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EX-10.7 - EXHIBIT 10.7 - VERINT SYSTEMS INCvrnt-ex107_20160131xform10.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-K 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2016

Commission File No. 001-34807
Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter) 
Delaware
 
11-3200514
(State or Other Jurisdiction of Incorporation or
Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
175 Broadhollow Road, Melville, New York
 
11747
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's telephone number, including area code: (631) 962-9600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange
on which registered
Common Stock, $.001 par value per share
 
The NASDAQ Stock Market, LLC
(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o
Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing price for the registrant’s common stock on the NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter (July 31, 2015) was approximately $3,583,372,000.

There were 62,266,435 shares of the registrant’s common stock outstanding on March 15, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2016, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
 




Verint Systems Inc. and Subsidiaries
Index to Form 10-K
As of and For the Year Ended January 31, 2016
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Cautionary Note on Forward-Looking Statements
 
This Annual Report on Form 10-K 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 II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
 
uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes, evolving industry standards, and customer challenges, such as the proliferation and strengthening of encryption, 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;
risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in our business;
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, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas, management distraction, post-acquisition integration activities, and potential asset impairments;
risks relating to our ability to effectively and efficiently enhance our existing operations and execute on our growth strategy, including managing investments in our business and operations and enhancing and securing our internal and external operations;
risks associated with our ability to effectively and efficiently allocate limited financial and human resources to business, developmental, strategic, or other opportunities, and risk that such investments may not come to fruition or produce satisfactory returns;
risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators;
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 and with security vulnerabilities or lapses, including information technology system breaches, failures, or disruptions;
risks that our products or services, or those of third-party suppliers, partners, or OEMs which we incorporate into our offerings or otherwise rely on, may contain defects or may be vulnerable to cyber-attacks;
risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, and fluctuations in foreign exchange rates;
risks associated with a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for applicable projects;

ii


risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate;
risks associated with our ability to retain and recruit qualified personnel in regions in which we operate, including in new markets and growth areas we may enter;
challenges associated with selling sophisticated solutions, including with respect to educating our customers on the benefits of our solutions or assisting them in realizing such benefits;
challenges associated with pursuing larger sales opportunities that often involve longer sales cycles, including with respect to transaction reductions, deferrals, or cancellations during the sales cycle, our ability to accurately forecast when a sales opportunity will convert to an order, or to forecast revenue and expenses, and increased volatility of our operating results from period to period;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;
risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position or our ability to incur additional debt, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Xura, Inc. (formerly, Comverse, Inc.) (“Xura”), being unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, and personnel and our ability to successfully implement and maintain adequate systems and internal controls for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays; and
risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits.
 
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors" under Item 1A of this report. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.


iii


PART I

Table of Contents
Item 1. Business

Our Company

Verint® Systems Inc. (together with its consolidated subsidiaries, “Verint”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) is a global leader in Actionable Intelligence® solutions.

Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence®.

Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help optimize customer engagement, enhance security, and mitigate risk.

We have established leadership positions in our respective markets by developing highly-scalable, enterprise-class solutions with advanced, integrated analytics for both unstructured and structured information. Our innovative solutions are developed by a large research and development (“R&D”) team comprised of approximately 1,400 professionals and backed by more than 700 patents and patent applications worldwide.

To help our customers maximize the benefits of our technology over the solution lifecycle and provide a high degree of flexibility, we offer a broad range of services, such as strategic consulting, implementation services, training, maintenance, and 24 x 7 support, as well as a broad range of deployment models, including on premises, hosted, managed services, and software as a service (“SaaS”).

Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.

Company Background

We were incorporated in Delaware in February 1994 and completed our initial public offering (“IPO”) in May 2002. Over the last two decades, we have grown our revenue and expanded our portfolio of Actionable Intelligence solutions through a combination of organic innovation and acquisitions.

We have three operating segments: Enterprise Intelligence Solutions (“Enterprise Intelligence”), Cyber Intelligence Solutions (“Cyber Intelligence”), and Video and Situation Intelligence Solutions (“Video Intelligence”), each of which is described in greater detail below and in “Management's Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this report. See also Note 17, “Segment, Geographic, and Significant Customer Information” to our consolidated financial statements included under Item 8 of this report for additional information and financial data about each of our operating segments and geographic regions.

Through our website at www.verint.com, we make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as amendments to those reports, filed or furnished by us pursuant to Section 13(a) or Section 15(d) of the Exchange Act, free of charge, as soon as reasonably practicable after we file such materials with, or furnish such materials to, the Securities and Exchange Commission (“SEC”). Our website address set forth above is not intended to be an active link and information on our website is not incorporated in, and should not be construed to be a part of, this report.
     
Our Market—Actionable Intelligence


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Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. Organizations are now more aware of the value they can create by using insights gleaned from large data sets. The amount and types of structured and unstructured data available to them is growing rapidly and presents new and increasing challenges and complexities. At the same time, organizations that are able to generate Actionable Intelligence from big data are better positioned to create value and achieve their strategic objectives.

Verint has been focused on Actionable Intelligence for more than a decade. Our solutions address three areas of the market:

Customer Engagement Optimization—solutions that help organizations enrich customer interactions, improve business processes, and optimize their workforces in order to enhance loyalty, increase revenue, mitigate risk, and manage operational costs.

Security Intelligence—solutions that help organizations prevent, detect, neutralize, and investigate crime, terror, and cyber threats, as well as protect people, property, and assets.

Fraud, Risk and Compliance—solutions that help organizations prevent loss; comply with regulations; investigate cyber, retail, and financial crime; help ensure continuity of business and protect private information. Our solutions for this area of the market are discussed within the Customer Engagement Optimization and the Security Intelligence sections below.

To address the Actionable Intelligence market, over the last decade, we have spent more than $1.0 billion in R&D, creating the foundation for Verint’s advanced Actionable Intelligence platform. We use our Actionable Intelligence platform internally to efficiently develop innovative, highly-scalable, enterprise-class analytical solutions for the markets we serve. We define our platform as having the following four components:

Data CaptureOur Actionable Intelligence platform enables the capture of a wide range of data, including both structured and unstructured data such as operational, transactional, network, and web data. Our platform is designed to support big data applications which depend on the ability to capture, store, and manage very large data sets from multiple data sources.

Data ProcessingOur Actionable Intelligence platform facilitates the process of taking structured and unstructured data from multiples sources and then cleansing, fusing, and preparing the data for analysis. This data processing stage is particularly important in applications that require data capture and fusion from multiple sources, different systems, and numerous environments.

Data AnalysisOur Actionable Intelligence platform enables the use of a wide range of analytical engines for data analytics, including classification, correlation, anomaly detection, identity extraction, behavioral analysis, and predictive analytics. Big data analysis is a crucial step in identifying critical insights that otherwise might not be intuitive.

Data VisualizationOur Actionable Intelligence platform facilitates the presentation of crucial insights from data to decision makers and the provision of workflow, collaboration, and case management capabilities so they can make timelier, more informed decisions. The platform supports many use cases, and the type of data visualization used for delivering actionable insights to users can be optimized based on the specific user environment.

Customer Engagement Optimization

We are a leading provider of Customer Engagement Optimization software and services that help organizations transform customer engagements to drive better business outcomes by enhancing loyalty, increasing revenue, mitigating risk, and managing operational costs. Our Customer Engagement Optimization solutions provide our customers with Actionable Intelligence to enrich their customer interactions, improve their business processes, and optimize their workforces. Our solutions are implemented in industries that have significant customer service operations, such as insurance, banking and brokerage, telecommunications, media, retail, government and public services, travel, and hospitality.

Historically, as organizations have looked to engage with their customers more effectively and address new communications channels and changing customer expectations, they have had to purchase multiple point solutions from different vendors, creating integration and maintenance challenges. Even if such point solutions were able to be integrated, we believe they often do not work together optimally or in a unified manner. We offer organizations a comprehensive Customer Engagement

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Optimization solution that includes customer analytics, engagement management, and enterprise workforce optimization capabilities, all from a single provider. As organizations take a more strategic approach to customer service and sales, we believe that they will be better positioned to gain a competitive advantage, build more meaningful customer and employee engagement, heighten loyalty, reduce operating costs, and increase revenue.

We believe the key trends driving demand for Customer Engagement Optimization solutions include:

Evolving Customer Expectations. Customers expect a more personalized and consistent experience across service channels. The manner in which consumers obtain customer service has evolved from traditional call centers and in-store visits, to omnichannel customer engagement centers that include evolving self-service channels, such as web, voice and mobile self-service, and customer communities; a host of digital communications, such as email, chat, and social media; and traditional phone. Today, consumers may select a service channel based on a number of factors, including which channels are available, their experiences with those channels, personal preference, and the type of service issue at hand. Often they use multiple channels for the same service-related issue, initially starting with a digital channel and ending with the contact center or vice-versa. Consumer expectations are changing rapidly as organizations provide them with more interaction channels than ever before. With multiple channels available and consumer desire to have their needs addressed quickly and efficiently in the first contact, we believe a focus on “ease of doing business” with an organization is becoming increasingly important and can be a key competitive differentiator. We also believe consumers have come to expect a consistent, contextual, and personalized experience across all of these channels, and therefore, organizations are seeking Customer Engagement Optimization solutions, like ours, to help improve omnichannel service and sales, and achieve better business outcomes.

Evolving Employee Expectations. Employee expectations are also evolving. Employees want their voices to be heard and their opinions to be taken into account. They want their skills and preferences to be considered and leveraged, and they want to be able to do the right things for their customers. Studies from the industry analyst community have reinforced the impact and importance of an engaged and empowered workforce, finding that when it comes to serving customers, happier, more empowered employees can have a significant impact not only on the customer experience, but also a company’s financial performance. We believe a happy and empowered employee base can be a significant differentiator for organizations that leverage these findings and that Customer Engagement Optimization solutions, like ours, can play an important role in helping to train and develop employees, as well as to solicit, analyze, and act on their opinions and feedback.

Evolving Customer-Centric Organizations. Customer-centric organizations are increasingly looking to aggregate, analyze, and act on big data to enhance operational efficiencies, build customer loyalty, and drive profitability. Today’s organizations have a significant amount of structured and unstructured customer, workforce, and other business data that is generated from numerous departments and multiple systems across the enterprise. We believe that today's customer-centric organizations are increasingly seeking Customer Engagement Optimization solutions that allow them to collect and analyze intelligence across different service channels to gain a better understanding of the performance of their workforce, the effectiveness of their service processes, the quality of their interactions, and changing customer behaviors. When captured, analyzed, and acted upon, organizations can use this Actionable Intelligence to help achieve important strategic objectives, such as optimizing customer engagement, building relationships and lifetime value, empowering staff, enhancing customer and employee loyalty, gaining a holistic view of operations and effectiveness, reducing operational costs, increasing revenue, and mitigating risk.

Evolving Requirements for Customer Authentication, Fraud Detection, Risk Management and Compliance. Organizations are facing significant pressure and challenges in safeguarding personal information, authenticating customers and complying with a myriad of ever-expanding regulatory and compliance requirements. Today, many of these risks are fueled by new system vulnerabilities and the rise of more sophisticated methods of cyber-attack. For example, in financial services, contact center fraud has driven demand for voice biometrics and predictive analytics solutions that can identify and thwart fraudsters, while quickly authenticating legitimate customers. In addition, financial protection and other regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Payment Card Industry Data Security Standard (PCI DSS), present tremendous compliance challenges for organizations of all sizes, with the risk of significant financial penalties and major remediation efforts for non-compliance. While organizations often have detailed processes and procedures for their employees to follow, we believe that many organizations lack the tools to adequately capture and analyze the information they need, exposing them to significant risk. To help address these complex dynamics, we believe organizations are increasingly seeking Actionable Intelligence to anticipate and prevent breaches, effectively authenticate customers and protect personal information, mitigate risk, prevent fraud, and help ensure compliance with evolving legal, regulatory, and internal requirements.


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Security Intelligence

We are a leading provider of Security Intelligence solutions. Our solutions are implemented in a variety of sectors, such as government, law enforcement, transportation, critical infrastructure, and commercial organizations.

We believe that terrorism, criminal activities, cyber-attacks, and other security threats, combined with new and more complex security challenges, such as the proliferation and strengthening of encryption, are driving demand for innovative solutions that can enhance security through the extensive use of Actionable Intelligence to help anticipate, prepare, and respond to security threats.

We believe that the key trends driving demand for Security Intelligence solutions include:

Increasing Frequency and Sophistication of Cyber-Attacks. As overall awareness of cyber risks has increased over the years, so have the investments made by many organizations seeking greater protection from these risks. However, despite investments in perimeter security and point solutions to address specific network and end-point vulnerabilities, there have been many reported incidents of successful cyber-attacks, demonstrating that legacy approaches are often insufficient to protect against these evolving and advanced threats. We believe that cyber-attacks will increase in frequency and sophistication and that many government and commercial organizations are unprepared to protect themselves against such attacks. As a result, we believe that organizations will seek an integrated cyber security platform with Actionable Intelligence capabilities. Such capabilities include better detection of threats through the tight integration of multiple point solutions and better protection through improved unified workflows and analytics-based investigative capabilities.

Increasing Complexities Associated with Extracting Intelligence from Communications Networks. Law enforcement, national security, and intelligence agencies worldwide are responsible for investigations related to criminal activities, national security, terrorism, drug trafficking, cyber crimes, and other illegal activities. Such investigations require highly complex methods and often involve collecting, fusing, and analyzing information from multiple sources, including from cyber space and a variety of communications networks. Further, in many countries, communications service providers are mandated by government regulation to satisfy certain technical requirements for delivering communication content and data to law enforcement and government authorities. We believe that the increasing complexity of and technological challenges present in communications networks, coupled with the need for cyber intelligence, will continue to drive demand for Actionable Intelligence solutions.

Increasing Demand for Innovative, Integrated Situational Intelligence Solutions that Combine Physical Security and Intelligence to Better Anticipate and Respond to Security Threats. In connection with safe city, border control, transportation security, critical infrastructure, and other large-scale security initiatives, we believe that governments and commercial organizations are increasingly interested in deploying innovative security solutions that enhance situational awareness while fusing data from a wide range of security systems, including video and non-video sensorssuch as audio, social media, access control, and intrusion detection to enhance overall security. By aggregating data from multiple sensors, situational awareness solutions enable efficient information correlation and analysis; rapid, rules-based alerts and action; and the ability to share information easily within and across agencies to facilitate timely response and investigation.

Increasing Challenges Driven by the Changing Face of Fraud and Risk. Today’s security and risk management professionals face a myriad of complex and evolving challenges in protecting their digital and physical infrastructures using situation intelligence, video surveillance, access control, and cyber protection systems for detecting, deterring, and countering advanced threats. These issues are particularly prominent in financial services, retail and government, and have heightened the need for a holistic approach to security and risk management using Actionable Intelligence solutions. For example, in financial services, organizations need to protect and secure physical perimeters, ATMs, human tellers, dispersed branch locations, company networks, and customer information against physical threats, fraudsters, and cyber-attacks. In retail, organizations need advanced intelligence to effectively investigate suspicious activities, protect people, property and assets, and reduce shrinkage. We believe that Actionable Intelligence solutions that provide organizations with advanced surveillance, situational awareness, analytics, and investigation and protection tools enable faster, more real-time responses to fraud, risk, and security issues.

Our Strategy

Our strategy to further enhance our position as a leading global provider of Actionable Intelligence solutions includes the following key elements:


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Continue to Drive the Development of Actionable Intelligence Solutions for Unstructured Data. We were a pioneer in the development of solutions that help commercial businesses and government organizations derive intelligence from both structured and unstructured data. We intend to continue to drive the adoption of our Actionable Intelligence vision and solutions by building the Verint brand; expanding our portfolio of Customer Engagement Optimization, Security Intelligence, and Fraud, Risk, and Compliance solutions delivered from a single provider; leveraging our large, global install base of customers; and offering services that help our customers achieve their goals and maximize their investments in our solutions.

Maintain Market Leadership through Innovation and Customer Centricity. We believe that to compete successfully we must continue to introduce solutions that better enable customers to derive Actionable Intelligence from their structured and unstructured data. In order to do this, we intend to continue to make significant investments in R&D, protect our intellectual property through patents and other means, and maintain regular dialog with our customer base in order to anticipate and understand their current and future business objectives, challenges, and requirements.

Continue to Expand our Market Presence through OEM and Partner Relationships. We have expanded our relationships with OEMs and other channel partners. We believe that these relationships broaden our market coverage and help make our solutions even more widely available on a global basis. We intend to continue expanding our existing relationships, while creating new ones.

Augment our Organic Growth with Acquisitions. We examine acquisition opportunities regularly as a means to add technology, increase our geographic presence, enhance our market leadership or scale, and/or expand into adjacent markets. Historically, we have engaged in acquisitions for all of these purposes and expect to continue doing so in the future when strategic opportunities arise.

Our Operating Segments
 
We conduct our business through three operating segmentsEnterprise Intelligence, Cyber Intelligence, and Video Intelligence. Organizing our business through three operating segments in this way allows us to align our resources and domain expertise to more effectively address the Actionable Intelligence market and our customers’ needs.

We address the Customer Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the Security Intelligence market opportunity through solutions from our Cyber Intelligence segment and Video Intelligence segment, and we address the Fraud, Risk and Compliance market opportunity through solutions from all three operating segments. Below is a summary of the solutions offered by each of our segments. These include solutions that we have sold in the past and new solutions introduced during the past year.

The Enterprise Intelligence Segment
Our Enterprise Intelligence segment includes solutions for customer analytics, engagement management, and workforce optimization as summarized in the following table.

CUSTOMER ANALYTICS
SOLUTIONS
DESCRIPTIONS
Speech Analytics
Provides a fast, smart, and accurate solution for analyzing and automatically categorizing call recordings according to each organization’s challenges and objectives, and proactively identifying trends and root cause of issues to help improve contact center performance and optimize service processes.
Text Analytics
Analyzes text-based communications, including survey verbatims, postings on social media sites, email, and customer service chat sessions in combination with speech analytics.
Enterprise Feedback Management
Provides an enterprise-class platform to help organizations gain a complete view into the perceptions, opinions, and intentions of their customers and employees through surveys delivered via email, web, SMS, IVR, and mobile devices.

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Engagement Analytics

Provides Actionable Intelligence by correlating customer interactions by intent, behaviors, and the journeys customers take across the array of channels they use to connect with organizations. Delivers analysis and predictions of operational challenges, such as customer churn and channel migration, through dynamic dashboards and data visualization.

Identity Authentication and Fraud Detection
Combines recorder-embedded “passive” voice biometrics technology with unique predictive analytics to screen calls against databases of both customer and fraudster “voiceprints.” Offers “upstream fraud detection” functionality to identify suspicious caller behavior within voice self-service interactions. Helps improve the customer experience by authenticating legitimate customers faster, reducing call handling and fraud-related losses.
ENGAGEMENT MANAGEMENT SOLUTIONS

DESCRIPTIONS

Employee Desktop
Unifies an employee’s desktop by presenting on one screen all of the contextual customer information, relevant knowledge, and business process guidance that an agent or employee needs for handling interactions in any channel without having to toggle among numerous screens and applications.
Case Management
Tracks the progress of customer and internal issues as they are resolved between various parties in the organization, and enables enforcement and measurement of compliance and quality.
Knowledge Management
Intelligently delivers complete and contextual answers to employees during an interaction and/or to consumers over web self-service. Reduces effort and saves time for employees and consumers with automated search results based on the context of an interaction.
Email and Whitemail Management
Enables organizations to respond faster to customer emails, letters, and faxes, using less agent time and reducing backlog of unanswered inquiries and unhappy customers.
Voice and Mobile Self-Service

Enhances voice and mobile self-service through real-time, contextual automation and analytics-driven personalization. Leverages business intelligence to help continually improve and optimize customer care.

Web Self-Service
Enables consumers to self-serve on the web in order to accomplish many tasks on their own without direct interaction with customer service representatives.
Live Chat
and
Co-Browse
Enables employees to help online customers when they need it the most-in real time via web chat. Live Chat encourages communication through a fast and simple text interface. Co-Browse enables employees to help customers navigate the organization’s website to complete self-service transactions, or simply help them find what they are looking for. Both the Live Chat and Co-Browse solutions help customers complete their transactions at the most critical junctures and reduce transaction abandonment.
Social Engagement
Enables agents to capture social posts and interact with customers in a similar manner to other communications channels, leveraging knowledge base, case management, and other support tools to address customer issues and concerns expressed in social media.
Communities
Enables organizations to set up and manage public and private communities and forums on behalf of their customers, partners, and employees in which knowledge sharing and collaboration can occur in a high-value, low-effort manner.
WORKFORCE OPTIMIZATION SOLUTIONS

DESCRIPTIONS

Quality Management
Provides sophisticated interaction assessment functionality, including intelligent evaluation forms and automatic delivery of calls for evaluation according to quotas or contact-related criteria. Enables organizations to deliver customer-driven quality by evaluating employees' interactions that are of high business value and relevance.

6


Recording
Reliably and securely captures, encrypts, archives, searches, and replays audio and screen interactions for compliance, liability protection, quality management and analytics purposes.
Workforce Management
Enables organizations to efficiently plan, forecast, and schedule employees to meet service level goals. Provides visibility into and a singular management tool for the work, the people, and the processes across customer touchpoints in contact center, back-office and branch operations.
Desktop and Process Analytics
Enables organizations to monitor and improve employee performance by capturing and measuring their desktop application activities. Provides objective and unbiased visibility into how work is performed at the employee desktop. Facilitates process automation and privacy, and delivers real-time guidance and next best actions to employees.
Performance Management - Scorecards, eLearning, Coaching, and Gamification

Serves as a complete, closed-loop solution to manage individual and departmental performance against goals using Scorecards to track and display key performance indicators (KPIs). Includes performance-driven eLearning and Coaching capabilities to improve employee skills and behavior when KPI scores fall below established thresholds. Offers gamification capabilities to energize employee engagement, helping transform the process of acquiring, maintaining, and improving the skills, knowledge, and behaviors necessary to successfully perform their job tasks-from a routine chore into a competitive and engaging experience.


The Cyber Intelligence Segment

Our Cyber Intelligence solutions are summarized in the following table.


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CYBER INTELLIGENCE
SOLUTIONS
DESCRIPTIONS
Cyber Security
Enables government, critical infrastructure, service providers, and enterprise organizations to address advanced cyber-attacks by deploying a pre-integrated cyber security platform capable of delivering threat protection through Actionable Intelligence capabilities. Includes a solution that integrates multiple advanced detection engines and provides unified workflows for investigation, behavioral analytics, and forensics that analyze attack paths, enable remediation, and help protect against future attempts.
Network Intelligence
Enables law enforcement, national security, and intelligence agencies to generate Actionable Intelligence by rapidly uncovering critical information from network traffic for investigating and proactively addressing criminal, national security, and terrorist threats. Can be configured to address a wide range of communications networks and scaled to address large volumes of traffic.
Off-Air Intelligence
Enables law enforcement, correctional facilities, and government agencies to enhance field operations with real-time Actionable Intelligence. Helps neutralize criminal, terrorist, and other threats by assisting operational units to better focus on suspects and suspicious behavior, and deploy field resources more effectively.
Web Intelligence

Enables investigative units to leverage web and open source data in order to identify insights and help accelerate investigations of fraud, criminal, terror, cyber and national security threats. Helps transform large volumes of content into Actionable Intelligence, identify suspicious behavioral patterns, the location of suspects, and links between suspects.

Fusion Intelligence
Provides government organizations with a centralized analytics platform for generating insights, identifying potential threats, and producing Actionable Intelligence. Enables a cross-source/cross-format single point of access to intelligence data sources to enable organization-wide investigation, management, and analysis.

Lawful Interception Compliance
Helps communications service providers comply with ETSI (European Telecommunications Standards Institute), CALEA (Communications Assistance for Law Enforcement Act), and other lawful interception regulations and standards. Supports multiple network types and provides a high degree of automation of the lawful interception compliance processes with complete audit trails and low administrative overhead.

The Video and Situation Intelligence Segment

Our Video Intelligence solutions are summarized in the following table.


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VIDEO AND SITUATION INTELLIGENCE
SOLUTIONS
DESCRIPTIONS
Situational Awareness Platform
Integrates data from multiple sources, such as access control, video, intrusion, fire, public safety, weather, traffic, first responder, and other mobile device systems. Provides a unified visualization layer and workflow enabling organizations to fuse, analyze, and report information, and take action on risks, alarms, and incidents across business and security systems. Helps identify and mitigate risks, improve response times, increase operational effectiveness, and reduce total cost of ownership.
Enterprise Video Management Software
Simplifies management of large volumes of video, including geographically dispersed surveillance video, with a suite of applications that includes automated system health monitoring, policy-based video distribution, networked video viewing, and investigation management. Designed for interoperability with other enterprise systems.
Video Analytics
Analyzes video content to improve visibility, reduce risks and improve operational performance in the following areas:
• Surveillance—automatically detects anomalies and activities of interest, such as perimeter intrusion, unattended objects, camera tampering, and vehicles moving in the wrong direction.
• Security—offers advanced analytics that integrate facial detection, facial recognition, and license plate recognition capabilities for industrial applications, and the opportunity to further expand business value by integrating with Point of Sale (POS), ATM, and teller transactions in retail stores and branch bank environments.
• Business—includes industry-specific analytics applications focused primarily on retail and banking environments to help address both operational and strategic initiatives.
EdgeVMS
Performs networked video recording utilizing secure, embedded operating systems and market-specific data integrations for security and fraud, risk, and compliance applications that require local storage, as well as remote networking.
Public Safety Media Recorder
Allows first responders (e.g., police, fire departments, and emergency medical services) to capture, analyze, manage, and act on public safety data. Includes incident investigation, evidence preparation, and compliance audit trail capabilities.

Customer Services

We offer a range of customer services, including implementation and training, consulting and managed services, and maintenance support, to help our customers maximize their return on investment in our solutions.

Implementation and Training

Our solutions are implemented by our service organizations, authorized partners, resellers, or customers. Our implementation services include project management, system installation, and commissioning, including integrating our solutions with our customers’ environments and third-party solutions. Our training programs are designed to enable our customers to effectively use our solutions and to certify our partners to sell, install, and support our solutions. Customer and partner training is provided at the customer site, at our training centers around the world, and/or remotely online.

Consulting and Managed Services

Our management consulting capabilities include business strategy, process excellence, performance management, and project and program management, and are designed to help our customers maximize the value of our solutions in their own environments. We also offer managed services for our solutions to help our customers gain further value from their investments in our technology and minimize the need for additional resources. Our managed services enable us to help ensure customers effectively manage our solutions and maximize the business insights produced, heighten customer engagement, and create strong relationships working together in the process.

Maintenance Support

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We offer a range of customer maintenance support plans to our customers and resellers, including phone, web, and email access to technical personnel up to 24-hours-a-day, seven-days-a-week. Our support programs are designed to help ensure long-term, successful use of our solutions. We believe that customer support is critical to retaining and expanding our customer base. Our Enterprise Intelligence solutions are sold with a warranty of generally one year for hardware and 90 days for software. Our Cyber Intelligence solutions and Video Intelligence solutions are sold with warranties that typically range from 90 days to three years and, in some cases, longer. In addition, customers are typically provided the option to purchase maintenance plans that provide a range of services, such as telephone support, advanced replacement, upgrades when and if available, and on-site repair or replacement. Currently, the majority of our maintenance revenue is related to our Enterprise Intelligence solutions.

Direct and Indirect Sales

We sell our solutions through our direct sales teams and indirect channels, including distributors, systems integrators, value-added resellers (“VARs”), and OEM partners. Approximately half of our overall sales are made through partners, distributors, resellers, and system integrators.

Each of our solutions is sold by trained, dedicated, regionally-organized direct and indirect sales teams. Our direct sales teams are focused on large and mid-sized customers and, in many cases, co-sell with our other channels and sales agents. Our indirect sales teams are focused on developing and supporting relationships with our indirect channels, which provide us with broader market coverage, including access to their customer base, integration services, and presence in certain geographies and vertical markets. Our sales teams are supported by business consultants, solutions specialists, and pre-sales engineers who, during the sales process, help determine customer requirements and develop technical responses to those requirements. While we sell directly and indirectly in all three of our segments, sales of our Video Intelligence solutions are primarily indirect, and sales of our Cyber Intelligence solutions are primarily direct. See “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsIf we are unable to establish and maintain our relationships with third parties that market and sell our products, our business and ability to grow could be materially adversely affected” under Item 1A of this report for a more detailed discussion of certain sales and distribution risks that we face.

Customers

Our solutions are used by more than 10,000 organizations in 180 countries. In the year ended January 31, 2016, we derived approximately 55%, 34%, and 11% of our revenue from the sale of our Enterprise Intelligence solutions, Cyber Intelligence solutions, and Video Intelligence solutions, respectively. In the year ended January 31, 2015, we derived approximately 58%, 32% and 10% of our revenue from the sale of our Enterprise Intelligence solutions, Cyber Intelligence solutions, and Video Intelligence solutions, respectively. In the year ended January 31, 2014, we derived approximately 55%, 32%, and 13% of our revenue from the sale of our Enterprise Intelligence solutions, Cyber Intelligence solutions, and Video Intelligence solutions, respectively. We are party to contracts with customers in each of our segments, the loss of which could have a material adverse effect on the segment.

In the year ended January 31, 2016, we derived approximately 51%, 31%, and 18% of our revenue from sales to end users in the Americas, in Europe, the Middle East and Africa (“EMEA”), and in the Asia-Pacific (“APAC”) regions, respectively. In the year ended January 31, 2015, we derived approximately 52%, 31%, and 17% of our revenue from sales to end users in the Americas, EMEA, and APAC, respectively. In the year ended January 31, 2014, we derived approximately 56%, 20%, and 24% of our revenue from sales to end users in the Americas, EMEA, and APAC, respectively. See also Note 17, “Segment, Geographic, and Significant Customer Information” to our consolidated financial statements included under Item 8 of this report for additional information and financial data about each of our operating segments and geographic regions.

For the year ended January 31, 2016, approximately one third of our business was generated from contracts with various governments around the world, including local, regional, and national government agencies. Due to the unique nature of the terms and conditions associated with government contracts generally, our government contracts may be subject to renegotiation or termination at the election of the government customer. Some of our customer engagements require us to have security credentials or to participate in projects through an approved legal entity.

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

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lower than in the fourth quarter of the preceding year, in some years, potentially by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of compensation incentive 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, also have an impact on our business and financial results. See “Risk Factors” under Item 1A of this report for a more detailed discussion of factors which may affect our business and financial results.

Research and Development

We continue to enhance the features and performance of our existing solutions and to introduce new solutions through extensive R&D activities, including the development of new solutions, the addition of capabilities to existing solutions, quality assurance, and advanced technical support for our customer services organization. In certain instances, primarily in our Cyber Intelligence segment, we may customize our products to meet the particular requirements of our customers. R&D is performed primarily in the United States, Israel, the United Kingdom, Ireland, the Netherlands, and Indonesia for our Enterprise Intelligence segment; in Israel, Germany, Brazil, Cyprus, and Bulgaria for our Cyber Intelligence segment; and primarily in Israel, and the United States for our Video Intelligence segment.

We believe that our future success depends on a number of factors, including among others, our ability to:

identify and respond to emerging technological trends and areas of growth in our markets;

develop and maintain competitive solutions that meet or exceed our customers’ changing needs and challenges;

enhance our existing products by adding features and functionality to meet or exceed specific customer needs or differentiate our products from those of our competitors; and

attract, recruit, and retain highly skilled and experienced employees.

To support these efforts, we make significant investments in R&D every year. In the years ended January 31, 2016, 2015, and 2014, we spent approximately $177.7 million, $173.7 million, and $126.5 million, respectively, on R&D, net. We allocate our R&D resources in response to market research and customer demand for additional features and solutions. Our development strategy involves rolling out initial releases of our products and adding features over time. We incorporate product feedback received from our customers into our product development process. While the majority of our products are developed internally, in some cases, we also acquire or license technologies, products, and applications from third parties based on timing and cost considerations. See “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsFor certain products, components, or services, we rely on third-party suppliers, manufacturers, and partners and if these relationships are interrupted we may not be able to obtain substitute suppliers, manufacturers, or partners on favorable terms or at all, and we may be subject to other adverse effects” under Item 1A of this report.

As noted above, a significant portion of our R&D operations is located outside the United States. We have derived benefits from participation in certain government-sponsored programs, including those of the Israeli Office of the Chief Scientist (“OCS”) and in other jurisdictions, for the support of R&D activities conducted in those locations. In the case of Israel, the Israeli law under which our OCS grants are made limits our ability to manufacture products, or transfer technologies, developed using these grants outside of Israel without permission from the OCS. See “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsBecause we have significant foreign operations and business, we are subject to geopolitical and other risks that could materially adversely affect our results” and “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsConditions in and our relationship to Israel may materially adversely affect our operations and personnel and may limit our ability to produce and sell our products or engage in certain transactions” under Item 1A of this report for a discussion of certain risks associated with our foreign operations.

Manufacturing, Suppliers, and Service Providers

We rely on both unaffiliated manufacturing subcontractors, as well as on our internal operations, to produce, assemble, and deliver our hardware products and solutions. We also rely on several unaffiliated manufacturing subcontractors for the supply of specific proprietary hardware components and assemblies that are incorporated into our products and solutions. Our internal manufacturing and assembly operations consist primarily of installing our software on externally purchased hardware components, final assembly, repair, and testing, which involves the application of extensive quality control procedures to

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materials, components, subassemblies, and systems. We also perform system integration functions prior to shipping turnkey solutions to our customers. Our internal manufacturing and assembly operations are performed primarily in our German, Israeli, and Cypriot facilities for our Cyber Intelligence solutions, and in our U.S. and Israeli facilities for certain of our Video Intelligence solutions. Our Enterprise Intelligence solutions are substantially all software and do not require any significant internal manufacturing. Although we have occasionally experienced delays and shortages in the supply of proprietary components in the past, we have, to date, been able to obtain adequate supplies of all components in a timely manner from alternative sources, when necessary. We also rely on third parties to provide certain services to us or to our customers, including hosting providers and providers of other cloud-based services. See “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsFor certain products, components, or services, we rely on third-party suppliers, manufacturers, and partners, and if these relationships are interrupted, we may not be able to obtain substitute suppliers, manufacturers, or partners on favorable terms or at all, and we may be subject to other adverse effects” under Item 1A of this report for a discussion of risks associated with our manufacturing operations and suppliers.

Employees

Currently, we employ approximately 5,000 professionals, including certain contractors, with approximately 42%, 21%, 25%, and 12% of our employees and contractors located in the Americas, Israel, EMEA (excluding Israel), and APAC, respectively.

We consider our relationship with our employees to be good and a critical factor in our success. Our employees in the United States are not covered by any collective bargaining agreements. In some cases, our employees outside the United States are automatically subject to certain protections negotiated by organized labor in those countries directly with the government or trade unions or are automatically entitled to severance or other benefits mandated under local laws. For example, while we are not a party to any collective bargaining or other agreement with any labor organization in Israel, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Laborers in Israel) and the Coordinating Bureau of Economic Organizations (including the Manufacturers’ Association of Israel) are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Industry, Trade and Labor.

Intellectual Property Rights

General

Our success depends to a significant degree on the legal protection of our software and other proprietary technology. We rely on a combination of patent, trade secret, copyright, and trademark laws, and confidentiality and non-disclosure agreements with employees and third parties to establish and protect our proprietary rights.

Patents

As of January 31, 2016, we had more than 700 patents and patent applications worldwide, including more than 130 patent issuances or allowances during the past year. We have accumulated a significant amount of proprietary know-how and expertise in developing Actionable Intelligence solutions. We regularly review new areas of technology related to our businesses to determine whether they can and should be patented.

Licenses

While we employ many of our innovations exclusively in our products and services, we also engage in outbound and inbound licensing of specific patented technologies. Our licenses are designed to prohibit unauthorized use, copying, and disclosure of our software technology. When we license our software to customers, we require license agreements containing restrictions and confidentiality terms customary in the industry in order to protect our proprietary rights in the software. These agreements generally warrant that the software and propriety hardware will materially comply with written documentation and assert that we own or have sufficient rights in the software we distribute and have not violated the intellectual property rights of others.
We license our products in a format that does not permit users to change the software code. See “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsFor certain products, components, or services, we rely on third-party suppliers, manufacturers, and partners, and if these relationships are interrupted, we may not be able to obtain substitute suppliers, manufacturers, or partners on favorable terms or at all, and we may be subject to other adverse effects” under Item 1A of this report.

We license certain software, technology, and related rights for use in the manufacture and marketing of our products and pay royalties to third parties under such licenses and other agreements. While it may be necessary in the future to seek or renew

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licenses relating to various aspects of our products, we believe, based on industry practice, such licenses generally can be obtained on commercially reasonable terms.

Trademarks and Service Marks

We use various trademarks and service marks to protect the marks used in our business. We also claim common law protections for other marks we use in our business. Competitors and other companies could adopt similar marks or try to prevent us from using our marks, consequently impeding our ability to build brand identity and possibly leading to customer confusion. See “Risk FactorsRisks Related to Our BusinessInformation/Product Security and Intellectual PropertyOur intellectual property may not be adequately protected” under Item 1A of this report for a more detailed discussion regarding the risks associated with the protection of our intellectual property.

Competition

We face strong competition in all of our markets, and we expect that competition will persist and intensify.

In our Enterprise Intelligence segment, our competitors include Aspect Software, Inc., eGain Corporation, Genesys Telecommunications, NICE Systems Ltd. (“NICE”), Medallia Inc., Pegasystems Inc., and divisions of larger companies, including Oracle Corporation and Salesforce.com, Inc., along with many smaller companies, which can vary across regions. In our Cyber Intelligence segment, our competitors include BAE Systems plc, Cyberbit Ltd. (a subsidiary of Elbit Systems Ltd.), FireEye, Inc., JSI Telecom, Rohde & Schwarz, and RSA (a business unit of EMC Corporation), along with a number of smaller companies and divisions of larger companies that compete with us in certain regions or only with respect to portions of our product portfolio. In our Video Intelligence segment, our competitors include Avigilon Corporation, Genetec Inc., March Networks (a subsidiary of Infinova Ltd.), Milestone Systems A/S (a division of Canon), and Qognify (formerly part of NICE), and divisions of larger companies, such as Tyco International Ltd., along with many smaller companies, which can vary across regions.

In each of our operating segments, we believe that we compete principally on the basis of:

product performance and functionality;
product quality and reliability;
breadth of product portfolio and pre-defined integrations;
global presence and high-quality customer service and support;
specific industry knowledge, vision, and experience; and
price.

We believe that our competitive success depends primarily on our ability to provide technologically advanced and cost-effective solutions and services. Some of our competitors have superior brand recognition and significantly greater financial or other resources than we do. We expect that competition will increase as other established and emerging companies enter our markets or we enter theirs, and as new products, services, technologies, and delivery methods are introduced, such as SaaS. In addition, consolidation is common in our markets and has in the past and may in the future improve the position of our competitors. See “Risk FactorsRisks Related to Our BusinessCompetition, Markets, and OperationsIntense competition in our markets and competitors with greater resources than us may limit our market share, profitability, and growth” under Item 1A of this report for a more detailed discussion of the competitive risks we face.

Export Regulations

We and our subsidiaries are subject to applicable export control regulations in countries from which we export goods and services. These controls may apply by virtue of the country in which the products are located or by virtue of the origin of the content contained in the products. If the controls of a particular country apply, the level of control generally depends on the nature of the goods and services in question. For example, our Cyber Intelligence solutions tend to be more highly controlled than our Enterprise Intelligence or Video Intelligence solutions. Where controls apply, the export of our products generally requires an export license or authorization or that the transaction qualify for a license exception or the equivalent, and may also be subject to corresponding reporting requirements.


Item 1A.                   Risk Factors
 
Many of the factors that affect our business and operations involve risks and uncertainties.  The factors described below are

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risks that could materially harm our business, financial condition, and results of operations.  These are not all the risks we face and other factors currently considered immaterial or unknown to us may have a material adverse impact on our future operations.

Risks Related to Our Business
 
Competition, Markets, and Operations
 
Our business is impacted by changes in general economic conditions and information technology and government spending in particular.
 
Our business is subject to risks arising from adverse changes in domestic and global economic conditions. Slowdowns, recessions, economic instability, political unrest, armed conflicts, or natural disasters around the world may cause companies and governments to delay, reduce, or even cancel planned spending. In particular, declines in information technology spending and limited or reduced government budgets have affected the markets for our solutions in both the Enterprise Intelligence market and the Security Intelligence market in certain periods and in certain regions.  For the year ended January 31, 2016, approximately one third of our business was generated from contracts with various governments around the world, including national, regional, and local government agencies. We expect that government contracts will continue to be a significant source of our revenue for the foreseeable future. Customers or partners who are facing business challenges, reduced budgets, or liquidity issues are also more likely to defer purchase decisions or cancel or reduce orders, as well as to delay or default on payments. In the year ended January 31, 2016, we experienced extended sales cycles, particularly for large projects, a reduction in deal sizes, and pressure on maintenance renewals for our Enterprise Intelligence solutions. This trend regarding extended sales cycles and reduced deal sizes was particularly acute for our Security Intelligence business which has significant exposure to emerging markets where budgets have been reduced significantly due to weak economic conditions and currency devaluations. If customers or partners significantly reduce their spending with us or significantly delay or fail to make payments to us, our business, results of operations, and financial condition would be materially adversely affected.

The industry in which we operate is characterized by rapid technological changes, evolving industry standards and challenges, and changing market potential from area to area, and if we cannot anticipate and react to such changes our results may suffer.
 
The markets for our products are characterized by rapidly changing technology and evolving industry standards and challenges.  The introduction of products embodying new technology, new delivery platforms such as SaaS, managed services, or other cloud-based solutions, the commoditization of older technologies, and the emergence of new industry standards and technological hurdles can exert pricing pressure on existing products and/or render them unmarketable or obsolete.  For example, in our Security Intelligence business, stronger and more frequent use of encryption has created significantly greater challenges for our customers and for our solutions to address. Moreover, the market potential and growth rates of the markets we serve are not uniform and are evolving. It is critical to our success that we are able to anticipate and respond to changes in technology and industry standards and new customer challenges by consistently developing new, innovative, high-quality products and services that meet or exceed the changing needs of our customers.  We must also successfully identify, enter, and appropriately prioritize areas of growing market potential, including by launching, successfully executing, and driving demand for new and enhanced solutions and services, while simultaneously preserving our legacy businesses.  If we are unable to execute on these strategic priorities, we may lose market share or experience slower growth, and our profitability and other results of operations may be materially adversely affected.



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Intense competition in our markets and competitors with greater resources than us may limit our market share, profitability, and growth.
 
We face aggressive competition from numerous and varied competitors in all of our markets, making it difficult to maintain market share, remain profitable, invest, and grow.  We are also encountering new competitors as we expand into new markets. Our competitors may be able to more quickly develop or adapt to new or emerging technologies, better respond to changes in customer needs or preferences, better identify and enter into new areas of growth, or devote greater resources to the development, promotion, and sale of their products.  Some of our competitors have, in relation to us, longer operating histories, larger customer bases, longer standing relationships with customers, superior brand recognition, superior margins, and significantly greater financial, technical, marketing, customer service, public relations, distribution, or other resources, especially in new markets we may enter. Consolidation among our competitors may also improve their competitive position. In recent years, several companies significantly larger than we are have also entered or increased their presence in our markets through internal development, partnerships, and acquisitions, and we have encountered larger competitors as we have expanded into new markets.  We also face competition from solutions developed internally by our customers or partners.  To the extent that we cannot compete effectively, our market share and, therefore, results of operations could be materially adversely affected.

Because price and related terms are key considerations for many of our customers, we may have to accept less-favorable payment terms, lower the prices of our products and services, and/or reduce our cost structure, including reducing headcount or investment in R&D, in order to remain competitive.  If we are forced to take these kinds of actions to remain competitive in the short-term, such actions may adversely impact our ability to execute and compete in the long-term.
 
Our future success depends on our ability to enhance our existing operations, execute on our growth strategy, and properly manage investment in our business and operations.
 
We experienced significant growth in recent years and our existing infrastructure, systems, processes, and personnel may not be adequate for our current or future needs. A key element of our long-term strategy is to continue to invest in, enhance, and secure our business and operations and grow, both organically and through acquisitions.  Investments in, among other things, new markets, new products, solutions, and technologies, R&D, infrastructure and systems, geographic expansion, and headcount are critical components in achieving this strategy.  However, such investments and efforts may not be successful, especially in new areas or new markets in which we have little or no experience, and even if successful, may negatively impact our short-term profitability.  Our success depends on our ability to effectively and efficiently enhance our existing operations and execute on our growth strategy, including our ability to properly allocate limited investment dollars, balance the extent and timing of investments with the associated impact on expenses and profitability, balance our focus between new areas or new markets and the operation and servicing of our legacy businesses and customers, capture efficiencies and economies of scale, and compete in the new areas or new markets and with the new solutions in which we have invested.  If we are unable to effectively and efficiently enhance our existing operations, execute on our growth strategy, and properly manage our investments, focus, and expenditures, our results of operations and market share may be materially adversely affected.

We may not be able to identify suitable targets for acquisition or investment, or complete acquisitions or investments on terms acceptable to us, which could negatively impact our ability to implement our growth strategy.
As part of our long-term growth strategy, we have made a number of acquisitions and investments and expect to continue to make acquisitions and investments in the future, subject to the terms of our senior credit agreement (the "Credit Agreement"), the indenture governing our 1.50% convertible senior notes due June 1, 2021 (the "Notes"), and other restrictions.
In many areas, we have seen the market for acquisitions become more competitive and valuations increase. Our competitors also continue to make acquisitions in or adjacent to our markets. As a result, it may be more difficult for us to identify suitable acquisition or investment targets or to consummate acquisitions or investments once identified on acceptable terms or at all. If we are not able to execute on our acquisition strategy, we may not be able to achieve our long-term growth strategy, may lose market share, or may lose our leadership position in one or more of our markets.
Our acquisition and investment activity presents certain risks to our business, operations, and financial position.

Acquisitions and investments are an important part of our strategy. Successful execution following the closing of an acquisition or investment is paramount to achieving the anticipated benefits of the transaction. If we are unable to execute successfully, we may experience both a loss on the investment and damage to our legacy business and valuation.


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The process of integrating an acquired company's business into our operations and investing in new technologies is challenging and may result in expected or unexpected operating or compliance challenges, which may require significant expenditures and a significant amount of our management's attention that would otherwise be focused on the ongoing operation of our business.  The potential difficulties or risks of integrating an acquired company’s business include, among others:

the effect of the acquisition on our financial and strategic positions and our reputation;
risk that we fail to successfully implement our business plan for the combined business, including plans to accelerate growth;
risk that we are unable to obtain the anticipated benefits of the acquisition, including synergies or economies of scale;
risk that the market does not accept the integrated product portfolio;
challenges in reconciling business practices or in integrating product development activities, logistics, or information technology and other systems;
retention risk with respect to key customers, suppliers, and employees and challenges in assimilating and training new employees;
challenges in complying with newly applicable laws and regulations, including obtaining or retaining required approvals, licenses, and permits; and
potential impact on our internal controls over financial reporting.

Acquisitions and/or investments may also result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the expenditure of available cash, and amortization expenses or write-downs related to intangible assets such as goodwill, any of which could have a material adverse effect on our operating results or financial condition. Investments in immature businesses with unproven track records and technologies have an especially high degree of risk, with the possibility that we may lose our entire investment or incur unexpected liabilities.  Transactions that are not immediately accretive to earnings may make it more difficult for us to maintain satisfactory profitability levels or compliance with the maximum leverage ratio covenant under the revolving credit facility under our Credit Agreement. Large or costly acquisitions or investments may also diminish our capital resources and liquidity or limit our ability to engage in additional transactions for a period of time.

All of the foregoing risks may be magnified as the cost, size, or complexity of an acquisition or acquired company increases, where the acquired company’s products, market, or business are materially different from ours, or where more than one integration is occurring simultaneously or within a concentrated period of time. There can be no assurance that we will be successful in making additional acquisitions in the future or in integrating or executing on our business plan for existing or future acquisitions.

Our solutions may contain defects or may be vulnerable to cyber-attacks, which could expose us to both financial and non-financial damages.

Many of our existing solutions are and future solutions are expected to be sophisticated and may develop operational problems.  New products and new product versions, new service models such as hosting, SaaS, and managed services, and the incorporation of third-party products or services into our solutions, also give rise to the risk of defects or errors. These defects or errors may relate to the operation or the security of the products. If we do not discover and remedy such defects, errors, or other operational or security problems until after a product has been released to customers or partners, we may incur significant costs to correct such problems and/or become liable for substantial damages for product liability claims or other liabilities. Moreover, even products or services that are well-designed and tested may be vulnerable to cyber-attacks. If one or more of our products or services, including elements provided by third-party suppliers or partners, are found to have defects or errors, or if there is a successful cyber-attack on one of our products or services even absent a defect or error, it may also result in questions regarding the integrity of our products or services generally, which could cause adverse publicity and impair their market acceptance and could have a material adverse effect on our results or financial condition.
 
If we are unable to establish and maintain our relationships with third parties that market and sell our products, our business and ability to grow could be materially adversely affected.
 
Approximately half of our sales are made through partners, distributors, resellers, and systems integrators.  To remain successful, we must maintain our existing relationships as well as identify and establish new relationships with such third parties. We must often compete with other suppliers for these relationships and our competitors often seek to establish exclusive relationships with these sales channels or to become a preferred partner for them.  Our ability to establish and maintain these relationships is based on, among other things, factors that are similar to those on which we compete for end customers, including features, functionality, ease of use, installation and maintenance, and price.  Even if we are able to secure such relationships on terms we find acceptable, there is no assurance that we will be able to realize the benefits we anticipate. 

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Some of our channel partners may also compete with us or have affiliates that compete with us, or may partner with our competitors or even offer our products and those of our competitors as alternatives when presenting proposals to end customers. Our ability to achieve our revenue goals and growth depends to a significant extent on maintaining, enabling, and adding to these sales channels, and if we are unable to do so, our business and ability to grow could be materially adversely affected.
 
The sophisticated nature of our solutions, sales cycle, and unpredictable sales terms and timing may create uncertainty in, or negatively impact, our operating results and make such results more volatile and difficult to predict.
 
The timing of our sales cycle ranges from as little as a few weeks to more than a year. Our larger sales, which we have historically emphasized in our sales strategy, typically require a minimum of a few months to consummate.  As the length or complexity of a sales process increases, so does the risk of successfully closing the sale.  Larger sales are often made by competitive bid, which also increases the time and uncertainty associated with such opportunities.  In addition, because many of our solutions are sophisticated, customers may also require education on the value and functionality of our solutions as part of the sales process, further extending the time frame and uncertainty of the process. 

Longer sales cycles, competitive bid processes, and the need to educate customers means that:
 
There is greater risk of customers deferring, scaling back, or cancelling sales as a result of, among other things, their receipt of a competitive proposal, changes in budgets and purchasing priorities, or the introduction or anticipated introduction of new or enhanced products by us or our competitors during the process.
 
 We may make a significant investment of time and money in opportunities that do not come to fruition, which investments may not be usable or recoverable in future projects.

We may be required to bid on a project in advance of the completion of its design or be required to begin working on a project in advance of finalizing a sale, in either case, increasing the risk of unforeseen technological difficulties or cost overruns.
 
We face greater downside risks if we do not correctly and efficiently deploy limited personnel and financial resources and convert such sales opportunities into orders.

Larger solution sales also require greater expertise in sales execution and transaction implementation than more basic product sales, including in establishing and maintaining appropriate contacts and relationships with customers and partners, product development, project management, staffing, integration, services, and support. Additionally, after the completion of a solution sale or the sale of a more sophisticated product in general, our customers or partners may need assistance from us in making full use of the functionality of these solutions or products, in realizing all of their benefits, or in implementation generally. If we are unable to assist our customers and partners in realizing the benefits they expect from our solutions and products, demand for our solutions and products may decline and our operating results may suffer.

The extended time frame and uncertainty associated with many of our sales opportunities also makes it difficult for us to accurately forecast our revenues (and attendant budgeting and guidance decisions) and increases the volatility of our operating results from period to period.  Our ability to forecast and the volatility of our operating results is also impacted by the fact that pricing, margins, and other deal terms may vary substantially from transaction to transaction, especially across business lines.  The terms of our transactions, including with respect to pricing, future deliverables, delivery model (e.g., perpetual license versus SaaS), and post-contract customer support, also impact the timing of our ability to recognize revenue.  Because these transaction-specific factors are difficult to predict in advance, this also complicates the forecasting of revenue.  The deferral or loss of one or more significant orders or a delay in a large implementation can also materially adversely affect our operating results, especially in a given quarter.  As with other software-focused companies, a large amount of our quarterly business tends to come in the last few weeks, or even the last few days, of each quarter.  This trend has also complicated the process of accurately predicting revenue and other operating results, particularly on a quarterly basis.  Finally, our business is subject to seasonal factors that may also cause our results to fluctuate from quarter to quarter.
 
For certain products, components, or services, we rely on third-party suppliers, manufacturers, and partners, and if these relationships are interrupted we may not be able to obtain substitute suppliers, manufacturers, or partners on favorable terms or at all and we may be subject to other adverse effects.
 
Although we generally use standard parts and components in our products, we do rely on non-affiliated suppliers and OEM partners for certain non-standard products or components which may be critical to our products, including both hardware and

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software, and on manufacturers of assemblies that are incorporated into our products. We also purchase technology, license intellectual property rights, and oversee third-party development and localization of certain products or components, in some cases, by or from companies that may compete with us or work with our competitors.  While we endeavor to use larger, more established suppliers, manufacturers, and partners wherever possible, in some cases, these providers may be smaller, less established companies, particularly in the case of suppliers of new or unique technologies that we have not developed internally.  If these suppliers, manufacturers, or partners experience financial, operational, manufacturing capacity, or quality assurance difficulties, cease production or sale of the products we buy from them entirely, or there is any other disruption, including loss of license, OEM, or distribution rights, including as a result of the acquisition of a supplier or partner by a competitor, we will be required to locate alternative sources of supply or manufacturing, to internally develop the applicable technologies, to redesign our products, and/or to remove certain features from our products, any of which would be likely to increase expenses, create delivery delays, and negatively impact our sales.  Although we endeavor to put in place contracts with key providers, including protections such as source code escrows (where needed), warranties, and indemnities, we may not be successful in obtaining adequate protections, these agreements may be short-term in duration, and the counterparties may be unwilling or unable to stand behind such protections. Moreover, these types of contractual protections offer limited practical benefits to us in the event our relationship with a key provider is interrupted.

We also rely on third parties to provide certain services to us or to our customers, including hosting partners and providers of other cloud-based services. If these third-party providers do not perform as expected, our customers may be adversely affected, resulting in potential liability and negative exposure for us. If it is necessary to migrate these services to other providers as a result of poor performance by these third parties, cyber breaches, security considerations, or other financial or operational factors, it could result in service disruptions to our customers and significant time and expense to us, any of which could adversely affect our business.
 
If we cannot retain and recruit qualified personnel, our ability to operate and grow our business may be impaired.
 
We depend on the continued services of our management and employees to run and grow our business. To remain successful and to grow, we need to retain existing employees and attract new employees who understand and/or have experience with our products, services, and markets, including new markets and growth areas we may enter. As we grow, we must also enhance and expand our management team to execute on new and larger agendas and challenges. The market for qualified personnel is competitive in the geographies in which we operate and may be limited especially in areas of emerging technology, and we may be at a disadvantage to companies with greater brand recognition or financial resources in recruiting. If we are unable to attract and retain qualified personnel, when and where they are needed, our ability to operate and grow our business could be impaired. Moreover, if we are not able to properly balance investment in personnel with growth in our business, our profitability may be adversely affected.
 
Because we have significant foreign operations and business, we are subject to geopolitical and other risks that could materially adversely affect our results.

We have significant operations and business outside the United States, including sales, research and development, manufacturing, customer services and support, and administrative services. The countries in which we have our most significant foreign operations include Israel, the United Kingdom, India, Indonesia, the Netherlands, Cyprus, Australia, and Brazil. We also generate significant revenue from more than 20 foreign countries, and smaller amounts of revenue from dozens more, including a number of emerging markets. We intend to continue to grow our business internationally.

Our foreign operations are, and any future foreign growth will be, subject to a variety of risks, many of which are beyond our control, including risks associated with:

foreign currency fluctuations;

political, security, and economic instability or corruption in foreign countries;

changes in and compliance with both international and local laws and regulations, including those related to trade compliance, anticorruption, data privacy and protection, tax, labor, employee benefits, customs, currency restrictions, and other requirements;

differences in tax regimes and potentially adverse tax consequences of operating in foreign countries;

product customization or localization issues;


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preferences for or policies and procedures that protect local suppliers;

legal uncertainties regarding intellectual property rights or rights and obligations generally;

recruitment and retention of qualified foreign employees; and

challenges or delays in collection of accounts receivable.

Any or all of these factors could materially adversely affect our business or results of operations.
 
Conditions in and our relationship to Israel may materially adversely affect our operations and personnel and may limit our ability to produce and sell our products or engage in certain transactions.
 
We have significant operations in Israel, including R&D, manufacturing, sales, and support.
 
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighbors, which in the past have led, and may in the future lead, to security and economic problems for Israel.  In addition, Israel has faced and continues to face difficult relations with the Palestinians and the risk of terrorist violence from both Palestinian as well as foreign elements such as Hezbollah.  Infighting among the Palestinians may also create security and economic risks to Israel.  Current and future conflicts and political, economic, and/or military conditions in Israel and the Middle East region have affected and may in the future affect our operations in Israel.  The exacerbation of violence within Israel or the outbreak of violent conflicts between Israel and its neighbors, including Iran, may impede our ability to manufacture, sell, and support our products or engage in R&D, or otherwise adversely affect our business or operations.  In addition, many of our employees in Israel are required to perform annual compulsory military service and are subject to being called to active duty at any time.  The absence of these employees may have an adverse effect on our operations.  Hostilities involving Israel may also result in the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel and could materially adversely affect our results of operations.
 
Restrictive laws, policies, or practices in certain countries directed toward Israel, Israeli goods, or companies having operations in Israel may also limit our ability to sell some of our products in certain countries.
 
We receive grants from the OCS for the financing of a portion of our research and development expenditures in Israel. The availability in any given year of these OCS grants depends on OCS approval of the projects and related budgets that we submit to the OCS each year.  The Israeli law under which these OCS grants are made limits our ability to manufacture products, or transfer technologies, developed using these grants outside of Israel. This may limit our ability to engage in certain outsourcing or business combination transactions involving these products or require us to pay significant royalties or fees to the OCS in order to obtain any OCS consent that may be required in connection with such transactions.
 
We are subject to complex, evolving regulatory requirements that may be difficult and expensive to comply with and that could negatively impact our business.
 
Our business and operations are subject to a variety of regulatory requirements in the United States and abroad, including, among other things, with respect to government contracts, labor, tax, import and export, anti-corruption, information security, data privacy, and communications monitoring and interception.  Compliance with these regulatory requirements may be onerous, time-consuming, and expensive, especially where these requirements are inconsistent from jurisdiction to jurisdiction or where the jurisdictional reach of certain requirements is not clearly defined or seeks to reach across national borders.  Regulatory requirements in one jurisdiction may make it difficult or impossible to do business in another jurisdiction.  We may also be unsuccessful in obtaining permits, licenses, or other authorizations required to operate our business, such as for the marketing or sale or import or export of our products and services. 

While we have implemented policies, procedures, and systems designed to achieve compliance with these regulatory requirements, we cannot assure you that these policies, procedures, or systems will be adequate or that we or our personnel will not violate these policies and procedures or applicable laws and regulations. Violations of these laws or regulations may harm our reputation and deter government agencies and other existing or potential customers or partners from purchasing our solutions. Furthermore, non-compliance with applicable laws or regulations could result in fines, damages, criminal sanctions against us, our officers, or our employees, restrictions on the conduct of our business, and damage to our reputation.
 
Regulatory requirements, such as laws requiring telecommunications providers to facilitate the monitoring of communications by law enforcement, may also influence market demand for many of our products and/or customer requirements for specific

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functionality and performance or technical standards.  The domestic and international regulatory environment is subject to constant change, often based on factors beyond our control or anticipation, including political climate, budgets, and current events, which could reduce demand for our products or require us to change or redesign products to maintain compliance or competitiveness.
 
Loss of security clearances or political factors may adversely affect our business.
 
Some of our subsidiaries maintain security clearances domestically and abroad in connection with the development, marketing, sale, and support of our Security Intelligence solutions.  These clearances are reviewed from time to time by these countries and could be deactivated, including for political reasons unrelated to the merits of our solutions, such as the list of countries we do business with or the fact that our local entity is controlled by or affiliated with an entity based in another country.  If we lose our security clearances in a particular country, we may be unable to sell our Security Intelligence solutions for secure projects in that country and might also experience greater challenges in selling such solutions even for non-secure projects in that country.  Even if we are able to obtain and maintain applicable security clearances, government customers may decline to purchase our Security Intelligence solutions if they were not developed or manufactured in that country or if they were developed or manufactured in other countries that are considered disfavored by such country.  We may also experience negative publicity or other adverse impacts on our business if we sell our Security Intelligence solutions to countries that are considered disfavored by the media or political or social rights organizations even though such transactions may be permissible under applicable law.
 
Information / Product Security and Intellectual Property
 
Our intellectual property may not be adequately protected.
 
While much of our intellectual property is protected by patents or patent applications, we have not and cannot protect all of our intellectual property with patents or other registrations. There can be no assurance that patents we have applied for will be issued on the basis of our patent applications or that, if such patents are issued, they will be, or that our existing patents are, sufficiently broad enough to protect our technologies, products, or services. Our intellectual property rights may not be successfully asserted in the future or may be invalidated, designed around, or challenged.
 
In order to safeguard our unpatented proprietary know-how, source code, trade secrets, and technology, we rely primarily upon trade secret protection and non-disclosure provisions in agreements with employees and other third parties having access to our confidential information. There can be no assurance that these measures will adequately protect us from improper disclosure or misappropriation of our proprietary information.
 
Preventing unauthorized use or infringement of our intellectual property rights is difficult even in jurisdictions with well-established legal protections for intellectual property such as the United States.  It may be even more difficult to protect our intellectual property in other jurisdictions where legal protections for intellectual property rights are less established.  If we are unable to adequately protect our intellectual property against unauthorized third-party use or infringement, our competitive position could be adversely affected.
 
Our products may infringe or may be alleged to infringe on the intellectual property rights of others, which could lead to costly disputes or disruptions for us and may require us to indemnify our customers and resellers for any damages they suffer.
 
The technology industry is characterized by frequent allegations of intellectual property infringement. In the past, third parties have asserted that certain of our products infringed upon their intellectual property rights and similar claims may be made in the future. Any allegation of infringement against us could be time consuming and expensive to defend or resolve, result in substantial diversion of management resources, cause product shipment delays, or force us to enter into royalty or license agreements. If patent holders or other holders of intellectual property initiate legal proceedings against us, either with respect to our own intellectual property or intellectual property we license from third parties, we may be forced into protracted and costly litigation, regardless of the merits of these claims. We may not be successful in defending such litigation, in part due to the complex technical issues and inherent uncertainties in intellectual property litigation, and may not be able to procure any required royalty or license agreements on terms acceptable to us, or at all. Third parties may also assert infringement claims against our customers. Subject to certain limitations, we generally indemnify our customers and resellers with respect to infringement by our products of the proprietary rights of third parties, which, in some cases, may not be limited to a specified maximum amount and for which we may not have sufficient insurance coverage or adequate indemnification in the case of intellectual property licensed from a third party.  If any of these claims succeed, we may be forced to pay damages, be required to obtain licenses for the products our customers or partners use, or incur significant expenses in developing non-infringing

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alternatives. If we cannot obtain necessary licenses on commercially reasonable terms, our customers may be forced to stop using or, in the case of resellers and other partners, stop selling our products.
 
Use of free or open source software could expose our products to unintended restrictions and could materially adversely affect our business.
 
Some of our products contain free or open source software (together, open source software) and we anticipate making use of open source software in the future. Open source software is generally covered by license agreements that permit the user to use, copy, modify, and distribute the software without cost, provided that the users and modifiers abide by certain licensing requirements. The original developers of the open source software generally provide no warranties on such software or protections in the event the open source software infringes a third party's intellectual property rights. Although we endeavor to monitor the use of open source software in our product development, we cannot assure you that past, present, or future products will not contain open source software elements that impose unfavorable licensing restrictions or other requirements on our products, including the need to seek licenses from third parties, to re-engineer affected products, to discontinue sales of affected products, or to release all or portions of the source code of affected products.  Any of these developments could materially adversely affect our business.
 
The mishandling or the perceived mishandling of sensitive information could harm our business.
 
Our products are in some cases used by customers to compile and analyze highly sensitive or confidential information and data, including information or data used in intelligence gathering or law enforcement activities. While our customers' use of our products in no way affords us access to the customer's sensitive or confidential information or data, we or our partners may receive or come into contact with such information or data, including personally identifiable information, when we are asked to perform services or support functions for our customers. We or our partners may also receive or come into contact with such information or data in connection with our SaaS or other hosted or managed services offerings.  We have implemented policies and procedures, and use information technology systems, to help ensure the proper handling of such information and data, including background screening of certain service personnel, non-disclosure agreements with employees and partners, access rules, and controls on our information technology systems. Customers are also increasingly focused on the security of our products and services and we continuously work to address these concerns, including through the use of encryption, access rights, and other customary security features, which vary based on the solution in question and customer requirements. However, these measures are designed to mitigate the risks associated with handling or processing sensitive data and cannot safeguard against all risks at all times. The improper handling of sensitive data, or even the perception of such mishandling (whether or not valid), or other security lapses or breaches affecting us, our partners, or our products or services, could reduce demand for our products or services or otherwise expose us to financial or reputational harm or legal liability.
 
We may be subject to information technology system breaches, failures, or disruptions that could harm our operations, financial condition, or reputation.
 
We rely extensively on information technology systems to operate and manage our business and to process, maintain, and safeguard information, including information belonging to our customers, partners, and personnel.  These systems may be subject to breaches, failures, or disruptions as a result of, among other things, cyber-attacks, computer viruses, physical security breaches, natural disasters, accidents, power disruptions, telecommunications failures, new system implementations, or acts of terrorism or war.  We have experienced cyber-attacks in the past and may experience them in the future, potentially with greater frequency.  While we are continually working to maintain secure and reliable systems, our security, redundancy, and business continuity efforts may be ineffective or inadequate.  We must continuously improve our design and coordination of security controls across our business groups and geographies. Despite our efforts, it is possible that our security controls, and other procedures that we follow, may not prevent system breaches, failures, or disruptions. Such system breaches, failures, or disruptions could subject us to the loss, compromise, or disclosure of sensitive or confidential information or intellectual property, the destruction or corruption of data, financial losses from remedial actions, liabilities to customers or other third parties, damage to our reputation, delays in our ability to process orders, delays in our ability to provide products and services to customers, including SaaS or other hosted or managed services offerings, R&D or production downtimes, or delays or errors in financial reporting.  Information system breaches or failures at one of our partners, including hosting providers or those who support other cloud-based offerings, may also result in similar adverse consequences. Any of the foregoing could harm our competitive position, result in a loss of customer confidence, and materially and adversely affect our results of operations or financial condition.
 

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Risks Related to Our Finances and Capital Structure
 
If our goodwill or other intangible assets become impaired, our financial condition and results of operations could be negatively affected.
 
Because we have historically acquired a significant number of companies, goodwill and other intangible assets have represented a substantial portion of our assets. Goodwill and other intangible assets totaled approximately $1,454 million, or approximately 62% of our total assets, as of January 31, 2016. We test our goodwill for impairment at least annually, or more frequently if an event occurs indicating the potential for impairment, and we assess on an as-needed basis whether there have been impairments in our other intangible assets. We make assumptions and estimates in this assessment which are complex and often subjective. These assumptions and estimates can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. To the extent that the factors described above change, we could be required to record additional non-cash impairment charges in the future, which could negatively affect our financial condition and results of operations.

We may be adversely affected by our acquisition of CTI or our historical affiliation with CTI and its former subsidiaries.

As a result of the February 2013 acquisition of our former parent company, CTI (the "CTI Merger"), CTI's liabilities, including contingent liabilities, have been consolidated into our financial statements. If CTI's liabilities are greater than represented, if the contingent liabilities we have assumed become fixed, or if there are obligations of CTI of which we were not aware at the time of completion of the CTI Merger, we may have exposure for those obligations and our business or financial condition could be materially and adversely affected. Adjustments to the CTI consolidated group's tax liability for periods prior to the CTI Merger could also affect the net operating losses ("NOLs") allocated to Verint as a result of the CTI Merger and cause us to incur additional tax liability in future periods.

As a result of our historical affiliation with CTI and other members of the historical CTI consolidated tax group, we could also become liable for taxes of other members of the CTI consolidated group for historical periods under certain circumstances. Adjustments to the historical CTI consolidated group's tax liability for periods prior to Verint’s IPO could also affect the NOLs allocated to Verint in the IPO and cause us to incur additional tax liability in future periods.

We are entitled to certain rights to indemnification from Xura in connection with the transactions contemplated by our agreement and plan of merger with CTI (the "CTI Merger Agreement") and the agreements entered into in connection with the distribution by CTI to its shareholders of substantially all of its assets other than its interest in us (the "Comverse share distribution"). However, there is no assurance that Xura will be willing and able to provide such indemnification if needed. If we become responsible for liabilities (including tax liabilities) not covered by indemnification or substantially in excess of amounts covered by indemnification, or if Xura becomes unwilling or unable to stand behind such protections, our financial condition and results of operations could be materially and adversely affected.

Our financial results may be significantly impacted by changes in our tax position.
We are subject to taxes in the United States and numerous foreign jurisdictions. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in valuation allowance on deferred tax assets (including our NOL carryforwards), changes in unrecognized tax benefits or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on our profitability. In addition, the tax authorities in the jurisdictions in which we operate, including the United States, may from time to time review the pricing arrangements between us and our foreign subsidiaries or among our foreign subsidiaries. An adverse determination by one or more tax authorities in this regard may have a material adverse effect on our financial results.
We have significant deferred tax assets which can provide us with significant future cash tax savings if we are able to use them, including significant NOLs inherited as a result of the CTI Merger. However, the extent to which we will be able to use these NOLs may be impacted, restricted, or eliminated by a number of factors, including changes in tax rates, laws or regulations, whether we generate sufficient future taxable income, and possible adjustments to the tax attributes of CTI or its non-Verint subsidiaries for periods prior to the CTI Merger. To the extent that we are unable to utilize our NOLs or other losses, our results of operations, liquidity, and financial condition could be materially adversely affected. When we cease to have NOLs available to us in a particular tax jurisdiction, either through their expiration, disallowance, or utilization, our cash tax liability will increase in that jurisdiction.


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Our international operations subject us to currency exchange risk.
 
We earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including the Israeli shekel, British pound sterling, euro, and Singapore dollar, among others.  Because our consolidated financial statements are presented in U.S. dollars, we must translate revenue, expenses, assets, and liabilities of entities using non-U.S. dollar functional currencies into U.S. dollars using currency exchange rates in effect during or at the end of each reporting period, meaning we are exposed to the impact of changes in currency exchange rates. In addition, our net income is impacted by the revaluation and settlement of monetary assets and liabilities denominated in currencies other than an entity’s functional currency, gains or losses on which are recorded within other income (expense), net. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. However, our hedging activities are limited in scope and duration and may not be effective at reducing the U.S. dollar cost of our global operations.

In addition, our financial outlooks do not assume fluctuations in currency exchange rates. Adverse fluctuations in currency exchange rates subsequent to providing our financial outlooks could cause our actual results to differ materially from those anticipated in our outlooks, which could negatively affect our business.
 
We have a significant amount of indebtedness, which exposes us to leverage risks and subjects us to covenants which may adversely affect our operations.
 
At March 15, 2016, we had total outstanding indebtedness of approximately $811 million under our Credit Agreement and the Notes, meaning that we are significantly leveraged. In addition, we have the ability to borrow additional amounts under our Credit Agreement, including the revolving credit facility, for a variety of purposes, including, among others, acquisitions and stock repurchases. Our leverage position may, among other things:

limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes;

require us to dedicate a substantial portion of our cash flow from operations to debt service, reducing the availability of our cash flow for other purposes;

require us to repatriate cash for debt service from our foreign subsidiaries resulting in dividend tax costs or require us to adopt other disadvantageous tax structures to accommodate debt service payments; or

increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities, and restrict our flexibility to react to changes in market or industry conditions.
 
In addition, because the unhedged portion of our indebtedness under our Credit Agreement bears interest at a variable rate, we are exposed to risk from fluctuations in interest rates in periods where market rates exceed the interest rate floor provided by our Credit Agreement.
 
The revolving credit facility under our Credit Agreement contains a financial covenant that requires us to maintain a maximum consolidated leverage ratio. Our ability to comply with the leverage ratio covenant is dependent upon our ability to continue to generate sufficient earnings each quarter, or in the alternative, to reduce expenses and/or reduce the level of our outstanding debt, and we cannot assure that we will be successful in any or all of these regards.
 
Our Credit Agreement also includes a number of restrictive covenants which limit our ability to, among other things:

incur additional indebtedness or liens or issue preferred stock;

pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness;

engage in transactions with affiliates;

engage in sale-leaseback transactions;

sell certain assets;

change our lines of business;

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make investments, loans, or advances; and

engage in consolidations, mergers, liquidations, or dissolutions.

These covenants could limit our ability to plan for or react to market conditions, to meet our capital needs, or to otherwise engage in transactions that might be considered beneficial to us.
 
If certain events of default occur under our Credit Agreement, our lenders could declare all amounts outstanding to be immediately due and payable. An acceleration of indebtedness under our Credit Agreement may also result in an event of default under the indenture governing the Notes. Additionally, if a change of control as defined in our Credit Agreement were to occur, the lenders under our credit facilities would have the right to require us to repay all of our outstanding obligations under the facilities.

If a fundamental change as defined in the indenture governing the Notes were to occur, the holders may require us to purchase for cash all or any portion of their Notes at 100% of the principal amount of the Notes, plus accrued and unpaid interest. Additionally, in the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert their Notes during specified periods of time at their option. If one or more holders elect to convert their Notes, we may be required to settle all or a portion of our conversion obligation in cash, which could adversely affect our liquidity.
 
If any of the events described in the foregoing paragraphs were to occur, in order to satisfy our obligations we may be forced to seek an amendment of and/or waiver under our debt agreements, raise additional capital through securities offerings, asset sales, or other transactions, or seek to refinance or restructure our debt. In such a case, there can be no assurance that we will be able to consummate such a transaction on reasonable terms or at all.
 
We consider other financing and refinancing options from time to time, however, we cannot assure you that such options will be available to us on reasonable terms or at all.  If one or more rating agencies were to downgrade our credit ratings, that could also impede our ability to refinance our existing debt or secure new debt, increase our future cost of borrowing, and create third-party concerns about our financial condition or results of operations.

Our internal controls over financial reporting may not prevent misstatements and material weaknesses or deficiencies could arise in the future which could lead to restatements or filing delays.
 
Our system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles ("GAAP").  Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement.  An evaluation of effectiveness is subject to the risk that the controls may become inadequate because of changes in conditions, because the degree of compliance with policies or procedures decreases over time, or because of unanticipated circumstances or other factors.  As a result, although our management has concluded that our internal controls are effective as of January 31, 2016, we cannot assure you that our internal controls will prevent or detect every misstatement, that material weaknesses or other deficiencies will not occur or be identified in the future, that this or future financial reports will not contain material misstatements or omissions, that future restatements will not be required, or that we will be able to timely comply with our reporting obligations in the future.
 

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The prices of our common stock and the Notes have been, and may continue to be, volatile and your investment could lose value.

The prices of our common stock and the Notes have been, and may continue to be, volatile. Those prices could be affected by any of the risk factors discussed in this Item. In addition, other factors that could impact the prices of our common stock and/or the Notes include:

announcements by us or our competitors regarding, among other things, strategic changes, new products, product enhancements or technological advances, acquisitions, major transactions, stock repurchases, or management changes;

speculation in the press and the analyst community, including with respect to changes in recommendations or earnings estimates or growth rates by financial analysts, changes in investors' or analysts' valuation measures for our securities, our credit ratings, or market trends unrelated to our performance;

stock sales by our directors, officers, or other significant holders, or stock repurchases by us;

hedging or arbitrage trading activity by third parties, including by the counterparties to the note hedge and warrant transactions that we entered into in connection with the issuance of the Notes; and

dilution that may occur upon any conversion of the Notes.

A significant drop in the price of our common stock or the Notes could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management's attention and resources, which could adversely affect our business.


Item 1B. Unresolved Staff Comments

None.


Item 2. Properties

The following describes our material properties as of the date of this report.
We lease a total of approximately 962,000 square feet of office space covering approximately 60 offices around the world and we own an aggregate of approximately 89,000 square feet of office space at three sites in Scotland, Germany, and Indonesia.
Other than as described below, these properties are comprised of small and mid-sized facilities that are used to support our administrative, marketing, manufacturing, product development, sales, training, support, and services needs for our three operating segments.
Our corporate headquarters is located in a leased facility in Melville, New York, and consists of approximately 49,000 square feet of space under a lease that we entered into on February 13, 2015 and that expires in 2027. The Melville facility is used primarily by our executive management and corporate groups, including finance, legal, and human resources, as well as for customer support and services for our Enterprise Intelligence operations.
We lease approximately 132,700 square feet of space at a facility in Alpharetta, Georgia under a lease that expires in 2026. The Alpharetta facility is used primarily by the administrative, marketing, product development, support, and sales groups for our Enterprise Intelligence operations.
We also occupy approximately 176,000 square feet of space at our main facility in Herzliya, Israel under a lease that we renewed on October 1, 2015 and that expires in 2025. This Herzliya facility is used primarily for manufacturing, storage, development, sales, marketing, and support related to our Cyber Intelligence operations, as well as for product development related to our Enterprise Intelligence and Video Intelligence operations. We also entered into a lease for approximately 138,000 square feet of space at another facility in Herzliya on February 1, 2015, which expires in 2028. This second Herzliya facility will allow us to consolidate approximately 72,000 square feet of space from several other smaller facilities in the area.

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From time to time, we may lease or sublease portions of our owned or leased facilities to third parties based on our operational needs. For additional information regarding our lease obligations, see Note 16, "Commitments and Contingencies" to our consolidated financial statements included under Item 8 of this report.
We believe that our leased and owned facilities are in good operating condition and are adequate for our current requirements, although changes in our business may require us to acquire additional facilities or modify existing facilities. We believe that alternative locations are available on commercially reasonable terms in all areas where we currently do business.


Item 3. Legal Proceedings

On March 26, 2009, legal actions were commenced by Ms. Orit Deutsch, a former employee of our subsidiary, Verint Systems Limited ("VSL"), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the “Deutsch Labor Action”) and against CTI in the Tel Aviv District Court (Case Number 1335/09) (the “Deutsch District Action”). In the Deutsch Labor Action, Ms. Deutsch filed a motion to approve a class action lawsuit on the grounds that she purports to represent a class of our employees and former employees who were granted Verint and CTI stock options and were allegedly damaged as a result of the suspension of option exercises during the period from March 2006 through March 2010, during which we did not make periodic filings with the SEC as a result of certain internal and external investigations and reviews of accounting matters discussed in our prior public filings. In the Deutsch District Action, in addition to a small amount of individual damages, Ms. Deutsch is seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class certification motions do not specify an amount of damages. On February 8, 2010, the Deutsch Labor Action was dismissed for lack of material jurisdiction and was transferred to the Tel Aviv District Court and consolidated with the Deutsch District Action. On March 16, 2009 and March 26, 2009, respectively, legal actions were commenced by Ms. Roni Katriel, a former employee of CTI's former subsidiary, Comverse Limited, against Comverse Limited in the Tel Aviv Regional Labor Court (Case Number 3444/09) (the “Katriel Labor Action”) and against CTI in the Tel Aviv District Court (Case Number 1334/09) (the “Katriel District Action”). In the Katriel Labor Action, Ms. Katriel is seeking to certify a class of plaintiffs who were granted CTI stock options and were allegedly damaged as a result of the suspension of option exercises during an extended filing delay period affecting CTI's periodic reporting discussed in CTI's historical SEC filings. In the Katriel District Action, in addition to a small amount of individual damages, Ms. Katriel is seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class certification motions do not specify an amount of damages. On March 2, 2010, the Katriel Labor Action was transferred to the Tel Aviv District Court, based on an agreed motion filed by the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on June 7, 2012, the District Court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an amended consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to effect the Comverse share distribution, on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order CTI to set aside up to $150.0 million in assets to secure any future judgment. The District Court ruled that it would not decide this motion until the Deutsch and Katriel class certification motion was heard. Plaintiffs initially filed a motion to appeal this ruling in August 2012, but subsequently withdrew it in July 2014.
Prior to the consummation of the Comverse share distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in us and Comverse) to Comverse or unaffiliated third parties. On October 31, 2012, CTI completed the Comverse share distribution, in which it distributed all of the outstanding shares of common stock of Comverse to CTI's shareholders. As a result of the Comverse share distribution, Comverse became an independent public company and ceased to be a wholly owned subsidiary of CTI, and CTI ceased to have any material assets other than its equity interest in us. On September 9, 2015, Comverse changed its name to Xura, Inc. ("Xura").
On February 4, 2013, we completed the CTI Merger. As a result of the CTI Merger, we have assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action. However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share distribution, we, as successor to CTI, are entitled to indemnification from Comverse (now Xura) for any losses we suffer in our capacity as successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
Following an unsuccessful mediation process, the proceeding before the District Court resumed and the parties have filed summations on the plaintiffs' motion to certify the suit as a class action, which remain under consideration by the District Court.

26


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.


Item 4. Mine Safety Disclosures
 
Not applicable.

27


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Market Information

Our common stock trades on the NASDAQ Global Select Market under the symbol "VRNT".

The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the NASDAQ Global Select Market.
 
 
Low
 
High
Year Ended January 31, 2015:
 
 
 
 
First quarter
 
$
42.29

 
$
49.99

Second quarter
 
$
41.44

 
$
53.19

Third quarter
 
$
45.89

 
$
57.89

Fourth quarter
 
$
52.84

 
$
61.05

 
 
 
 
 
Year Ended January 31, 2016:
 
 
 
 
First quarter
 
$
52.79

 
$
64.78

Second quarter
 
$
57.05

 
$
66.45

Third quarter
 
$
40.90

 
$
59.69

Fourth quarter
 
$
35.61

 
$
49.70


Holders

There were approximately 2,700 holders of record of our common stock at March 15, 2016. Such record holders include holders who are nominees for an undetermined number of beneficial owners.

Dividends

We have not declared or paid any cash dividends on our equity securities and have no current plans to pay any dividends on our equity securities. We intend to retain our earnings to finance the development of our business, repay debt, and for other corporate purposes. In addition, the terms of our Credit Agreement restrict our ability to pay cash dividends on shares of our common stock. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" included under Item 7 of this report and Note 6, "Long-Term Debt" to our consolidated financial statements included under Item 8 of this report for a more detailed discussion of these limitations.

Any future determination as to the payment of dividends on our common stock will be made by our board of directors at its discretion, subject to the limitations contained in our Credit Agreement and will depend upon our earnings, financial condition, capital requirements, and other relevant factors.

Stock Performance Graph

The following table compares the cumulative total stockholder return on our common stock with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Services Index, assuming an investment of $100 on January 31, 2011 through January 31, 2016, and the reinvestment of any dividends. The comparisons in the graph below are based upon the closing sale prices on NASDAQ for our common stock from January 31, 2011 through January 31, 2016. This data is not indicative of, nor intended to forecast, future performance of our common stock.


28


January 31,
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
Verint Systems Inc.
 
$
100.00

 
$
82.07

 
$
98.08

 
$
131.86

 
$
154.90

 
$
106.24

NASDAQ Composite Index
 
$
100.00

 
$
105.66

 
$
119.44

 
$
159.71

 
$
181.15

 
$
180.76

NASDAQ Computer & Data Processing Index
 
$
100.00

 
$
105.14

 
$
113.83

 
$
167.27

 
$
178.75

 
$
217.29


Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

On March 29, 2016, we announced that our board of directors had authorized a new share repurchase program whereby we may make up to $150 million in purchases of our outstanding shares of common stock over the two years following the date of announcement. Under the share repurchase program, purchases can be made from time to time using a variety of methods, which may include open market purchases. The specific timing, price and size of purchases will depend on prevailing stock prices, general market and economic conditions, and other considerations, including the amount of cash generated in the U.S. and other potential uses of cash, such as acquisitions. Purchases may be made through a Rule 10b5-1 plan pursuant to pre-determined metrics set forth in such plan. The board of directors’ authorization of the share repurchase program does not obligate us to acquire any particular amount of common stock, and the program may be suspended or discontinued at any time.


Item 6. Selected Financial Data

29



The following selected consolidated financial data has been derived from our audited consolidated financial statements. The data below should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 and our consolidated financial statements and notes thereto included under Item 8 of this report.

Our historical results should not be viewed as indicative of results expected for any future period.

Five-Year Selected Financial Highlights:

Consolidated Statements of Operations Data
 
 
Year Ended January 31,
(in thousands, except per share data)
 
2016
 
2015
 
2014
 
2013
 
2012
Revenue
 
$
1,130,266

 
$
1,128,436

 
$
907,292

 
$
839,542

 
$
782,648

Operating income
 
$
67,852

 
$
79,111

 
$
122,286

 
$
99,553

 
$
86,478

Net income
 
$
22,228

 
$
36,402

 
$
58,776

 
$
58,804

 
$
40,625

Net income attributable to Verint Systems Inc.
 
$
17,638

 
$
30,931

 
$
53,757

 
$
54,002

 
$
36,993

Net income attributable to Verint Systems Inc. common shares
 
$
17,638

 
$
30,931

 
$
53,583

 
$
38,530

 
$
22,203

Net income per share attributable to Verint Systems Inc.:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.29

 
$
0.53

 
$
1.01

 
$
0.97

 
$
0.58

Diluted
 
$
0.28

 
$
0.52

 
$
0.99

 
$
0.96

 
$
0.56

Weighted-average shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
61,813

 
58,096

 
52,967

 
39,748

 
38,419

Diluted
 
62,921

 
59,374

 
53,878

 
40,312

 
39,499


We have never declared a cash dividend to common stockholders.

Consolidated Balance Sheet Data
 
 
January 31,
(in thousands)
 
2016
 
2015
 
2014
 
2013
 
2012
Total assets
 
$
2,355,735

 
$
2,340,452

 
$
1,768,192

 
$
1,556,553

 
$
1,493,462

Long-term debt, including current maturities
 
$
738,087

 
$
726,258

 
$
637,670

 
$
568,973

 
$
587,973

Preferred stock
 
$

 
$

 
$

 
$
285,542

 
$
285,542

Total stockholders' equity
 
$
1,068,164

 
$
1,004,903

 
$
633,118

 
$
229,676

 
$
144,295


Consolidated balance sheet data presented for periods prior to January 31, 2016 reflect the retrospective adoption of Accounting Standards Update ("ASU") No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Agreements, under which certain debt issuance costs are now presented as direct reductions of the corresponding long-term debt rather than as other assets. As a result, both total assets and long-term debt, including current maturities, were reduced by $10.5 million, $4.7 million, $7.7 million, and $9.4 million as of January 31, 2015, 2014, 2013, and 2012, respectively.

During the five-year period ended January 31, 2016, we acquired a number of businesses, the more significant of which are identified in the table below. The operating results of acquired businesses have been included in our consolidated financial statements since their respective acquisition dates and have contributed to our revenue growth.

In addition to the impact of our business acquisitions, our consolidated operating results and consolidated financial condition during the five-year period ended January 31, 2016 included the following notable transactions:

30




As of and for the year ended January 31,
 
 
Description
2016
 
None
 
 
 
 
2015
 
Completion of the acquisitions of KANA Software, Inc. and its subsidiaries ("KANA") in February 2014 and UTX Technologies Limited ("UTX") in March 2014.
 
 
An income tax benefit of $44.4 million resulting from the reduction of a valuation allowance on our deferred income tax assets recorded in connection with the acquisition of KANA; and
 
 
Losses on early retirements of debt of $12.5 million, primarily associated with an amendment to our Credit Agreement and the early partial retirement of our term loans.
 
 
 
 
2014
 
Completion of the CTI Merger on February 4, 2013; and
 
 
Losses on early retirements of debt of $9.9 million, primarily associated with an amendment to our Credit Agreement.
 
 
 
 
2013
 
Professional fees and related expenses of $16.1 million associated with the CTI Merger.
 
 
 
 
2012
 
Completion of the acquisition of Vovici Corporation in August 2011; and
 
 
A loss on early retirement of debt of $8.1 million associated with the termination of a credit agreement.


Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with "Business" under Item 1, "Selected Financial Data" under Item 6, and our consolidated financial statements and the related notes thereto included under Item 8 of 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 in "Risk Factors" under Item 1A of this report.

Overview

Our Business

Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence.

Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.

Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.

We conduct our business through three operating segments—Enterprise Intelligence, Cyber Intelligence, and Video Intelligence. Organizing our business through three operating segments allows us to align our resources and domain expertise to more effectively address the Actionable Intelligence market. We address the Customer Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the Security Intelligence market

31


opportunity through solutions from our Cyber Intelligence segment and Video Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through solutions from all three operating segments.

For the years ended January 31, 2016, 2015, and 2014, our Enterprise Intelligence segment represented approximately 55%, 58%, and 55% of our total revenue, respectively. For the years ended January 31, 2016, 2015, and 2014, our Cyber Intelligence segment represented approximately 34%, 32%, and 32% of our total revenue, respectively. For the years ended January 31, 2016, 2015, and 2014, our Video Intelligence segment represented approximately 11%, 10%, and 13% of our total revenue, respectively.

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 investment in our business, increasing capital expenditures, or making other decisions that may reduce our profitability, we also consider the leverage ratio in our revolving credit facility. See "— Liquidity and Capital Resources" for more information.

Key Trends and Factors That May Impact our Performance

We believe that there are many factors that affect our ability to sustain and increase both revenue and profitability, including:

Market acceptance of Actionable Intelligence solutions. We compete in markets where the value of aspects of our products and solutions is still in the process of market acceptance. Our future growth depends in part on the continued and increasing acceptance and realization of the value of our product offerings. However, we believe that organizations in both the enterprise and security markets want and need Actionable Intelligence solutions to help achieve their customer engagement, enhanced security, and risk mitigation goals.

Evolving technologies and market potential. Our success depends in part on our ability to keep pace with technological changes, customer challenges, and evolving industry standards in our product offerings, successfully developing, launching, and driving demand for new, innovative, high-quality products and services that meet or exceed customer needs, and identifying, entering, and prioritizing areas of growing market potential. For example, in our Security Intelligence business, stronger and more frequent use of encryption has created significantly greater challenges for our customers and for our solutions to address. In the enterprise market, we believe that today's customer-centric organizations are increasingly seeking Customer Engagement Optimization solutions that allow them to collect and analyze intelligence across different service channels to gain a better understanding of the performance of their workforce, the effectiveness of their service processes, the quality of their interactions, and changing customer behaviors, as well as to anticipate and prevent information security breaches, effectively authenticate customers, protect personal information, mitigate risk, prevent fraud, and help ensure compliance with evolving legal, regulatory, and internal requirements. In the security market, we believe that terrorism, criminal activities, cyber-attacks, and other security threats, combined with new and more complex security challenges, including increasingly frequent and sophisticated cyber-attacks and increasingly complex and secure communication networks, are driving demand for Actionable Intelligence solutions to help anticipate, prepare, and respond to these threats.

Information technology and government spending. Our growth and results depend in part on general economic conditions and the pace of information technology spending by both commercial and governmental customers. In the year ended January 31, 2016, we experienced extended sales cycles, particularly for large projects, a reduction in deal sizes, and pressure on maintenance renewals for our Enterprise Intelligence solutions. This trend regarding extended sales cycles and reduced deal sizes was particularly acute for our Security Intelligence business which has significant exposure to emerging markets where budgets have been reduced significantly due to weak economic conditions and currency devaluations.

See Item 1 of this report for more information on key trends that we believe are driving demand for our solutions and "Risk Factors" under Item 1A of this report for a more complete description of risks that may impact future revenue and profitability.


Critical Accounting Policies and Estimates


32


An appreciation of our critical accounting policies is necessary to understand our financial results. The accounting policies outlined below are considered to be critical because they can materially affect our operating results and financial condition, as these policies may require us to make difficult and subjective judgments regarding uncertainties. The accuracy of these estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying variables, many of which are beyond our control, and there can be no assurance that our estimates are accurate.

Revenue Recognition

Our revenue recognition policy is a critical component of determining our operating results and is based on a complex set of accounting rules that require us to make significant judgments and estimates. We derive and report our revenue in two categories: (a) product revenue, including sale of hardware products (which include software that works together with the hardware to deliver the product's essential functionality) and licensing of software products, and (b) service and support revenue, including revenue from installation services, post-contract customer support ("PCS"), project management, hosting services, SaaS, application managed services, product warranties, business advisory consulting and training services. Our customer arrangements may include any combination of these elements. We follow the appropriate revenue recognition rules for each of these revenue streams. For additional information, see Note 1, "Summary of Significant Accounting Policies" to our consolidated financial statements included under Item 8 of this report. Revenue recognition for a particular arrangement is dependent upon such factors as the level of customization within the solution and the contractual delivery, acceptance, payment, and support terms with the customer. Significant judgment is required to conclude on each of these factors, and if we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.

We generally consider a purchase order or executed sales quote, when combined with a master license agreement, to constitute evidence of an arrangement. Delivery occurs when the product is shipped or transmitted and title and risk of loss have transferred to the customers. Our typical customer arrangements do not include substantive product acceptance provisions; however, if such provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. If the fee due from a customer is not fixed or determinable due to extended payment terms, revenue is recognized when payment becomes due or upon cash receipt, whichever is earlier.

Our multiple-element arrangements consist of a combination of our product and service offerings that may be delivered at various points in time. For arrangements within the scope of the multiple-deliverable guidance, a deliverable constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the delivered elements. For multiple-element arrangements comprised only of tangible products containing software components and non-software components and related services, we allocate revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. The total transaction revenue is allocated to the multiple elements based on each element's relative selling price compared to the total selling price.

We account for multiple-element arrangements that contain only software and software-related elements by allocating a portion of the total purchase price to the undelivered elements, primarily installation services, PCS, consulting, and training, using VSOE of fair value of the undelivered elements. The remaining portion of the total transaction value is allocated to the delivered software, referred to as the residual method. If we are unable to establish VSOE for the undelivered elements of the arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, we recognize the arrangement fee ratably over the PCS period.

For multiple-element arrangements that are comprised of a combination of hardware and software elements, the total transaction value is bifurcated between the hardware elements and the software elements that are not essential to the functionality of the hardware, based on the relative selling prices of the hardware elements and the software elements as a group. Revenue is then recognized for the hardware and hardware-related services following the hardware revenue recognition methodology outlined above and revenue for the software and software-related services is recognized following the residual method or ratably over the PCS period if VSOE for PCS does not exist.

Our policy for establishing VSOE for installation, business advisory consulting, and training is based upon an analysis of separate sales of services. We utilize either the substantive renewal rate approach or the bell-shaped curve approach to establish VSOE for our PCS offerings, depending upon the business segment, geographical region, or product line. The timing of revenue recognition on software licenses and other revenue could be significantly impacted if we are unable to maintain VSOE on one or more undelivered elements during any quarterly period. Loss of VSOE could result in (i) the complete deferral of all

33


revenue or (ii) ratable recognition of all revenue under a customer arrangement until such time as VSOE is re-established. If we are unable to re-establish VSOE on one or more undelivered elements for an extended period of time it would impact our ability to accurately forecast the timing of quarterly revenue, which could have a material adverse effect on our business, financial position, results of operations or cash flows.

We typically are not able to determine TPE for our products or our service and support offerings. TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in stand-alone sales to similarly situated customers.

If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of allocating the arrangement by considering several external and internal factors including, but not limited to, pricing practices, similar product offerings, margin objectives, geographies in which we offer our products and services, internal costs, competition, and product lifecycle. The determination of ESP is made through consultation with and approval by our management, taking into consideration our go-to-market strategies. We have established processes to update ESP for each element, when appropriate, to ensure that it reflects recent pricing experience.

PCS revenue is derived from providing technical software support services and unspecified software updates and upgrades to customers on a when-and-if-available basis. PCS revenue is recognized ratably over the term of the maintenance period which, in most cases, is one year. When PCS is included within a multiple-element arrangement, we utilize either the substantive renewal rate approach or the bell-shaped curve approach to establish VSOE of the PCS, depending upon the business operating segment, geographical region, or product line.

Under the substantive renewal rate approach, we believe it is necessary to evaluate whether both the support renewal rate and term are substantive, and whether the renewal rate is being consistently applied to subsequent renewals for a particular customer. We establish VSOE under this approach through analyzing the renewal rate stated in the customer agreement and determining whether that rate is above the minimum substantive VSOE renewal rate established for that particular PCS offering. The minimum substantive VSOE rate is determined based upon an analysis of renewal rates associated with historical PCS contracts. Typically, renewal rates of 15% for PCS plans that provide when-and-if-available upgrades, and 10% for plans that do not provide for when-and-if-available upgrades, would be deemed to be minimum substantive renewal rates. For contracts that do not contain a stated renewal rate, revenue associated with the entire bundled arrangement is recognized ratably over the PCS term. Contracts that have a renewal rate below the minimum substantive VSOE rate are deemed to contain a more than insignificant discount element, for which VSOE cannot be established. We recognize revenue for these arrangements over the period that the customer is entitled to renew their PCS at the discounted rate, but not to exceed the estimated economic life of the product.

Under the bell-shaped curve approach of establishing VSOE, we perform a VSOE compliance test to ensure that a substantial majority (75% or over) of our actual PCS renewals are within a narrow range of plus or minus 15% of the median pricing.

Some of our arrangements require significant customization of the product to meet the particular requirements of the customer. For these arrangements, revenue is recognized under contract accounting methods, typically using the percentage of completion ("POC") method. Under the POC method, revenue recognition is generally based upon the ratio of hours incurred to date to the total estimated hours required to complete the contract. Profit estimates on long-term contracts are revised periodically based on changes in circumstances, and any losses on contracts are recognized in the period that such losses become evident. Generally, the terms of long-term contracts provide for progress billings based on completion of milestones or other defined phases of work. Significant judgment is often required when estimating total hours and progress to completion on these arrangements, as well as whether a loss is expected to be incurred on the contract due to several factors including the degree of customization required and the customer's existing environment. We use historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within our control.

Our SaaS offerings generally provide customers access to certain of our software within a cloud-based information technology environment that we manage and offer to customers on a subscription basis. We recognize revenue for subscription and related support services over the contract period originating when the subscription service is made available to the customer and the contractual hosting period has commenced.

Our application managed services revenue is derived from providing services that enhance our customers IT processes and maximize the business benefits of our solutions. Application managed services revenue is recognized ratably over the applicable term which, in most cases, is at least one year. When application managed services is included within a multiple-

34


element arrangement, we utilize the substantive renewal rate approach to establish VSOE. In addition, we perform a budget versus actual time analysis to support our initial estimate of effort required to provide these services.

We extend customary trade payment terms to our customers in the normal course of conducting business. To assess the probability of collection for purposes of revenue recognition, we have established credit policies that establish prudent credit limits for our customers. These credit limits are based upon our risk assessment of the customer's ability to pay, their payment history, geographic risk, and other factors, and are not contingent upon the resale of the product or upon the collection of payments from their customers. These credit limits are reviewed and revised periodically on the basis of updated customer financial statement information, payment performance, and other factors. When a customer is not deemed creditworthy, revenue is recognized when payment is received.

We record provisions for estimated product returns in the same period in which the associated revenue is recognized. We base these estimates of product returns upon historical levels of sales returns and other known factors. Actual product returns could be different from our estimates and current or future provisions for product returns may differ from historical provisions. Concessions granted to customers are recorded as reductions to revenue in the period in which they were granted and have been minimal in both amount and frequency.

Product revenue derived from shipments to resellers and OEMs who purchase our products for resale are generally recognized when such products are shipped (on a "sell-in" basis) since we do not expect our resellers or OEMs to carry inventory of our products. This policy is predicated on our ability to estimate sales returns as well as other criteria regarding these customers. We are also required to evaluate whether our resellers and OEMs have the ability to honor their commitment to make fixed or determinable payments regardless of whether they collect payment from their customers. In this regard, we assess whether our resellers and OEMs are new, poorly capitalized, or experiencing financial difficulty, and whether they have a pattern of not paying as amounts become due on previous arrangements or seeking payment terms longer than those provided to end customers. If we were to change any of these assumptions or judgments, it could cause a material change to the revenue reported in a particular period. We have historically experienced insignificant product returns from resellers and OEMs, and our payment terms for these customers are similar to those granted to our end-users. Our policy also presumes that we have no significant performance obligations in connection with the sale of our products by our resellers and OEMs to their customers. If a reseller or OEM develops a pattern of payment delinquency, or seeks payment terms longer than generally granted to our resellers or OEMs, we defer the recognition of revenue from transactions with that reseller or OEM until the receipt of cash.

Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the contracts should be combined and accounted for as a single arrangement. We record reimbursements from customers for out-of-pocket expenses as revenue. Shipping and handling fees and expenses that are billed to customers are recognized in revenue and the costs associated with such fees and expenses are recorded in cost of revenue. Historically, these fees and expenses have not been material. Taxes collected from customers and remitted to government authorities are excluded from revenue.
For multiple-element arrangements that contain software and software related elements for which we are unable to establish VSOE of one or more elements, we use various available indicators of fair value and apply our best judgment to reasonably classify the arrangement's revenue into product revenue and service revenue for financial reporting purposes.

Allowance for Doubtful Accounts

We estimate the collectability of our accounts receivable balances each accounting period and adjust our allowance for doubtful accounts accordingly. We exercise a considerable amount of judgment in assessing the collectability of accounts receivable, including consideration of the creditworthiness of each customer, their collection history, and the related aging of past due accounts receivable balances. We evaluate specific accounts when we learn that a customer may be experiencing a deterioration of its financial condition due to lower credit ratings, bankruptcy, or other factors that may affect its ability to render payment.

Accounting for Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, including in-process research and development assets, and liabilities assumed, based upon their estimated fair values at the acquisition date. These fair values are typically estimated with assistance from independent valuation specialists. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, contractual support obligations assumed, and pre-acquisition contingencies.

Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

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Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies;

expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed;

the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio;

cost of capital and discount rates; and

estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize.

In connection with the purchase price allocations for applicable acquisitions, we estimate the fair value of the contractual support obligations we are assuming from the acquired business. The estimated fair value of the support obligations is determined utilizing a cost build-up approach, which determines fair value by estimating the costs related to fulfilling the obligations plus a reasonable profit margin. The estimated costs to fulfill the support obligations are based on the historical direct costs related to providing the support services. The sum of these costs and operating profit represents an approximation of the amount that we would be required to pay a third party to assume the support obligations.

Impairment of Goodwill and Other Intangible Assets

We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating segment, on an annual basis as of November 1, or more frequently if changes in facts and circumstances indicate that impairment in the value of goodwill may exist. As of January 31, 2016, our reporting units are consistent with our operating segments identified in Note 17, "Segment, Geographic, and Significant Customer Information" to our consolidated financial statements included under Item 8 of this report.

We review goodwill for impairment utilizing either a qualitative assessment or a two-step process. If we decide that it is appropriate to perform a qualitative assessment and conclude that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step requires us to estimate the fair value of each reporting unit and compare that fair value to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.

For reporting units where we decide to perform a qualitative assessment, we assess and make judgments regarding a variety of factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans, capital requirements, management and personnel issues, and our stock price, among others. We then consider the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit’s fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount.

For reporting units where we perform the two-step process, we utilize some or all of three primary approaches to assess fair value: (a) an income-based approach, using projected discounted cash flows, (b) a market-based approach, using multiples of comparable companies, and (c) a transaction-based approach, using multiples for recent acquisitions of similar businesses made in the marketplace.

Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our estimated

36


cash flows, (e) selection of peer group companies for the comparable public company and the comparable transaction approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.

The determination of reporting units also requires judgment. We assess whether a reporting unit exists within a reportable segment by identifying the unit, determining whether the unit qualifies as a business under GAAP, and assessing the availability and regular review by segment management of discrete financial information for the unit.

We review intangible assets that have finite useful lives and other long-lived assets when an event occurs indicating the potential for impairment. If any indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the assets in question to their carrying amounts. If the undiscounted cash flows used in the test for recoverability are less than the long-lived assets carrying amount, we determine the fair value of the long-lived asset and recognize an impairment loss if the carrying amount of the long-lived asset exceeds its fair value. The impairment loss recognized is the amount by which the carrying amount of the long-lived asset exceeds its fair value.

For all of our goodwill and other intangible asset impairment reviews, the assumptions and estimates used in the process are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments, and estimates we have used in our assessments are reasonable and appropriate, a material change in any of our assumptions or external factors could lead to future goodwill or other intangible asset impairment charges.

Based upon our November 1, 2015 goodwill impairment reviews, we concluded that the estimated fair values of our Enterprise Intelligence, Cyber Intelligence, and Video Intelligence reporting units significantly exceeded their carrying values.
Our Enterprise Intelligence, Cyber Intelligence, and Video Intelligence reporting units carried goodwill of $1.0 billion, $120.7 million, and $37.5 million, respectively, at January 31, 2016.

We did not record any impairments of goodwill for the years ended January 31, 2016, 2015, or 2014.

Income Taxes

We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus deferred taxes. Deferred taxes result from differences between the financial statement and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.

We are subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our tax provision involves the application of complex tax laws and requires significant judgment and estimates.

We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date, and we establish a valuation allowance when it is more likely than not that all or a portion of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more likely than not realizable, we establish a valuation allowance.

We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more likely than not sustainable, based solely on their technical merits, upon examination, and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that we believe is more likely than not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets. Our policy is to include interest (expense and/or income) and penalties related to unrecognized income tax benefits as a component of the provision for income taxes.

Contingencies


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We recognize an estimated loss from a claim or loss contingency when and if information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for claims and contingencies requires the use of significant judgment and estimates. One notable potential source of loss contingencies is pending or threatened litigation. Legal counsel and other advisors and experts are consulted on issues related to litigation as well as on matters related to contingencies occurring in the ordinary course of business.

Accounting for Stock-Based Compensation

We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of the award.

During the three-year period ended January 31, 2016, restricted stock units were our predominant stock-based payment award. The fair value of these awards is equivalent to the market value of our common stock on the grant date. In the past, we have also awarded stock options, the fair value of which is estimated on the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model for this purpose, which requires the input of significant assumptions including an estimate of the average period of time employees will retain stock options before exercising them, the estimated volatility of our common stock price over the expected term, the number of options that will ultimately be forfeited before completing vesting requirements, and the risk-free interest rate.

We periodically award restricted stock units that vest upon the achievement of specified performance goals. Our estimate of the fair value of these performance-based awards requires an assessment of the probability that the specified performance criteria will be achieved. At each reporting date, we update our assessment of the probability that the specified performance criteria will be achieved and adjust our estimate of the fair value of the award, if necessary.

Changes in assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized. The assumptions we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties and the application of judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Cost of Revenue

We have made an accounting policy election whereby certain costs of product revenue, including hardware and third-party software license fees, are capitalized and amortized over the same period that product revenue is recognized, while installation and other service costs are generally expensed as incurred, except for certain contracts recognized according to contract accounting.

For example, in a multiple-element arrangement where revenue is recognized over the PCS support period, the cost of revenue associated with the product is capitalized upon product delivery and amortized over that same period. However, the cost of revenue associated with the services is expensed as incurred in the period in which the services are performed. In addition, we expense customer acquisition and origination costs to selling, general and administrative expense, including sales commissions, as incurred, with the exception of certain sales referral fees in our Cyber Intelligence segment which are capitalized and amortized ratably over the revenue recognition period.


Results of Operations
 
Seasonality and Cyclicality
 
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. In most years, our revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter (prior to the impact of unusual or nonrecurring items). Moreover, revenue and operating income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, in some years, by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of incentive compensation plans for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance.  Many other factors, including general economic conditions, may also have an impact on our business and financial results.

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Overview of Operating Results
 
The following table sets forth a summary of certain key financial information for the years ended January 31, 2016, 2015, and 2014: 
 
 
Year Ended January 31,
(in thousands, except per share data)
 
2016
 
2015
 
2014
Revenue
 
$
1,130,266

 
$
1,128,436

 
$
907,292

Operating income
 
$
67,852

 
$
79,111

 
$
122,286

Net income attributable to Verint Systems Inc. common shares
 
$
17,638

 
$
30,931

 
$
53,583

Net income per common share attributable to Verint Systems Inc.:
 
 

 
 
 
 

   Basic
 
$
0.29

 
$
0.53

 
$
1.01

   Diluted
 
$
0.28

 
$
0.52

 
$
0.99


Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Our revenue increased approximately $1.9 million to $1,130.3 million in the year ended January 31, 2016 from $1,128.4 million in the year ended January 31, 2015.  The increase consisted of a $34.1 million increase in service and support revenue, offset by a $32.2 million decrease in product revenue.  In our Cyber Intelligence segment, revenue increased approximately $26.0 million, or 7%, from $359.4 million in the year ended January 31, 2015 to $385.4 million in the year ended January 31, 2016.  The increase consisted of a $31.0 million increase in service and support revenue and a $5.0 million decrease in product revenue. In our Video Intelligence segment, revenue increased approximately $8.5 million, or 8%, from $110.4 million in the year ended January 31, 2015 to $118.9 million in the year ended January 31, 2016, primarily due to an increase in product revenue.  In our Enterprise Intelligence segment, revenue decreased approximately $32.8 million, or 5%, to $625.9 million in the year ended January 31, 2016 from $658.7 million in the year ended January 31, 2015 due to a decrease in product revenue. For additional details on our revenue by segment, see "—Revenue by Operating Segment".  Revenue in the Americas, EMEA, and APAC represented approximately 51%, 31%, and 18% of our total revenue, respectively, in the year ended January 31, 2016, compared to approximately 52%, 31%, and 17%, respectively, in the year ended January 31, 2015. Further details of changes in revenue are provided below.

Operating income was $67.9 million in the year ended January 31, 2016 compared to $79.1 million in the year ended January 31, 2015.  This decrease in operating income was primarily due to an $11.9 million decrease in gross profit primarily due to decreased gross profit in our Enterprise Intelligence segment and a $0.7 million decrease in operating expenses, which consisted of a $4.0 million increase in net research and development expenses, offset by a $2.6 million decrease in selling, general and administrative expense and a $2.1 million decrease in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.

Net income attributable to Verint Systems Inc. common shares was $17.6 million, and diluted net income per common share was $0.28, in the year ended January 31, 2016 compared to net income attributable to Verint Systems Inc. common shares of $30.9 million, and diluted net income per common share of $0.52, in the year ended January 31, 2015.  The decrease in net income attributable to Verint Systems Inc. and diluted net income per common share in the year ended January 31, 2016 was primarily due to a $16.0 million decrease in our benefit for income taxes, from a benefit of $15.0 million in the year ended January 31, 2015 to an expense of $1.0 million in the year ended January 31, 2016, and decreased operating income, as described above. These decreases to net income attributable to Verint Systems Inc. common shares were partially offset by a $13.0 million decrease in other expense, net, primarily due to losses upon early retirement of debt recorded during the year ended January 31, 2015, with no comparable losses during the year ended January 31, 2016. Further details of changes in total other expense, net, are provided below.
 
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates.  When comparing average exchange rates for the year ended January 31, 2016 to average exchange rates for the year ended January 31, 2015, the U.S. dollar strengthened relative to the British pound sterling, euro, Israeli shekel (both hedged and unhedged), Australian dollar, Brazilian real, and Singapore dollar, resulting in an overall decrease in our revenue (primarily in our Enterprise Intelligence and Cyber Intelligence segments), cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the year ended January 31, 2016, had foreign exchange rates remained unchanged from rates in effect for the year ended January 31, 2015, our revenue would have been approximately $40.0 million higher and our cost of revenue and operating expenses on a combined basis would have been approximately $44.6 million higher, which would have resulted in a $4.6 million decrease in operating income.


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Currently, we employ approximately 5,000 professionals, including part-time employees and certain contractors, as compared to approximately 4,800 at January 31, 2015.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Our revenue increased approximately $221.1 million, or 24%, to $1,128.4 million in the year ended January 31, 2015 from $907.3 million in the year ended January 31, 2014.  In our Enterprise Intelligence segment, revenue increased approximately $159.8 million, or 32%, to $658.7 million in the year ended January 31, 2015 from $498.9 million in the year ended January 31, 2014.  The increase consisted of a $132.9 million increase in service and support revenue and a $26.9 million increase in product revenue.  In our Cyber Intelligence segment, revenue increased approximately $71.4 million, or 25%, from $288.0 million in the year ended January 31, 2014 to $359.4 million in the year ended January 31, 2015.  The increase consisted of a $54.9 million increase in product revenue and a $16.5 million increase in service and support revenue. In our Video Intelligence segment, revenue decreased approximately $10.0 million, or 8%, from $120.4 million in the year ended January 31, 2014 to $110.4 million in the year ended January 31, 2015, primarily due to a decrease in product revenue.  For additional details on our revenue by segment, see "—Revenue by Operating Segment".  Revenue in the Americas, EMEA, and APAC represented approximately 52%, 31%, and 17% of our total revenue, respectively, in the year ended January 31, 2015, compared to approximately 56%, 20%, and 24%, respectively, in the year ended January 31, 2014. The change in the percentage of revenue by geographical region in the year ended January 31, 2015 compared to the year ended January 31, 2014 primarily reflected the timing of revenue recognized in those regions under several large contracts, primarily in our Cyber Intelligence segment. Further details of changes in revenue are provided below.

Operating income was $79.1 million in the year ended January 31, 2015 compared to $122.3 million in the year ended January 31, 2014.  This decrease in operating income was primarily due to a $155.6 million increase in operating expenses, from $478.6 million to $634.2 million, partially offset by a $112.4 million increase in gross profit from $600.9 million to $713.3 million.  The increase in gross profit was primarily due to increased gross profit in our Enterprise Intelligence and Communication Intelligence segments. Despite the increase in gross profit, our overall gross margin decreased from 66% in the year ended January 31, 2014 to 63% in the year ended January 31, 2015 primarily due to a change in the mix of services attributable to a business combination in our Enterprise Intelligence segment that closed during the year ended January 31, 2015.   The increase in operating expenses consisted of an $87.9 million increase in selling, general and administrative expense, a $47.2 million increase in net research and development expenses, and a $20.5 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. common shares was $30.9 million, and diluted net income per common share was $0.52, in the year ended January 31, 2015 compared to net income attributable to Verint Systems Inc. common shares of $53.6 million, and diluted net income per common share of $0.99, in the year ended January 31, 2014.  The decrease in net income attributable to Verint Systems Inc. common shares and diluted net income per common share in the year ended January 31, 2015 was primarily due to our decreased operating income, as described above, a $6.9 million increase in interest expense, and a $2.6 million increase in losses upon early retirement of debt recorded during year ended January 31, 2015 compared to the year ended January 31, 2014. These decreases to net income attributable to Verint Systems Inc. common shares were partially offset by and a $19.5 million decrease in our (benefit) provision for income taxes and a $10.7 million decrease in other expense, net. During the year ended January 31, 2015, other expense, net, included net foreign currency losses of $13.4 million, partially offset by net gains on derivative instruments of $4.0 million. During the year ended January 31, 2014, other expense, net, included a charge of $12.9 million for the derecognition of an indemnification asset associated with the resolution of an uncertain tax position previously recorded in connection with the CTI Merger and net foreign currency losses of $6.1 million. Further details of changes in total other expense, net, are provided below.
 
When comparing average exchange rates for the year ended January 31, 2015 to average exchange rates for the year ended January 31, 2014, while the U.S. dollar weakened relative to the British pound sterling and our hedged Israeli shekel rate, it strengthened relative to the euro, Australian dollar, Japanese yen, Brazilian real, and Singapore dollar, resulting in an overall decrease in our revenue and cost of revenue. For operating expenses, the impact of the weakened U.S. dollar relative to the British pound sterling and our hedged Israeli shekel rate was greater than the impact of the strengthening of the U.S. dollar against the euro, Australian dollar, Japanese yen, Brazilian real, and Singapore dollar, resulting in an increase in operating expenses on a U.S. dollar-denominated basis.  For the year ended January 31, 2015, had foreign exchange rates remained unchanged from rates in effect for the year ended January 31, 2014, our revenue would have been approximately $4.2 million higher and our cost of revenue and operating expenses on a combined basis would have been approximately $3.8 million lower, which would have resulted in a $8.0 million increase in operating income.

As of January 31, 2015, we employed approximately 4,800 employees, including part-time employees and certain contractors, as compared to approximately 3,400 at January 31, 2014. This increase was due to a combination of acquisitions and organic growth during the twelve months ended January 31, 2015.


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Revenue by Operating Segment
 
The following table sets forth revenue for each of our three operating segments for the years ended January 31, 2016, 2015, and 2014: 
 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Enterprise Intelligence
 
$
625,943

 
$
658,671

 
$
498,901

 
(5)%
 
32%
Cyber Intelligence
 
385,393

 
359,395

 
288,003

 
7%
 
25%
Video Intelligence
 
118,930

 
110,370

 
120,388

 
8%
 
(8)%
Total revenue
 
$
1,130,266

 
$
1,128,436

 
$
907,292

 
—%
 
24%
 
Enterprise Intelligence Segment
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Enterprise Intelligence revenue decreased approximately $32.8 million, or 5%, from $658.7 million in the year ended January 31, 2015 to $625.9 million in the year ended January 31, 2016.  The decrease consisted of a $31.9 million decrease in product revenue and a $0.9 million decrease in service and support revenue. The decrease in product revenue primarily reflects a lower aggregate value of executed license arrangements, which comprises the majority of our product revenue and which can fluctuate from period to period. The decrease in service and support revenue was primarily due to a decrease in revenue from professional services and consulting projects in the year ended January 31, 2016, partially offset by an increase in support revenue. As mentioned above, our revenue during the year ended January 31, 2016 was also adversely affected by the impact of the strengthening of the U.S dollar relative to foreign locations currencies where we conduct business.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Enterprise Intelligence revenue increased approximately $159.8 million, or 32%, from $498.9 million in the year ended January 31, 2014 to $658.7 million in the year ended January 31, 2015.  The increase consisted of a $132.9 million increase in service and support revenue and a $26.9 million increase in product revenue.  The increase in service and support revenue was primarily due to an increase in our customer install base, both organically and through business combinations, and the related support revenue generated from this customer base during the year ended January 31, 2015, as well as increased revenue from new service offerings in the year ended January 31, 2015. The increase in product revenue was due to an increase in product sales to new customers during the year ended January 31, 2015. The growth of service revenue relative to product revenue was attributable to various factors, including an increase in services associated with customer product upgrades, a higher component of service offerings in our standard arrangements, and growth in our install base, both organically and as a result of business combinations, through the end of such period.

Cyber Intelligence Segment
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Cyber Intelligence revenue increased approximately $26.0 million, or 7%, from $359.4 million in the year ended January 31, 2015 to $385.4 million in the year ended January 31, 2016.  The increase consisted of a $31.0 million increase in service and support revenue, partially offset by a $5.0 million decrease in product revenue.  The increase in service and support revenue was primarily attributable to an increase in progress realized during the current year on projects with revenue recognized using the percentage of completion ("POC") method, some of which commenced in the previous fiscal year, and an increase in support revenue from new and existing customers. The decrease in product revenue was primarily due to a decrease in product deliveries to customers, partially offset by an increase in progress realized during the current year on projects with revenue recognized using the POC method, some of which commenced in the previous fiscal year. As mentioned above, our revenue during the year ended January 31, 2016 was also adversely affected by the impact of the strengthening of the U.S dollar relative to the currencies used in the foreign locations where we conduct business.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Cyber Intelligence revenue increased approximately $71.4 million, or 25%, from $288.0 million in the year ended January 31, 2014 to $359.4 million in the year ended January 31, 2015.  The increase consisted of a $54.9 million increase in product revenue and a $16.5 million increase in service and support revenue.  The increase in product revenue was primarily due to an increase in product deliveries to customers and an increase in progress realized during the year ended January 31, 2015 on projects with revenue recognized using the POC method, some of which commenced in the previous fiscal year. The increase in service and support revenue was primarily attributable to an increase in progress realized during the year ended January 31, 2015 on projects with revenue recognized using the POC

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method, some of which commenced in the previous fiscal year, and an increase in revenue from software-as-a-service ("SaaS") offerings.

Video Intelligence Segment
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Video Intelligence revenue increased approximately $8.5 million, or 8%, from $110.4 million in the year ended January 31, 2015 to $118.9 million in the year ended January 31, 2016.  The increase was primarily attributable to an increase in product deliveries to customers during the year ended January 31, 2016 as compared to the year ended January 31, 2015.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Video Intelligence revenue decreased approximately $10.0 million, or 8%, from $120.4 million in the year ended January 31, 2014 to $110.4 million in the year ended January 31, 2015.  The decrease was primarily attributable to a decrease in sales of certain hardware products to a single large customer during the year ended January 31, 2015 as compared to the year ended January 31, 2014.

Volume and Price
 
We sell products in multiple configurations, and the price of any particular product varies depending on the configuration of the product sold. Due to the variety of customized configurations for each product we sell, we are unable to quantify the amount of any revenue increase attributable to a change in the price of any particular product and/or a change in the number of products sold.
 
Product Revenue and Service and Support Revenue
 
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products and sale of hardware products (which include software that works together with the hardware to deliver the product's essential functionality), and (b) service and support revenue, including revenue from installation services, post-contract customer support, project management, hosting services, SaaS, application managed services, product warranties, and business advisory consulting and training services.  For multiple-element arrangements for which we are unable to establish VSOE for one or more elements, we use various available indicators of fair value and apply our best judgment to reasonably classify the arrangement's revenue into product revenue and service and support revenue.

The following table sets forth product revenue and service and support revenue for the years ended January 31, 2016, 2015, and 2014:
 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Product revenue
 
$
455,406

 
$
487,617

 
$
416,478

 
(7)%
 
17%
Service and support revenue
 
674,860

 
640,819

 
490,814

 
5%
 
31%
Total revenue
 
$
1,130,266

 
$
1,128,436

 
$
907,292

 
—%
 
24%
 
Product Revenue
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Product revenue decreased approximately $32.2 million, or 7%, from $487.6 million for the year ended January 31, 2015 to $455.4 million for the year ended January 31, 2016, resulting from a $31.9 million decrease in our Enterprise Intelligence segment and a $5.0 million decrease in our Cyber Intelligence segment, partially offset by a $4.7 million increase in our Video Intelligence segment.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Product revenue increased approximately $71.1 million, or 17%, from $416.5 million for the year ended January 31, 2014 to $487.6 million for the year ended January 31, 2015, resulting from a $54.9 million increase in our Cyber Intelligence segment and a $26.9 million increase in our Enterprise Intelligence segment, partially offset by a $10.7 million decrease in our Video Intelligence segment.

For additional information see "—Revenue by Operating Segment".
 
Service and Support Revenue
 

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Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Service and support revenue increased approximately $34.1 million, or 5%, from $640.8 million for the year ended January 31, 2015 to $674.9 million for the year ended January 31, 2016.  This increase was primarily attributable to increases of $31.0 million and $3.8 million in our Cyber Intelligence and Video Intelligence segments, respectively, partially offset by a $0.9 million decrease in our Enterprise Intelligence segment.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Service and support revenue increased approximately $150.0 million, or 31%, from $490.8 million for the year ended January 31, 2014 to $640.8 million for the year ended January 31, 2015.  This increase was primarily attributable to increases of $132.9 million and $16.5 million in our Enterprise Intelligence and Cyber Intelligence segments, respectively.

For additional information see "— Revenue by Operating Segment".

Cost of Revenue
 
The following table sets forth cost of revenue by product and service and support, as well as amortization of acquired technology and backlog for the years ended January 31, 2016, 2015, and 2014:
 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Cost of product revenue
 
$
145,071

 
$
144,870

 
$
137,558

 
—%
 
5%
Cost of service and support revenue
 
248,061

 
239,274

 
156,593

 
4%
 
53%
Amortization of acquired technology and backlog
 
35,774

 
31,004

 
12,269

 
15%
 
153%
Total cost of revenue
 
$
428,906

 
$
415,148

 
$
306,420

 
3%
 
35%
 
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. When revenue is deferred, we also defer hardware material costs and third-party software royalties and recognize those costs over the same period that the product revenue is recognized. Cost of product revenue also includes amortization of capitalized software development costs, employee compensation and related expenses associated with our global operations, facility costs, and other allocated overhead expenses. In our 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.

Our product gross margins are impacted by the mix of products that we sell from period to period. As with many other technology companies, our software products tend to have higher gross margins than our hardware products.
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Cost of product revenue remained relatively unchanged at $145.1 million for the year ended January 31, 2016 compared to $144.9 million for the year ended January 31, 2015. For the year ended January 31, 2016, we recorded a $3.2 million charge for the impairment of certain technology assets associated with a prior business combination in our Cyber Intelligence segment. For the year ended January 31, 2015, we recorded a $2.6 million charge for the impairment of certain capitalized software development costs, reflecting strategy changes in certain product development initiatives in our Cyber Intelligence segment as a result of the UTX acquisition. Our overall product gross margins decreased to 68% in the year ended January 31, 2016 from 70% in the year ended January 31, 2015. As noted above, certain costs are not allocated to our operating segments when we calculate product gross margins by operating segment. Product gross margins in our Enterprise Intelligence segment decreased to 93% in the year ended January 31, 2016 from 94% in the year ended January 31, 2015. Product gross margins in our Cyber Intelligence segment increased from 61% in the year ended January 31, 2015 to 62% in the year ended January 31, 2016. Product gross margins in our Video Intelligence segment increased to 60% in the year ended January 31, 2016 from 59% in the year ended January 31, 2015. The above changes in product gross margins are primarily attributable to changes in product mix in the year ended January 31, 2016 compared to the year ended January 31, 2015.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Cost of product revenue increased approximately 5% from $137.6 million in the year ended January 31, 2014 to $144.9 million in the year ended January 31, 2015.  Our overall

43


product gross margins increased to 70% in the year ended January 31, 2015 from 67% in the year ended January 31, 2014. Product gross margins in our Enterprise Intelligence segment increased from 92% in the year ended January 31, 2014 to 94% in the year ended January 31, 2015 primarily due to a continued decrease in hardware sales as part of our product offerings. Product gross margins in our Cyber Intelligence segment increased from 56% in the year ended January 31, 2014 to 61% in the year ended January 31, 2015 primarily due to a change in product mix.  Product gross margins in our Video Intelligence segment increased to 59% in the year ended January 31, 2015 compared to 58% in the year ended January 31, 2014 due to a change in product mix.
 
Cost of Service and Support Revenue
 
Cost of service and support revenue primarily consists of employee compensation and related expenses, contractor costs, and travel expenses relating to installation, training, application managed services, 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, with the exception of certain transactions accounted for using the POC method.
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Cost of service and support revenue increased approximately 4% from $239.3 million in the year ended January 31, 2015 to $248.1 million in the year ended January 31, 2016.  The increase is primarily attributable to an $11.3 million increase in employee compensation and related expenses due primarily to increased services and support employee headcount chiefly in our Cyber Intelligence segment, and a $3.4 million increase in contractor costs due to increase use of contractors in our Cyber Intelligence and Enterprise Intelligence segments during the year ended January 31, 2016 compared to the year ended January 31, 2015. These increases were partially offset by a $2.4 million decrease in travel expenses primarily in our Enterprise Intelligence segment and a $1.3 million decrease in materials expense incurred to provide services primarily in our Enterprise Intelligence segment. Our overall service and support gross margins were 63% in each of the years ended January 31, 2016 and 2015.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Cost of service and support revenue increased approximately 53% from $156.6 million in the year ended January 31, 2014 to $239.3 million in the year ended January 31, 2015.  Employee compensation and related expenses increased $51.3 million due primarily to increased headcount in our Enterprise Intelligence segment in connection with a business combination that closed during the year ended January 31, 2015. Contractor costs, travel expense, and materials expense incurred to provide services increased $10.2 million, $5.2 million, and $8.2 million, respectively, primarily due to a business combination that closed during the year ended January 31, 2015 in our Enterprise Intelligence segment. Stock-based compensation expense increased $3.4 million resulting from an increase in average amounts of outstanding restricted stock units, and increases in our stock price during such period, which impacted the total stock-based compensation to be recognized over the vesting periods. Our overall service and support gross margins decreased from 68% in the year ended January 31, 2014 to 63% in the year ended January 31, 2015 primarily due to a change in the mix of services in connection with a business combination that closed during the year ended January 31, 2015 in our Enterprise Intelligence segment.

Amortization of Acquired Technology and Backlog
 
Amortization of acquired technology and backlog consists of amortization of technology assets and customer backlog acquired in connection with business combinations.

Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Amortization of acquired technology and backlog increased approximately 15% from $31.0 million in the year ended January 31, 2015 to $35.8 million in the year ended January 31, 2016 primarily due to an increase in amortization expense of acquired technology-based intangible assets associated with business combinations that closed during the year ended January 31, 2016.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Amortization of acquired technology and backlog increased approximately 153% from $12.3 million in the year ended January 31, 2014 to $31.0 million in the year ended January 31, 2015 primarily due to an increase in amortization expense of acquired technology-based intangible assets associated with business combinations that closed during the year ended January 31, 2015.

Further discussion regarding our business combinations appears in Note 4, "Business Combinations" to our consolidated financial statements included under Item 8 of this report.
 
Research and Development, Net
 

44


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 years ended January 31, 2016, 2015, and 2014:
 
 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Research and development, net
 
$
177,650

 
$
173,748

 
$
126,539

 
2%
 
37%
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Research and development, net increased approximately $4.0 million, or 2%, from $173.7 million in the year ended January 31, 2015 to $177.7 million in the year ended January 31, 2016.  The increase was primarily attributable to a $2.8 million increase in stock-based compensation expense due to a combination of an increase in the number of outstanding RSUs, higher expenses associated with performance-based RSUs, and higher grant-date stock prices during the year ended January 31, 2016 (which are used to determine the grant-date fair value of an RSU), and our bonus share program, further details for which appear in Note 13, "Stock-Based Compensation" to our consolidated financial statements included under Item 8 of this report. Contractor expenses increased $0.8 million due to increased use of contractors for research and development activities in our Cyber Intelligence segment during the year ended January 31, 2016 compared to the year ended January 31, 2015. Research and development reimbursements received from government programs decreased $1.1 million during the year ended January 31, 2016, primarily in our Enterprise Intelligence segment, resulting in an increase in research and development expense compared to the year ended January 31, 2015. These increases were partially offset by a $0.9 million decrease in employee compensation and related expenses due to decreased research and development employee headcount in our Enterprise Intelligence segment.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Research and development, net increased approximately $47.2 million, or 37%, from $126.5 million in the year ended January 31, 2014 to $173.7 million in the year ended January 31, 2015.  The increase was primarily attributable to a $37.0 million increase in employee compensation and related expenses due to an increase in employee headcount in connection with business combinations that closed during the year ended January 31, 2015 in our Enterprise Intelligence and Communication Intelligence segments. Stock-based compensation expense increased $3.0 million resulting from an increase in average amounts of outstanding restricted stock units, and an increase in our stock price during such period (which impacted the total stock-based compensation to be recognized over the vesting periods). Contractor expense increased $2.4 million due to increased use of contractors for research and development activities in our Cyber Intelligence segment during the year ended January 31, 2015 compared to the year ended January 31, 2014.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions and sales referral fees, facility costs, communication expenses, and other administrative expenses.
 
The following table sets forth selling, general and administrative expenses for the years ended January 31, 2016, 2015, and 2014:
 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Selling, general and administrative
 
$
412,728

 
$
415,266

 
$
327,385

 
(1)%
 
27%
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Selling, general and administrative expenses decreased approximately $2.6 million, or 1%, from $415.3 million in the year ended January 31, 2015 to $412.7 million in the year ended January 31, 2016. Sales commissions expense decreased $3.8 million due primarily to decreased product bookings in our Enterprise Intelligence segment. Employee compensation and related expenses decreased $2.8 million due primarily to a decrease in headcount of general and administrative employees in our Enterprise Intelligence segment. Accounting, legal, and other professional service fees decreased $2.3 million primarily due to higher use of such services during the year ended January 31, 2015 as a result of services provided in connection with the KANA and UTX acquisitions. Travel expenses decreased $2.1 million due primarily to decreased travel expenses in our Enterprise Intelligence segment. The change in fair

45


value of our obligations under contingent consideration arrangements was a $0.9 million benefit during the year ended January 31, 2016 compared to $0.9 million expense during the year ended January 31, 2015, resulting in a $1.8 million decrease in selling, general, and administrative expense. These decreases were partially offset by increases of $6.4 million and $2.5 million in stock-based compensation expense and facilities expenses, respectively. Stock-based compensation expense increased primarily due to a combination of an increase in the number of outstanding RSUs, higher expenses associated with performance-based RSUs, and higher grant-date stock prices during the year ended January 31, 2016 (which are used to determine the grant-date fair value of an RSU), and our bonus share program, further details for which appear in Note 13, "Stock-Based Compensation" to our consolidated financial statements included under Item 8 of this report. Facilities expenses increased due primarily to the early termination of a facility lease in the Americas region, and costs associated with entering our new headquarters in Melville, NY.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Selling, general and administrative expenses increased approximately $87.9 million, or 27%, from $327.4 million in the year ended January 31, 2014 to $415.3 million in the year ended January 31, 2015. Employee compensation and related expenses increased $34.5 million due primarily to increased employee headcount in our Enterprise Intelligence and Cyber Intelligence segments, as well as an increase in employee headcount for corporate support employees. Stock-based compensation expense increased $12.6 million due primarily to an increase in average amounts of outstanding restricted stock units, and an increase in our stock price during the period (which impacted the total stock-based compensation to be recognized over the vesting periods). Sales and marketing expense, travel expense, and facilities expense increased $3.8 million, $4.0 million, and $6.4 million, respectively, due primarily to business combinations that closed during the year ended January 31. 2015. Also contributing to the increase in selling, general, and administrative expense was a $9.9 million increase in agent commissions expense in our Communication Intelligence segment, a $5.6 million increase in contractor expense due primarily to increased use of contractors for corporate support activities, including acquisition and integration related expenses, and a $3.5 million increase in the change in fair value of our obligations under contingent consideration arrangements. These increases were partially offset by a decrease of $3.5 million in expenses from special performance incentives associated with a prior period business combination that were included in selling, general, and administrative expenses for the year ended January 31, 2014 with no equivalent expenses in the year ended January 31, 2015.

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 years ended January 31, 2016, 2015, and 2014:
 
 
Year Ended January 31,
 
% Change
(in thousands) 
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Amortization of other acquired intangible assets
 
$
43,130

 
$
45,163

 
$
24,662

 
(5)%
 
83%
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Amortization of other acquired intangible assets decreased approximately $2.1 million, or 5%, from $45.2 million in the year ended January 31, 2015 to $43.1 million in the year ended January 31, 2016 primarily due to acquired intangible assets from historical business combinations becoming fully amortized during the year ended January 31, 2016, resulting in decreased amortization on those intangibles compared to the year ended January 31, 2015. This decrease was partially offset by amortization associated with business combinations that closed during the year ended January 31, 2016.
 
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Amortization of other acquired intangible assets increased approximately $20.5 million, or 83%, from $24.7 million in the year ended January 31, 2014 to $45.2 million in the year ended January 31, 2015 primarily due to amortization associated with business combinations that closed during the year ended January 31, 2015.
 
Further discussion regarding our business combinations appears in Note 4, "Business Combinations" to our consolidated financial statements included under Item 8 of this report.
 
Other Income (Expense), Net
 
The following table sets forth total other expense, net for the years ended January 31, 2016, 2015, and 2014:

46


 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Interest income
 
$
1,490

 
$
1,070

 
$
963

 
39%
 
11%
Interest expense
 
(33,885
)
 
(36,661
)
 
(29,780
)
 
(8)%

23%
Losses on early retirements of debt
 

 
(12,546
)
 
(9,879
)
 
(100)%

27%
Other income (expense):
 
 

 
 

 
 

 



Foreign currency (losses) gains
 
(8,037
)
 
(13,402
)
 
(6,057
)
 
(40)%

121%
Gains on derivatives
 
394

 
3,986

 
345

 
(90)%

*
Derecognition of indemnification asset related to CTI Merger
 

 

 
(12,874
)
 
—%
 
*
Other, net
 
(4,634
)
 
(155
)
 
(1,689
)
 
*

(91)%
Total other income (expense)
 
(12,277
)
 
(9,571
)
 
(20,275
)
 
28%

(53)%
Total other expense, net
 
$
(44,672
)
 
$
(57,708
)
 
$
(58,971
)
 
(23)%

(2)%
 
* Percentage is not meaningful.
 
Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Total other expense, net, decreased by $13.0 million from $57.7 million in the year ended January 31, 2015 to $44.7 million in the year ended January 31, 2016

During the year ended January 31, 2015, we recorded a $12.5 million loss upon early retirements of debt. Of this amount, $7.1 million was recorded in connection with the extinguishment of the March 2013 Term Loans (defined below), and $5.5 million was recorded in connection with the retirement of $530.0 million of the February 2014 Term Loans and March 2014 Term Loans (defined below). Further discussion regarding our credit facilities appears in Note 6, “Long-Term Debt” to our consolidated financial statements included under Item 8 of this report.

Interest expense decreased to $33.9 million in the year ended January 31, 2016 from $36.7 million in the year ended January 31, 2015 primarily due to lower interest rates on outstanding borrowings during the year ended January 31, 2016.

We recorded $8.0 million of net foreign currency losses in the year ended January 31, 2016 compared to $13.4 million of net losses in the year ended January 31, 2015.  Foreign currency losses in the year ended January 31, 2016 resulted primarily from the strengthening of the U.S. dollar against the Singapore dollar, euro, and Canadian dollar resulting in foreign currency losses on our Singapore dollar, euro, and Canadian dollar-denominated net assets, respectively, in certain entities which use a U.S. dollar functional currency. Also contributing to the net foreign currency loss was the strengthening of the U.S dollar against the British pound sterling, resulting in foreign currency losses on U.S dollar-denominated net liabilities in certain entities which use a British pound sterling functional currency, and the strengthening of the U.S dollar against the Brazilian real, resulting in foreign currency losses on U.S dollar denominated net liabilities in certain entities which use a Brazilian real functional currency.
 
In the year ended January 31, 2016, there were net gains on derivative financial instruments (not designated as hedging instruments) of $0.4 million, compared to net gains of $4.0 million on such instruments for the year ended January 31, 2015.  The net gains in the current year reflected gains on contracts executed to hedge movements in the exchange rate between the U.S. dollar and the euro.

Other, net, expense increased to $4.6 million in the year ended January 31, 2016 from $0.2 million in the year ended January 31, 2015. Other, net, expense in the year ended January 31, 2016 consisted primarily of write-offs of indemnification assets associated with tax liabilities recorded in connection with prior business combinations.

Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Total other expense, net, decreased by $1.3 million from $59.0 million in the year ended January 31, 2014 to $57.7 million in the year ended January 31, 2015. 

During the year ended January 31, 2015, we recorded $12.5 million of losses upon early retirements of debt. Of this amount, $7.1 million was recorded in connection with the early retirement of the March 2013 Term Loans (defined below), and $5.5 million was recorded in connection with the early retirement of $530.0 million of the February 2014 Term Loans and March 2014 Term Loans (defined below). Further discussion regarding our credit facilities appears in Note 6, “Long-Term Debt” to our consolidated financial statements included under Item 8 of this report.


47


Interest expense increased to $36.7 million in the year ended January 31, 2015 from $29.8 million in the year ended January 31, 2014 primarily due to incremental borrowings discussed in Note 6, “Long-Term Debt” to our consolidated financial statements included under Item 8 of this report.

We recorded $13.4 million of net foreign currency losses in the year ended January 31, 2015 compared to $6.1 million of net losses in the year ended January 31, 2014.  Foreign currency losses in the year ended January 31, 2015 resulted primarily from (i) strengthening of the U.S. dollar against the British pound sterling, resulting in foreign currency losses on U.S. dollar-denominated net liabilities in certain entities which use a British pound sterling functional currency, (ii) weakening of the euro against the British pound sterling, resulting in foreign currency losses on euro-denominated net assets in certain entities which use a British pound sterling functional currency, and (iii) strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-denominated net assets in certain entities which use a U.S. dollar functional currency. Of the $13.4 million of net foreign currency losses in the year ended January 31, 2015, $12.4 million were recorded during the three months ended January 31, 2015.
 
In the year ended January 31, 2015, there were net gains on derivative financial instruments (not designated as hedging instruments) of $4.0 million, compared to net gains of $0.3 million on such instruments for the year ended January 31, 2014.  The higher net gains in the current year reflected gains on contracts executed to hedge movements in the exchange rate between the U.S. dollar and the euro.

Other, net, expense decreased to $0.2 million in the year ended January 31, 2015 from $1.7 million in the year ended January 31, 2014 due to the inclusion of a $1.1 million write-off of an indemnification asset associated with tax liabilities recorded in connection with the CTI Merger in the year ended January 31, 2014, with no comparable expense in the year ended January 31, 2015.

Provision (Benefit) for Income Taxes
 
The following table sets forth our provision (benefit) for income taxes for the years ended January 31, 2016, 2015, and 2014:
 
 
Year Ended January 31,
 
% Change
(in thousands)
 
2016
 
2015
 
2014
 
2016 - 2015
 
2015 - 2014
Provision (benefit) for income taxes
 
$
952

 
$
(14,999
)
 
$
4,539

 
*
 
*
 
* Percentage is not meaningful.

Year Ended January 31, 2016 compared to Year Ended January 31, 2015. Our effective income tax rate was 4.1% for the year ended January 31, 2016, compared to an effective income tax benefit rate of 70.1% for the year ended January 31, 2015.  For the year ended January 31, 2016, our effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to mix and levels of income and losses among taxing jurisdictions and changes in unrecognized income tax benefits. We recorded tax benefits of $20.2 million as a result of audit settlements and statute of limitation lapses related to domestic and foreign jurisdictions. Pre-tax income in our profitable jurisdictions, where we recorded income tax provisions at rates lower than the U.S. federal statutory income tax rate, was substantially offset by our domestic losses where we maintain valuation allowances and did not record the related income tax benefits. The result was an income tax provision of $1.0 million on $23.2 million of pre-tax income, which represented an effective income tax rate of 4.1%. For the year ended January 31, 2015, our effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to the release of $44.4 million of Verint valuation allowances. We maintain valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions. In connection with the acquisition of KANA on February 3, 2014, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we reduced the valuation allowance recorded on our deferred income tax assets to the extent of the deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected as a discrete income tax benefit and not as a component of the KANA acquisition accounting. The effective income tax rate was also affected by the mix and levels of income and losses among taxing jurisdictions, changes in unrecognized income tax benefits, and the recording of valuation allowance on certain income tax attributes of a foreign subsidiary where we do not expect to realize the benefits. Pre-tax income in our profitable jurisdictions, where we recorded income tax provisions at rates lower than the U.S. federal statutory income tax rate, was substantially offset by our domestic losses where we maintain valuation allowances and did not record the related income tax benefits. The result was an income tax benefit of $15.0 million on $21.4 million of pre-tax income, which represented an effective income tax benefit rate of 70.1%.


48


Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Our effective income tax benefit rate was 70.1% for the year ended January 31, 2015, compared to 7.2% for the year ended January 31, 2014.  For the year ended January 31, 2015, our effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to the release of $44.4 million of Verint valuation allowances. As discussed in the prior paragraph, this resulted in an income tax benefit of $15.0 million on $21.4 million of pre-tax income, resulting in an income tax benefit rate of 70.1%.  For the year ended January 31, 2014, our effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to the level and mix of income and losses by jurisdiction and an income tax benefit of $12.4 million for the reversal of unrecognized tax benefits established in connection with the CTI Merger. The recognition of the CTI income tax benefits resulted in a charge within other income (expense), net due to the write-off of an indemnification asset. Pre-tax income in our profitable jurisdictions, where we recorded income tax provisions at rates lower than the U.S. federal statutory income tax rate, was partially offset by our domestic losses where we maintain valuation allowances and did not record the related income tax benefits. The result was an income tax provision of $4.5 million on $63.3 million of pre-tax income, which represented an effective income tax rate of 7.2%.

The comparison of our effective income tax rates between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction, foreign income tax rate differentials, amount of permanent book to tax differences, the impact of unrecognized tax benefits, and the effects of valuation allowances on certain loss jurisdictions.

Backlog
 
While we have certain projects with multiple deliverables over longer periods of time, for most of our transactions, delivery generally occurs within several months following receipt of the order. As a result, we believe that our backlog at any particular time is not meaningful because it is not necessarily indicative of future revenue.

 
Liquidity and Capital Resources
 
Overview
 
Our primary recurring source of cash is the collection of proceeds from the sale of products and services to our customers, including cash periodically collected in advance of delivery or performance.

Our primary recurring use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs, and capital expenditures. We also utilize cash for debt service under our Credit Agreement and our Notes, and periodically for business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term investments, are our primary sources of operating liquidity, and we believe that our operating liquidity is sufficient to support our current business operations, including debt service and capital expenditure requirements.

We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of products, technologies, and businesses. We have used cash as consideration for substantially all of our historical business acquisitions, including approximately $31 million of net cash expended for business acquisitions during the year ended January 31, 2016.

We continually examine our options with respect to terms and sources of existing and future short-term and long-term capital resources to enhance our operating results and to ensure that we retain financial flexibility, and may from time to time elect to raise additional equity or debt capital in the capital markets.

A considerable portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term investments, and restricted cash and bank time deposits (including any long-term portions) held by our subsidiaries outside of the United States were $321.5 million and $297.2 million as of January 31, 2016 and 2015, respectively, and are generally used to fund the subsidiaries’ operating requirements and to invest in growth initiatives, including business acquisitions. We currently do not anticipate that we will need funds generated from foreign operations to fund our domestic operations for the next 12 months or for the foreseeable future.

Should other circumstances arise whereby we require more capital in the United States than is generated by our domestic operations, or should we otherwise consider it in our best interests, we could repatriate future earnings from foreign jurisdictions, which could result in higher effective tax rates. If available, our NOLs, particularly those in the United States, could reduce potential income tax liabilities that may result from repatriated earnings from foreign jurisdictions to the United

49


States. We generally have not provided for deferred income taxes on the excess of the amount for financial reporting over the tax basis of investments in our foreign subsidiaries because we currently plan to indefinitely reinvest such earnings outside the United States.

The following table sets forth our cash and cash equivalents, restricted cash and bank time deposits, short-term investments and long-term debt as of January 31, 2016 and 2015:
 
 
January 31,
(in thousands) 
 
2016
 
2015
Cash and cash equivalents
 
$
352,105

 
$
285,072

Restricted cash and bank time deposits
 
11,820

 
36,920

Short-term investments
 
55,982

 
35,751

Total cash, cash equivalents, restricted cash and bank time deposits, and short-term investments
 
$
419,907

 
$
357,743

Total debt, including current maturities
 
$
738,087

 
$
726,258

 
Our operating activities generated $156.9 million of cash during the year ended January 31, 2016, which was partially offset by $85.8 million of net cash used in combined investing and financing activities during this period.  Further discussion of these items appears below.
 
Consolidated Cash Flow Activity
 
The following table summarizes selected items from our consolidated statements of cash flows for the years ended January 31, 2016, 2015 and 2014:
 
 
Year Ended January 31,
(in thousands)
 
2016
 
2015
 
2014
Net cash provided by operating activities
 
$
156,903

 
$
193,725

 
$
178,284

Net cash used in investing activities
 
(75,600
)
 
(676,835
)
 
(64,196
)
Net cash (used in) provided by financing activities
 
(10,204
)
 
395,713

 
54,534

Effect of exchange rate changes on cash and cash equivalents
 
(4,066
)
 
(6,149
)
 
23

Net increase (decrease) in cash and cash equivalents
 
$
67,033

 
$
(93,546
)
 
$
168,645


Net Cash Provided by Operating Activities
 
Net cash provided by operating activities is driven primarily by our net income (which decreased $14.2 million in the year ended January 31, 2016 compared to the year ended January 31, 2015), adjusted for non-cash items, and working capital changes. Operating activities generated $156.9 million of net cash during the year ended January 31, 2016, compared to $193.7 million generated during the year ended January 31, 2015.

Operating activities generated $193.7 million of net cash during the year ended January 31, 2015, compared to $178.3 million generated during the year ended January 31, 2014. Our operating results for the year ended January 31, 2015 included $122.1 million of net non-cash expenses, compared to $97.3 million of net non-cash expenses in the prior year, so despite reporting lower net income in the year ended January 31, 2015 compared to the prior year, our operating cash flow improved.

Our cash flow from operating activities can fluctuate from period to period due to several factors, including the timing of our billings and collections, the timing and amounts of interest, income tax and other payments, and our operating results.

Net Cash Used in Investing Activities

During the year ended January 31, 2016, our investing activities used $75.6 million of net cash, the primary components of which were $31.4 million of net cash utilized for business acquisitions, $30.3 million of payments for property, equipment, and capitalized software development costs, and $21.4 million of net purchases of short-term investments during the year.
Partially offsetting those uses was $7.5 million of net cash provided by other investing activities, consisting primarily of decreases in restricted cash and bank time deposits during the period. Restricted cash and bank time deposits are typically short-term deposits used to secure bank guarantees in connection with customer sales contracts, the amounts of which will fluctuate from period to period.

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During the year ended January 31, 2015, our investing activities used $676.8 million of net cash, the primary component of which was $605.3 million of net cash utilized for business acquisitions, including the acquisitions of KANA in February 2014 and UTX in March 2014. We also had a $36.3 million increase in restricted cash and bank time deposits during this period. The increase in restricted cash and bank time deposits during the year reflected deposits associated with several large sales contracts. In addition, during the year we made $29.2 million of payments for property, equipment, and capitalized software development costs, and made $7.5 million of net purchases of short-term investments.

During the year ended January 31, 2014, our investing activities used $64.2 million of net cash, the primary components of which were $32.8 million of net cash utilized for business acquisitions, $22.4 million of payments for property, equipment, and capitalized software development costs, and $18.9 million of net purchases of short-term investments. Partially offsetting these uses was a $7.7 million decrease in restricted cash and bank time deposits.

We had no significant commitments for capital expenditures at January 31, 2016.
 
Net Cash (Used in) Provided by Financing Activities
 
For the year ended January 31, 2016, our financing activities used $10.2 million of net cash, including payments of $7.2 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and dividend payments of $3.2 million to the noncontrolling interest holders in a joint venture which serves as a systems integrator for certain Asian markets.
 
For the year ended January 31, 2015, our financing activities provided $395.7 million of net cash. In connection with the February 2014 acquisition of KANA, we incurred $300.0 million of incremental term loans and borrowed $125.0 million under the revolving credit facility under our Credit Agreement (defined below). Additionally, in March 2014, we incurred $643.5 million of new term loans, the proceeds of which were used to repay $643.5 million of prior term loans. In June 2014, we completed concurrent public offerings of 5,750,000 shares of our common stock, gross proceeds from which were $274.6 million, and $400.0 million in aggregate principal amount of 1.50% convertible senior notes. We used $15.6 million of the net proceeds from these offerings to pay the net costs of an arrangement consisting of the purchase of call options and the sale of warrants to purchase our common stock, the intent of which is to reduce the potential dilution to our common stock upon conversion of the Notes. We used the majority of the remainder of the net proceeds to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and all $106.0 million of then-outstanding borrowings under the rvolving credit facility under our Credit Agreement. In connection with these various financing activities, we paid $29.2 million of debt and equity issuance costs, including underwriting discounts and commissions associated with the public offerings. Other financing activities during the year ended January 31, 2015 included payments of $10.4 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and the receipt of $17.6 million of proceeds from exercises of stock options.
 
For the year ended January 31, 2014, our financing activities provided $54.5 million of net cash. During this period, we borrowed $646.7 million under our Credit Agreement, repaid $576.0 million of outstanding borrowings under our prior Credit Agreement, and paid $7.8 million of related debt issuance costs. We also received $10.4 million of cash in connection with the CTI Merger during this year. Other financing activities during the year ended January 31, 2014 included payments of $16.1 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, and the receipt of $10.9 million of proceeds from exercises of stock options.
 
Liquidity and Capital Resources Requirements
 
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet anticipated operating costs, required payments of principal and interest, working capital needs, ordinary course capital expenditures, research and development spending, and other commitments for at least the next 12 months. Currently, we have no plans to pay any cash dividends on our common stock, which are not permitted under our Credit Agreement.

Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the impact of changes in customer buying behavior due to circumstances over which we have no control. If we determine to make additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could involve the issuance of additional equity or debt securities.


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On March 29, 2016, we announced that our board of directors had authorized a new share repurchase program whereby we may make up to $150 million in purchases of our outstanding shares of common stock over the two years following the date of announcement. Under the share repurchase program, purchases can be made from time to time using a variety of methods, which may include open market purchases. The specific timing, price and size of purchases will depend on prevailing stock prices, general market and economic conditions, and other considerations, including the amount of cash generated in the U.S. and other potential uses of cash, such as acquisitions. Purchases may be made through a Rule 10b5-1 plan pursuant to pre-determined metrics set forth in such plan. The board of directors’ authorization of the share repurchase program does not obligate us to acquire any particular amount of common stock, and the program may be suspended or discontinued at any time.

Financing Arrangements

1.50% Convertible Senior Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021, unless earlier converted by the holders pursuant to their terms. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.

The Notes were issued concurrently with our issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Credit Agreement, as further described below.

The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.

The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount.

The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. The Notes have an initial conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an initial 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. 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 ending on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;

during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or

upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.

On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the
maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied.

If we satisfy our conversion obligation in solely cash or a combination of cash and shares of common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value for each trading day in a 50 trading-day conversion period. Holders will not receive any additional cash payment or additional shares of common stock representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Instead, interest will be deemed to be paid by the consideration delivered upon conversion of a Note.

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The conversion rate for the Notes is subject to adjustment as described in the indenture governing the Notes. An adjustment to the conversion rate will result in a corresponding (but inverse) adjustment to the conversion price.

If specified “make-whole adjustment events” occur, the conversion rate for any Notes converted in connection with such make-whole adjustment event will, in specified circumstances, be increased by a number of additional shares of common stock. In addition, holders may require us to purchase for cash all or any portion of their Notes upon the occurrence of a “fundamental change” at a price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.

As of January 31, 2016, 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 January 31, 2016, we had not purchased any shares 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 proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of January 31, 2016, no Warrants had been exercised and all Warrants remained outstanding.

Credit Agreement
 
In April 2011, we entered into a credit agreement with our lenders, which was amended and restated on March 6, 2013, and further amended on February 3, 2014, March 7, 2014, and June 18, 2014 (the "Credit Agreement"). The Credit Agreement, as amended and restated, provides for senior secured credit facilities, comprised of $943.5 million of term loans, of which $300.0 million was borrowed in February 2014 (the "February 2014 Term Loans") and of which $643.5 million was borrowed in March 2014 (the "March 2014 Term Loans"), all of which mature in September 2019, and a $300.0 million revolving credit facility maturing in September 2018, subject to increase and reduction from time to time, as described in the Credit Agreement.
On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent
issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term
Loans. At January 31, 2016 and 2015, $411.1 million of combined borrowings were outstanding under the February 2014 Term Loans and March 2014 Term Loans, currently bearing interest at an annual rate of 3.50%, and there were no outstanding borrowings under our revolving credit facility.

On February 11, 2016, we executed a pay-fixed, receive-variable interest rate swap with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our term loans under which we will pay interest at a fixed rate of 4.143% and receive variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million. The effective date of the agreement is November 1, 2016, and settlements with the counterparty will occur on a quarterly basis, beginning on February 1, 2017. The agreement will terminate on September 6,

53


2019. Assuming that we elect three-month LIBOR at the term loans' interest rate reset dates, beginning on November 1, 2016 and throughout the term of the interest rate swap agreement, the annual interest rate on $200.0 million of our term loans will be fixed at 4.143% during that period.

Following the partial retirements of the February 2014 Term Loans and March 2014 Term Loans in June 2014 described above, there are no scheduled principal payments on the term loans until August 2016. The vast majority of the term loan balances are due upon maturity in September 2019.
 
The revolving credit facility contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1 until January 31, 2016 and no greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). At January 31, 2016, our consolidated leverage ratio was approximately 2.5 to 1 compared to a permitted consolidated leverage ratio of 5.00 to 1, and our EBITDA for the twelve-month period then ended exceeded by at least $120.0 million the minimum EBITDA required to satisfy the Leverage Ratio Covenant given our outstanding debt as of such date.

Contractual Obligations

At January 31, 2016, our contractual obligations were as follows: 
 
 
Payments Due by Period
(in thousands)
 
Total
 
< 1 year
 
1-3 years
 
3-5 years
 
> 5 years
Long-term debt obligations, including interest
 
$
899,526

 
$
22,723

 
$
49,181

 
$
424,622

 
$
403,000

Operating lease obligations
 
139,485

 
17,361

 
31,319

 
26,846

 
63,959

Purchase obligations
 
45,776

 
29,396

 
16,380

 

 

Other long-term obligations
 
676

 
248

 
94

 
94

 
240

Total contractual obligations
 
$
1,085,463

 
$
69,728

 
$
96,974

 
$
451,562

 
$
467,199


The long-term debt obligations reflected above include projected interest payments over the term of our outstanding debt as of January 31, 2016, assuming interest rates in effect for our term loan borrowings as of January 31, 2016.

Operating lease obligations reflected above exclude future sublease income from certain space we have subleased to third parties. As of January 31, 2016, total expected future sublease income was $1.0 million and will range from $0.1 million to $0.8 million on an annual basis through August 2018.

During the year ended January 31, 2016, we entered into a new operating lease for a facility in Herzliya, Israel, whose lease term commenced on February 1, 2016.  The aggregate minimum lease commitment over the 12-year term of this new lease, excluding operating expenses, is approximately $40.6 million. This operating lease commitment is reflected in the table above.

Our purchase obligations are associated with agreements for purchases of goods or services generally including agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transactions. Agreements to purchase goods or services that have cancellation provisions with no penalties are excluded from these purchase obligations.

Our consolidated balance sheet at January 31, 2016 included $25.3 million of non-current tax reserves, net of related benefits (including interest and penalties of $3.3 million) for uncertain tax positions. However, these amounts are not included in the table above because it is not possible to predict or estimate the timing of payments for these obligations. We do not expect to make any significant payments for these uncertain tax positions within the next 12 months.
 
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 year ended January 31, 2016, we made $7.4 million of payments under contingent consideration arrangements. As of January 31, 2016, potential future cash payments and earned consideration expected to be paid subsequent to January 31, 2016 under contingent consideration arrangements total $51.7 million, the estimated fair value of which was $22.4 million, including $4.0 million reported in accrued expenses and other current liabilities, and $18.4 million reported in other liabilities. The performance periods associated with these potential payments extend through April 2020.

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Off-Balance Sheet Arrangements
 
As of January 31, 2016, 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
 
New Accounting Pronouncements Recently Adopted

In April 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and in August 2015 issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU No. 2015-03 changes the presentation of debt issuance costs in financial statements by requiring an entity to present such costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU No. 2015-15 provides clarification regarding costs to secure revolving lines of credit, and indicates that the SEC staff would not object to an entity deferring and presenting costs associated with line-of-credit arrangements as an asset and subsequently amortizing them ratably over the term of the revolving debt arrangement. We elected to early adopt ASU No. 2015-03 as of January 31, 2016, and retrospectively reclassified $10.5 million of debt issuance costs associated with our long-term debt as of January 31, 2015 from other non-current assets to long-term debt. $3.1 million of net deferred debt issuance costs related to our revolving credit facility continue to be reported within other assets on our consolidated balance sheet at January 31, 2016.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as long-term on the balance sheet. We have elected to early adopt ASU 2015-17 as of January 31, 2016 on a prospective basis. The January 31, 2015 consolidated balance sheet was not adjusted.

New Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet.  The new guidance is effective for all periods beginning after December 15, 2018 and we are currently evaluating the effects that the adoption of ASU No. 2016-02 will have on our consolidated financial statements, but anticipate that the new guidance will significantly impact our consolidated financial statements given our significant number of leases.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As originally issued, this guidance was effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In July 2015, the FASB deferred the effective date by one year, to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Entities may choose from two adoption methods, with certain practical expedients. We are currently reviewing this standard to assess the impact on our future consolidated financial statements and evaluating the available adoption methods.


Item 7A. 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

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manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to enter into derivative transactions only to the extent considered necessary to meet our risk management objectives. We use derivative instruments solely to reduce the financial impact of these risks and do not use derivative instruments for speculative purposes.

Interest Rate Risk on Our Debt

In June 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021. Holders may convert the Notes prior to maturity upon the occurrence of certain conditions. Upon conversion, we would be required to pay the holders, at our election, cash, shares of common stock, or a combination of both. Concurrent with the issuance of the Notes, we entered into the Note Hedges and sold the Warrants. These separate transactions were completed to reduce our exposure to potential dilution upon conversion of the Notes.
 
The Notes have a fixed annual interest rate of 1.50% and therefore do not have interest rate exposure. However, the fair values of the Notes are subject to interest rate risk, market risk and other factors due to the convertible feature. The fair values of the Notes are also affected by our common stock price. Generally, the fair values of Notes will increase as interest rates fall and/or our common stock price increases, and decrease as interest rates rise and/or our common stock price decreases. Changes in the fair values of the Notes do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligations. We do not carry the Notes at fair value, but we report the fair value of the Notes for disclosure purposes.

As of January 31, 2016, we have $411.1 million of outstanding term loan borrowings maturing in September 2019 under our Credit Agreement, which also includes a $300.0 million revolving credit facility maturing in September 2018, under which there were no outstanding borrowings at January 31, 2016. Borrowings under the Credit Agreement bear interest at our option at either a base rate plus a spread of 1.75% or an Adjusted LIBOR Rate, as defined in the Credit Agreement, plus a spread of 2.75%. As of January 31, 2016, the interest rate on our term loan borrowings was 3.50%.

Because the interest rates applicable to borrowings under our Credit Agreement are variable, we are exposed to market risk from changes in the underlying index rates, which affect our cost of borrowing. To partially mitigate risks associated with the variable interest rate on our term loans, in February 2016, we executed a pay-fixed, receive-variable interest rate swap with a multinational financial institution under which we will pay interest at a fixed rate of 4.143% and receive variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million. The effective date of the agreement is November 1, 2016, and settlements with the counterparty will occur on a quarterly basis, beginning on February 1, 2017. The agreement will terminate on September 6, 2019. Assuming that we elect three-month LIBOR at the term loans' interest rate reset dates, beginning on November 1, 2016 and throughout the term of the interest rate swap agreement, the annual interest rate on $200.0 million of our term loans will be fixed at 4.143% during that period.
 
The periodic interest rates on unhedged borrowings under the Credit Agreement are currently a function of several factors, the most important of which is LIBOR. However, borrowings are subject to either a 0.75% (Eurodollar loans) or 1.00% (Base Rate loans) LIBOR floor in the interest rate calculation, which helps reduce the likelihood of increases in the current periodic interest rate, because current short-term LIBO Rates are below 0.75%, and accordingly changes in short-term LIBOR will not impact the calculation unless those rates increase above the interest rate floors. Excluding the impact of the interest swap agreement discussed in the previous paragraph, based upon our borrowings as of January 31, 2016, for each 1.00% increase in the applicable LIBOR above the interest rate floor, our annual interest payments would increase by approximately $4.1 million.

Interest Rate Risk on Our Investments

We invest in cash, cash equivalents, bank time deposits, and marketable debt securities. Interest rate changes could result in an increase or decrease in interest income we generate from these interest-bearing assets. Our cash, cash equivalents, and bank time deposits are primarily maintained at high credit-quality financial institutions around the world, and our marketable debt investments are restricted to highly rated corporate debt securities. We have not invested in marketable debt securities with remaining maturities in excess of twelve months or in marketable equity securities during the three-year period ended January 31, 2016.

The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk. We have investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.

As of January 31, 2016 and 2015, we had cash and cash equivalents totaling approximately $352.1 million and $285.1 million, respectively, consisting of demand deposits, bank time deposits with maturities of 90 days or less, money market accounts, and

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marketable debt securities with remaining maturities of 90 days or less. At such dates we also held $27.2 million and $36.9 million, respectively, of restricted cash and restricted bank time deposits (including long-term portions) which were not available for general operating use. These balances primarily represent deposits to secure bank guarantees in connection with customer sales contracts. The amounts of these deposits can vary depending upon the terms of the underlying contracts. We also had short-term investments of $56.0 million and $35.8 million at January 31, 2016 and 2015, respectively, consisting of bank time deposits and marketable debt securities of corporations, all with remaining maturities in excess of 90 days, but less than one year, at the time of purchase.

To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming, during the year ending January 31, 2016, average short-term interest rates increase or decrease by 50 basis points relative to average rates realized during the year ended January 31, 2015. Such a change would cause our projected interest income from cash, cash equivalents, restricted cash and bank time deposits, and short-term investments to increase or decrease by approximately $2.2 million, assuming a similar level of investments in the year ending January 31, 2017 as in the year ended January 31, 2016.

Due to the short-term nature of our cash and cash equivalents, time deposits, money market accounts, and marketable debt securities, their carrying values approximate their market values and are not generally subject to price risk due to fluctuations in interest rates.

Foreign Currency Exchange Risk

The functional currency for most of our foreign subsidiaries is the applicable local currency, although we have several subsidiaries with functional currencies that differ from their local currency, of which the most notable exceptions are our subsidiaries in Israel, whose functional currencies are the U.S. dollar. We are exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars for consolidated reporting purposes. If there are changes in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars results in a gain or loss which is recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

For the year ended January 31, 2016, a significant portion of our operating expenses, primarily labor expenses, were denominated in the local currencies where our foreign operations are located, primarily Israel, the United Kingdom, Germany, certain other European countries whose functional currency is the euro, Singapore, and Australia. We also generate some portion of our revenue in foreign currencies, mainly the British pound sterling, euro, Singapore dollar, and Australian dollar. As a result, our consolidated U.S. dollar operating results are subject to the potentially material adverse impact of fluctuations in foreign currency exchange rates between the U.S. dollar and the other currencies in which we transact.

In addition, we have certain monetary assets and liabilities that are denominated in currencies other than the respective entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that result in gains or losses. We recorded net foreign currency losses of $8.0 million, $13.4 million, and $6.1 million for the years ended January 31, 2016, 2015, and 2014, respectively, which are recorded in other expense, net.

From time to time, we enter into foreign currency forward contracts in an effort to reduce the volatility of cash flows primarily related to forecasted payroll and payroll-related expenses denominated in Israeli shekels. These contracts are generally limited to durations of approximately 12 months or less. Our 50% owned joint venture in Singapore periodically enters into foreign currency forward contracts in an effort to reduce the volatility of cash flows primarily related to forecasted U.S. dollar payments to its suppliers. These contracts are generally limited to durations of approximately 12 months or less. We have also periodically entered into foreign currency forward contracts to manage exposures resulting from forecasted customer collections denominated in currencies other than the respective entity’s functional currency and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency.

During the years ended January 31, 2016, 2015, and 2014, we recorded net gains of $0.4 million, $4.0 million, and $0.3 million, respectively, on foreign currency forward contracts not designated as hedges for accounting purposes. We had $2.3 million of net unrealized losses on outstanding foreign currency forward contracts as of January 31, 2016, with notional amounts totaling $136.4 million. We had $8.8 million of net unrealized losses on outstanding foreign currency forward contracts as of January 31, 2015, with notional amounts totaling $156.8 million.

A sensitivity analysis was performed on all of our foreign exchange derivatives as of January 31, 2016. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% shift in the value of

57


exchange rates relative to the U.S. dollar, and assumes no changes in interest rates. A 10% increase in the relative value of the U.S. dollar would decrease the estimated fair value of our foreign exchange derivatives by approximately $7.4 million. Conversely, a 10% decrease in the relative value of the U.S. dollar would increase the estimated the fair value of these financial instruments by approximately $9.1 million.

The counterparties to these foreign currency forward contracts are multinational commercial banks. While we believe the risk of counterparty nonperformance is not material, past disruptions in the global financial markets have impacted some of the financial institutions with which we do business. A sustained decline in the financial stability of financial institutions as a result of disruption in the financial markets could affect our ability to secure creditworthy counterparties for our foreign currency hedging programs.

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Item 8.     Financial Statements and Supplementary Data






59


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Verint Systems Inc.
Melville, New York

We have audited the accompanying consolidated balance sheets of Verint Systems Inc. and subsidiaries (the "Company") as of January 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended January 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Verint Systems Inc. and subsidiaries as of January 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

New York, New York
March 29, 2016


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VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
 
January 31,
 (in thousands, except share and per share data)

2016
 
2015
Assets

 


 

Current Assets:

 


 

Cash and cash equivalents

$
352,105


$
285,072

Restricted cash and bank time deposits

11,820


36,920

Short-term investments
 
55,982

 
35,751

Accounts receivable, net of allowance for doubtful accounts of $1.2 million and $1.1 million, respectively

256,419


262,092

Inventories

18,312


17,505

Deferred cost of revenue

1,876


6,722

Deferred income taxes
 

 
11,176

Prepaid expenses and other current assets

57,598


54,954

  Total current assets

754,112


710,192

Property and equipment, net

68,904


62,490

Goodwill

1,207,176


1,200,817

Intangible assets, net

246,682


311,894

Capitalized software development costs, net