for a business acquisition, $20.8$11.2 million of payments for property, equipment, and capitalized software development costs, $22.1and $7.0 million of net purchases of short-term investments, partially offset by $2.9 million of net cash used inprovided by other investing activities, consisting primarily of a net increasedecrease in restricted bank time deposits and settlements of derivative instruments during the period, and $2.1 million of net purchases of short-term investments. Restricted bank time deposits are typically deposits, which do not qualify as cash equivalents, used to secure bank guarantees in connection with sales contracts, the amounts of which will fluctuate from period to period.
We had no significant commitments for capital expenditures at July 31, 2019.April 30, 2020.
Net Cash Used inProvided by (Used in) Financing Activities
For the sixthree months ended July 31,April 30, 2020, our financing activities generated $114.7 million of net cash, primarily due to a $155.0 million increase in borrowings under our revolving credit facility, partially offset by $36.8 million of payments to repurchase treasury stock, $1.9 million repayments of borrowings and other financing obligations, $1.3 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and $0.2 million of distributions to a noncontrolling shareholder of one of our subsidiaries.
For the three months ended April 30, 2019, our financing activities used $27.1$13.7 million of net cash, the most significant portions of which were payments of $6.0 million related to deferred purchase price of a prior period business combination, $16.6$5.7 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $3.2 million repayments of borrowings and other financing obligations, a $0.7 million dividend payment to a noncontrolling shareholder of one of our subsidiaries, and $0.5 million of payments to repurchase treasury stock.
For the six months ended July 31, 2018, our financing activities used $13.7 million of net cash, the most significant portions of which were payments of $9.4 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $2.7$1.6 million repayments of borrowings and other financing obligations, and a $0.8$0.5 million dividend paymentof payments to a noncontrolling shareholder of one of our subsidiaries.repurchase treasury stock.
Liquidity and Capital Resources Requirements
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet anticipated operating costs, required payments of principal and interest, dividends on the convertible preferred stock, working capital needs, ordinary course capital expenditures, research and development spending, and other commitments for at least the next 12 months. Currently, we have no plans to pay any cash dividends on our common stock, which are not permittedsubject to certain restrictions under our 2017 Credit Agreement.
Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the impact of changes in customer buying behavior due to circumstances over which we have no control.control, including, but not limited to, the effects of the COVID-19 pandemic. If we determine to make additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could involve the issuance of additional equity or debt securities or increase our borrowings under our credit facility.
On March 29, 2016,December 4, 2019, we announced that our board of directors had authorized a common stock repurchase program ofwhereby we may repurchase up to $150 $300 million of common stock over two years following the date of announcement. This program expiredperiod ending on March 29, 2018. We made a total of $46.9 million in repurchases andFebruary 1, 2021. During the three months ended April 30, 2020, we did not acquire anyacquired approximately 613,000 shares of treasury stock duringat a cost of $34.0 million under this program. During the year ended January 31, 20192020, we acquired approximately 2,119,000 shares of treasury stock at a cost of $116.1 million under the program.this program, of which $2.8 million was settled in cash in February 2020.
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 ("Notes"), unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under a prior credit agreement.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in right
of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in
respect of the principal amount of the Notes. We currently expect to refinance the Notes at or prior to maturity with new convertible notes or other debt.
The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;
•during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or
•upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied. Holders of the Notes may require us to purchase for cash all or any portion of their Notes upon the occurrence of a “fundamental change” at a price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest.
As of July 31, 2019,April 30, 2020, 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 July 31, 2019,April 30, 2020, 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 July 31, 2019,April 30, 2020, no Warrants had been exercised and all Warrants remained outstanding.
Credit Agreements
On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders, and terminated a prior credit agreement.
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”) and a $300.0 million revolving credit facility maturing on June 29, 2022 (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement. The majority of the proceeds from the 2017 Term Loan were used to repay all outstanding termsterm loans under our prior credit agreement.
The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility will be accelerated to March 1, 2021 if on such date any Notes remain outstanding.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million. This discount is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
We are required to pay a commitment fee with respect to unused availability under the 2017 Revolving Credit Facility at a rate per annum determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the “Leverage Ratio”).
The 2017 Term Loan requires quarterly principal payments of approximately $1.1 million, which commenced on August 1, 2017, with the remaining balance due on June 29, 2024. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
On January 31, 2018, we entered into the 2018 Amendment to our 2017 Credit Agreement, providing for, among other things, a reduction of the interest rate margins on the 2017 Term Loan from 2.25% to 2.00% for Eurodollar loans, and from 1.25% to 1.00% for ABR loans. The vast majority of the impact of the 2018 Amendment was accounted for as a debt modification. For the portion of the 2017 Term Loan which was considered extinguished and replaced by new loans, we wrote off $0.2 million of unamortized deferred debt issuance costs as a loss on early retirement of debt during the three months ended January 31, 2018. The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining term of the 2017 Term Loan.
On June 8, 2020, we entered into a second amendment to the 2017 Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, our Notes will not be deemed to be outstanding if such Notes are cash collateralized in accordance with the 2017 Credit Agreement, as amended, for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility, discussed above. We currently intend to cash collateralize, or otherwise refinance or repurchase, the Notes prior to their maturity. Refer to Note 16, “Subsequent Events” to our condensed consolidated financial statements included under Part I, Item I of this report for further details regarding the Second Amendment to the 2017 Credit Agreement.
For loans under the 2017 Revolving Credit Facility, the margin is determined by reference to our Leverage Ratio. Borrowings under the 2017 Revolving Credit Facility were $200.0 million as of April 30, 2020. As of April 30, 2020, the weighted average interest rate on our revolving credit facility borrowings was 2.33%.
As of July 31, 2019,April 30, 2020, the interest rate on the 2017 Term Loan was 4.40%3.37%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 4.58%3.55% at July 31, 2019.April 30, 2020. As of January 31, 2019,2020, the interest rate on the 2017 Term Loan was 4.52%3.85%.
In February 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on the term loans under our prior credit agreement, under which we paypaid interest at a fixed rate of 4.143% and receivereceived variable interest of three-month LIBOR (subject to a
minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”). Although the prior credit agreement was terminated on June 29, 2017, the 2016 Swap remainsremained in effect until September 6, 2019, and servesserved as an economic hedge to partially mitigate the risk of higher borrowing costs under the 2017 Credit Agreement resulting from increases in market interest rates. TheEffective June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the prior credit agreement, the 2016 Swap iswas no longer formally designated as a cash flow hedge for accounting purposes, and therefore subsequent settlements arewere reported within other income (expense), net on the condensed consolidated statement of operations, not within interest expense. The 2016 Swap matured on September 6, 2019.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap, under which we will pay interest at a fixed rate of 2.949% and receive variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap iswas September 6, 2019, and settlements with the counterparty will occurbe on a quarterly basis, beginning on November 1, 2019. The 2018 Swap will terminate on June 29, 2024.
During the operating term of the 2018 Swap, if we elect three-month LIBOR at the periodic interest rate reset dates for at least $200.0 million of our 2017 Term Loan, the annual interest rate on that amount of the 2017 Term Loan will be fixed at 4.949% (including the impact of our current 2.00% interest rate margin on Eurodollar loans) for the applicable interest rate period.
The 2018 Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and are reclassified into the condensed consolidated statement of operations within interest expense in the period in which the hedged transaction affects earnings.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2017 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. At July 31, 2019,April 30, 2020, our Leverage Ratio was approximately 2.22.8 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
Contractual Obligations
OurExcept for additional borrowings under our revolving credit facility of $155.0 million during the three months ended April 30, 2020, we believe there have been no material changes to our contractual obligations disclosed in the contractual obligations section of our Annual Report on Form 10-K for the year ended January 31, 2019 includes a table summarizing our contractual obligations of approximately $1.2 billion as of January 31, 2019, including approximately $940 million for long-term debt obligations, including projected future interest.2020. That table appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the report. For additional information regarding our leases, long-term debt and our commitments and contingencies, see Note 15, “Leases”, Note 7, “Long-Term Debt” and Note 16, “Commitments and Contingencies” in the Form 10-K and Note 7, “Long-Term Debt” and Note 14 “Commitments and Contingencies” in the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q.
We believe thatPlease refer to Note 1, “Basis of Presentation and Significant Accounting Policies", under "Description of Business", to our contractual obligations and commercial commitments did not materially change during the six months ended July 31, 2019.condensed consolidated financial statements included under Part I, Item 1 of this report for information regarding dividends on expected issuances of convertible preferred stock.
Contingent Payments Associated with Business Combinations
In connection with certain of our business combinations, we have agreed to make contingent cash payments to the former owners of the acquired companies based upon achievement of performance targets following the acquisition dates.
For the sixthree months ended July 31, 2019,April 30, 2020, we made $23.7$3.0 million of payments under contingent consideration arrangements. As of July 31, 2019,April 30, 2020, potential future cash payments and earned consideration expected to be paid subsequent to July 31, 2019April 30, 2020 under contingent consideration arrangements total $133.9$133.6 million, the estimated fair value of which was $43.0$35.0 million, including $27.2$20.4 million reported in accrued expenses and other current liabilities, and $15.8$14.6 million reported in other liabilities. The performance periods associated with these potential payments extend through January 2022.
Off-Balance Sheet Arrangements
As of July 31, 2019,April 30, 2020, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, and the potential impact of these pronouncements on our condensed consolidated financial statements, see Note 1, “Basis of Presentation and Significant Accounting Policies” to the condensed consolidated financial statements in Part I, Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. We are exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations. To manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to use derivative instruments only to the extent considered necessary to meet our risk management objectives. We use derivative instruments solely to reduce the financial impact of these risks and do not use derivative instruments for speculative purposes.
Interest Rate Risk on Our Debt
The 2017 Credit Agreement bears interest at variable rates based on LIBOR plus a margin. The margin for the 2017 Term Loan is fixed at 2.00% for Eurodollar loans, and 1.00% for ABR loans. For loans under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio. Because the interest rates applicable to borrowings under the 2017 Credit Agreement are variable, we are exposed to market risk from changes in the underlying index rates, which affect our cost of borrowing.
The Financial Conduct Authority of the United Kingdom plans to phase out LIBOR by the end of 2021, and we have approachedare considering the administrative agent under this facility to discuss the impact of the planned phase out.out would have on this facility. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR. However, it is currently
uncertain what, if any, alternative reference interest rates, including SOFR, or other reforms will be enacted in response to the planned phase out,
and we cannot assure you that an alternative to LIBOR (on which the Eurodollar Rate is based) that we find acceptable will be
available to us.
The section entitled “Quantitative and Qualitative Disclosures About Market Risk” under Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 31, 20192020 provides detailed quantitative and qualitative discussions of the market risks affecting our operations. Other than as described above under “Interest Rate Risk on Our Debt”, and the market risk that is created by the global market disruptions and uncertainties resulting from COVID-19, we believe that our market risk profile did not materially change during the sixthree months ended July 31, 2019.April 30, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of July 31, 2019.April 30, 2020. 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 July 31, 2019.April 30, 2020.
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 July 31, 2019,April 30, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Due to the COVID-19 pandemic, a significant number of our employees are now working from home. The design of our financial reporting processes, systems, and controls allows for remote execution with accessibility to secure data.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be achieved. Further, the design of a control system must reflect the impact of resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all possible conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II
Item 1. Legal Proceedings
See Note 15,14, “Commitments and Contingencies” of the Notes to the condensed consolidated financial statements under Part I, Item 1 for information regarding our legal proceedings.
Item 1A. Risk Factors
ThereOther than as discussed below, there have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2019 and the Risk Factor described in Part II “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2019 (the “First Quarter Form 10-Q”).2020. In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our Annual Report on Form 10-K, and the First Quarter Form 10-Q, which could materially affect our business, financial condition, or operating results. The risks described in our Annual Report on Form 10-K and the First Quarter Form 10-Q are not the only risks facing us, however. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition, or operating results in the future.
The full extent to which the COVID-19 pandemic will adversely affect our business and results of operations cannot be predicted at this time.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Companies around the world, including us, our customers, partners, and vendors, have implemented actions in response, including among others, office closings, site restrictions, and employee travel restrictions. The global spread of COVID-19 and actions taken in response have negatively affected us, our customers, partners, and vendors and caused significant economic and business disruption the extent and duration of which is not currently known. We are monitoring and assessing the impact of the COVID-19 pandemic daily, including recommendations and orders issued by government and public health authorities.
During the first quarter, revenue in both of our operating segments was negatively impacted by delays and reduced spending attributed to the impact of the COVID-19 pandemic on our customers’ operational priorities and as a result of cost containment measures they have implemented. Due to the pandemic, we have seen a reduction or delay in large customer contracts, particularly on-premises arrangements, and we have been unable to conduct face-to-face meetings with existing or prospective customers and partners, present in-person demonstrations of our solutions, or host or attend in-person trade shows and conferences. Limitations on access to the facilities of our customers have also impacted our ability to deliver some of our products, complete certain implementations, and provide in-person consulting and training services, negatively impacting our ability to recognize revenue. We cannot predict how the pandemic will impact our results in future periods, including to the extent that customers delay or miss payments, customers defer, reduce, or refrain from placing orders or renewing subscriptions or support arrangements, or travel restrictions and site access restrictions remain necessary.
In light of the adverse impact of COVID-19 on global economic conditions and our revenue, along with the uncertainty associated with the extent and timing of a potential recovery, we have implemented several cost-reduction actions. Such actions have included, but are not limited to, reducing our discretionary spending, substantially decreasing capital expenditures, extending days payable outstanding, considering the optimal uses of our cash and other capital resources, including with respect to our stock repurchase program, and reducing workforce-related costs. These actions may have an adverse impact on us, particularly if they remain in place for an extended period. We continue to evaluate and may decide to implement further cost control strategies to help us mitigate the impact of the pandemic.
The ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity and financial results cannot be predicted at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 4, 2019, we announced that our board of directors had authorized a stock repurchase program whereby we may repurchase up to $300 million of common stock over the period ending on February 1, 2021. Share repurchase activity under this program during the three months ended April 30, 2020 was as follows:
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) |
February 1, 2020 - February 29, 2020 | | 359,379 | | | $ | 57.32 | | | 359,379 | | | $ | 163,381 | |
March 1, 2020 - March 31, 2020 | | 253,518 | | | $ | 52.77 | | | 253,518 | | | $ | 150,003 | |
April 1, 2020 - April 30, 2020 | | — | | | $ | — | | | — | | | $ | 150,003 | |
Total | | 612,897 | | | $ | 55.44 | | | 612,897 | | | $ | 150,003 | |
(1) Represents the approximate weighted-average price paid per share.
From time to time, we have purchased treasury stock from directors, officers, and other employees to facilitate income tax withholding and payment requirements upon vesting of equity awards during a Company-imposed trading blackout or lockup periods. There was no such activity during the three months ended July 31, 2019.April 30, 2020.
Shortly after the conclusion of our first fiscal quarter ended April 30, 2020, on May 7, 2020, we closed the initial tranche of the previously announced strategic partnership with the Apax Investor. Pursuant to the agreement, dated as of December 4, 2019, at the Closing, we sold 200,000 shares of our Series A Convertible Perpetual Preferred Stock, par value $0.001 per share, for an aggregate purchase price of $200.0 million. See “Management’s discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 2 of this report for a more detailed discussion regarding the Apax investment.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The following exhibit list includes agreements that we entered into or that became effective during the three months ended July 31, 2019:
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Number | | Description | | Filed Herewith / Incorporated by
Reference from
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101.INS | | XBRL Instance Document | | Filed herewith |
101.INS101.SCH | | XBRL Instance Document | | Filed herewith |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
(1)These exhibits are being “furnished” with this periodic report and are not deemed “filed” with the SEC and are not incorporated by reference in any filing of the company under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.
* Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 6 of this report.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Verint Systems Inc. |
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September 4, 2019June 9, 2020 | /s/ Douglas E. Robinson |
| Douglas E. Robinson |
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |