Notes to Condensed Consolidated Financial Statements
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1.
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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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
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.
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.
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2.
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NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
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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
:
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Three Months Ended
October 31,
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Nine Months Ended
October 31,
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(in thousands, except per share amounts)
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2016
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2015
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2016
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2015
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Net (loss) income
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$
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(7,434
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)
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$
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8,470
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$
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(34,705
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)
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$
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3,441
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Net income attributable to noncontrolling interest
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803
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|
836
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2,693
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3,308
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Net (loss) income attributable to Verint Systems Inc.
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$
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(8,237
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)
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$
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7,634
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$
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(37,398
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)
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$
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133
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Weighted-average shares outstanding:
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Basic
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62,895
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62,206
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62,602
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61,666
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Dilutive effect of employee equity award plans
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—
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572
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—
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1,137
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Dilutive effect of 1.50% convertible senior notes
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—
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—
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—
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—
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Dilutive effect of warrants
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—
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—
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—
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—
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Diluted
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62,895
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62,778
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62,602
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62,803
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Net (loss) income per common share attributable to Verint Systems Inc.:
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Basic
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$
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(0.13
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)
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$
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0.12
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$
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(0.60
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)
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$
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0.00
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Diluted
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$
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(0.13
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)
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$
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0.12
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$
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(0.60
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)
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$
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0.00
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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:
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Three Months Ended
October 31,
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Nine Months Ended
October 31,
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(in thousands)
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2016
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2015
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2016
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2015
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Common shares excluded from calculation:
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Stock options and restricted stock-based awards
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1,239
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1,466
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1,060
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650
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1.50% convertible senior notes
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6,205
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6,205
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6,205
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6,205
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Warrants
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6,205
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6,205
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6,205
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6,205
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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
$75.00
per share.
Our Note Hedges (as defined in Note 6, "Long-Term Debt") do not impact the calculation of diluted net income per share under the treasury stock method, because their effect would be anti-dilutive. However, in the event of an actual conversion of any or all of the Notes, the common shares that would be delivered to us under the Note Hedges would neutralize the dilutive effect of the common shares that we would issue under the Notes. As a result, actual conversion of any or all of the Notes would not increase our outstanding common stock. Up to
6,205,000
common shares could be issued upon exercise of the Warrants. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 6, "Long-Term Debt".
3. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of
October 31, 2016
and January 31, 2016:
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October 31, 2016
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(in thousands)
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Cost Basis
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Gross Unrealized Gains
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Gross Unrealized Losses
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Estimated Fair Value
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Cash and cash equivalents:
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Cash and bank time deposits
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$
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295,661
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$
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—
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|
|
$
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—
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|
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$
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295,661
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Money market funds
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|
168
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|
|
—
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|
|
—
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|
|
168
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Total cash and cash equivalents
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$
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295,829
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|
|
$
|
—
|
|
|
$
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—
|
|
|
$
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295,829
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|
|
|
|
|
|
|
|
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Short-term investments:
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|
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Commercial paper and corporate debt securities (available-for-sale)
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$
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2,997
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|
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$
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—
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|
|
$
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—
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$
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2,997
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Bank time deposits
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7,321
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|
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—
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|
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—
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7,321
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Total short-term investments
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$
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10,318
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$
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—
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$
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—
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$
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10,318
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January 31, 2016
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(in thousands)
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Cost Basis
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Gross Unrealized Gains
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Gross Unrealized Losses
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Estimated Fair Value
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Cash and cash equivalents:
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Cash and bank time deposits
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$
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334,938
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|
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$
|
—
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|
|
$
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—
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|
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$
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334,938
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Money market funds
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12,137
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|
|
—
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|
|
—
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12,137
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Commercial paper and corporate debt securities
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5,054
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—
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(24
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)
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5,030
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Total cash and cash equivalents
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$
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352,129
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|
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$
|
—
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|
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$
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(24
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)
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$
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352,105
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Short-term investments:
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Commercial paper and corporate debt securities (available-for-sale)
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$
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53,018
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|
|
$
|
—
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|
|
$
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(86
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)
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|
$
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52,932
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Bank time deposits
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3,050
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|
|
—
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|
|
—
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|
|
3,050
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Total short-term investments
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$
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56,068
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|
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$
|
—
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|
|
$
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(86
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)
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|
$
|
55,982
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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.
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
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.
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(in thousands)
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Amount
|
Components of Purchase Price:
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|
|
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:
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|
•
|
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.
|
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|
•
|
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.
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.
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
|
|
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
Intelligence operating segment. No events or circumstances indicating the potential for goodwill impairment were identified during the nine months ended
October 31, 2016
.
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.
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
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:
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
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
|
)
|
|
$
|
—
|
|
|
$
|
(163,852
|
)
|
|
$
|
(165,816
|
)
|
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statement of operations, with presentation location, for the three and nine months ended
October 31, 2016
and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
|
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Location
|
Unrealized gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
57
|
|
|
$
|
(162
|
)
|
|
$
|
79
|
|
|
$
|
(703
|
)
|
|
Cost of product revenue
|
|
|
67
|
|
|
(164
|
)
|
|
74
|
|
|
(650
|
)
|
|
Cost of service and support revenue
|
|
|
345
|
|
|
(1,029
|
)
|
|
470
|
|
|
(4,458
|
)
|
|
Research and development, net
|
|
|
213
|
|
|
(527
|
)
|
|
265
|
|
|
(2,136
|
)
|
|
Selling, general and administrative
|
|
|
682
|
|
|
(1,882
|
)
|
|
888
|
|
|
(7,947
|
)
|
|
Total, before income taxes
|
|
|
(75
|
)
|
|
187
|
|
|
(94
|
)
|
|
872
|
|
|
(Provision) benefit for income taxes
|
|
|
$
|
607
|
|
|
$
|
(1,695
|
)
|
|
$
|
794
|
|
|
$
|
(7,075
|
)
|
|
Total, net of income taxes
|
Our interim provision for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
For the three months ended
October 31, 2016
, we recorded an income tax provision of
$3.4 million
on a pre-tax loss of
$4.1 million
, which represented a negative effective income tax rate of
82.4%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax income in profitable jurisdictions, where we record income tax provisions, was lower than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record income tax benefits.
For the three months ended October 31, 2015, we recorded an income tax provision of
$1.6 million
on pre-tax income of
$10.0 million
, which represented an effective income tax rate of
15.5%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax income in profitable jurisdictions, where we record tax provisions, was higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record income tax benefits. In addition, following the receipt of an approval from a foreign government agency and of a tax ruling in a foreign jurisdiction, we adjusted certain unrecognized tax benefits and deferred tax items resulting in net discrete income tax benefits of
$3.4 million
. We also recorded a discrete income tax benefit of
$1.5 million
for the adjustment of certain unrecognized tax benefits established in connection with the KANA acquisition. The adjustment to the KANA acquisition unrecognized tax benefits resulted in a charge within other expense, net due to the write-off of an indemnification asset.
For the nine months ended October 31, 2016, we recorded an income tax provision of
$4.7 million
on a pre-tax loss of
$30.0 million
, which represented a negative effective income tax rate of
15.8%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax income in profitable jurisdictions, where we record income tax provisions, was significantly lower than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record income tax benefits.
For the nine months ended October 31, 2015, we recorded an income tax provision of
$5.1 million
on pre-tax income of
$8.6 million
, which represented an effective income tax rate of
59.8%
. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax income in profitable jurisdictions, where we record income tax provisions, was slightly higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record income tax benefits. In addition, following the receipt in the three months ended October 31, 2015 of an approval from a foreign government agency and of a tax ruling in a foreign jurisdiction, we adjusted certain unrecognized tax benefits and deferred tax items resulting in net discrete income tax benefits of
$3.4 million
. During the three months ended October 31, 2015, we also recorded a discrete income tax benefit of
$1.5 million
for the adjustment of certain unrecognized tax benefits established in connection with the KANA acquisition. The adjustment to the KANA acquisition unrecognized tax benefits resulted in a charge within other expense, net due to the write-off of an indemnification asset. Also,
following the receipt of a tax ruling in a foreign jurisdiction in the three months ended April 30, 2015, we reorganized certain operations within the foreign jurisdiction, resulting in a discrete income tax benefit of
$3.0 million
.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting guidance for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against our federal and certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in the U.S. and in certain foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized income tax benefits of
$147.8 million
and
$142.3 million
(excluding interest and penalties) as of
October 31, 2016
and January 31, 2016, respectively. The accrued liability for interest and penalties was
$3.6 million
and
$3.3 million
at
October 31, 2016
and January 31, 2016, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. As of
October 31, 2016
and January 31, 2016, the total amount of unrecognized income tax benefits that, if recognized, would impact our effective income tax rate were approximately
$142.3 million
and
$136.6 million
, respectively. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at
October 31, 2016
could decrease by approximately
$3.1 million
in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made.
|
|
10.
|
FAIR VALUE MEASUREMENTS
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of
October 31, 2016
and January 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
|
Fair Value Hierarchy Category
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper and corporate debt securities, classified as cash and cash equivalents
|
|
—
|
|
|
2,997
|
|
|
—
|
|
Short-term investments, classified as available-for-sale
|
|
—
|
|
|
7,320
|
|
|
—
|
|
Foreign currency forward contracts
|
|
—
|
|
|
746
|
|
|
—
|
|
Total assets
|
|
$
|
168
|
|
|
$
|
11,063
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
2,471
|
|
|
$
|
—
|
|
Interest rate swap agreement
|
|
—
|
|
|
1,146
|
|
|
—
|
|
Contingent consideration - business combinations
|
|
—
|
|
|
—
|
|
|
31,578
|
|
Option to acquire noncontrolling interests of consolidated subsidiaries
|
|
—
|
|
|
—
|
|
|
3,434
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
3,617
|
|
|
$
|
35,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2016
|
|
|
Fair Value Hierarchy Category
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
12,137
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper and corporate debt securities, classified as cash and cash equivalents
|
|
—
|
|
|
5,030
|
|
|
—
|
|
Short-term investments, classified as available-for-sale
|
|
—
|
|
|
52,932
|
|
|
—
|
|
Foreign currency forward contracts
|
|
—
|
|
|
113
|
|
|
—
|
|
Total assets
|
|
$
|
12,137
|
|
|
$
|
58,075
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
2,377
|
|
|
$
|
—
|
|
Contingent consideration - business combinations
|
|
—
|
|
|
—
|
|
|
22,391
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
2,377
|
|
|
$
|
22,391
|
|
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended
October 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Fair value measurement at beginning of period
|
|
$
|
22,391
|
|
|
$
|
14,507
|
|
Contingent consideration liabilities recorded for business combinations
|
|
7,700
|
|
|
16,238
|
|
Changes in fair values, recorded in operating expenses
|
|
4,800
|
|
|
(132
|
)
|
Payments of contingent consideration
|
|
(3,313
|
)
|
|
(4,944
|
)
|
Foreign currency translation and other
|
|
—
|
|
|
—
|
|
Fair value measurement at end of period
|
|
$
|
31,578
|
|
|
$
|
25,669
|
|
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
During the nine months ended October 31, 2016, we acquired two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interests. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries. The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the nine months ended
October 31, 2016
:
|
|
|
|
|
|
(in thousands)
|
|
Nine Months Ended
October 31,
|
Fair value measurement at beginning of period
|
|
$
|
—
|
|
Acquisition of option to acquire noncontrolling interests of consolidated subsidiaries
|
|
3,134
|
|
Change in fair value, recorded in operating expenses
|
|
300
|
|
Fair value measurement at end of period
|
|
$
|
3,434
|
|
There were no transfers between levels of the fair value measurement hierarchy during the nine months ended
October 31, 2016
and 2015.
Fair Value Measurements
Money Market Funds
- We value our money market funds using quoted active market prices for such funds.
Short-term Investments and Commercial Paper -
The fair values of short-term investments, as well as commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term
investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts
- The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Interest Rate Swap Agreement -
The fair value of our interest rate swap agreement is based in part on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreement, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration
-
Business Combinations
- The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from
2.5%
to
41.7%
in our calculations of the estimated fair values of our contingent consideration liabilities as of
October 31, 2016
. We utilized discount rates ranging from
3.0%
to
41.7%
in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2016.
Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries
- The fair value of the option is determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasure the fair value of the option at each reporting period, and any changes in fair value are recorded within selling, general, and administrative expenses. We utilized a discount rate of
14.5%
in our calculation of the estimated fair value of the option as of
October 31, 2016
.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair values of our term loan borrowings were
$412 million
and
$411 million
at
October 31, 2016
and January 31, 2016, respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy because we cannot reasonably observe activity in the limited market in which participations in our term loans are traded. The indicative prices provided to us as at each of
October 31, 2016
and January 31, 2016 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders. We had no revolving credit borrowings at
October 31, 2016
and January 31, 2016.
The estimated fair values of our Notes were approximately
$378 million
and
$367 million
at
October 31, 2016
and January 31, 2016, respectively. The estimated fair values of the Notes are determined based on quoted bid and ask prices in the over-the-counter market in which the Notes trade. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
|
|
11.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. Our joint venture, which has a Singapore dollar functional currency, also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations related to settlements of liabilities denominated in U.S. dollars. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond
twelve months
, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of
$147.1 million
and
$136.4 million
as of
October 31, 2016
and January 31, 2016, respectively.
Interest Rate Swap Agreement
During the nine months ended October 31, 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on 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, 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 interest rate swap agreement is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and are reclassified into the statement of operations in the period in which the hedged transaction affects earnings. Hedge ineffectiveness, if any, is recognized currently in the statement of operations.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of
October 31, 2016
and January 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
October 31,
|
|
January 31,
|
(in thousands)
|
Balance Sheet Classification
|
|
2016
|
|
2016
|
Derivative assets:
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
Designated as cash flow hedges
|
Prepaid expenses and other current assets
|
|
$
|
250
|
|
|
$
|
—
|
|
Not designated as hedging instruments
|
Prepaid expenses and other current assets
|
|
496
|
|
|
113
|
|
Total derivative assets
|
|
|
$
|
746
|
|
|
$
|
113
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
Designated as cash flow hedges
|
Accrued expenses and other current liabilities
|
|
$
|
1,151
|
|
|
$
|
2,108
|
|
Not designated as hedging instruments
|
Accrued expenses and other current liabilities
|
|
1,210
|
|
|
239
|
|
|
Other liabilities
|
|
110
|
|
|
30
|
|
Interest rate swap agreement, designated as a cash flow hedge
|
Accrued expenses and other current liabilities
|
|
694
|
|
|
—
|
|
|
Other liabilities
|
|
452
|
|
|
—
|
|
Total derivative liabilities
|
|
|
$
|
3,617
|
|
|
$
|
2,377
|
|
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss ("AOCL") and on the condensed consolidated statements of operations for the three and nine months ended
October 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net (losses) gains recognized in AOCL:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(886
|
)
|
|
$
|
(2,568
|
)
|
|
$
|
2,098
|
|
|
$
|
1,396
|
|
Interest rate swap agreement
|
|
478
|
|
|
—
|
|
|
(1,146
|
)
|
|
—
|
|
|
|
$
|
(408
|
)
|
|
$
|
(2,568
|
)
|
|
$
|
952
|
|
|
$
|
1,396
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
682
|
|
|
$
|
(1,882
|
)
|
|
$
|
888
|
|
|
$
|
(7,947
|
)
|
For information regarding the line item locations of the net (losses) gains on foreign currency forward contracts reclassified out of AOCL into the condensed consolidated condensed statements of operations, see Note 8, "Stockholders' Equity".
There were no gains or losses from ineffectiveness of these cash flow hedges recorded for the three and nine months ended
October 31, 2016
and 2015. All of the foreign currency forward contracts underlying the
$0.8 million
of net unrealized losses recorded in our accumulated other comprehensive loss at
October 31, 2016
mature within twelve months, and therefore we expect all such losses to be reclassified into earnings within the next twelve months.
Derivative
Financial Instruments
Not Designated as Hedging Instruments
Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the
three and nine months ended
October 31, 2016
and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification in Condensed Consolidated Statements of Operations
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Foreign currency forward contracts
|
|
Other (expense) income, net
|
|
$
|
1,267
|
|
|
$
|
309
|
|
|
$
|
(696
|
)
|
|
$
|
583
|
|
|
|
12.
|
STOCK-BASED COMPENSATION
|
Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three and nine months ended
October 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenue - product
|
|
$
|
290
|
|
|
$
|
431
|
|
|
$
|
802
|
|
|
$
|
1,051
|
|
Cost of revenue - service and support
|
|
1,517
|
|
|
1,761
|
|
|
4,771
|
|
|
4,023
|
|
Research and development, net
|
|
2,585
|
|
|
2,583
|
|
|
7,193
|
|
|
6,445
|
|
Selling, general and administrative
|
|
9,562
|
|
|
11,649
|
|
|
32,916
|
|
|
38,738
|
|
Total stock-based compensation expense
|
|
$
|
13,954
|
|
|
$
|
16,424
|
|
|
$
|
45,682
|
|
|
$
|
50,257
|
|
The following table summarizes stock-based compensation expense by type of award 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
|
Restricted stock units and restricted stock awards
|
|
$
|
13,121
|
|
|
$
|
14,187
|
|
|
$
|
41,610
|
|
|
$
|
43,771
|
|
Stock bonus program and bonus share program
|
|
788
|
|
|
2,210
|
|
|
3,937
|
|
|
6,328
|
|
Total equity-settled awards
|
|
13,909
|
|
|
16,397
|
|
|
45,547
|
|
|
50,099
|
|
Phantom stock units (cash-settled awards)
|
|
45
|
|
|
27
|
|
|
135
|
|
|
158
|
|
Total stock-based compensation expense
|
|
$
|
13,954
|
|
|
$
|
16,424
|
|
|
$
|
45,682
|
|
|
$
|
50,257
|
|
Awards under our stock bonus and bonus share programs are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of our common stock.
Restricted Stock Units
We periodically award restricted stock units ("RSUs") to our directors, officers, and other employees. These awards contain various vesting conditions and are subject to certain restrictions and forfeiture provisions prior to vesting.
The following table summarizes restricted stock unit activity and related information for the nine months ended
October 31, 2016
:
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Number of RSUs
|
|
Weighted-Average Grant Date Fair Value
|
RSUs outstanding, January 31, 2016
|
|
2,649
|
|
|
$
|
54.57
|
|
RSUs granted
|
|
1,850
|
|
|
$
|
35.26
|
|
RSUs released
|
|
(1,413
|
)
|
|
$
|
47.91
|
|
RSUs forfeited
|
|
(264
|
)
|
|
$
|
53.64
|
|
RSUs outstanding, October 31, 2016
|
|
2,822
|
|
|
$
|
45.34
|
|
Our restricted stock unit awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of
October 31, 2016
, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards.
With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the plan under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce
available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving a cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under "Stock Bonus Program" and "Bonus Share Program".
As of
October 31, 2016
, there was approximately
$85.9 million
of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of
1.9 years
. The unrecognized compensation expense does not include compensation expense related to shares for which a grant date has been established but the requisite service period has not begun.
Stock Bonus Program
Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent that shares remain available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a
one
-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is determined using a
five
-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the "discount"). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash. Obligations under this program are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of common stock determined using a discounted average price of our common stock.
For the year ending January 31, 2017, our board of directors approved up to
125,000
shares of common stock for awards under the program and a discount of
15%
.
The following table summarizes activity under the stock bonus program during the nine months ended October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Shares in lieu of cash bonus - granted and released
|
|
25
|
|
|
43
|
|
Shares in respect of discount:
|
|
|
|
|
Granted
|
|
—
|
|
|
7
|
|
Released
|
|
2
|
|
|
5
|
|
Bonus Share Program
Over the past several years, our board of directors authorized the use of shares of common stock available under our equity incentive plans to award discretionary bonuses to employees other than executive officers, subject to certain limitations on the aggregate number of shares that may be issued (the "bonus share program"). There is no discount feature associated with awards under the bonus share program. Similar to the accounting for the stock bonus program, obligations for these bonuses are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known, to be settled with a variable number of shares of common stock.
For bonuses in respect of the year ended January 31, 2016, the board of directors approved the use of up to
75,000
shares of common stock, plus any shares not used under the stock bonus program in respect of the year ended January 31, 2016, for awards under this program (not to exceed
200,000
shares in aggregate between the two programs). During the three months ended July 31, 2016, approximately
171,000
shares of common stock were awarded and released under the bonus share program in respect of the year ended January 31, 2016.
In March 2016, our board of directors authorized the continuation of the bonus share program in respect of bonuses for the year ending January 31, 2017, and has approved up to
81,250
shares of common stock, plus any shares not used under the 2017 Stock Bonus Program, for awards under this program in respect of the year ending January 31, 2017 (not to exceed
206,250
shares in aggregate between the two programs).
The combined accrued liabilities for the stock bonus program and the bonus share program were
$3.6 million
and
$6.6 million
at
October 31, 2016
and January 31, 2016, respectively.
|
|
13.
|
COMMITMENTS AND CONTINGENCIES
|
Warranty Liability
The following table summarizes the activity in our warranty liability, which is included in accrued expenses and other liabilities in the condensed consolidated balance sheets, for the nine months ended
October 31, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Warranty liability at beginning of period
|
|
$
|
826
|
|
|
$
|
633
|
|
Provision charged to expenses
|
|
746
|
|
|
187
|
|
Warranty charges
|
|
(536
|
)
|
|
(120
|
)
|
Foreign currency translation and other
|
|
1
|
|
|
(2
|
)
|
Warranty liability at end of period
|
|
$
|
1,037
|
|
|
$
|
698
|
|
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 purported 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 our previous extended filing delay period. In the Deutsch District Action, in addition to a small amount of individual damages, Ms. Deutsch was 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 did 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 was seeking to certify a class of plaintiffs who were granted CTI stock options and were allegedly damaged as a result of the suspension of option exercises during CTI's previous extended filing delay period. In the Katriel District Action, in addition to a small amount of individual damages, Ms. Katriel was 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 did not specify an amount of damages. On March 2, 2010, the Katriel Labor Action was transferred to the Tel Aviv District Court, based on an agreed motion filed by the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on June 7, 2012, the District Court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an amended consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to effect the distribution of all of the issued and outstanding shares of capital stock of its former subsidiary, Comverse, Inc., on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order CTI to set aside up to
$150.0
million in assets to secure any future judgment. The District Court ruled at such time 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"), and on August 19, 2016, Xura was taken private by affiliates of Siris Capital Group, LLC.
On February 4, 2013, we merged with CTI. As a result of the merger, we have assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action. However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share distribution, we, as successor to CTI, are entitled to indemnification from Comverse (now Xura) for any losses we suffer in our capacity as successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
Following an unsuccessful mediation process, the proceeding before the District Court resumed. On August 28, 2016, the District Court (i) denied plaintiffs’ motion to certify the suit as a class action with respect to all claims relating to Verint stock options and (ii) approved the plaintiffs’ motion to certify the suit as a class action with respect to claims of current or former employees of Comverse Limited (now Xura) or VSL who held unexercised CTI stock options at the time CTI suspended option exercises as a result of its previous extended filing delay period. The court also ruled that the merits of the case and any calculation of damages would be evaluated under New York law. The deadline for appeals of the court's August 28, 2016 ruling is December 15, 2016.
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.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the enterprise’s chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is our CODM.
Through July 31, 2016, we were organized and had reported our operating results in
three
operating segments: Enterprise Intelligence, Video Intelligence, and Cyber Intelligence. In August 2016, we reorganized into two businesses and, now report our results in
two
operating segments, Customer Engagement Solutions ("Customer Engagement") and Cyber Intelligence Solutions ("Cyber Intelligence"). Comparative segment financial information provided for prior periods has been recast to conform to this revised segment structure.
Over time, our Video Intelligence business had evolved to focus on two use cases: the first is fraud mitigation and loss prevention, and the second is situational intelligence and incident response. The fraud and loss prevention use case is applicable to our banking and retail customers, while the situational intelligence and incident response use case is applicable to other vertical markets, including our public sector and campus customers. As part of this evolution, in August 2016, we separated our Video Intelligence team to create better vertical market alignment and growth opportunities. We transitioned the banking and retail portion of the Video Intelligence team into our Enterprise Intelligence segment, aligning it with our large banking and retail customer presence in our Enterprise Intelligence segment. This combined segment has been named Customer Engagement Solutions. We transitioned the situational intelligence portion of the Video Intelligence team into our Cyber Intelligence segment, reflecting this business’s focus on security and public safety. We believe this change creates two strong businesses of scale, well positioned for growth in their respective markets, with dedicated management teams, unique product portfolios, and domain expertise, and aligns with the manner in which, beginning for the three and nine months ending October 31, 2016, our CODM receives and uses financial information to allocate resources and evaluate the performance of our Customer Engagement and Cyber Intelligence businesses.
We measure the performance of our operating segments based upon operating segment revenue and operating segment contribution. Operating segment contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs, research and development and selling, marketing, and administrative expenses. We do not allocate certain expenses, which include the majority of general and administrative expenses, facilities and communication expenses, purchasing expenses, manufacturing support and logistic expenses, depreciation and amortization, amortization of capitalized software development costs, stock-based compensation, and special charges such as restructuring costs when calculating operating segment contribution. These expenses are included in the unallocated expenses section of the table presented below. Revenue from transactions between our operating segments is not material.
Operating results by segment for the three and nine months ended
October 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Customer Engagement
|
|
|
|
|
|
|
|
|
|
|
Segment revenue
|
|
$
|
173,860
|
|
|
$
|
176,775
|
|
|
$
|
525,620
|
|
|
$
|
518,468
|
|
Revenue adjustments
|
|
(1,103
|
)
|
|
(1,168
|
)
|
|
(6,610
|
)
|
|
(2,477
|
)
|
|
|
172,757
|
|
|
175,607
|
|
|
519,010
|
|
|
515,991
|
|
Cyber Intelligence
|
|
|
|
|
|
|
|
|
|
|
Segment revenue
|
|
86,169
|
|
|
108,569
|
|
|
247,537
|
|
|
334,332
|
|
Revenue adjustments
|
|
(24
|
)
|
|
(122
|
)
|
|
(300
|
)
|
|
(851
|
)
|
|
|
86,145
|
|
|
108,447
|
|
|
247,237
|
|
|
333,481
|
|
Total revenue
|
|
$
|
258,902
|
|
|
$
|
284,054
|
|
|
$
|
766,247
|
|
|
$
|
849,472
|
|
|
|
|
|
|
|
|
|
|
Segment contribution:
|
|
|
|
|
|
|
|
|
|
|
Customer Engagement
|
|
$
|
65,085
|
|
|
$
|
69,546
|
|
|
$
|
188,800
|
|
|
$
|
189,157
|
|
Cyber Intelligence
|
|
20,575
|
|
|
31,809
|
|
|
55,506
|
|
|
102,033
|
|
Total segment contribution
|
|
85,660
|
|
|
101,355
|
|
|
244,306
|
|
|
291,190
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses, net:
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets
|
|
19,944
|
|
|
19,956
|
|
|
60,990
|
|
|
59,262
|
|
Stock-based compensation
|
|
13,954
|
|
|
16,424
|
|
|
45,682
|
|
|
50,257
|
|
Other unallocated expenses
|
|
46,237
|
|
|
42,647
|
|
|
139,651
|
|
|
141,023
|
|
Total unallocated expenses, net
|
|
80,135
|
|
|
79,027
|
|
|
246,323
|
|
|
250,542
|
|
Operating income (loss)
|
|
5,525
|
|
|
22,328
|
|
|
(2,017
|
)
|
|
40,648
|
|
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
|
|
During the three months ended October 31, 2016, we identified certain net expenses incurred during the six months ended July 31, 2016 which were incorrectly charged against the segment contribution of our Cyber Intelligence segment, which instead should have been included within other unallocated expenses. As a result, the Cyber Intelligence segment contribution previously reported for the three months ended April 30, 2016 was understated by
$2.6 million
, and for the three months ended July 31, 2016 was overstated by
$0.2 million
, resulting in a net
$2.4 million
understatement of our Cyber Intelligence segment contribution for the six months ended July 31, 2016. Other unallocated expenses were misstated in the opposite direction by corresponding amounts in the same periods. The Cyber Intelligence segment contribution and other unallocated expenses for the nine months ended October 31, 2016 as presented the table above reflect the correct classification of these net expenses.
Revenue adjustments represent revenue of acquired companies which is included within segment revenue reviewed by the CODM, but not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the obligations’ acquisition-date fair values.
With the exception of goodwill and acquired intangible assets, we do not identify or allocate our assets by operating segment. Consequently, it is not practical to present assets by operating segment. In connection with the change in operating segments noted above, we have reallocated
$26.5 million
of goodwill from our former Video Intelligence segment to our Customer Engagement segment, and
$11.4 million
to our Cyber Intelligence segment. The allocations of goodwill and acquired intangible assets by operating segment appear in Note 5, "Intangible Assets and Goodwill".
15. SUBSEQUENT EVENT
Business Combination
On November 16, 2016, we completed the acquisition of all of the outstanding shares of OpinionLab, Inc. ("OpinionLab"), a leading 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. OpinionLab is based in Chicago, Illinois.
The purchase price consisted of
$56.4 million
of cash paid at the closing, funded from cash on hand, partially offset by
$6.4 million
of OpinionLab's cash received in the acquisition, resulting in net cash consideration at closing of
$50.0 million
, and we agreed to pay potential additional future cash consideration of up to
$28.0 million
, contingent upon the achievement of certain performance targets over the period from closing through January 31, 2021. The purchase price is subject to customary purchase price adjustments related to the final determination of OpinionLab's cash, net working capital, transaction expenses, and taxes as of November 16, 2016. The acquired business is being integrated into our Customer Engagement operating segment.
We incurred transaction and related costs, consisting primarily of professional fees directly related to the acquisition of OpinionLab, of
$0.3 million
for the three months ended October 31, 2016. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
We are currently in the process of completing the purchase price accounting and related allocations associated with the acquisition of OpinionLab. Although this work is still in process, at this time we anticipate that a significant portion of the purchase price will be allocated to goodwill and acquired identifiable intangible assets, including technology and customer assets, and we expect the preliminary purchase price accounting to be completed during the three months ending January 31, 2017. Additionally, we are still determining the pro forma impact of this acquisition on our operating results for the applicable historical reporting periods.