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EX-32.2 - EXHIBIT 32.2 - VERINT SYSTEMS INCvrnt-ex322_20161031xform10.htm
EX-32.1 - EXHIBIT 32.1 - VERINT SYSTEMS INCvrnt-ex321_20161031xform10.htm
EX-31.2 - EXHIBIT 31.2 - VERINT SYSTEMS INCvrnt-ex312_20161031xform10.htm
EX-31.1 - EXHIBIT 31.1 - VERINT SYSTEMS INCvrnt-ex311_20161031xform10.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                                to                                     .
 
Commission File No. 001-34807
verintlogonov2015a02.jpg
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)
 
(631) 962-9600
 
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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
 
There were 62,679,652 shares of the registrant’s common stock outstanding on November 15, 2016.
 




Verint Systems Inc. and Subsidiaries
Index to Form 10-Q
As of and For the Period Ended October 31, 2016
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


Cautionary Note on Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
 
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 and the transition of portions of the software market to the cloud, 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 and profitability goals, including managing investments in our business and operations, managing our cloud transition and our revenue mix, 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, including with respect to longer sales cycles, transaction reductions, deferrals, or cancellations during the sales cycle, risk of customer concentration, 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 our Annual Report on Form 10-K for the year ended January 31, 2016. 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

Item 1.     Financial Statements






1


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

2016
 
2016
Assets

 


 

Current Assets:

 


 

Cash and cash equivalents

$
295,829


$
352,105

Restricted cash and bank time deposits

14,628


11,820

Short-term investments
 
10,318

 
55,982

Accounts receivable, net of allowance for doubtful accounts of $1.9 million and $1.2 million, respectively

260,032


256,419

Inventories

20,392


18,312

Deferred cost of revenue

3,233


1,876

Prepaid expenses and other current assets

66,627


57,598

  Total current assets

671,059


754,112

Property and equipment, net

77,551


68,904

Goodwill

1,197,557


1,207,176

Intangible assets, net

215,494


246,682

Capitalized software development costs, net

10,219


11,992

Long-term deferred cost of revenue

10,462


13,117

Other assets

79,553


53,752

  Total assets

$
2,261,895


$
2,355,735








Liabilities and Stockholders' Equity

 


 

Current Liabilities:

 


 

Accounts payable

$
57,785


$
65,447

Accrued expenses and other current liabilities

203,128


209,071

Deferred revenue

144,787


167,912

  Total current liabilities

405,700


442,430

Long-term debt

742,067


735,983

Long-term deferred revenue

19,872


20,488

Other liabilities

98,178


88,670

  Total liabilities

1,265,817


1,287,571

Commitments and Contingencies






Stockholders' Equity:

 


 

Preferred stock - $0.001 par value; authorized 2,207,000 shares at October 31, 2016 and January 31, 2016, respectively; none issued.
 

 

Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 64,027,000 and 62,614,000 shares; outstanding 62,679,000 and 62,266,000 shares at October 31, 2016 and January 31, 2016, respectively.

64


63

Additional paid-in capital

1,435,928


1,387,955

Treasury stock, at cost - 1,348,000 and 348,000 shares at October 31, 2016 and January 31, 2016, respectively.

(46,147
)

(10,251
)
Accumulated deficit

(238,834
)

(201,436
)
Accumulated other comprehensive loss

(165,816
)

(116,194
)
Total Verint Systems Inc. stockholders' equity

985,195


1,060,137

Noncontrolling interest

10,883


8,027

  Total stockholders' equity

996,078


1,068,164

  Total liabilities and stockholders' equity

$
2,261,895


$
2,355,735


See notes to condensed consolidated financial statements.

2


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 

 
 

 
 
 
 
Product
 
$
88,004

 
$
115,573

 
$
254,172

 
$
340,139

Service and support
 
170,898

 
168,481

 
512,075

 
509,333

  Total revenue
 
258,902

 
284,054

 
766,247

 
849,472

Cost of revenue:
 
 

 
 

 
 
 
 
Product
 
29,499

 
34,982

 
82,455

 
111,756

Service and support
 
64,007

 
61,475

 
195,892

 
188,576

Amortization of acquired technology
 
9,700

 
9,060

 
28,014

 
26,896

  Total cost of revenue
 
103,206

 
105,517

 
306,361

 
327,228

Gross profit
 
155,696

 
178,537

 
459,886

 
522,244

Operating expenses:
 
 

 
 

 
 
 
 
Research and development, net
 
41,028

 
45,443

 
128,847

 
134,741

Selling, general and administrative
 
98,899

 
99,870

 
300,080

 
314,489

Amortization of other acquired intangible assets
 
10,244

 
10,896

 
32,976

 
32,366

  Total operating expenses
 
150,171

 
156,209

 
461,903

 
481,596

Operating income (loss)
 
5,525

 
22,328

 
(2,017
)
 
40,648

Other income (expense), net:
 
 

 
 

 
 
 
 
Interest income
 
229

 
335

 
695

 
992

Interest expense
 
(8,708
)
 
(8,467
)
 
(25,976
)
 
(25,365
)
Other expense, net
 
(1,121
)
 
(4,175
)
 
(2,660
)
 
(7,715
)
  Total other expense, net
 
(9,600
)
 
(12,307
)
 
(27,941
)
 
(32,088
)
(Loss) income before provision for income taxes
 
(4,075
)
 
10,021

 
(29,958
)
 
8,560

Provision for income taxes
 
3,359

 
1,551

 
4,747

 
5,119

Net (loss) income
 
(7,434
)
 
8,470

 
(34,705
)
 
3,441

Net income attributable to noncontrolling interest
 
803

 
836

 
2,693

 
3,308

Net (loss) income attributable to Verint Systems Inc.
 
$
(8,237
)
 
$
7,634

 
$
(37,398
)
 
$
133

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

 
 

 
 
 
 
Basic
 
$
(0.13
)
 
$
0.12

 
$
(0.60
)
 
$
0.00

Diluted
 
$
(0.13
)
 
$
0.12

 
$
(0.60
)
 
$
0.00

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
62,895

 
62,206

 
62,602

 
61,666

Diluted
 
62,895

 
62,778

 
62,602

 
62,803

 
See notes to condensed consolidated financial statements.





3


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited) 
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands)
 
2016
 
2015
 
2016
 
2015
Net (loss) income
 
$
(7,434
)
 
$
8,470

 
$
(34,705
)
 
$
3,441

Other comprehensive (loss) income, net of reclassification adjustments:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
(26,207
)
 
(6,568
)
 
(49,476
)
 
4,854

Net unrealized (losses) gains on available-for-sale securities
 

 
(156
)
 
110

 
(112
)
Net unrealized (losses) gains on foreign exchange contracts designated as hedges
 
(1,570
)
 
(686
)
 
1,208

 
9,343

Net unrealized gain (loss) on interest rate swap designated as a hedge
 
478

 

 
(1,146
)
 

Benefit (provision) for income taxes on net unrealized (losses) gains on foreign exchange contracts designated as hedges
 
169

 
35

 
(155
)
 
(1,056
)
Other comprehensive (loss) income
 
(27,130
)
 
(7,375
)
 
(49,459
)
 
13,029

Comprehensive (loss) income
 
(34,564
)
 
1,095

 
(84,164
)
 
16,470

Comprehensive income attributable to noncontrolling interest
 
667

 
468

 
2,856

 
2,851

Comprehensive (loss) income attributable to Verint Systems Inc.
 
$
(35,231
)
 
$
627

 
$
(87,020
)
 
$
13,619

 
See notes to condensed consolidated financial statements.

4


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
 
Verint Systems Inc. Stockholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Verint Systems Inc. Stockholders' Equity
 
 
 
Total Stockholders' Equity
(in thousands) 
 
Shares
 
Par
Value
 
 
Treasury
Stock
 
Accumulated
Deficit
 
 
 
Non-controlling
Interest
 
Balances at January 31, 2015
 
60,905

 
$
61

 
$
1,321,455

 
$
(10,251
)
 
$
(219,074
)
 
$
(94,335
)
 
$
997,856

 
$
7,047

 
$
1,004,903

Net income
 

 

 

 

 
133

 

 
133

 
3,308

 
3,441

Other comprehensive income (loss)
 

 

 

 

 

 
13,486

 
13,486

 
(457
)
 
13,029

Stock-based compensation - equity-classified awards
 

 

 
43,771

 

 

 

 
43,771

 

 
43,771

Exercises of stock options
 
6

 

 
229

 

 

 

 
229

 

 
229

Common stock issued for stock awards and stock bonuses
 
1,342

 
2

 
7,743

 

 

 

 
7,745

 

 
7,745

Tax effects from stock award plans
 

 

 
577

 

 

 

 
577

 

 
577

Balances at October 31, 2015
 
62,253

 
$
63

 
$
1,373,775

 
$
(10,251
)
 
$
(218,941
)
 
$
(80,849
)
 
$
1,063,797


$
9,898

 
$
1,073,695

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 31, 2016
 
62,266

 
$
63

 
$
1,387,955

 
$
(10,251
)
 
$
(201,436
)
 
$
(116,194
)
 
$
1,060,137

 
$
8,027

 
$
1,068,164

Net (loss) income
 

 

 

 

 
(37,398
)
 

 
(37,398
)
 
2,693

 
(34,705
)
Other comprehensive (loss) income
 

 

 

 

 

 
(49,622
)
 
(49,622
)
 
163

 
(49,459
)
Stock-based compensation - equity-classified awards
 

 

 
41,610

 

 

 

 
41,610

 

 
41,610

Exercises of stock options
 

 

 
1

 

 

 

 
1

 

 
1

Common stock issued for stock awards and stock bonuses
 
1,413

 
1

 
6,952

 

 

 

 
6,953

 

 
6,953

Purchases of treasury stock
 
(1,000
)
 

 

 
(35,896
)
 

 

 
(35,896
)
 

 
(35,896
)
Tax effects from stock award plans
 

 

 
(590
)
 

 

 

 
(590
)
 

 
(590
)
Balances at October 31, 2016
 
62,679

 
$
64

 
$
1,435,928

 
$
(46,147
)
 
$
(238,834
)
 
$
(165,816
)
 
$
985,195

 
$
10,883

 
$
996,078

 
See notes to condensed consolidated financial statements.

5


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
October 31,
(in thousands) 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net (loss) income
 
$
(34,705
)
 
$
3,441

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
85,411

 
79,469

Stock-based compensation, excluding cash-settled awards
 
45,547

 
50,099

Amortization of discount on convertible notes
 
7,948

 
7,542

Non-cash gains (losses) on derivative financial instruments, net
 
693

 
(583
)
Other non-cash items, net
 
8,767

 
11,220

Changes in operating assets and liabilities, net of effects of business combinations:
 
 

 
 

Accounts receivable
 
3,708

 
6,241

Inventories
 
(2,823
)
 
(2,138
)
Deferred cost of revenue
 
1,349

 
4,477

Prepaid expenses and other assets
 
(6,066
)
 
(5,462
)
Accounts payable and accrued expenses
 
(21,305
)
 
(16,722
)
Deferred revenue
 
(21,749
)
 
(40,130
)
Other, net
 
4,914

 
(9,883
)
Net cash provided by operating activities
 
71,689

 
87,571

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Cash paid for business combinations, including adjustments, net of cash acquired
 
(72,269
)
 
(31,618
)
Purchases of property and equipment
 
(20,611
)
 
(17,012
)
Purchases of investments
 
(34,215
)
 
(90,689
)
Maturities and sales of investments
 
79,930

 
30,985

Cash paid for capitalized software development costs
 
(1,730
)
 
(3,453
)
Change in restricted cash and bank time deposits, including long-term portion, and other investing activities, net
 
(31,737
)
 
16,843

Net cash used in investing activities
 
(80,632
)
 
(94,944
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Repayments of borrowings and other financing obligations
 
(1,987
)
 
(260
)
Proceeds from exercises of stock options
 
1

 
229

Purchases of treasury stock
 
(35,896
)
 

Payments of contingent consideration for business combinations (financing portion)
 
(3,231
)
 
(4,792
)
Other financing activities
 
(1,076
)
 
(239
)
Net cash used in financing activities
 
(42,189
)
 
(5,062
)
Effect of foreign currency exchange rate changes on cash and cash equivalents
 
(5,144
)
 
(377
)
Net decrease in cash and cash equivalents
 
(56,276
)
 
(12,812
)
Cash and cash equivalents, beginning of period
 
352,105

 
285,072

Cash and cash equivalents, end of period
 
$
295,829

 
$
272,260


See notes to condensed consolidated financial statements.

6


VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business
 
Unless the context otherwise requires, the terms "Verint", "we", "us", and "our" in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
 
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in approximately 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence®.

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

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

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") for the year ended January 31, 2016. The condensed consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for the periods ended October 31, 2016 and 2015, and the condensed consolidated balance sheet as of October 31, 2016, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2016 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2016. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2016. The results for interim periods are not necessarily indicative of a full year’s results.

Recasting of Prior Period Segment Information

Through July 31, 2016, we were organized and had reported our operating results in three operating segments. In August 2016, we reorganized into two businesses and now report our results in two operating segments, as further discussed in Note 14, "Segment Information". Comparative segment financial information for prior periods appearing in Note 5, "Intangible Assets and Goodwill" and Note 14, "Segment Information", has been recast to conform to this revised segment structure.

Reclassification Within Condensed Consolidated Statements of Cash Flows

Certain amounts within the presentation of net cash provided by operating activities in our condensed consolidated statement of cash flows for the nine months ended October 31, 2015 have been reclassified to conform to the current period's presentation. These reclassifications had no effect on net cash provided by operating activities.

Principles of Consolidation
 

7


The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned or otherwise controlled subsidiaries, and a joint venture in which we hold a 50% equity interest.  The joint venture is a variable interest entity in which we are the primary beneficiary. The noncontrolling interest in this joint venture is reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our equity. We have two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interest. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries.

We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.

Investments in companies in which we have less than a 20% ownership interest and can not exercise significant influence are accounted for at cost.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Accounts Receivable, Net

Accounts receivable, net, includes unbilled accounts receivable on arrangements recognized under contract accounting methods, representing revenue recognized on contracts for which billing will occur in subsequent periods, in accordance with the terms of the contracts. Unbilled accounts receivable on such contracts were $64.5 million and $46.6 million at October 31, 2016 and January 31, 2016, respectively. Under most contracts, unbilled accounts receivable are typically billed and collected within one year of revenue recognition. However, as of October 31, 2016, we have unbilled accounts receivable on certain complex projects with a long-standing customer for which the underlying billing milestones are still in progress and have remained unbilled for periods in excess of one year, and in some cases, for several years. We have no history of uncollectible accounts with this customer and believe that collection of such amounts is still reasonably assured. We expect billing and collection of these unbilled accounts receivable to occur within the next twelve months.

Significant Accounting Policies

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2016. There were no material changes to our significant accounting policies during the nine months ended October 31, 2016.

Recent Accounting Pronouncements
 
New Accounting Pronouncements Not Yet Effective

In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update also requires an entity to disclose the nature of restrictions on its cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. We typically have restrictions on certain amounts of cash and cash equivalents, primarily consisting of amounts used to secure bank guarantees in connection with sales contract performance obligations,
and expect to continue to have similar restrictions in the future. We currently report changes in such restricted amounts as cash flows from investing activities on our condensed consolidated statement of cash flows. This standard will change that presentation. We are currently reviewing this standard to assess other potential impacts on our future condensed consolidated financial statements.


8


In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance with the intent of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This new standard changes the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. The new standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), which amends the accounting for stock-based compensation and requires excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than stockholders' equity. This guidance also requires excess tax benefits to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

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


2.
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
 
The following table summarizes the calculation of basic and diluted net (loss) income per common share attributable to Verint Systems Inc. for the three and nine months ended October 31, 2016 and 2015

9


 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands, except per share amounts) 
 
2016
 
2015
 
2016
 
2015
Net (loss) income
 
$
(7,434
)
 
$
8,470

 
$
(34,705
)
 
$
3,441

Net income attributable to noncontrolling interest
 
803

 
836

 
2,693

 
3,308

Net (loss) income attributable to Verint Systems Inc.
 
$
(8,237
)
 
$
7,634

 
$
(37,398
)
 
$
133

Weighted-average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
62,895

 
62,206

 
62,602

 
61,666

Dilutive effect of employee equity award plans
 

 
572

 

 
1,137

Dilutive effect of 1.50% convertible senior notes
 

 

 

 

Dilutive effect of warrants
 

 

 

 

Diluted
 
62,895

 
62,778

 
62,602

 
62,803

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

 
 

 
 
 
 
Basic
 
$
(0.13
)
 
$
0.12

 
$
(0.60
)
 
$
0.00

Diluted
 
$
(0.13
)
 
$
0.12

 
$
(0.60
)
 
$
0.00


We excluded the following weighted-average potential common shares from the calculations of diluted net (loss) income per common share during the applicable periods because their inclusion would have been anti-dilutive:
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands) 
 
2016
 
2015
 
2016
 
2015
Common shares excluded from calculation:
 
 

 
 

 
 
 
 
Stock options and restricted stock-based awards
 
1,239

 
1,466

 
1,060

 
650

1.50% convertible senior notes
 
6,205

 
6,205

 
6,205

 
6,205

Warrants
 
6,205

 
6,205

 
6,205

 
6,205


In periods for which we report a net loss attributable to Verint Systems Inc., basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.

Our 1.50% convertible senior notes ("Notes") will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the Warrants (as defined in Note 6, "Long-Term Debt") unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share.

Our Note Hedges (as defined in Note 6, "Long-Term Debt") do not impact the calculation of diluted net income per share under the treasury stock method, because their effect would be anti-dilutive. However, in the event of an actual conversion of any or all of the Notes, the common shares that would be delivered to us under the Note Hedges would neutralize the dilutive effect of the common shares that we would issue under the Notes. As a result, actual conversion of any or all of the Notes would not increase our outstanding common stock. Up to 6,205,000 common shares could be issued upon exercise of the Warrants. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 6, "Long-Term Debt".


3. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

The following tables summarize our cash, cash equivalents, and short-term investments as of October 31, 2016 and January 31, 2016:

10


 
 
October 31, 2016
(in thousands) 
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
295,661

 
$

 
$

 
$
295,661

Money market funds
 
168

 

 

 
168

Total cash and cash equivalents
 
$
295,829

 
$

 
$

 
$
295,829

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
2,997

 
$

 
$

 
$
2,997

Bank time deposits
 
7,321

 

 

 
7,321

Total short-term investments
 
$
10,318

 
$

 
$

 
$
10,318

 
 
January 31, 2016
(in thousands)
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
334,938

 
$

 
$

 
$
334,938

Money market funds
 
12,137

 

 

 
12,137

Commercial paper and corporate debt securities
 
5,054

 

 
(24
)
 
5,030

Total cash and cash equivalents
 
$
352,129

 
$

 
$
(24
)
 
$
352,105

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
53,018

 
$

 
$
(86
)
 
$
52,932

Bank time deposits
 
3,050

 

 

 
3,050

Total short-term investments
 
$
56,068

 
$

 
$
(86
)
 
$
55,982


Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.

As of October 31, 2016 and January 31, 2016, all of our available-for-sale investments had contractual maturities of less than one year. Gains and losses on sales of available-for-sale securities during the nine months ended October 31, 2016 and 2015 were not significant.

During the nine months ended October 31, 2016 and 2015, proceeds from maturities and sales of available-for-sale securities were $79.9 million and $31.0 million, respectively.

None of our available-for-sale securities had unrealized gains or losses at October 31, 2016.


4.
BUSINESS COMBINATIONS

On November 16, 2016, we completed the acquisition of OpinionLab, Inc., a leading software-as-a-service ("SaaS") provider of omnichannel Voice of Customer (“VoC”) feedback solutions which help organizations collect, understand, and leverage customer insights, helping drive smarter, real-time business action.

Please refer to Note 15, "Subsequent Event", for information regarding this business combination.

Nine Months Ended October 31, 2016

Contact Solutions, LLC


11


On February 19, 2016, we completed the acquisition of Contact Solutions, LLC ("Contact Solutions"), a provider of real-time, contextual self-service solutions, based in Reston, Virginia. The purchase price consisted of $66.9 million of cash paid at closing, and a $2.5 million post-closing purchase price adjustment based upon a determination of Contact Solutions' acquisition-date working capital, which was paid during the three months ended July 31, 2016. The cash paid at closing was funded with cash on hand.

In connection with the purchase price allocation for Contact Solutions, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $0.6 million of current and long-term deferred revenue, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not yet been received, we recorded a $2.9 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $1.2 million of which is included within prepaid expenses and other current assets, and $1.7 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.

The purchase price for Contact Solutions was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.

The purchase price allocation for Contact Solutions has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available during the measurement period (up to one year from the acquisition date). Fair values still under review include values assigned to identifiable intangible assets and certain pre-acquisition loss contingencies.

Among the factors contributing to the recognition of goodwill as a component of the Contact Solutions purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Customer Engagement segment and is deductible for income tax purposes.

Transaction and related costs directly related to the acquisition of Contact Solutions, consisting primarily of professional fees and integration expenses, were $0.4 million and $1.0 million for the three and nine months ended October 31, 2016, and were expensed as incurred and are included in selling, general and administrative expenses.

Revenue and (loss) income before provision for income taxes attributable to Contact Solutions included in our condensed consolidated statement of operations for the three and nine months ended October 31, 2016 were not significant.

The following table sets forth the components and the allocation of the purchase price for our acquisition of Contact Solutions.


12


(in thousands)
 
Amount
Components of Purchase Price:
 
 

Cash paid at closing
 
$
66,915

Other purchase price adjustments
 
2,518

Total purchase price
 
$
69,433

 
 
 
Allocation of Purchase Price:
 
 

Net tangible assets (liabilities):
 
 

Accounts receivable
 
$
8,102

Other current assets, including cash acquired
 
2,392

Property and equipment, net
 
7,007

Other assets
 
1,904

Current and other liabilities
 
(4,943
)
Deferred revenue - current and long-term
 
(642
)
Net tangible assets
 
13,820

Identifiable intangible assets:
 
 

Customer relationships
 
18,000

Developed technology
 
13,100

Trademarks and trade names
 
2,400

Total identifiable intangible assets
 
33,500

Goodwill
 
22,113

Total purchase price allocation
 
$
69,433


The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of ten years, four years, and five years, respectively, the weighted average of which is approximately 7.4 years.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.

The pro forma impact of the acquisition of Contact Solutions was not material to our historical consolidated operating results and is therefore not presented.

Other Business Combination

During the nine months ended October 31, 2016, we completed a transaction that qualified as a business combination in our Customer Engagement segment. This business combination was not material to our condensed consolidated financial statements.

Year Ended January 31, 2016

During the year ended January 31, 2016, we completed three business combinations:

On February 12, 2015, we completed the acquisition of a business that has been integrated into our Customer Engagement operating segment.
On May 1, 2015, we completed the acquisition of a business that has been integrated into our Cyber Intelligence operating segment.
On August 11, 2015, we acquired certain technology and other assets for use in our Customer Engagement operating segment in a transaction that qualified as a business combination.


These business combinations were not individually material to our condensed consolidated financial statements.

The combined consideration for these business combinations was approximately $49.5 million, including $33.2 million of combined cash paid at the closings. For one of these business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $30.5 million, contingent upon the achievement of certain performance targets over periods extending through April 2020. The fair value of these contingent consideration obligations was estimated to be $16.2 million at the applicable acquisition date.

13



Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $28.7 million of goodwill associated with these business combinations, $7.7 million and $21.0 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively. For income tax purposes, $5.1 million of this goodwill is deductible and $23.6 million is not deductible.

Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions were insignificant for the three and nine months ended October 31, 2016, and
$0.3 million and $1.0 million for the three and nine months ended October 31, 2015, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for business combinations completed during the year ended January 31, 2016 are final.

The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the year ended January 31, 2016:
(in thousands)
 
Amount
Components of Purchase Prices:
 
 

Cash
 
$
33,222

Fair value of contingent consideration
 
16,237

Total purchase prices
 
$
49,459

 
 
 
Allocation of Purchase Prices:
 
 

Net tangible assets (liabilities):
 
 

Accounts receivable
 
$
992

Other current assets, including cash acquired
 
4,274

Other assets
 
395

Current and other liabilities
 
(3,037
)
Deferred revenue - current and long-term
 
(1,872
)
Deferred income taxes - current and long-term
 
(2,922
)
Net tangible liabilities
 
(2,170
)
Identifiable intangible assets:
 
 

Customer relationships
 
1,212

Developed technology
 
20,300

Trademarks and trade names
 
300

In-process research and development
 
1,100

Total identifiable intangible assets
 
22,912

Goodwill
 
28,717

Total purchase price allocations
 
$
49,459



For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from 
five years to ten years, from four years to five years, and three years, respectively, the weighted average of which is approximately 4.4 years.


The pro forma impact of these acquisitions was not material to our historical consolidated operating results and is therefore not presented.

Other Business Combination Information

The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general and administrative expenses in our condensed consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.

14



In connection with an immaterial business combination that closed during the nine months ended October 31, 2016, we recorded a contingent consideration obligation with a fair value of $7.7 million.

For the three and nine months ended October 31, 2016, we recorded $2.2 million and $4.8 million respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. For the three and nine months ended October 31, 2015, we recorded net benefits of $1.0 million and $0.1 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was $31.6 million at October 31, 2016, of which $10.1 million was recorded within accrued expenses and other current liabilities, and $21.5 million was recorded within other liabilities.

Payments of contingent consideration earned under these agreements were $3.3 million for the nine months ended October 31, 2016, and $1.9 million and $4.9 million for the three and nine months ended October 31, 2015, respectively. There were no payments of contingent consideration earned during the three months ended October 31, 2016.


5.
INTANGIBLE ASSETS AND GOODWILL
 
Acquisition-related intangible assets consisted of the following as of October 31, 2016 and January 31, 2016:
 
 
 
October 31, 2016
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets, with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
378,056

 
$
(233,255
)
 
$
144,801

Acquired technology
 
219,805

 
(158,571
)
 
61,234

Trade names
 
20,719

 
(13,276
)
 
7,443

Non-competition agreements
 
3,047

 
(2,409
)
 
638

Distribution network
 
4,440

 
(4,162
)
 
278

Total intangible assets with finite lives
 
626,067

 
(411,673
)
 
214,394

In-process research and development, with indefinite lives
 
1,100

 

 
1,100

    Total intangible assets
 
$
627,167

 
$
(411,673
)
 
$
215,494

 
 
 
January 31, 2016
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets, with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
371,722

 
$
(211,824
)
 
$
159,898

Acquired technology
 
211,388

 
(134,391
)
 
76,997

Trade names
 
18,457

 
(11,570
)
 
6,887

Non-competition agreements
 
3,047

 
(2,137
)
 
910

Distribution network
 
4,440

 
(3,550
)
 
890

Total intangible assets with finite lives
 
609,054

 
(363,472
)
 
245,582

In-process research and development, with indefinite lives
 
1,100

 

 
1,100

    Total intangible assets
 
$
610,154

 
$
(363,472
)
 
$
246,682


The following table presents net acquisition-related intangible assets by reportable segment as of October 31, 2016 and January 31, 2016: 
 
 
October 31,
 
January 31,
(in thousands)

2016

2016
Customer Engagement

$
183,258


$
201,503

Cyber Intelligence

32,236


45,179

Total

$
215,494


$
246,682


15


 
Total amortization expense recorded for acquisition-related intangible assets was $19.9 million and $61.0 million for the three and nine months ended October 31, 2016, respectively, and $20.0 million and $59.3 million for the three and nine months ended October 31, 2015, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
 
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
(in thousands)

 

Years Ending January 31,

Amount
2017 (remainder of year)

$
19,442

2018

61,838

2019

35,028

2020

25,730

2021

19,693

2022 and thereafter

52,663

   Total

$
214,394

 
During the nine months ended October 31, 2015, we recorded a $2.3 million impairment of an acquired technology asset, which is included within cost of product revenue. No other impairments of acquired intangible assets were recorded during the nine months ended October 31, 2016 and 2015.
As discussed in Note 14, "Segment Information", effective in August 2016, we reorganized into two businesses and now report our results in two operating segments. We have reallocated $51.8 million of goodwill, net of $25.3 million of accumulated impairment losses, from our former Video Intelligence segment to our Customer Engagement segment, and $22.2 million of goodwill, net of $10.8 million of accumulated impairment losses to our Cyber Intelligence segment using a relative fair value approach. In addition, we completed an assessment for potential impairment of the goodwill previously allocated to our former Video Intelligence segment immediately prior to the reallocation and determined that no impairment existed.

Goodwill activity for the nine months ended October 31, 2016, in total and by reportable segment, was as follows: 
 
 
 
 
Reportable Segment
(in thousands)
 
Total
 
Customer Engagement
 
Cyber
Intelligence
Year Ended January 31, 2016:
 
 
 
 
 
 
Goodwill, gross, at January 31, 2016
 
$
1,274,041

 
$
1,131,249

 
$
142,792

Accumulated impairment losses through January 31, 2016
 
(66,865
)
 
(56,043
)
 
(10,822
)
   Goodwill, net, at January 31, 2016
 
1,207,176

 
1,075,206

 
131,970

Business combinations
 
30,725

 
30,725

 

Foreign currency translation and other
 
(40,344
)
 
(41,212
)
 
868

   Goodwill, net, at October 31, 2016
 
$
1,197,557

 
$
1,064,719

 
$
132,838

 
 
 
 
 
 
 
Balance at October 31, 2016:
 


 
 

 
 

Goodwill, gross, at October 31, 2016
 
$
1,264,422

 
$
1,120,762

 
$
143,660

Accumulated impairment losses through October 31, 2016
 
(66,865
)
 
(56,043
)
 
(10,822
)
   Goodwill, net, at October 31, 2016
 
$
1,197,557

 
$
1,064,719

 
$
132,838


Based upon our November 1, 2015 goodwill impairment reviews, we concluded that the estimated fair values of all of our reporting units, then consisting of Enterprise Intelligence, Cyber Intelligence, and Video Intelligence, significantly exceeded their carrying values.
As a result of the segment reorganization discussed above, we have concluded that we now have three reporting units, consisting of Customer Engagement, Cyber Intelligence (excluding situational intelligence solutions), and the Situational Intelligence business of our former Video Intelligence segment, which is now a component of our Cyber

16


Intelligence operating segment. No events or circumstances indicating the potential for goodwill impairment were identified during the nine months ended October 31, 2016.


6.
LONG-TERM DEBT

The following table summarizes our long-term debt at October 31, 2016 and January 31, 2016: 
 
 
October 31,
 
January 31,
(in thousands)
 
2016
 
2016
 
 
 
 
 
1.50% Convertible Senior Notes
 
$
400,000

 
$
400,000

February 2014 Term Loans
 
130,394

 
130,729

March 2014 Term Loans
 
279,696

 
280,413

Other debt
 
502

 

Less: Unamortized debt discounts and issuance costs
 
(63,816
)
 
(73,055
)
Total debt
 
746,776

 
738,087

Less: current maturities
 
4,709

 
2,104

Long-term debt
 
$
742,067

 
$
735,983


Current maturities of long-term debt are reported within accrued expenses and other current liabilities on the condensed consolidated balance sheet.

1.50% Convertible Senior Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes ("Notes") due June 1, 2021, unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.

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

The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the other specified conditions for conversion have been satisfied.

As of October 31, 2016, the Notes were not convertible.

In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the "debt discount") is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Issuance costs attributable to the debt component of the Notes were netted against long-term debt and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at October 31, 2016.


17


As of October 31, 2016, the carrying value of the debt component was $338.7 million, which is net of unamortized debt discount and issuance costs of $56.0 million and $5.3 million, respectively. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the Notes was approximately 5.29% at October 31, 2016.

Based on the closing market price of our common stock on October 31, 2016, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.

Note Hedges and Warrants

Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the "Note Hedges") and sold warrants (the "Warrants"). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.

Note Hedges

Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of October 31, 2016, we had not purchased any shares of our common stock under the Note Hedges.

Warrants

We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of October 31, 2016, no Warrants had been exercised and all Warrants remained outstanding.

The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.

Credit Agreement

In April 2011, we entered into a credit agreement with our lenders, which was amended and restated in March 2013, and further amended in February, March, and June 2014 (the "Credit Agreement"). The Credit Agreement, as amended and restated, provides for senior secured credit facilities, comprised of $943.5 million of term loans, of which $300.0 million was borrowed in February 2014 (the "February 2014 Term Loans") and $643.5 million was borrowed in March 2014 (the "March 2014 Term Loans"), all of which matures in September 2019, and a $300.0 million revolving credit facility maturing in September 2018 (the "Revolving Credit Facility"), subject to increase and reduction from time to time, as described in the Credit Agreement.
The February 2014 Term Loans were borrowed in connection with our February 2014 acquisition of Kana Software, Inc. (“Kana”). The March 2014 Term Loans were borrowed as part of a refinancing of previously outstanding amounts under the Credit Agreement. In June 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and all $106.0 million of then-outstanding borrowings under the Revolving Credit Facility.
The outstanding February 2014 Term Loans and March 2014 Term Loans incur 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 October 31, 2016 and January 31, 2016, the interest rate on both the February 2014 Term Loans and the March 2014 Term Loans was 3.50%. Taking into account the impact of original issuance discounts, if any, and related deferred debt

18


issuance costs, the effective interest rates on the February 2014 Term Loans and March 2014 Term Loans were approximately 4.03% and 3.58%, respectively, at October 31, 2016.
We are required to pay a commitment fee equal to 0.50% per annum of the undrawn portion on the Revolving Credit Facility, payable quarterly, and customary administrative agent and letter of credit fees.
Debt issuance and debt modification costs, as well as original issuance discounts, incurred in connection with the Credit Agreement are deferred and amortized as adjustments to interest expense over the remaining contractual life of the associated borrowing.
The Credit Agreement, contains certain customary affirmative and negative covenants for credit facilities of this type, as well as a financial covenant that currently requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.
Future Principal Payments on Term Loans

As of October 31, 2016, future scheduled principal payments on the February 2014 Term Loans and March 2014 Term Loans are presented in the following table:
(in thousands)
 
February
2014
 
March
2014
Years Ending January 31,
 
Term Loans
 
Term Loans
2017 (remainder of year)
 
$
334

 
$
717

2018
 
1,337

 
2,869

2019
 
1,337

 
2,869

2020
 
127,386

 
273,241

   Total
 
$
130,394

 
$
279,696

Interest Expense

The following table presents the components of interest expense incurred on the Notes and on borrowings under our Credit Agreement for the three and nine months ended October 31, 2016 and 2015:
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands)
 
2016
 
2015
 
2016
 
2015
1.50% Convertible Senior Notes:
 
 
 
 
 
 
 
 
Interest expense at 1.50% coupon rate
 
$
1,500

 
$
1,500

 
$
4,500

 
$
4,500

Amortization of debt discount
 
2,685

 
2,547

 
7,949

 
7,542

Amortization of deferred debt issuance costs
 
253

 
240

 
750

 
711

Total Interest Expense - 1.50% Convertible Senior Notes
 
$
4,438

 
$
4,287

 
$
13,199

 
$
12,753

 
 
 
 
 
 
 
 
 
Borrowings under Credit Agreement:
 
 
 
 
 
 
 
 
Interest expense at contractual rates
 
$
3,669

 
$
3,677

 
$
10,943

 
$
10,912

Amortization of debt discounts
 
15

 
14

 
44

 
42

Amortization of deferred debt issuance costs
 
557

 
547

 
1,653

 
1,616

Total Interest Expense - Borrowings under Credit Agreement
 
$
4,241

 
$
4,238

 
$
12,640

 
$
12,570



7.
SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
 
Condensed Consolidated Balance Sheets
 
Inventories consisted of the following as of October 31, 2016 and January 31, 2016: 

19


 
 
October 31,
 
January 31,
(in thousands)
 
2016
 
2016
Raw materials
 
$
9,891

 
$
7,177

Work-in-process
 
6,466

 
6,668

Finished goods
 
4,035

 
4,467

   Total inventories
 
$
20,392

 
$
18,312


Condensed Consolidated Statements of Operations
 
Other expense, net consisted of the following for the three and nine months ended October 31, 2016 and 2015:
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands)
 
2016
 
2015
 
2016
 
2015
Foreign currency (losses) gains, net
 
$
(2,152
)
 
$
(2,517
)
 
$
1,870

 
$
(5,434
)
Gains (losses) on derivative financial instruments, net
 
1,266

 
309

 
(696
)
 
583

Other, net
 
(235
)
 
(1,967
)
 
(3,834
)
 
(2,864
)
   Total other expense, net
 
$
(1,121
)
 
$
(4,175
)
 
$
(2,660
)
 
$
(7,715
)

Condensed Consolidated Statements of Cash Flows
 
The following table provides supplemental information regarding our condensed consolidated cash flows for the nine months ended October 31, 2016 and 2015:
 
 
Nine Months Ended
October 31,
(in thousands)
 
2016
 
2015
Cash paid for interest
 
$
13,927

 
$
13,949

Cash payments of income taxes, net
 
$
25,023

 
$
13,168

Non-cash investing and financing transactions:
 
 

 
 
Accrued but unpaid purchases of property and equipment
 
$
5,169

 
$
4,041

Inventory transfers to property and equipment
 
$
139

 
$
1,084

Liabilities for contingent consideration in business combinations
 
$
7,700

 
$
16,237



8.
STOCKHOLDERS’ EQUITY
 
Dividends on Common Stock

We did not declare or pay any dividends on our common stock during the nine months ended October 31, 2016 and 2015. Under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.

Share Repurchase Program

On March 29, 2016, we announced that our board of directors had authorized a share repurchase program whereby we may make up to $150.0 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 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.

Treasury Stock
 

20


Repurchased shares of common stock are recorded as treasury stock, at cost. We periodically purchase treasury stock from directors, officers, and other employees to facilitate income tax withholding and payment requirements upon vesting of equity awards.

During the nine months ended October 31, 2016, we acquired 1,000,000 shares of treasury stock at a cost of $35.9 million, including 500,000 shares at a cost $18.7 million during the three months ended October 31, 2016, under the aforementioned share repurchase program. We did not acquire any shares of treasury stock during the nine months ended October 31, 2015.

At October 31, 2016, we held approximately 1,348,000 shares of treasury stock with a cost of $46.1 million. At January 31, 2016, we held approximately 348,000 shares of treasury stock with a cost of $10.3 million.


Accumulated Other Comprehensive Income (Loss)
 
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income (loss) as presented in our condensed consolidated statements of operations.

The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the nine months ended October 31, 2016:
(in thousands)
 
Unrealized (Losses) Gains on Foreign Exchange Contracts Designated as Hedges
 
Unrealized Loss on Interest Rate Swap Designated as Hedge
 
Unrealized (Losses) Gains on Available-for-Sale Investments
 
Foreign Currency Translation Adjustments
 
Total
Accumulated other comprehensive loss at January 31, 2016
 
$
(1,871
)
 
$

 
$
(110
)
 
$
(114,213
)
 
$
(116,194
)
Other comprehensive income (loss) before reclassifications
 
1,848

 
(1,147
)
 
110

 
(49,639
)
 
(48,828
)
Gains reclassified out of accumulated other comprehensive income (loss)
 
794

 

 

 

 
794

Net other comprehensive income (loss), current period
 
1,054

 
(1,147
)
 
110

 
(49,639
)
 
(49,622
)
Accumulated other comprehensive loss at October 31, 2016
 
$
(817
)
 
$
(1,147
)
 
$